sec document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
(Rule 14a-101)
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
(x) Filed by the Registrant
( ) Filed by a Party other than the Registrant
Check the appropriate box:
(x) Preliminary proxy statement
( ) Confidential, for Use of the SEC Only (as permitted by Rule 14a-6(e)(2))
( ) Definitive proxy statement
( ) Definitive Additional Materials
( ) Soliciting Material Pursuant to ss.240.14a-12
LYNCH INTERACTIVE CORPORATION
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(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):
(X) No fee required.
( ) Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
Title of each class of securities to which transaction applies:
(1) Aggregate number of securities to which transaction applies: Per unit
price or other underlying value of transaction computed pursuant to
Exchange Act Rule
(2) 0-11 (set forth the amount on which the filing fee is calculated and
state how it was determined):
(3) Proposed maximum aggregate value of transaction:
(4) Total fee paid:
(5) Fee paid previously with preliminary materials.
( ) Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date filed:
LYNCH INTERACTIVE CORPORATION
401 Theodore Fremd Avenue
Rye, New York 10580
(914) 921 - 8821
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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD __________, 2005
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_________ __, 2005
To Stockholders of
Lynch Interactive Corporation:
NOTICE IS HEREBY GIVEN to the holders of common stock, par value
$0.0001 per share (the "Common Stock"), of Lynch Interactive Corporation, a
Delaware corporation (the "Corporation"), that the Annual Meeting of
Stockholders (the "Annual Meeting") of the Corporation, will be held at
__________ Greenwich, Connecticut, on _______, ______, 2005, at 8:30 a.m.
Eastern time, for the following purposes:
1) To approve, subject to final action by the Board of Directors of the
Corporation (the "Board of Directors"), an amendment to the Corporation's
Restated Certificate of Incorporation effecting a 1-for-100 reverse stock
split of the Common Stock.
2) To approve, subject to final action by the Board of Directors, an amendment
to the Corporation's Certificate of Incorporation granting to the
Corporation an option to acquire shares proposed to be sold by stockholders
subsequent to such reverse stock split if, after such sale, there would be
300 or more holders of record of the Common Stock.
3) To re-approve the Principal Executive Bonus Plan.
4) To elect seven members of the Board of Directors to serve until the next
Annual Meeting and until their successors are duly elected and qualify.
5) To approve a proposal to adjourn the Annual Meeting, if necessary, to
solicit additional proxies.
6) To transact such other business as may properly come before the Annual
Meeting or any adjournments thereof.
Information relating to the above matters is set forth in the enclosed
proxy statement. The Board of Directors and management of the Corporation are
not aware of any other matters that will come before the Annual Meeting. As
determined by the Board of Directors, only stockholders of record at the close
of business on ________ __, 2005 are entitled to receive notice of, and to vote
at, the Annual Meeting and any adjournments thereof.
THE BOARD OF DIRECTORS ENCOURAGES ALL STOCKHOLDERS TO PERSONALLY
ATTEND THE ANNUAL MEETING. YOUR VOTE IS VERY IMPORTANT REGARDLESS OF THE NUMBER
OF SHARES YOU OWN. WHETHER OR NOT YOU EXPECT TO ATTEND THE ANNUAL MEETING, YOU
ARE REQUESTED TO PROMPTLY DATE, COMPLETE, SIGN AND RETURN THE ENCLOSED PROXY
CARD IN THE ENCLOSED ACCOMPANYING POSTAGE-PAID ENVELOPE IN ORDER THAT YOUR
SHARES OF OUR COMMON STOCK MAY BE REPRESENTED. YOUR COOPERATION IS GREATLY
APPRECIATED.
By Order of the Board of Directors,
John A. Cole
Vice President, General Counsel and Secretary
PRELIMINARY COPY
LYNCH INTERACTIVE CORPORATION
401 Theodore Fremd Avenue
Rye, New York 10580
(914) 921-8821
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PROXY STATEMENT
SUMMARY TERM SHEET
-----------------------
This summary term sheet, including the "Questions and Answers About the
Meeting and Transaction" section that follows, highlights selected information
from the attached proxy statement for the 2005 Annual Meeting of our
stockholders and addresses the material terms of the reverse stock split
described below. For a complete description of the reverse stock split, you
should carefully read the proxy statement and all of its exhibits. This summary
is qualified in its entirety by reference to the more detailed information
appearing elsewhere in, or accompanying, the proxy statement, including the
financial statements in our amended annual report, which accompanies and is
incorporated by reference into the proxy statement. References to the
"Corporation," "us," "we," "our" or "Lynch Interactive" refer to Lynch
Interactive Corporation, a Delaware corporation. This proxy statement and the
accompanying proxy are being mailed to holders of shares of our Common Stock on
or about _____ ___, 2005.
The table of contents appears on page 9, immediately following the
"Questions and Answers About the Meeting and Transaction."
THE REVERSE STOCK SPLIT HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, AND NEITHER THE
SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE COMMISSION HAS PASSED UPON THE
FAIRNESS OR MERITS OF THE REVERSE STOCK SPLIT OR UPON THE ACCURACY OR ADEQUACY
OF THE INFORMATION CONTAINED IN THIS PROXY STATEMENT. ANY PRESENTATION TO THE
CONTRARY IS UNLAWFUL.
REVERSE STOCK SPLIT; "GOING DARK"; "PINK SHEET" QUOTATION
o Our Board of Directors has authorized, subject to stockholder approval
and subsequent final action by our Board of Directors, a 1-for-100
reverse stock split of our Common Stock. Stockholders who own fewer
than 100 shares at the effective time of the reverse stock split will
receive a cash payment equal to the fair market value of the shares
they hold, as described in more detail in the proxy statement. For
example, if the reverse split took place on July __, 2005, a
shareholder holding fewer than 100 shares would receive a cash payment
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of $_____ per share for each share held on such date. Stockholders who
own 100 or more shares of our Common Stock at the effective time of
the reverse stock split will remain stockholders, will continue to
hold whole and fractional shares, and will not be entitled to receive
any cash for their fractional share interests resulting from the
reverse stock split.
o The amendment to our Restated Certificate of Incorporation that would
effect the 1-for-100 reverse split, a form of which is attached as
Exhibit A, would also include a standing option for us to repurchase
any shares of Common Stock proposed to be transferred by a remaining
stockholder if after such proposed transfer the number of holders of
record of our Common Stock would equal or exceed 300. The price to be
paid for the shares purchased upon exercise of this option would be
equal to (i) the mean between the bid and asked prices (as published
in the pink sheets) averaged over the 20 trading days on which the
shares of Common Stock were actually quoted immediately preceding the
date of exercise of the option or (ii) if the Common Stock is not then
quoted in the pink sheets, or if such determination cannot otherwise
be made, the fair market value of such shares as determined in good
faith by our Board of Directors.
o If consummated, the reverse stock split would be part of a "going
dark" plan. Following the reverse stock split, we would have fewer
than 300 holders of record and we would delist our Common Stock from
the American Stock Exchange (the "AMEX"). We would also terminate the
registration of our Common Stock under the Securities Exchange Act of
1934 (the "Exchange Act"). We would "go dark," I.E., become a ----
non-reporting company for purposes of the Exchange Act. This will
eliminate the significant expense required to comply with public
reporting and related requirements including, but not limited to,
those of the Sarbanes-Oxley Act of 2002. Our Board of Directors has
concluded that the cost associated with being a reporting company is
not justified by its benefits in view of the limited trading activity
in our Common Stock, and has determined that the reverse stock split
is fair to and in the best interests of our stockholders, including
our unaffiliated stockholders. See also the information in the
sections "Recommendation of Our Board of Directors" and "Fairness of
the Reverse Stock Split."
o Subsequent to the reverse split, our shares may be quoted in the "pink
sheets," but initially at a price approximately 100 times their
current price on the AMEX. In addition, the spread between the bid and
asked prices of our Common Stock in the pink sheets may be wider than
on the AMEX and the liquidity of our shares may be reduced. In order
to facilitate future quotation of our Common Stock in the pink sheets
and to eliminate any then existing fractional shares, at some time
after the reverse stock is completed, we may effect a forward stock
split.
o If we "go dark," we intend voluntarily to disseminate press releases,
quarterly financial statements and audited annual financial statements
to our stockholders and the investment community generally to
facilitate quotation of our shares in the pink sheets.
o The members of our Board of Directors, including Mario J. Gabelli (who
may be deemed to be a controlling stockholder of ours), have indicated
that they intend to vote, or cause to be voted, the shares of our
Common Stock that they directly or indirectly control in favor of the
reverse stock split. The shares of our Common Stock beneficially owned
by directors represent approximately 26% of our outstanding voting
securities.
o The reverse stock split is not expected to affect our current business
plan or operations, except for the anticipated cost and management
time savings associated with termination of our public reporting
company obligations. See also the information in the section
"Structure of Proposal."
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o Our Board of Directors has retained the authority to determine whether
and when to file the amendment to our Restated Certificate of
Incorporation with the Secretary of State of the State of Delaware to
effect the reverse stock split, notwithstanding the authorization of
the reverse stock split by our stockholders. As we are submitting the
reverse stock split to our stockholders to save the expenses involved
in compliance with the Sarbanes-Oxley Act of 2002, particularly
Section 404 thereof, any Congressional or regulatory initiative that
would give substantial relief to issuers such as the Corporation could
influence the Board to abandon the amendment.
o Our Board of Directors has set the cash consideration to be paid for
fractional shares held by holders of less than one whole share
resulting from the reverse stock split to be the greater of (i) $29.00
or (ii) 120% of the average of the closing prices per share of our
Common Stock on the AMEX over the 20 days immediately preceding the
Effective Date on which the shares of Common Stock were actually
traded, which amount the Board of Directors believes to represent, and
is referred to hereinafter as, the "fair market value" per share of
our Common Stock.
o Our Board of Directors retained Caymus Partners LLC to provide an
opinion as to the fairness to our unaffiliated stockholders, from a
financial point of view, of the consideration to be paid in the
reverse stock split.
o Our stockholders are not entitled to appraisal rights under either our
Restated Certificate of Incorporation or our Bylaws, as amended, or
under the Delaware General Corporation Law, even if they vote against
the reverse stock split. See also the information in the section
"Appraisal and Dissenters' Rights."
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QUESTIONS AND ANSWERS ABOUT THE MEETING AND THE PROPOSALS
Q: WHAT IS THE TIME AND PLACE OF THE ANNUAL MEETING?
A: The Annual Meeting will be held at __________________, Greenwich,
Connecticut, on ______, ___, 2005, at 8:30 a.m. Eastern time.
Q: WHAT PROPOSALS WILL BE VOTED ON AT THE ANNUAL MEETING?
A: You are being asked to vote on the approval of a proposed amendment to our
Restated Certificate of Incorporation that will provide for a 1-for-100 reverse
stock split and to vote on the approval of a proposed amendment to our Restated
Certificate of Incorporation that will grant to the Company the right of first
refusal option subsequent to the reverse stock split. You are also being asked
to re-approve the Principal Executive Bonus Plan, which was first approved in
2000, to elect seven directors, to adjourn the meeting if necessary to solicit
additional proxies, and to transact such other business as may properly come
before the meeting.
Q: WHAT DOES IT MEAN TO "GO DARK" AND WHAT ARE ITS BENEFITS?
A: If the reverse stock split is consummated, we would have fewer than 300
holders of record, and we would be eligible to delist from the AMEX and to
terminate the registration of our Common Stock under the Exchange Act, so that,
among other things, we would not have to comply with the requirements of the
Sarbanes-Oxley Act of 2002. Additionally, the shares of our Common Stock would
trade, if at all, only in the pink sheets or in privately negotiated sales. If
we delist and deregister our Common Stock, we currently intend voluntarily to
disseminate press releases, quarterly financial statements and audited annual
financial statements to our stockholders and the investment community generally.
The benefits of delisting and deregistering include:
o Eliminating the costs associated with filing documents under the
Exchange Act with the SEC;
o Eliminating the costs of compliance with Sarbanes-Oxley and related
regulations;
o Reducing the direct and indirect costs of administering our
stockholder accounts and responding to stockholder requests;
o Affording our stockholders who hold fewer than 100 shares immediately
before the reverse stock split the opportunity to receive cash for
their shares without having to pay brokerage commissions and other
transaction costs; and
o Permitting our management to focus its time and resources on our
long-term business goals and objectives.
Q: WHAT ARE THE DISADVANTAGES TO "GOING DARK"?
A: Some of the disadvantages include:
o Stockholders owning fewer than 100 shares of our Common Stock
immediately before the reverse stock split will not have an
opportunity to liquidate their shares after the reverse stock split at
a time and for a price of their own choosing; instead, they will be
cashed out and will no longer be our stockholders and will not have
the opportunity to participate in or benefit from any future potential
appreciation in our value.
o Stockholders who will continue to be our stockholders following the
reverse stock split will no longer have available all of the
information regarding our operations and results that is currently
available in our filings with the SEC, although, as indicated above,
we currently intend to continue voluntarily to disseminate press
releases, quarterly and audited annual financial statements; we will
no longer be subject to the liability provisions of the Exchange Act;
we will no longer be subject to the provisions of Sarbanes-Oxley,
including those requiring our officers to certify the accuracy of our
financial statements;
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o Our stockholders following the reverse stock split will no longer be
able to trade our securities on the AMEX, but only in the pink sheets
or in privately negotiated transactions, the effect of which may be a
significant reduction in liquidity;
o We may have less flexibility in attracting and retaining executives
and other employees because equity-based incentives (such as stock
options, if we ever choose to use them) tend not to be viewed as
having the same value in a non-reporting company; and
o We will be less likely to be able to use shares of our Common Stock to
acquire other companies.
See "Fairness of the Reverse Stock Split."
Q: IS THERE A METHOD TO PREVENT THE NUMBER OF HOLDERS OF RECORD FROM REACHING
500, THEREBY MAKING US A REPORTING COMPANY AGAIN?
A: We need to be able to keep the number of holders of record of our Common
Stock below 500 in order to avoid re-registering under the Exchange Act, filing
public reports and complying with Sarbanes-Oxley. Therefore, the amendment to
our Restated Certificate of Incorporation that would effect the 1-for-100
reverse stock split would also include a standing option for us to repurchase
any shares of Common Stock proposed to be transferred by a remaining stockholder
if, after such proposed transfer the number of holders of record of our Common
Stock would equal or exceed 300. The price to be paid for the shares pursuant to
this option would be equal to (i) the mean between the bid and asked prices (as
published in the pink sheets) averaged over the 20 trading days immediately
preceding the date of exercise of the option on which the shares of Common Stock
were actually traded or (ii) if the Common Stock is not then traded in the pink
sheets, or if such determination can not otherwise be made, the fair market
value for such shares as determined by our Board of Directors in good faith.
Q: LYNCH INTERACTIVE HAS BEEN PUBLICLY HELD SINCE 1999; WHAT ARE SOME OF THE
REASONS FOR DELISTING AND DEREGISTERING NOW?
A: Our Board of Directors believes that we currently derive no material
benefit from our status as a public reporting company. The low trading volume in
our Common Stock has not provided significant liquidity to our stockholders. Our
Board of Directors does not expect that we will use our shares of Common Stock
as consideration for acquisitions or other transactions in the foreseeable
future and we have no present intention of raising capital through a public
offering. Finally, the low trading volume in our Common Stock results in
substantial spikes in the trading price when actual trades are made on the AMEX.
The costs of remaining a public company (principally compliance with section 404
of Sarbanes-Oxley) will be substantial for the Corporation. See "Background of
the Proposal."
Q: AS A STOCKHOLDER, WHAT WILL I RECEIVE IN THE TRANSACTION?
A: If the reverse stock split is consummated and if you own fewer than 100
shares of our Common Stock immediately before the effective time of the reverse
stock split, you will receive cash equal to the fair market value, without
interest, of the shares of Common Stock that you own and you will cease to be
our stockholder. The fair market value to be received for fractional shares will
be equal to the greater of (i) $29.00 per share and (ii) 120% of the average of
the closing price per share of our Common Stock on the AMEX over the 20 trading
days immediately preceding the Effective Date on which the shares of Common
Stock were actually traded. As our Board of Directors has retained the authority
to determine when, and if, to consummate the transaction, the exact amount of
cash you would receive will depend on the selected Effective Date. If you own
100 or more shares of our Common Stock immediately before the effective time of
the reverse stock split you will continue to be our stockholder, holding whole
and fractional shares (if your holdings are not divisible evenly by 100), and
you will not receive any cash payment for any of your shares in connection with
the transaction.
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Q: IF I OWN FEWER THAN 100 SHARES, IS THERE ANY WAY I CAN CONTINUE TO BE A
STOCKHOLDER AFTER THE TRANSACTION?
A: If you currently own fewer than 100 shares of our Common Stock, you can
continue to be our stockholder after the effective time of the reverse stock
split by purchasing in the open market or in privately negotiated transactions
sufficient additional shares to cause you to own a minimum of 100 shares in a
single account immediately before the effective time of the reverse stock split.
However, we cannot assure you that any shares will be available for purchase. In
addition, you may want to (i) consolidate holdings in two or more accounts
aggregating 100 or more shares into a single account and/or (ii) hold your
shares in "street name" (if your broker or bank holds over 100 shares in total)
and arrange with your bank or broker not to effect the cash-out for the shares
it holds for you.
Q: IS THERE ANYTHING I CAN DO TO TAKE ADVANTAGE OF THE OPPORTUNITY TO RECEIVE
CASH FOR MY SHARES AS A RESULT OF THE TRANSACTION IF I CURRENTLY OWN MORE THAN
100 SHARES?
A: If you currently own 100 or more shares, you can receive cash for shares
you own as of the effective time of the reverse stock split if you reduce your
ownership of our Common Stock in each of your account(s) to fewer than 100
shares by selling such shares in the open market or otherwise transferring them.
However, we cannot assure you that any purchaser for your shares will be
available.
Q: WHAT HAPPENS IF I OWN A TOTAL OF 100 OR MORE SHARES BENEFICIALLY, BUT I
HOLD FEWER THAN 100 SHARES OF RECORD IN MY NAME AND FEWER THAN 100 SHARES WITH
MY BROKER IN "STREET NAME"?
A: An example of this would be that you have 40 shares registered in your own
name with our transfer agent and you have 60 shares registered with your broker
in "street name." Accordingly, you are the beneficial owner of a total of 100
shares, but you do not own 100 shares of record or beneficially in the same
name. If this is the case, as a result of the transaction, you would receive
cash for the 40 shares you hold of record. You will also receive cash for the 60
shares held in street name assuming your broker or other nominee effects the
cash-out for its beneficial owners of fewer than 100 shares of our Common Stock
held in the broker's or nominee's name. As explained above, you can avoid this
result by consolidating your holdings of 100 or more shares into a single
account. Brokers or other nominees may have different procedures than registered
stockholders for processing the reverse stock split and cash-out. If you hold
your shares with a broker or other nominee and if you have questions about such
procedures, we encourage you to contact your broker or nominee.
Q: WHAT ARE THE FEDERAL INCOME TAX CONSEQUENCES OF THE TRANSACTION TO ME?
A: Stockholders who do not receive any cash as a result of the reverse stock
split should not recognize any gain or loss as a result of the reverse stock
split. For stockholders who will continue to be our stockholders after the
transaction, their tax basis and holding period in the shares of our Common
Stock should remain unchanged after the reverse stock split. Stockholders who
will be paid cash for their shares of our Common Stock as a result of this
transaction will generally recognize capital gain or loss for federal income tax
purposes. Such gain or loss will be measured by the difference between the cash
received by such stockholder and the aggregate adjusted tax basis of the shares
of Common Stock held. To review the material tax consequences of the reverse
stock split in greater detail, please read the discussion under the section
"Material Federal Income Tax Consequences."
Q: AM I ENTITLED TO APPRAISAL RIGHTS?
A: Under the Delaware General Corporation Law, our stockholders are not
entitled to appraisal or other similar rights in connection with the reverse
stock split.
Q: WHAT IS THE VOTING RECOMMENDATION OF OUR BOARD OF DIRECTORS?
A: Our Board of Directors has determined that the reverse stock split and
right of first refusal are advisable and in the best interests of our
unaffiliated stockholders. Our Board of Directors has therefore unanimously
approved the reverse stock split and recommends that you vote "FOR" approval of
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this matter at the Annual Meeting. Our Board of Directors has also unanimously
approved the right of first refusal and recommends that you vote "FOR" approval
of this matter at the Annual Meeting. See the information in the section
"Recommendation of our Board of Directors."
Our Board of Directors also recommends that you vote "FOR" the re-approval of
the Principal Executive Bonus Plan, "FOR" the election to the Board of Directors
of each nominee named in the proxy statement and "FOR" the adjournment of the
Annual Meeting, if necessary, to solicit additional proxies.
Q: WERE THERE ADDITIONAL FACTORS SUPPORTING OUR BOARD'S DETERMINATION TO
RECOMMEND APPROVAL OF THE REVERSE STOCK SPLIT?
A: In addition to considering the advantages and disadvantages of the reverse
stock split discussed above, our Board of Directors based its recommendation to
approve such transaction on the following:
o The financial presentations and opinion of Caymus Partners LLC, the
financial advisor retained in connection with the reverse stock split,
and our Board of Directors' discussions and conclusions about the
fairness to our unaffiliated stockholders, from a financial point of
view, of the proposed fair market value to be paid to holders who own
fewer than 100 shares of our Common Stock immediately before the
effective time of the reverse stock split; and
o Attempts of our stockholders to achieve liquidity through open market
sales on the AMEX will likely continue to be hampered due to the low
average daily trading volume of shares of our Common Stock, where only
a small number of shares could be purchased or sold without the risk
of significantly increasing or decreasing the trading price.
Q: WHAT IS THE TOTAL COST TO US OF THE REVERSE STOCK SPLIT?
A: We estimate that the total cash outlay related to the reverse stock split
will be approximately $512,000, of which we will pay approximately $340,000 to
cash out fractional shares, based on recent trading prices of shares of our
Common Stock, and approximately $172,000 in legal, financial advisor and other
costs to effect the proposed transaction. This amount could be larger or smaller
if the number of stockholders with fewer than 100 shares immediately before the
reverse stock split changes as a result of purchases, sales or other transfers
of our Common Stock.
Q: WHAT SHARES CAN I VOTE?
A: You may vote all shares of our Common Stock that you own as of the close of
business on the record date, which is ______ ___, 2005. These shares include (1)
shares held directly in your name as the "holder of record," and (2) shares held
for you in "street name" as the "beneficial owner" through a nominee (such as a
broker or bank). Nominees may have different procedures and, if you own shares
in street name, you should contact them prior to voting.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. Once the reverse stock split is consummated, we will send instructions
on where to send your stock certificates and how you will receive any cash
payments you may be entitled to receive.
Q: CAN I VOTE MY SHARES WITHOUT ATTENDING THE ANNUAL MEETING?
A: Whether you hold your shares directly as the stockholder of record or
beneficially in "street name," you may direct your vote without attending the
Annual Meeting. You may vote by signing your proxy card or, for shares held in
"street name," by signing the voting instruction card included by your broker or
nominee and mailing it in the enclosed, preaddressed envelope. If you provide
specific voting instructions, your shares will be voted as you instruct. If you
sign but do not provide instructions, your shares will be voted as described
below in "How are votes counted?"
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Q: CAN I CHANGE MY VOTE?
A: You may change your proxy instructions at any time prior to the vote at the
Annual Meeting. For shares held directly in your name, you may change your vote
by signing a new proxy card bearing a later date (which automatically revokes
the earlier dated proxy card) or by attending the Annual Meeting and voting in
person. Attendance at the Annual Meeting will not cause your previously signed
proxy card to be revoked unless you specifically so request. For shares held
beneficially by you in street name, you may change your vote by submitting new
voting instructions to your broker or nominee.
Q: WHAT ARE THE VOTING REQUIREMENTS TO APPROVE THE REVERSE STOCK SPLIT AND
RIGHT OF FIRST REFUSAL, RE-APPROVE THE PRINCIPAL EXECUTIVE BONUS PLAN AND TO
ELECT DIRECTORS?
A: Approval of the reverse stock split and right of first refusal will require
the affirmative vote of a majority of the outstanding shares of our Common
Stock. Re-approval of the Principal Executive Bonus Plan, and any decision to
adjourn the meeting if necessary to solicit more proxies, will require the
affirmative vote of a majority of the votes cast on such proposal at the Annual
Meeting. The election of nominees to our Board of Directors will be determined
by a plurality of the votes of the shares of our Common Stock present in person
or represented by proxy at the Annual Meeting.
Q: HOW ARE VOTES COUNTED?
A: You may vote "FOR," "AGAINST" or "ABSTAIN" on the reverse stock split and
right of first refusal, re-approval of the Principal Executive Bonus Plan and an
adjournment. If you "ABSTAIN" on the proposal to approve the reverse stock split
or right of first refusal, it has the same effect as a vote "AGAINST." If you
"ABSTAIN" on the proposal to re-approve the Principal Executive Bonus Plan or to
adjourn or withhold authority to vote for any nominee for director, it will have
no effect on the votes cast. If you sign and date your proxy card with no
further instructions, your shares will be voted "FOR" the approval of the
reverse stock split and right of first refusal, "FOR" the re-approval of the
Principal Executive Bonus Plan, "FOR" the election of each nominee for our Board
of Directors named in the proxy statement, and "FOR" adjournment, if necessary
in order to solicit additional proxies, all in accordance with the
recommendations of our Board of Directors.
Q: WHERE CAN I FIND THE VOTING RESULTS OF THE ANNUAL MEETING?
A: We will announce preliminary voting results at the Annual Meeting and
publish final results in a Current Report on Form 8-K filed with the SEC and by
amending the Schedule 13E-3 filed in connection with the reverse stock split.
Q: IF THE TRANSACTION IS APPROVED BY OUR STOCKHOLDERS, MUST IT BE CONSUMMATED
BY OUR BOARD OF DIRECTORS?
A: No. Our Board of Directors may abandon the reverse stock split at any time
or may proceed with it at any time without further notice to or action on the
part of our stockholders.
Q: HOW WILL WE OPERATE AFTER THE TRANSACTION?
A: If the reverse stock split is consummated, and assuming that we have fewer
than 300 holders of record after the transaction, we will delist, deregister and
no longer be subject to the reporting and related requirements under the federal
securities laws that are applicable to reporting companies. We do not anticipate
that the reverse stock split will have an effect on the conduct of our business.
We expect our business and operations to continue as they are currently being
conducted.
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TABLE OF CONTENTS
Page
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SUMMARY TERM SHEET............................................................1
Reverse Stock Split; "Going Dark"; "Pink Sheet" Quotation.................1
Questions And Answers About The Meeting And The Proposals.................4
TABLE OF CONTENTS.............................................................9
SPECIAL FACTORS..............................................................11
Background of the Proposal...............................................11
Purpose of the Proposal..................................................14
Structure of the Proposal................................................14
Advantages of the Proposal...............................................17
Disadvantages of the Proposal............................................19
Opinion of Financial Advisor.............................................21
Alternative Transactions Considered......................................29
Fairness of the Reverse Stock Split......................................30
PROXIES AND VOTING PROCEDURES................................................32
COST OF PROXY SOLICITATION...................................................32
INTRODUCTION.................................................................33
PROPOSAL NO. 1 AMENDMENT TO RESTATED CERTIFICATE ON INCORPORATION
TO EFFECT A REVERSE STOCK SPLIT............................................34
Special Interests of Affiliated Persons in the Transaction...............34
Costs/Source of Funds and Expenses.......................................34
Federal Income Tax Consequences..........................................35
Appraisal Rights.........................................................38
Votes Required...........................................................38
Recommendation of Our Board of Directors.................................38
PROPOSAL NO. 2 AMENDMENT TO RESTATED CERTIFICATE ON INCORPORATION
TO GRANT OPINION TO REPURCHASE SHARES......................................38
Special Interests of Affiliated Persons in the Transaction...............39
Appraisal Rights.........................................................39
Votes Required...........................................................39
Recommendation of Our Board of Directors.................................39
PROPOSAL NO. 3 RE-APPROVAL OF THE PRINCIPAL EXECUTIVE BONUS PLAN............40
Administration...........................................................40
Eligibility and Participation............................................40
Determination of Annual Bonus............................................41
Performance Goals........................................................41
Limits on Annual Bonus...................................................41
Form and Payment of Annual Bonus.........................................41
Amendment and Termination of Principal Executive Bonus Plan..............42
Performance Awards.......................................................42
Votes Required...........................................................42
Recommendation of Our Board of Directors.................................42
MARKET RELATED INFORMATION...................................................42
Market for Common Stock..................................................42
Dividend Policy..........................................................43
PROPOSAL NO. 4 ELECTION OF DIRECTORS........................................43
Votes Required...........................................................44
Recommendation of Our Board of Directors.................................45
9
GOVERNANCE OF LYNCH INTERACTIVE..............................................45
Board of Directors.......................................................45
Committees of Board of Directors.........................................45
Compensation of Directors................................................46
Employee Code of Ethics and Conflicts of Interest Policy.................46
Policy Regarding Reports of Actions That May Be Violations of Law........47
Stockholder Communications...............................................47
EXECUTIVE COMPENSATION.......................................................48
Summary Compensation Table...............................................48
EXECUTIVE COMPENSATION AND BENEFITS COMMITTEE REPORT ON EXECUTIVE
COMPENSATION...............................................................48
Overview and Philosophy..................................................48
Executive Officer Compensation Program...................................49
Chief Executive Officer Compensation.....................................50
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...............51
PERFORMANCE GRAPH............................................................53
TRANSACTIONS WITH CERTAIN AFFILIATED PERSONS.................................54
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE......................54
INDEPENDENT PUBLIC ACCOUNTANTS...............................................54
Resignation of Ernst & Young LLP.....................................54
Audit Fees...............................................................55
Audit-Related Fees.......................................................55
Tax Fees.................................................................55
All Other Fees...........................................................56
Audit Committee's Pre-Approval Policies and Procedures...................56
AUDIT COMMITTEE REPORT.......................................................56
PROPOSALS OF STOCKHOLDERS....................................................57
MISCELLANEOUS................................................................57
ANNUAL REPORT................................................................57
Exhibit A Form of Certificate of Amendment of the Restated Certificate
of Incorporation of Lynch Interactive Corporation...........................A-1
Exhibit B Financial Advisor's Fairness Opinion...............................B-1
10
SPECIAL FACTORS
BACKGROUND OF THE PROPOSAL
In recent years, our Common Stock has attracted only limited market
research attention. There has been low trading volume on the AMEX, resulting in
an inefficient market for our shares. Due to the low trading volume and our
small market capitalization we do not have the ability to use our Common Stock
as a significant part of our employee compensation and incentives strategy or as
consideration for acquisitions. Our Board of Directors does not foresee
opportunities to raise capital through sales of equity securities in a public
offering. Also, our Board of Directors has determined that given our size and
the absence of sustained interest by securities research analysts and other
factors, we have not enjoyed an appreciable enhancement in our company image,
which usually results from having reporting company status.
We incur substantial direct and indirect costs associated with compliance
with the Exchange Act's filing and reporting requirements imposed on reporting
companies. The cost of this compliance has increased significantly with the
implementation of the provisions of Sarbanes-Oxley, including but not limited
to, significant costs and burdens of compliance with the forthcoming internal
control audit requirements of Section 404 of Sarbanes-Oxley, more commonly
referred to in this proxy statement as Section 404. While the SEC has deferred
for another year the application of Section 404 to non-accelerated filers
including the Corporation, the cost of implementing Section 404's internal
control procedures is expected to be unduly burdensome and costly, considering
our size and our decentralized control environment. We have already incurred,
and would continue to incur, substantial costs to implement these procedures
unless and until we delist and deregister. In addition, we incur direct and
indirect expenses associated with listing the shares of our Common Stock on the
AMEX. We have also incurred substantial indirect costs as a result of, among
other things, the executive time expended to prepare and review our public
filings.
In light of these circumstances, our Board of Directors believes that it is
in our best interest to undertake the reverse stock split, enabling us to
deregister our Common Stock under the Exchange Act. Deregistering will relieve
us of the administrative burden, cost and competitive disadvantages associated
with filing reports and otherwise complying with the requirements imposed under
the Exchange Act and Sarbanes-Oxley.
Our management retained consultants, starting in July 2004, to assist us in
preparing to comply with the requirements of Section 404, including expending
approximately $300,000 in preparing a preliminary project and cost plan and
documentation of the internal control procedures at one of our seven principal
subsidiaries.
Our Chairman of the Board had certain concerns that he first voiced in
August 2004 which, over time, resulted in this proposal. He had recently
overseen Section 404 compliance implementation at another company, of which he
is chief executive officer. He recognized that the significant costs (both
out-of-pocket and internal) that were being incurred at this other company would
be magnified for the Corporation due to its management philosophy and business
plan. We have primarily grown through the acquisition of small, stand-alone,
non-publicly reporting companies. When we acquire local telephone subsidiaries,
our philosophy is to maintain decentralized operations and to allow these
subsidiaries to maintain their administrative office locations, staffing and
business systems as they were prior to their acquisition. In particular, the
accounting personnel have generally been retained in such local office locations
to insure continuity of operations. Management believes that having individuals
who record the accounting entries for a subsidiary in close proximity to the
11
subsidiary's operations helps to insure accuracy of financial reporting.
However, this decentralization leads to a lack of standardization of procedures
and processes and a limited number of employees at each location. As a result,
our Chairman believed that the Corporation would require significantly greater
resources, both in terms of dollars spent and management time diverted, to
accomplish the detailed documentation, as well as management and auditor testing
requirements required by Section 404, than would be the case for companies of
similar overall size with centralized organizations. In addition, he was
concerned that the steps to implement these requirements could impair our local,
customer-driven focus and would divert employees of our operating subsidiaries
from running their businesses. Finally, the Chairman posited that the
significant time requirements relating to Section 404 compliance, which would be
imposed on our corporate officers and independent directors, would not be
justified by their benefits and would divert management's attention from other
matters.
In response to his concerns, our officers and directors began to evaluate
whether we were achieving the benefits of being a publicly traded company when
weighed against the costs of maintaining our public reporting obligations. As
discussed above, because of the nature of the trading market in our stock and
our small market capitalization, we do not have the ability to use our Common
Stock as consideration for acquisitions. Further, we do not currently have
viable opportunities to raise capital through a public offering of our Common
Stock. We have also been limited in our ability to use our Common Stock as a
significant part of our employee compensation and incentive strategy.
In addition to the limited benefits we have realized from having reporting
company status, we have determined that 8 of our 14 local telephone companies,
three of which had revenues in the $5 million revenue range, with limited
support staffs, would be required to implement full documentation and testing
under Section 404. When it considered the constraints imposed by the limited
liquidity and trading volatility associated with the low trading volume of our
Common Stock on the AMEX, as well as the significant costs of Section 404
compliance, the Board viewed the Chairman's concerns as well-founded.
At our December 2004 Board meeting, the directors informally approved the
preliminary steps taken by management to develop a specific proposal to delist
and deregister, including a review of publicly available documents of other
companies that had recently undertaken "going private" transactions, and a
determination of the compatibility of such approaches with the Corporation's
situation. With the assistance of counsel, management evaluated the alternatives
presented in such documents and filings and developed a recommendation to be
presented to the Board. Also in December 2004, management consulted with counsel
about alternative methods and procedures for delisting and deregistering our
shares.
On January 12, 2005, at a meeting of the Audit Committee of our Board of
Directors, our independent auditors, Deloitte & Touche LLP, discussed new
accounting pronouncements regarding the SEC's final rules for implementing
Section 404. In the course of that meeting, Deloitte & Touche expressed concern
over the Corporation's readiness to comply with Section 404, even with the
assistance of consultants already retained by the Corporation. Specifically,
12
Deloitte and Touche was concerned that the limited personnel resources at each
of the Corporation's subsidiaries, coupled with the geographically dispersed
operations, the lack of centralization of subsidiary processes and controls, and
the use of primarily internal resources to document key processes and controls,
could make Section 404 compliance difficult. Deloitte & Touche advised the
audit committee to consider expanding its use of external resources to
supplement the Company's efforts.
Following this audit committee meeting, management continued to refine the
proposal and directors had informal discussions among themselves, which
discussions involved the alternatives to the reverse stock split, including an
issuer tender offer, a traditional stock repurchase program and an odd-lot
repurchase program. (The alternatives are discussed in greater detail in the
section "Alternative Transactions Considered," beginning on page 29.) At
subsequent telephone meetings on January 29, and February 23, 2005, the Board
considered using a fixed (pre-determined) per share price for shares to be
repurchased. In light of uncertainties as to when and if the proposal would be
acted upon, specifically that it could not be predicted with certainty when
stockholder approval would take place and that our Board of Directors would have
discretion with respect to the timing of the filing of the amendment, the Board
reverted to a formula price, tentatively set at 110% of the average closing
stock price for the 20 trading days prior to the effective time. The Board set
the formula price at 110% of the 20-day trading average based on the
recommendation of management. In preparing its recommendation to the Board,
management had reviewed recent similar transactions and, in one case, spoke to
an executive at a company that had recently completed such a transaction. The
reverse stock split ratio was selected primarily to reduce the number of holders
to fewer than 300 and secondarily for ease of calculations.
Finally, on March 9, 2005, our Board of Directors reviewed a preliminary
draft of the Corporation's proposed proxy statement, which included a fully
developed reverse stock split proposal. Using the draft proxy statement as a
basis for discussion, the Board reviewed the increasing costs of operating as a
reporting company and evaluated the merits of delisting and deregistering our
shares of Common Stock. In addition to the reverse stock split, our Board of
Directors formally considered the alternatives listed in the draft proxy
statement to achieve this result. In light of the readily apparent problems with
these other alternatives, when compared with the reverse stock split proposal,
our Board of Directors concluded, after a full discussion, that the most viable
alternative was the reverse stock split. Our Board of Directors authorized our
management to retain Caymus Partners LLC as its financial advisor and to proceed
with the reverse split, but it changed the proposed price formula by increasing
the price from 110% to 120% of the average price per share over the prior 20
trading days. The price was increased to 120% of the average price per share
over the prior 20 trading days because the Board felt that the 20% premium was a
fair price, particularly given then recent declines in the stock price. The
Board determined to use a 20 trading day average at the suggestion of management
and counsel. Based on their combined experience, a 20 trading day average is a
relatively common convention used to determine fair market value, particularly
for a company with low trading volume, such as ours. A 20 trading day average
looks back approximately one month, thereby reducing the risk that a sharp, but
temporary, increase or decrease in the stock price will result in a formula
price that does not accurately reflect recent market prices of our Common Stock.
The Board of Directors, at its March 9 and April 17 meetings, and the audit
committee, at its April 19 meeting, unanimously approved the filing of the proxy
statement. Each of the directors intends to vote for the proposed reverse stock
split and right of first refusal at the Annual Meeting.
Also, on April 17, 2005, the Board considered the proposal with the benefit
of draft copies of the Caymus opinion and report. In its report, Caymus Partners
utilized a number of methodologies in order to analyze our value. The discounted
cash flow analysis, which Caymus Partners considers to be the most accurate
measure of our going concern value, resulted in a mean implied equity per share
value of $29.00. Based on these materials, the Board modified the pricing
formula again by adding a $29.00 per share "floor," and asked Caymus Partners to
update its report. Although the Board could have chosen to employ a fixed price,
13
rather than a formula, it had rejected a fixed price model during the early
stages of the proposal's development. The Board believed that given the
uncertainties with respect to the timing of the reverse stock split, coupled
with the volatility of the trading market in the Company's Common Stock, a fixed
price was not appropriate. In the exercise of its best judgment, the Board felt
that a formula, with the addition of the $29.00 per share "floor," was the
correct method for determining the cash-out price. A formula preserves the
Corporation's flexibility to effect the reverse stock split at a time of its
choosing following approval of the proposal. A formula also takes into account
fluctuations in the stock price over the 20 day trading period without giving
undue weight to the stock price on any particular day. In this way,
irregularities in the stock price are accounted for and the price paid to
cashed-out stockholders is most representative of the fair value of the shares.
Further, as recent market prices of the Corporation's stock had been below
$29.00 and the general tend of the Corporation's stock price had been downward
since the beginning of 2005, the Board believed that the $29.00 per share
"floor" would provide stockholders who are cashed-out a fair price, while the
20% premium on the 20 trading day average would protect stockholders in the
event of higher market prices during the 20 trading day period. It delegated to
the Audit Committee final authority to accept the Caymus report and opinion and
to direct management to file the preliminary proxy statement with the SEC.
On April 19, 2005, the Audit Committee of the Board of Directors, acting
pursuant to authority delegated to it by the full Board of Directors on April
17, 2005, received and approved the report and opinion of the financial advisor
regarding the fairness from a financial point of view of the proposed cash
consideration to be paid to our unaffiliated stockholders for fractional shares
and directed that the preliminary proxy statement be filed with the SEC. Our
Board of Directors subsequently fully adopted the analysis employed by Caymus
Partners in preparing its report.
PURPOSE OF THE PROPOSAL
The primary purpose of the reverse stock split is to enable us to reduce
the number of our holders of record to fewer than 300. This will allow:
o termination of the listing of our shares on the AMEX and the expenses
associated with listing thereon;
o termination of the registration of our Common Stock under Section
12(b) of the Exchange Act and suspension of our duties to file
periodic reports with the SEC and comply with Sarbanes-Oxley;
o elimination of the administrative burden and expense of maintaining
small stockholders' accounts; and
o liquidation by small stockholders of their shares of our Common Stock
at a fair price, without having to pay brokerage commissions.
While it is possible that the Corporation could subsequently return to
filing company status, the Board of Directors views this as an unlikely scenario
because: (i) the Corporation has no present intention of undertaking a public
offering; (ii) the standing option to acquire shares if the number of holders of
record would exceed or equal 300 effectively protects the Corporation against
inadvertently becoming subject to reporting requirements, and (iii) the
Corporation has no intention of relisting on a securities exchange or automated
quotation system.
STRUCTURE OF THE PROPOSAL
Our Board of Directors has approved the submission of the reverse stock
split and right of first refusal to a vote of our stockholders and recommends
the transaction for your approval. Our Board of Directors has, however, retained
the final authority to determine if and when to file the amendment to our
Restated Certificate of Incorporation with the Office of the Secretary of State
of the State of Delaware in order to effectuate these amendments.
14
Notwithstanding authorization of the proposed transaction by our current
stockholders, our Board of Directors may abandon the reverse stock split at any
time without further action by our stockholders, or may file the amendment at
any time without further notice to or action by our stockholders. However, the
Board believes that the proposal should be acted on before it becomes "stale."
It expects to make this decision within 60 days after approval by the
stockholders.
As of April 19, 2005 there were approximately 2,752,251 shares of our
Common Stock outstanding and approximately 889 holders of record. As of such
date, approximately 690 holders of record held fewer than 100 shares of our
Common Stock. As a result, we believe that the reverse stock split will reduce
the number of our holders of record to approximately 200, while only reducing
the number of outstanding shares to approximately 27,410 (2,741,000 on a
pre-reverse stock split basis).
EFFECTS ON STOCKHOLDERS WITH FEWER THAN 100 SHARES OF COMMON STOCK
If the reverse stock split is implemented, stockholders holding fewer than
100 shares of our Common Stock immediately before the reverse stock split,
sometimes referred to as Cashed Out Stockholders, will:
o not receive a fractional share of Common Stock as a result of the
reverse stock split;
o receive cash equal to the fair market value of the shares of our
Common Stock they held immediately before the reverse stock split in
accordance with the procedures described in this proxy statement;
o not be required to pay any service charges or brokerage commissions in
connection with the reverse stock split;
o not receive any interest on the cash payments made as a result of the
reverse stock split; and
o have no further ownership interest in our Corporation and no further
voting rights.
Cash payments to Cashed Out Stockholders as a result of the reverse stock
split will be subject to income taxation. For a discussion of the federal income
tax consequences of the reverse stock split, please see the section of this
proxy statement entitled "Material Federal Income Tax Consequences."
If you do not currently hold at least 100 shares of Common Stock in a
single account and you want to continue to hold shares of our Common Stock after
the reverse stock split, you may do so by taking any of the following actions:
1. Purchasing a sufficient number of additional shares of our Common
Stock in the open market or privately and having them registered in
your name and consolidated with your current record account, if you
are a record holder, or having them entered in your account with a
nominee (such as your broker or bank) in which you hold your current
shares so that you hold at least 100 shares of our Common Stock in
your account immediately before the effective time of the reverse
stock split;
2. If you hold an aggregate of 100 or more shares in two or more
accounts, consolidating your accounts so that you hold at least 100
shares of our Common Stock in one account immediately before the
effective time of the reverse stock split; or
3. Transferring your shares into an account with a broker or bank so that
the shares are held in "street name," and if the nominee holds at
least 100 shares and does not receive instructions from you to cash
out your position, your beneficial interest will continue.
You will have to act far enough in advance so that the purchase or transfer
of any shares of our Common Stock and/or consolidation of your accounts
containing shares of our Common Stock is completed by the close of business
prior to the effective time of the reverse stock split.
15
EFFECTS ON STOCKHOLDERS WITH 100 OR MORE SHARES OF COMMON STOCK
If the reverse stock split is consummated, stockholders holding 100 or more
shares of our Common Stock immediately before the reverse stock split, otherwise
referred to as Continuing Stockholders, will:
o continue to be our stockholders and will be the only persons entitled
to vote as stockholders after the consummation of the reverse stock
split;
o not receive cash for any of their shares of our Common Stock,
including fractional shares; and
o likely experience a reduction in liquidity (which may be significant)
with respect to their shares of our Common Stock. If our Common Stock
continues to be quoted, it will be quoted in the pink sheets, and
there may be no trading market at all in our Common Stock. In order
for our Common Stock to be quoted in the pink sheets, one or more
broker-dealers must act as a market maker and sponsor our shares.
However, because we will not file reports with the SEC, there can be
no assurance that any broker-dealer will be willing to act as a market
maker for our shares of Common Stock, even if we voluntarily
disseminate press releases, quarterly financial statements and audited
annual financial statements to our stockholders and the investment
community generally.
Thus, for example, if you own 159 shares immediately before the effective
time of the reverse stock split, you will own 1.59 shares after the reverse
stock split and you will receive no cash whatsoever.
EFFECTS ON LYNCH INTERACTIVE
If consummated, the reverse stock split will affect the registration of our
Common Stock under the Exchange Act, as we intend to delist our Common Stock
from the AMEX and apply for termination of our registration as soon as
practicable after the consummation of the reverse stock split.
We have no current plans to issue additional shares of our Common Stock
after the reverse stock split, but we reserve the right to do so at any time and
from time to time at such prices and on such terms as our Board of Directors
determines to be in our best interest. Continuing Stockholders will not have any
preemptive or other preferential rights to purchase any shares of our Common
Stock that we may issue in the future, unless such rights are specifically
hereafter granted.
After the reverse stock split has been consummated, we may, from time to
time, repurchase shares of our Common Stock pursuant to our share repurchase
program, in privately negotiated sales or in other transactions. The timing of
any such repurchase will depend on a number of factors, including our financial
condition, operating results and available capital at the time. In addition, we
may be required at various times in the future to exercise our option to
repurchase shares of Common Stock in order to prevent the number of our holders
of record from equaling or exceeding 300. We cannot predict the likelihood,
timing or prices of such purchases and they may well occur without regard to our
financial condition or available cash at the time.
16
We expect that upon the completion of the reverse stock split, the shares
of our Common Stock beneficially owned by our directors and executive offices
will comprise approximately 26% of the then issued and outstanding shares of our
Common Stock, which is approximately the same percentage they comprised prior to
the effective time of the reverse stock split. The Corporation has no
outstanding stock options and only two officers (and no directors) have elected,
pursuant to the provisions of the Corporation's 401k plan, to have a portion of
their contributions to that plan used to purchase shares of the Corporation's
Common Stock while the transaction is pending. Such purchases are made by the
trustee of the plan at prevailing market prices on a non-discretionary basis.
Except as set forth above, the Corporation is not aware that any directors or
officers intend to acquire shares while the proposed reverse stock split is
pending. See "Special Interests of Affiliated Persons in the Transaction."
The par value of the shares of our Common Stock will be $0.01 per share
following consummation of the reverse stock split.
SCHEDULE 13E-3 FILING
The reverse stock split is considered a "going private" transaction as
defined in Rule 13e-3 promulgated under the Exchange Act, because it is intended
to terminate the registration of our Common Stock under Section 12(b) of the
Exchange Act and suspend our duty to file periodic reports with the SEC.
Consequently, we have filed a Rule 13e-3 Transaction Statement on Schedule 13E-3
with the SEC.
ADVANTAGES OF THE PROPOSAL
COST SAVINGS
As a result of recent corporate governance scandals and the legislative and
litigation environment resulting from those scandals, the costs of being a
public reporting company have increased for those companies subject to Section
404 requirements, and the costs of our remaining a public reporting company are
expected to increase substantially in the near future. Legislation such as
Sarbanes-Oxley will continue to have the effect of increasing the compliance
burdens and potential liabilities of being a public reporting company. It will
increase audit fees and other costs of compliance, such as securities counsel
fees, as well as outside director fees and potential liability faced by our
officers and directors. We also incur substantial indirect costs as a result of,
among other things, our management's time expended to prepare and review our
public filings.
17
Our Board of Directors believes that by deregistering our shares of Common
Stock and suspending our periodic reporting obligations, we will realize annual
cost savings of approximately $1.7 million as follows:
Estimated Ongoing Estimated Ongoing
Annual Costs of Annual Cost Savings
Remaining Listed From Delisting
Public Company Fees and Costs: and Registered and Deregistering
------------------------------ -------------- -----------------
AMEX listing fees $ 15,000 $ 15,000
Printing, mailing and filing costs 9,000 5,000
Audit fees 1,310,000 400,000
Other fees 15,000 10,000
Subtotal $ 1,349,000 $ 430,000
Sarbanes-Oxley Compliance Fees
Attestation fees $ 1,000,000 $ 1,000,000
Consultants fees 270,000 270,000
--------------- --------------
$ 1,270,000 $ 1,270,000
---------------- ---------------
$ 2,619,000 $ 1,700,000
=============== ==============
These estimated annual cost savings reflect, among other things: (i) a
reduction in audit, attestation and related fees, (ii) the elimination of costs
associated with filing periodic reports with the SEC, (iii) the elimination of
costs associated with the listing of shares of our Common Stock on the AMEX and
(iv) the reduction in direct miscellaneous clerical and other expenses,
including printing, stock transfer and proxy solicitation expenses.
Compliance with Section 404 would require significant expenditures during
the initial fiscal year of compliance, including costs related to computer
software and hardware and fees to third parties for compliance planning,
assessment, documentation and testing. Management estimates the increased fees
to third parties during the initial year of compliance at approximately
$500,000. The initial year will require significant consulting costs to help the
Corporation document control narratives and control matrices, remediate where
controls are considered less than adequate, and determine which controls should
be tested. In 2004, the Company incurred $300,000 in external consulting costs
to document the controls at one subsidiary. The Corporation's management expects
to be able to utilize the work performed at the subsidiary to serve as a model
for the other subsidiaries. However, due to the Corporation's limited personnel
resources, it would take two consultants more than six months to complete the
initial documentation and remediation required. The Corporation estimates that
two consultants would be retained for 1,250 hours each at a cost of $200 per
hour, for a total of $500,000. This is in addition to the $300,000 spent in
2004. The Corporation believes the $500,000 amount represents costs that are
over and above the ongoing annual cost to update the documentation and perform
required testing. In addition, the estimated annual costs and cost savings do
not include other costs that management and the Board of Directors believe are
substantial, though difficult or impossible to quantify, such as internal and
outside legal expenses related to being a public reporting company, management
and internal clerical support time devoted to this area, and the increased risk
of liability associated with being a reporting company.
The cost savings figures set forth above are only estimates. The actual
savings we realize from the transaction may be higher or lower than such
estimates, depending, among other things, on how promptly we consummate the
reverse stock split. Estimates of the annual savings to be realized are based
upon (i) the actual costs to us of the services and disbursements in each of the
categories listed above that are reflected in our financial records and (ii) the
allocation to each category of management's estimates of the portion of the
expenses and disbursements in such category believed to be solely or primarily
attributable to our public reporting company status. In some instances,
management's cost saving expectations were based on information provided or upon
verifiable assumptions. For example, our auditors, Deloitte & Touche, have
informally advised us that there will be a reduction in auditing fees if we no
longer continue as a public reporting company, though the estimated annual
savings were developed by management.
OPPORTUNITY FOR CASHED OUT STOCKHOLDERS TO SELL THEIR HOLDINGS AT OR ABOVE
THE THEN CURRENT MARKET TRADING PRICE, WITHOUT BROKERAGE FEES OR COMMISSIONS
In connection with the reverse stock split, our Board of Directors
determined that a fair price for this transaction to Cashed Out Stockholders is
the fair market value as set forth in the section "Background of the Proposal"
of this proxy statement, because it provides them an opportunity to liquidate
their holdings at a fair price without brokerage commissions.
18
ABILITY TO CONTROL DECISION WHETHER TO REMAIN AS A STOCKHOLDER
Another factor considered by our Board of Directors in determining the
fairness of the transaction to our unaffiliated stockholders is that current
holders of fewer than 100 shares of our Common Stock can remain as our
stockholders, even if the reverse stock split is consummated, by acquiring
additional shares so that they own at least 100 shares of our Common Stock
immediately before the effective time of the reverse stock split. Conversely,
stockholders that own 100 or more shares of our Common Stock can reduce their
holdings to fewer than 100 shares by selling shares prior to the transaction.
Our Board of Directors considered the structure of the transaction to be fair to
our unaffiliated stockholders because it allows them a measure of control over
the decision of whether to remain stockholders after the transaction, or to
receive the cash consideration offered in connection with the reverse stock
split, if the transaction is consummated.
OPERATIONAL FLEXIBILITY
Another advantage of effectuating the reverse stock split relates to
operational flexibility. Our Board of Directors believes that consummating the
reverse stock split and ending our status as a public reporting company would
enable management to concentrate its efforts on our long-term growth, free from
the constraints of public ownership. Our Board of Directors believes that we
will benefit more if its business decisions can be made with a view toward
long-term growth and with less emphasis on the effect of decisions upon the
short-term earnings and the consequent short-term effect of such earnings on the
market value of our Common Stock.
NO MATERIAL CHANGE IN PERCENTAGE OWNERSHIP OF CONTINUING STOCKHOLDERS
As only an estimated 11,000 out of 2,752,251 shares of our Common Stock
would be eliminated as a result of the reverse stock split, the percentage
ownership of Continuing Stockholders would be approximately the same as it was
prior to the reverse stock split. For example, our officers and directors
currently beneficially own approximately 26% of the outstanding shares of our
Common Stock and will beneficially own approximately 26% of our Common Stock
following completion of the reverse stock split. We believe that structuring the
transaction in a manner that preserves the approximate percentage ownership of
the Continuing Stockholders, whether affiliated or unaffiliated, supports the
fairness of the transaction to all the stockholders.
PROTECTION AGAINST INADVERTENTLY BECOMING A REPORTING COMPANY
If the number of holders of record of our Common Stock increases to 500 or
more we would be required to re-register under the Exchange Act, file public
reports and comply with the requirements of Sarbanes-Oxley. The right of first
refusal protects us against inadvertently becoming subject to such requirements.
Such protection will ensure that we do not incur the significant expenses
required to comply with public reporting and related requirements.
DISADVANTAGES OF THE PROPOSAL
SUBSTANTIAL OR COMPLETE REDUCTION OF PUBLIC SALE OPPORTUNITIES FOR OUR
STOCKHOLDERS
Following the transaction, we anticipate that the market for shares of our
Common Stock will be less active and may be eliminated altogether. Our
stockholders may no longer have the option of selling their Common Stock in a
public market. While shares may be quoted in the pink sheets, any such market
for our Common Stock may be highly illiquid after the suspension of our periodic
reporting obligations, even though we currently intend voluntarily to
disseminate press releases, quarterly financial statements and audited annual
financial statements to our stockholders and the investment community generally.
19
In addition, because of the standing option in favor of the Corporation to
purchase any Common Stock proposed to be sold if, after each sale, the number of
record holders of Common Stock would equal or exceed 300, stockholders may be
deprived of the opportunity to sell their shares at prices they could otherwise
obtain by selling to others. Instead, they would receive the formula specified
in the amended Restated Certificate of Incorporation, which is generally the
average of the bid and asked prices for the last 20 days when the stock is, in
fact, quoted in the pink sheets and may be a lower price than they could
otherwise negotiate with a third party.
LOSS OF CERTAIN PUBLICLY AVAILABLE INFORMATION
Upon terminating the registration of our Common Stock under the Exchange
Act, our duty to file periodic reports with the SEC would be suspended. Although
we intend voluntarily to disseminate press releases, quarterly financial
statements and audited financial statements, some of the information regarding
our operations and financial results that is currently available to the general
public and our investors may not be available after we have terminated our
registration. Upon the suspension of our duty to file reports with the SEC,
investors seeking information about us may have to contact us directly to
receive such information. We cannot assure you that we will provide the
requested information to an investor. While our Board of Directors acknowledges
the circumstances in which such termination of publicly available information
may be disadvantageous to some of our stockholders, our Board of Directors
believes that the overall benefit to us of no longer being a public reporting
company substantially outweighs the disadvantages thereof.
As the Corporation will no longer be subject to certain liability
provisions of the Exchange Act and officers will no longer have to make the
certifications required by Sarbanes-Oxley, stockholders could find that the
information provided to them is more limited and that their recourse for alleged
false or misleading statements is also more limited. See also "Special Interests
of Affiliated Persons in the Transaction."
20
POSSIBLE DELAY IN SALE OF SHARES
As a result of the standing option in favor of the Corporation to purchase
any Common Stock proposed to be sold if, after each sale, the number of record
holders of Common Stock would equal or exceed 300, stockholders may experience a
delay in their ability to sell shares to others until the Corporation has
decided whether to exercise the right of first refusal or the time to exercise
the right of first refusal has lapsed.
POSSIBLE SIGNIFICANT DECLINE IN THE VALUE OF OUR SHARES
As a result of the limited liquidity in our Common Stock following the
consummation of transaction and the diminished opportunity for our stockholders
to monitor actions of our management due to the lack of certain public
information, Continuing Stockholders may experience a significant decrease in
the value of their shares of our Common Stock.
INABILITY TO PARTICIPATE IN ANY FUTURE INCREASES IN VALUE OF OUR COMMON
STOCK
Cashed Out Stockholders will have no further financial interest in the
Corporation and thus will not have the opportunity to participate in any
potential appreciation in the value of our shares, including without limitation
if we were to become a public reporting company again in the future. Our Board
of Directors determined that this factor does not make the transaction unfair to
our unaffiliated stockholders, because those stockholders who wish to remain
stockholders after the reverse stock split can do so by acquiring additional
shares so that they own at least 100 shares of our Common Stock before the
reverse stock split.
OPINION OF FINANCIAL ADVISOR
Our Board of Directors retained Caymus Partners LLC to act as the financial
advisor to it and requested that it evaluate the fairness, from a financial
point of view, of the reverse stock split to our public stockholders, by which
we mean our unaffiliated stockholders. On April 17, 2005, the financial advisor
delivered its report and opinion to the effect that, as of the date of the
opinion and based upon and subject to the matters stated in the opinion, the
fractional share consideration equal to the fair market value described in this
proxy statement, would be fair, from a financial point of view, to the
unaffiliated holders of our Common Stock. Thereafter on April 19, 2005, the
Audit Committee of the Board of Directors, acting pursuant to authority
delegated to it by the Board of Directors, met again with the financial advisor
and approved the report and opinion.
Caymus Partners, LLC is an investment banking "boutique" firm organized in
2001. The firm has successfully completed over 30 transactions, and its eight
professionals, while at other firms, closed more than 240 transactions. Those
professional personnel have collectively over 65 years of investment banking and
other investment related experience. Such experience is broadly based both in
terms of industries and kinds of transactions represented.
Under the terms of our agreement with Caymus Partners LLC, it has received
a fee of $30,000, plus reimbursement of its reasonable out-of-pocket and
incidental expenses and it will issue to the Board of Directors an opinion both
at (or about) the date of this proxy statement and at (or about) the effective
time, if any, of the transaction, as to the fairness, from a financial point of
view, of the cash consideration to be paid to unaffiliated stockholders in
exchange for their fractional shares. In connection with the engagement, we are
required to furnish the financial advisor with all information it reasonably
requests and we are responsible for the truth and accuracy, in all material
respects, of such information. We have agreed to indemnify the financial advisor
and its directors, officers, controlling persons (within the meaning of the
Exchange Act), other affiliates, agents and employees from any claims arising
from or related to the engagement, except where such claims are found to have
resulted primarily from the financial advisor's or its agents', employees' or
affiliates' gross negligence or willful misconduct.
21
In April 2003, an entity controlled by our Chairman and Chief Executive
Officer made a $100,000 investment in five year callable, preferred return
securities issued by Caymus Partners LLC. The investment constituted
approximately 25% of the outside (non-member) capital raised by the firm and is
intended to yield 10% per annum (plus a 5% profits interest under certain
circumstances). Our Chairman also serves on the Caymus Partners Board of
Advisors, which is an advisory body without management or control functions. In
addition, we retained Caymus Securities LLC, an affiliate of the financial
advisor, in March 2005 to assist us in locating and negotiating a new line of
credit to replace our existing line with First National Bank of Omaha and to
arrange additional sources of lending through the private market. If successful,
the financial advisor will receive a maximum fee of approximately $100,000 in
connection with this engagement. The Board of Directors does not believe that
any of these relationships is material or compromises the independence of the
financial advisor.
THE FULL TEXT OF THE FINANCIAL ADVISOR'S WRITTEN OPINION IS ATTACHED AS
EXHIBIT B AND SHOULD BE READ CAREFULLY IN ITS ENTIRETY. THE FINANCIAL ADVISOR'S
OPINION IS DIRECTED TO OUR BOARD OF DIRECTORS AND RELATES ONLY TO THE FAIRNESS
OF THE REVERSE STOCK SPLIT FROM A FINANCIAL POINT OF VIEW, DOES NOT ADDRESS ANY
OTHER ASPECT OF THE REVERSE STOCK SPLIT OR ANY RELATED TRANSACTION AND DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER WITH RESPECT TO THE REVERSE STOCK
SPLIT OR ANY OTHER MATTER BEING VOTED UPON BY OUR STOCKHOLDERS.
In arriving at its opinion, the financial advisor:
o Reviewed a draft of our proxy statement.
o Reviewed and analyzed certain publicly available financial and other
data with respect to Lynch Interactive and certain other relevant
historical operating data relating to us from published sources.
o Conducted discussions with members of our senior management and
reviewed certain of our financial forecasts with respect to our
business prospects and financial outlook. The financial forecasts we
provided to our financial advisor and the assumptions underlying such
forecasts are included immediately following the "Opinion of Financial
Advisor."
o Reviewed current and historical market prices and trading activity of
our Common Stock.
o Compared certain of our financial information with similar information
of certain other publicly traded companies.
o Reviewed the financial terms, to the extent publicly available, of
selected precedent transactions which the financial advisor deemed
generally comparable to the reverse stock split.
In rendering its opinion, the financial advisor considered such other
information and conducted such other financial studies, analyses and
investigations as it deemed appropriate under the circumstances. In connection
with the review, the financial advisor relied upon and assumed the accuracy and
completeness of the financial and other information publicly available or
furnished to it by us or otherwise reviewed by it. The financial advisor did not
independently verify the accuracy or completeness of such information. Nor did
the financial advisor make or obtain any independent evaluations or appraisals
of any of our properties, assets or liabilities (contingent or otherwise). In
addition, neither we nor our Board of Directors authorized the financial advisor
to solicit any indications of interest from any third party with respect to the
purchase of all or a part of our business. With respect to our financial
projections, the financial advisor assumed that they were reasonably prepared on
a basis reflecting the best currently available estimates and judgments of our
management as to our future financial performance, and the financial advisor
expressed no opinion with respect to such forecasts or the assumptions on which
they were based. Its opinion was necessarily based upon financial, economic,
market and other conditions as they existed and could be evaluated on the date
of the opinion.
22
The financial advisor expressed no view as to, and its opinion did not
address, the relative merits of the reverse stock split as compared to any
alternative business strategies that might exist for us or the effect of any
transaction in which we might engage. The financial advisor did not express any
opinion as to the prices or price ranges at which our Common Stock has traded or
may trade in the future. Although the financial advisor evaluated the fractional
share consideration from a financial point of view, it was not asked to and did
not recommend the specific consideration payable in the reverse stock split. The
fractional share consideration was determined by our Board of Directors. No
limitations were imposed by us on the financial advisor with respect to the
investigations made or procedures followed by it in rendering its opinion.
In preparing its opinion, the financial advisor performed a variety of
financial and comparative analyses. The summary of these analyses is not a
complete description of them. The preparation of a fairness opinion is a complex
analytical process involving various determinations as to the most appropriate
and relevant methods of financial analysis and the application of those methods
to the particular circumstances and, therefore, a fairness opinion is difficult
to summarize. Accordingly, the financial advisor believes that its analyses must
be considered as a whole and that selecting portions of its analyses and factors
or focusing on information presented in tabular format, without considering all
analyses and factors or the narrative description of the analyses, could create
a misleading or incomplete view of the process underlying its analyses and
opinion.
In its analyses, the financial advisor considered industry performance,
general business, economic, market and financial conditions and other matters
existing as of the date of its opinion. Many of these factors are beyond our
control. No company, transaction or business used in those analyses as a
comparison is identical to us or the reverse stock split, nor is an evaluation
of those analyses entirely mathematical; rather, the analyses involve complex
considerations and judgments concerning financial and operating characteristics
and other factors that could affect the acquisition, public trading or other
values of the companies, business segments or transactions being analyzed.
The estimates contained in the financial advisor's analyses and the
valuation ranges resulting from any particular analysis do not reflect actual
values or future results or values. Those values may be significantly more or
less favorable than those suggested by the analyses. In addition, analyses
relating to the value of businesses or securities do not purport to be
appraisals or to reflect the prices at which businesses or securities actually
may be sold. Accordingly, these analyses and estimates are inherently subject to
substantial uncertainty.
The financial advisor's opinion and analyses were only one of several
factors considered by our Board of Directors in its evaluation of the reverse
stock split and should not be viewed as determinative of the views of our Board
of Directors or management with respect to the fractional share consideration to
be paid if the reverse stock split is consummated, or with respect to the
reverse stock split generally.
23
The following is a summary of the material financial analyses that the
financial advisor performed in connection with the rendering of its opinion.
In connection with the rendering of its opinion, the financial advisor took
into account its assessment of general economic, market and financial conditions
as well as its experience in connection with similar transactions and securities
valuations generally and among other things:
o Reviewed and analyzed transaction documents provided by the
Corporation;
o Reviewed publicly available financial information and other data
including the Corporation's most recent audited financial statements
(Form 10-K);
o Reviewed and analyzed certain financial characteristics of companies
that were deemed to have characteristics comparable to the
Corporation;
o Reviewed and analyzed certain financial terms of acquisitions
involving target companies deemed to have characteristics comparable
to the Corporation;
o Reviewed and analyzed certain financial terms of reverse stock splits
in conjunction with going private transactions;
o Reviewed and discussed with representatives or management of the
Corporation certain financial and operating information furnished by
them, including assumptions with respect to the business, operations
and prospects of the Corporation;
o Reviewed and analyzed the projected cash flows of the Corporation;
o Considered the historical financial results and present financial
condition of Interactive;
o Reviewed the reported prices and trading activity for the shares of
the Corporation;
o Reviewed the prices for historical periods of companies having
characteristics comparable to the Corporation; and
o Performed such other analyses and examinations as Caymus Partners
deemed appropriate.
COMPARABLE COMPANY ANALYSIS
Caymus Partners' comparable company analysis was based on application of
valuation multiples from a selected group of comparable public companies (the
"Company Comparables" and the "Core LEC Comparables," as more fully described
below).
In selecting the Company Comparables, Caymus Partners searched
comprehensive lists and directories of comparable public companies. The
Comparable Company approach is based upon the theory that the stock price of
publicly-traded companies reflects all readily available information. In other
words, the market continuously evaluates each company and determines a current
value as reflected by the bids and offers for the company's stock.
Using this technique, publicly-traded companies are reviewed in order to
identify a peer group similar to the subject company. When selecting the Company
Comparables, certain determinant factors included: (i) participation in the
local exchange carrier ("LEC") industry with emphasis on the rural, incumbent
and competitive LEC markets; (ii) publicly available financial information; and
(iii) an active trading market. The Company Comparables selected were:
o Alaska Comm. Systems Group Inc. (Nasdaq:ALSK)
o Commonwealth Telephone Enterprises Inc. (Nasdaq:CTCO)
o CT Communications Inc. (Nasdaq:CTCI)
o D&E Communications Inc. (Nasdaq:DECC)
o Fairpoint Communications Inc. (NYSE:FRP)
o Hector Communications Corp. (AMEX:HCT)
o Iowa Telecommunications Services Inc. (NYSE: IWA)
o Hickory Tech Corp. (Nasdaq:HTCO)
o North Pittsburgh Systems Inc. (Nasdaq:NPSI)
o Otelco, Inc. (AMEX: OTT)
o Shenandoah Telecommunications Co. (Nasdaq:SHEN)
o SureWest Communications (Nasdaq:SURW)
o Valor Communications Group Inc. (NYSE: VCG)
o Warwick Valley Telephone Co. (Nasdaq:WWVYE)
24
Caymus Partners then selected four companies of the 14 Company Comparables
to represent a more defined grouping of comparable companies (the "Core LEC
Comparables"). The four "Core LEC Comparables," were chosen as the most reliable
comparables to the Corporation based upon the following factors:
o Enterprise values were closest to that of Lynch Interactive;
o Stock prices as a percentage of 52-week high were similar;
o Multiples of enterprise values for revenue and EBITDA were reasonable
(no outliers);
o Number of access lines was closest to that of Lynch Interactive; and
o LTM EBITDA margins were comparable to that of Lynch Interactive.
Such factors were taken into account on a collective, not an individual,
basis. While some companies, which were not considered to be in the "Core LEC
Comparable" group were more comparable to the Corporation for certain of the
factors mentioned above, they were not considered comparable, and therefore not
chosen, based upon such factors considered collectively.
The four Core LEC Comparables selected were:
o CT Communications Inc. (Nasdaq:CTCI)
o D&E Communications Inc. (Nasdaq:DECC)
o Hickory Tech Corp. (Nasdaq:HTCO)
o North Pittsburgh Systems Inc. (Nasdaq:NPSI)
No company included in the selected Company Comparables or Core LEC
Comparables is identical to the Corporation. In selecting and evaluating the
Company Comparables and Core LEC Comparables, Caymus Partners made subjective
judgments and assumptions with regard to industry performance, general business,
economical, market and financial conditions, and other matters. Because of the
inherent differences between business, operations, financial conditions and
prospects of the Corporation and those of the selected Company Comparables and
Core LEC Comparables, Caymus Partners believed it was inappropriate to, and
therefore did not, rely solely on the quantitative results of the Comparable
Company analysis.
For both the Company Comparables and the Core LEC Comparables, Caymus
Partners then compared market values, of, among other things, current enterprise
value (equity value plus total debt, minority interest, preferred stock, less
cash and cash equivalents) as multiples of the latest 12-month ("LTM") earnings
from continuing operations before interest, taxes, depreciation and
amortization, or EBITDA. In its analysis, Caymus Partners determined the EBITDA
multiple range for the Company Comparables to be 6.00x to 6.50x, and for the
Core LEC Comparables, to be 5.60x to 6.20x.
Caymus Partners applied a range of these multiples to the LTM EBITDA of the
Corporation to obtain an enterprise valuation range for the Corporation. EBITDA
was chosen because it is a more reliable indicator of value than other factors
such as revenue. Caymus Partners then calculated an equity value for the
Corporation by subtracting net debt, minority interest and preferred stock from
the enterprise value. The implied equity value per share for the Corporation
ranged from $24.53 to $31.36 (mean value of $27.95 per share) using multiples
derived from Company Comparables. The implied equity value per share for the
Corporation ranged from $19.07 to $27.26 (mean value of $23.17) using multiples
derived from the Core LEC Companies.
25
COMPARABLE TRANSACTIONS ANALYSIS
Caymus Partners' comparable transaction analysis was based on application
of valuation multiples from a select group of transactions deemed relevant based
on similar business operations and publicly available information (the
"Transaction Comparables").
Information is typically not disclosed for transactions involving a private
seller, even when the buyer is a public company, unless the acquisition is
deemed to be "material" for the acquiror. In addition to the lack of information
on comparable acquisitions, available information on public companies may be
outdated or incomplete. As a result, the selected Comparable Transactions
Analysis is typically limited to transactions involving the acquisition of a
public company, or substantially all of its assets, or the acquisition of a
large private company, or substantially all of its assets, by the public
company. Accordingly, an analysis of comparable business combinations is not
mathematical; rather it involves complex considerations and judgments concerning
differences in financial and operating characteristics of the comparable
transactions.
In the Comparable Transactions Analysis, Caymus Partners reviewed
acquisitions of companies involving 100% control. Transactions involving partial
control, including minority control positions, buybacks of stock, etc., were not
reviewed due to the inability to gather such appropriate data. No acquired
company involved in the selected Comparable Transactions Analysis is identical
to the Corporation. In selecting and evaluating the Transaction Comparables,
Caymus Partners made subjective judgments and assumptions with regard to
industry performance, general business, economical, market and financial
conditions, and other matters. Because of the inherent differences between the
business, operations, financial conditions and prospects of the Corporation and
those of the acquired companies included in the Comparable Transactions
Analysis, Caymus Partners believed it was inappropriate to, and therefore did
not, rely solely on the quantitative results of the Comparable Transactions
Analysis.
Caymus Partners identified six (6) Transaction Comparables announced and
closed in the last three and one-half years involving target companies in the
local exchange carrier industry. Based on the information disclosed with respect
to the target in each of the Comparable Transactions, Caymus Partners calculated
and compared the total enterprise value as a multiple of LTM EBITDA. EBITDA was
chosen because it is a more reliable indicator of value than other factors such
as revenue. Caymus Partners adjusted the mean and median EBITDA multiples of
comparable transactions to account for an already implied control premium of 20%
since the acquisitions were for 100% control. After discounting the EBITDA
multiples, Caymus Partners applied a range of these multiples to the LTM EBITDA
of the Corporation to obtain an implied enterprise value for the Corporation,
assuming less than 100% control. In its analysis, Caymus Partners determined the
EBITDA multiples range for Transaction Comparables to be 5.80x to 6.40x. Caymus
Partners then calculated an equity value for the Corporation by subtracting net
debt, minority interest and preferred stock from the enterprise value.
The implied equity per share value for the Corporation ranged from $21.80
to $30.00 (mean value of $25.90 per share).
26
DISCOUNTED CASH FLOW ANALYSIS
Caymus Partners performed a discounted cash flow analysis ("DCF") on the
Corporation. The fundamental premise of the DCF approach is to estimate the
available cash flows a prudent investor would expect a company to generate over
its remaining life. To determine this amount, Caymus Partner relied on cash flow
projections for the fiscal years ending 2005 through 2009, as provided by the
Corporation's management. Caymus Partners estimated the Corporation's discount
rate by analyzing the Corporation's current capitalization, Corporation tax
rate, risk free rate and estimates of market premia with respect to certain
qualitative factors associated with the Corporation's operations and financial
measurements and its marketability of shares.
The discounted cash flow analysis incorporates estimates provided by the
Corporation's management of cash flows during 2005 and for the next four
succeeding years. These estimates, in turn, are based on assumptions,
projections and forecasts, including without limitation business conditions,
financial markets and regulatory actions and initiatives. As a result, there is
no assurance that any such estimates will be met and such estimates are subject
to uncertainties, risks and inaccuracies, any or all of which could be
substantial. Caymus Partners performed the discounted cash flow analysis on the
preliminary cash flow of the Corporation. To arrive at a present value of the
free cash flow, Caymus Partners utilized discount rates ranging from 11.0% to
13.0%. A range of terminal year EBITDA multiples between and including 5.50x and
6.00x, which range is in line with EBITDA multiples for Interactive's Core LEC
Comparables, were utilized in this analysis. Caymus Partners discounted the free
cash flows and terminal year EBITDA valuation to derive a range of enterprise
values. These enterprise values were reduced by net debt to arrive at an equity
value. The Corporation's net debt is estimated to be approximately $147 million
(as of December 31, 2004). Caymus Partners determined that the implied equity
per share value for the Corporation ranged from $24.05 to $33.96 (mean value of
$29.00).
FRACTIONAL SHARE CASH-OUT VALUES OF SELECT REVERSE STOCK SPLITS
Caymus Partners performed an analysis of other "going dark" transactions
associated with reverse stock splits to determine the premiums paid for
fractional shares. An analysis of selected other reverse stock splits associated
with "going dark" transactions is heavily dependent on a small number of
companies that may or may not be related to Interactive and that have varying
transactional circumstances, market capitalizations, profitability and future
growth opportunities.
Caymus Partners aggregated selected reverse stock split transactions in
conjunction with pending "going dark" transactions to determine the cash
premiums paid, if any, of fractional shares. Caymus Partners concluded that,
based on the difficulty in obtaining "going dark" transactions, the lack of data
provided for those transactions and the lack of data related to companies paying
fractional share premiums, an analysis of reverse stock split data is not useful
for purposes of opining on the value to be paid by Interactive in this
transaction.
HISTORICAL STOCK TRADING ANALYSIS
Caymus Partners reviewed the historical performance of the Corporation's
Common Stock based on historical analysis of closing prices for the 20-day
period prior to the date of its analysis. Caymus Partners noted that the closing
prices for the Corporation's Common Stock over this period ranged from $19.25 to
$29.28. The following chart summarizes the average closing prices of the
Corporation's stock over that 20-day period.
Price as of April 11, 2005 $29.28
5-Day Trailing Average $26.41
10-Day Trailing Average $25.36
20-Day Trailing Average $24.72
27
THE CAYMUS REPORT WILL BE MADE AVAILABLE FOR INSPECTION AND COPYING AT THE
PRINCIPAL EXECUTIVE OFFICES OF THE CORPORATION DURING ITS REGULAR BUSINESS HOURS
BY ANY INTERESTED EQUITY SECURITY HOLDER OF THE CORPORATION OR BY THE
REPRESENTATIVE OF SUCH A HOLDER WHO HAS BEEN DESIGNATED IN WRITING. A COPY OF
THE REPORT WILL BE TRANSMITTED BY THE CORPORATION TO ANY INTERESTED EQUITY
SECURITY HOLDER OF THE CORPORATION OR SUCH REPRESENTATIVE UPON WRITTEN REQUEST
AND AT THE EXPENSE OF THE REQUESTING SECURITY HOLDER.
FINANCIAL FORECASTS AND ASSUMPTIONS
2005 PROFIT PLAN
EBITDA
2002 2003 2004 2005 2006 2007 2008 2009
Actual Actual Forecast Plan Plan Plan Plan Plan
-----------------------------------------------------------------------------------
Total EBITDA - operations 41,920 43,239 44,836 46,852 45,323 45,837 45,839 45,621
------ ------ ------ ------ ------ ------ ------ ------
Corporate cost (3,334) (4,529) (6,800) (5,020) (3,400) (3,490) (3,580) (3,670)
------ ------ ------ ------ ------ ------ ------ ------
EBITDA 38,586 38,710 38,036 41,832 41,923 42,347 42,259 41,951
====== ====== ====== ====== ====== ====== ====== ======
Depreciation 17,890 19,524 19,620 20,786 20,929 20,944 20,702 20,582
------ ------ ------ ------ ------ ------ ------ ------
Amortization 1,463 758 956 550 550 550 550 474
------ ------ ------ ------ ------ ------ ------ ------
Operating Profit 19,233 18,428 17,460 20,496 20,444 20,853 21,007 20,895
====== ====== ====== ====== ====== ====== ====== ======
2005 PROFIT PLAN
CAPITAL SPENDING
2002 2003 2004 2005 2006 2007 2008 2009
Actual Actual Forecast Plan Plan Plan Plan Plan
-----------------------------------------------------------------------------------
Total Capex 23,785 23,049 18,985 14,908 16,713 15,164 11,673 11,644
------ ------ ------ ------ ------ ------ ------ ------
Regulated
Telco 21,424 21,564 17,753 13,123 15,577 14,325 10,835 10,784
------ ------ ------ ------ ------ ------ ------ ------
Internet 409 445 394 406 358 293 326 335
------ ------ ------ ------ ------ ------ ------ ------
CLEC 509 563 464 505 348 346 321 321
------ ------ ------ ------ ------ ------ ------ ------
Cable TV 151 131 338 749 305 152 166 155
------ ------ ------ ------ ------ ------ ------ ------
Alarm 255 93 35 0 0 0 0 0
------ ------ ------ ------ ------ ------ ------ ------
Wireless 66 7 0 75 100 0 0 0
------ ------ ------ ------ ------ ------ ------ ------
Other 971 246 1 50 25 48 25 49
------ ------ ------ ------ ------ ------ ------ ------
23,785 23,049 18,985 14,908 16,713 15,164 11,673 11,644
====== ====== ====== ====== ====== ====== ====== ======
ASSUMPTIONS
1. The Corporation assumes that the federal regulations relating to the
revenue requirements of rural telephone companies, including the Universal
Service Fund, will not change.
2. The Corporation assumes that current trends with respect to access lines
and minutes of use will remain unchanged.
3. The Corporation assumes that intrastate rates will decline.
4. The Corporation assumes there will be some, but minimal, growth in
deregulated services.
5. The Corporation assumes that its cost structure will remain static, with
adjustments for inflation.
6. The Corporation assumes it will maintain its current level of
infrastructure.
28
ALTERNATIVE TRANSACTIONS CONSIDERED
In making the determination to submit the reverse stock split for approval
by our stockholders, our Board of Directors considered the feasibility of
certain other alternative transactions, as described below, each of which was
ultimately rejected because of its disadvantages:
o ISSUER TENDER OFFER. Our Board of Directors considered the feasibility
of an issuer tender offer to repurchase the shares of our Common Stock
held by our unaffiliated stockholders. A principal disadvantage of
this type of transaction relates to our ability to secure the debt
financing needed to effect a tender offer in which there is full
participation by unaffiliated stockholders. We recently replaced our
$5 million of line of credit from First National Bank of Omaha with a
$10 million line of credit from Webster Bank, N.A. The purpose of this
line of credit is to supply us with needed working capital. Our Board
does not believe, given our leveraged capital structure, that
additional debt is desirable at this time, even if it could be
obtained in amounts sufficient to purchase the shares of every
stockholder that might want to participate. In addition, although the
voluntary nature of such a transaction is an advantage for our
stockholders, we would have no assurance that the transaction would
result in a sufficient number of shares being tendered. Finally, the
going private rules regarding the treatment of our stockholders in a
tender offer, including pro-rata acceptance of offers from our
stockholders, make it difficult to ensure that we would be able to
significantly reduce the number of holders of record to a level below
300.
o TRADITIONAL STOCK REPURCHASE PROGRAM. In September 1999, subsequent to
our spin-off from Lynch Corporation, the Board of Directors authorized
the purchase by the Corporation of up to 100,000 shares of our Common
Stock. Through March 31, 2004, the Corporation had purchased 72,700
shares at an average price of $32.26 per share, with prices ranging
from $20.10 on May 5, 2003 to $53.97 on January 28, 2002. Our Board of
Directors considered increasing the number of shares subject to this
stock repurchase plan. However, repurchasing enough shares in this
manner to enable us to deregister under the Exchange Act would likely
take an extended period of time, would have no assurance of success
and would be of indeterminate cost.
The Corporation was not considering going dark in September 1999 when
it approved the repurchase plan and did not consider this step until
August 2004. Also, shares purchased since July 2004 were made
automatically pursuant to a non-discretionary arrangement until
January 5, 2005, when all purchases stopped.
29
The Corporation reserves the right to recommence purchases following
the reverse stock split under the present Board authorization and has
made no decision as to whether or not to ask the Board to increase the
number of shares authorized for purchase in the future.
ODD-LOT REPURCHASE PROGRAM. Our Board of Directors also considered the
feasibility of a transaction in which we would announce to our
stockholders that we would repurchase, at a designated price per
share, the shares of our Common Stock held by any stockholder who
holds fewer than a specified number of shares and who offers such
shares for sale pursuant to the terms of the program. The voluntary
nature of such an approach would be an advantage for our stockholders.
However, because our stockholders would not be required to participate
in the program, we could not be certain at the outset whether a
sufficient number of odd-lot stockholders would participate and
thereby result in the number of holders of record being reduced to
below 300. In terms of timing, such a program, especially after giving
effect to any extensions of deadlines for tendering into the program,
would likely necessitate a longer time frame than that of the reverse
stock split.
MAINTAINING THE STATUS QUO. Our Board of Directors also considered
maintaining the status quo. In that case, we would continue to incur
the expenses of being a public reporting company without enjoying the
benefits traditionally associated with public reporting company
status.
Expense reductions may be achievable through centralization of various
functions (e.g., accounting, receivables and payables, etc.) and
moving financing activities up to the parent level. This approach has
always been rejected in favor of a decentralized approach which
maintains autonomy for management at the Corporation's operating
subsidiaries. Both management and the Board of Directors believe this
distinguishes the Corporation from its competitors and makes it an
attractive company to sell a privately owned business to. Despite
this, the Board of Directors recently approved a $10 million capital
budget for 2005, as compared to $22 million for 2004. However, the
Corporation continues to face significant cash expenditures in
defending the Taylor False Claims Act case disclosed in the
Corporation's Annual Report on Form 10-K, which expenditures to date
are approximately $5,000,000. Although we believe that this lawsuit is
completely without merit, the alleged damages sought by plaintiff in
this case are in excess of $1 billion, an indeterminate proportion of
which might have to be borne by the Company, making us an unattractive
candidate for a third party buy-out at this time.
FAIRNESS OF THE REVERSE STOCK SPLIT
Our Board of Directors has fully reviewed and considered the terms,
purpose, alternatives and effects of the reverse stock split and has unanimously
determined (including by a majority of directors who are not our employees) that
the transaction is in our best interests and is substantively and procedurally
fair to the unaffiliated stockholders.
The reverse stock split is not structured in such a way so as to require
the approval of at least a majority of our unaffiliated stockholders, because
our affiliated stockholders only own approximately 26% of our voting securities.
Despite the foregoing, our Board of Directors believes that the reverse stock
split is procedurally fair to each differently-impacted group of stockholders -
those unaffiliated stockholders who will be cashed-out and those unaffiliated
stockholders who will be Continuing Stockholders - due to: (i) the requirement
that the proposal receive a majority vote - including a substantial portion of
the unaffiliated stockholders in order to be approved and (ii) to the ability of
the unaffiliated stockholders, by taking the steps described in the eighth and
ninth questions and answers under "Questions and Answers about the Meeting and
Proposals," to switch their status from Cashed Out Stockholder to Continuing
Stockholder (or vice versa) as they see fit. Further, Continuing Stockholders
have the advantage of continuing as stockholders in a company that will not be
subject to the costs associated with compliance with Section 404. This savings
will significantly decrease our ongoing expenses, which will improve our
liquidity.
30
In evaluating the fairness of the reverse stock split with respect to the
unaffiliated stockholders in particular, our Board of Directors also noted that
the transaction would not differentiate among stockholders on the basis of
affiliate status. The sole determining factor in whether a stockholder will
become a Cashed Out Stockholder or a Continuing Stockholder as a result of the
reverse stock split is the number of shares held by such stockholder immediately
before the effective time of the reverse stock split. For this reason the Board
did not consider it necessary to appoint an unaffiliated representative to act
solely on behalf of the unaffiliated stockholders in negotiating or preparing a
report on the transaction. Our Board of Directors also noted that the percentage
ownership of each Continuing Stockholder, whether affiliated or unaffiliated,
will be approximately the same as it was prior to the reverse stock split.
Our Board of Directors considered the advantages and disadvantages of the
reverse stock split discussed in the sections "Advantages of the Proposal" and
"Disadvantages of the Proposal" in reaching its conclusion as to the substantive
fairness of the reverse stock split to our unaffiliated stockholders. Our Board
of Directors did not assign specific weight to each advantage and disadvantage
in a formulaic fashion, but did place special emphasis on the opportunity for
unaffiliated stockholders, if they hold fewer than 100 shares immediately before
the effective time for the reverse stock split, to sell their holdings without
brokerage fees or commissions, as well as the significant cost and time savings
for us.
In considering the formula to be used for determining the price paid to
Cashed Out Stockholders, the Board of Directors considered the going concern
value, the current market value and the historical market value of the
Corporation's Common Stock, but did not consider firm offers, because the
Corporation had received no firm offers during the past two years. The Board of
Directors also considered the opinion and report of the Corporation's financial
advisor, Caymus Partners, LLC. The Board believed that Caymus Partners'
discounted cash flow analysis presented the most accurate measure of going
concern value because such a measure attempts to value the Company, not in
comparison to other companies or transactions, but as a company that will
continue to operate. Using the discounted cash flow analysis, Caymus Partners
determined that the implied equity value per share for the Company ranged from
$24.05 to $33.96 (with a mean value of $29.00).
In addition, Caymus Partners calculated the book value per share, $12.56 at
December 31, 2004, and the liquidation value per share ($20.90) at December 31,
2004, which analysis was adopted by the Board of Directors. Caymus Partners
focused its analysis on current and historical market values, on the values of
comparable companies and transactions, and on the present discounted value of
projected cash flows of the Corporation (as described above in "Opinion of
Financial Advisor"), each of which it felt was a more accurate indicator of
going concern value than either book value per share or liquidation value per
share.
Neither the Board of Directors nor the financial advisor separately
considered prices paid by the Corporation under its stock repurchase plan,
because such prices were market prices that had already been considered
directly. However, through March 31, 2004, the Corporation had repurchased such
shares at an average price of $32.26 per share, which is more than $3.00 per
share over the $29.00 "floor" established for the reverse stock split. This
disparity is explained completely by changes in the price of the Corporation's
Common Stock on the AMEX at different times.
The Board of Directors, in developing the pricing formula to be used,
considered market prices of the Common Stock over the 12-month period ending
March 31, 2005. During that period, the market price of the Common Stock ranged
from high of $37.95 to a low of $19.25. If the reverse stock split had taken
place on January 18, 2005, the Company's stockholders would have received $30.25
per share based on the market price of the Common Stock, a $1.25 premium over
the $29.00 per share "floor" price. However, if the reverse stock split had
taken place on March 31, 2005, stockholders would have received $24.00 per share
based on the market price of the Common Stock, a $5.00 discount from the $29.00
per share "floor" price. The Board also considered recent declines in market
prices of the Common Stock as compared to the higher prices during certain
periods of the first quarter of 2005. In an effort to take into account the
discount that the cash payable in the reverse stock split represents as compared
to the recent higher market prices, while also taking into account the general
downward trend of the Corporation's stock price, the Board of Directors settled
on a 20% premium over the 20-day average closing price formula and added a
"floor" price of $29 per share. The Board felt that such a formula provided a
fair price to stockholders. The "floor" guarantees Cashed Out Stockholders a
price of $29.00 per share, while the 20% premium protects Cashed Out
Stockholders in the event that market prices for the Corporation's Common Stock
increase during the 20 trading day period prior to the reverse stock split.
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We have not made any special provision in connection with the reverse stock
split to grant stockholders access to our corporate files or to obtain counsel
or appraisal services at our expense. Our Board of Directors did not consider
these steps necessary to ensure the fairness of the reverse stock split. Our
Board of Directors determined that such steps would be costly, time consuming
and would not provide any meaningful additional benefits. Our Board of Directors
determined that this proxy statement, together with our other filings with the
SEC, provide adequate information for our unaffiliated stockholders to make an
informed decision with respect to the transaction.
PROXIES AND VOTING PROCEDURES
Only stockholders of record at the close of business on ______ ___, 2005,
the record date, are entitled to notice of, and to vote at, the Annual Meeting
of our stockholders. As of the close of business on such date, 2,752,251 shares
of our Common Stock were outstanding and eligible to be voted. Each share of our
Common Stock is entitled to one vote on each matter submitted to our
stockholders. Where a specific instruction is given in the proxy, the proxy will
be voted in accordance with such instruction. If no such instruction is given,
the proxy will be voted FOR the reverse stock split described below, FOR the
nominees to the Board of Directors named below, FOR re-approval of the Principal
Executive Bonus Plan, FOR an adjournment if necessary to solicit more proxies,
and in the discretion of the proxies with respect to any other matter that is
properly brought before the Annual Meeting. Any stockholder giving a proxy may
revoke it at any time before it is voted at the Annual Meeting by delivering a
written notice of revocation or a duly executed proxy bearing a later date to
our Corporate Secretary or by appearing at the Annual Meeting and revoking his
or her proxy and voting in person.
In order to be approved by our stockholders, the reverse stock split and
right of first refusal must receive the votes of a majority of the shares of our
Common Stock issued and outstanding, so abstaining has the effect of a negative
vote. In order to re-approve the Principal Executive Bonus Plan, the proposal
has to receive the votes of a majority of the votes cast, so abstaining will
have no effect. The candidates for election to our Board of Directors who
receive the highest number of affirmative votes will be elected. In order to
adjourn the Annual Meeting to solicit additional proxies the proposal has to
receive the votes of a majority of the votes cast, so abstaining will have no
effect. Shares held by brokers who do not have discretionary authority to vote
on a particular matter and who have not received voting instructions from their
customers, referred to as "broker non-votes," are not counted or deemed to be
present or represented for purposes of determining whether that matter has been
approved by stockholders, but they are counted as present for purposes of
determining the existence of a quorum at the Annual Meeting.
An automated system administered by our transfer agent tabulates the votes.
COST OF PROXY SOLICITATION
This solicitation of proxies is made on behalf of our Board of Directors,
and the cost thereof will be borne by us. We have employed the firm of Morrow &
Co. Inc., 445 Park Avenue, 5th Floor, New York, New York, 10022, to assist in
this solicitation at a cost of $5,000, plus out-of-pocket expenses. We will also
reimburse brokerage firms and nominees for their expenses in forwarding proxy
material to beneficial owners of our Common Stock. In addition, our officers and
employees, none of whom will receive any compensation therefore in addition to
their regular compensation, may solicit proxies. The solicitation will be made
by mail and, in addition, may be made by telegrams, personal interviews and by
telephone.
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INTRODUCTION
This proxy statement is furnished by our Board of Directors in connection
with the solicitation of proxies for use at the Annual Meeting of stockholders
to be held at_________________________, on _________________, 2005, at 8:30 a.m.
Eastern time, and at any adjournments thereof.
You are being asked to vote on the following proposals:
1. To approve, subject to final action by our Board of Directors, an
amendment to our Restated Certificate of Incorporation to effect a
1-for-100 reverse stock split of our Common Stock with the result that
(i) holdings prior to such split of fewer than 100 shares of Common
Stock will be converted to a fractional share, which will be
immediately cancelled and converted into a right to receive the cash
consideration described in this proxy statement, and (ii) we will have
fewer than 300 holders of record, allowing us to delist the Common
Stock from the AMEX and to deregister the Common Stock under the
Exchange Act, and to avoid many of the costs associated with being a
public reporting company. The filing of the amendment to our Restated
Certificate of Incorporation with the Office of the Secretary of State
of the State of Delaware, and the subsequent delisting of our shares
of Common Stock from the AMEX and the deregistration of the Common
Stock under the Exchange Act are sometimes collectively referred to in
this proxy statement as the "transaction."
2. To approve, subject to final action by our Board of Directors, an
amendment to our Restated Certificate of Incorporation granting us an
option to acquire shares proposed to be sold by stockholders
subsequent to such reverse stock split, if after such sale, there
would be would be 300 or more holders of record of our Common Stock.
3. To re-approve the Principal Executive Bonus Plan.
4. To elect seven members of our Board of Directors to serve until the
next Annual Meeting of our stockholders and until their successors are
duly elected and qualify.
5. To adjourn the meeting, if necessary to solicit additional proxies.
6. To transact such other business as may properly come before the Annual
Meeting or any adjournments thereof. The Board of Directors is not
aware of such matters.
33
PROPOSAL NO. 1
AMENDMENT TO
RESTATED CERTIFICATE ON INCORPORATION
TO EFFECT A REVERSE STOCK SPLIT
We are seeking approval of the reverse stock split described above. If
approved by our stockholders, and upon subsequent final action of our Board of
Directors, we will file an amendment to our Restated Certificate of
Incorporation to effect a 1-for-100 reverse stock split of our Common Stock.
The following discussion, together with the "Special Factors" section set
forth above in this proxy statement, describes in more detail the reverse stock
split.
SPECIAL INTERESTS OF AFFILIATED PERSONS IN THE TRANSACTION
In considering the recommendation of our Board of Directors with respect to
the reverse stock split, our stockholders should be aware that our executive
officers and directors have interests in the transaction, which are in addition
to, or may be different from, our stockholders generally. These interests may
create potential conflicts of interest including, but not limited to, the
significant increase in legal exposure for members of boards of directors of
public reporting companies, especially in the aftermath of recent legislation
and related regulations. While there are still significant controls, regulations
and liabilities for directors and executives officers of unregistered companies,
the legal exposure for the members of our Board of Directors and our executive
officers will be reduced after the reverse stock split.
Each of the directors and officers has indicated to us that it will vote
its shares of our Common Stock in favor of authorizing the reverse stock split.
Such directors and officers will receive cash or not solely basis of the number
of shares held by them immediately prior to the effective time, just like
unaffiliated stockholders.
COSTS/SOURCE OF FUNDS AND EXPENSES
Based on estimates of the record ownership of shares of our Common Stock,
the number of shares outstanding and other information as of March 31, 2005, and
assuming that 10,000 shares are cashed out, we estimate that the total funds
required to consummate the reverse stock split will be approximately $512,000,
of which approximately $340,000 will be used to pay the consideration to
stockholders entitled to receive cash for their shares of our Common Stock and
$172,000 will be used to pay the costs of the reverse stock split, as follows:
Legal fees and expenses $135,000
Financial consulting 30,000
Proxy solicitation and
transfer agent fees 7,000
--------
$172,000
========
34
These expenses do not include the normal costs of conducting the annual
meeting of stockholders, because those costs would be incurred in the normal
course of business of a public reporting company.
We intend to fund these costs using cash on hand and, if necessary, by
accessing our credit line. As of March 31, 2005, the Corporation had $29.7
million in cash and cash equivalents on a consolidated basis. Much of this cash
is held at subsidiaries. In order to manage its liquidity the Corporation has
recently negotiated a $10 million, 3-year line of credit with Webster Bank,
National Association to be used for general corporate purposes. The line of
credit is unsecured, contains typical representations and covenants and provides
for interest at 1.5% above the greater of (i) Webster Bank's "prime rate" (as
defined therein) and (ii) the Federal Funds rate plus 0.5%.
FEDERAL INCOME TAX CONSEQUENCES
Summarized below are material federal income tax consequences to us and to
our stockholders resulting from the reverse stock split, if it is consummated.
This summary is based on the provisions of the Internal Revenue Code of 1986, as
amended, more commonly referred to as the Code, the Treasury Regulations, issued
pursuant thereto, and published rulings and court decisions in effect as of the
date hereof, all of which are subject to change. This summary does not take into
account possible changes in such laws or interpretations, including amendments
to the Code, other applicable statutes, Treasury Regulations and proposed
Treasury Regulations or changes in judicial or administrative rulings; some of
which may have retroactive effect. No assurance can be given that any such
changes will not adversely affect the federal income tax consequences of the
reverse stock split.
This summary does not address all aspects of the possible federal income
tax consequences of the reverse stock split and is not intended as tax advice to
any person or entity. In particular, and without limiting the foregoing, this
summary does not consider the federal income tax consequences to our
stockholders in light of their individual investment circumstances nor to our
stockholders subject to special treatment under the federal income tax laws (for
example, tax exempt entities, life insurance companies, regulated investment
companies and foreign taxpayers), or who hold, have held, or will hold our
Common Stock as part of a straddle, hedging, or conversion transaction for
federal income tax purposes. In addition, this summary does not address any
consequences of the reverse stock split under any state, local or foreign tax
laws.
We will not obtain a ruling from the Internal Revenue Service or an opinion
of counsel regarding the federal income tax consequences to our stockholders as
a result of the reverse stock split. Accordingly, you are encouraged to consult
your own tax advisor regarding the specific tax consequences of the proposed
transaction, including the application and effect of state, local and foreign
income and other tax laws.
This summary assumes that you are one of the following: (i) a citizen or
resident of the United States, (ii) a domestic corporation, (iii) an estate the
income of which is subject to United States federal income tax regardless of its
source, or (iv) a trust if a United States court can exercise primary
supervision over the trust's administration and one or more United States
persons are authorized to control all substantial decisions of the trust. This
summary also assumes that you have held and will continue to hold your shares as
capital assets for federal income tax purposes.
You should consult your tax advisor as to the particular federal, state,
local, foreign, and other tax consequences, applicable to your specific
circumstances.
35
We believe that the reverse stock split will be treated as a tax-free
"recapitalization" for federal income tax purposes. This should result in no
material federal income tax consequences to Lynch Interactive or to our
stockholders who do not receive cash in the transaction. However, if you are
receiving cash in the transaction, you may not qualify for tax-free
"recapitalization" treatment for federal income tax purposes.
STOCKHOLDERS WHO DO NOT RECEIVE CASH IN CONNECTION WITH THE REVERSE STOCK
SPLIT
If you (1) continue to hold Common Stock directly immediately after the
reverse stock split, and (2) you receive no cash as a result of the reverse
stock split, you should not recognize any gain or loss in the reverse stock
split for federal income tax purposes. Your aggregate adjusted tax basis in your
shares of our Common Stock held immediately after the reverse stock split will
be equal to your aggregate adjusted tax basis in such shares held immediately
prior to the reverse stock split and you will have the same holding period or
periods in your Common Stock as you had in such Common Stock immediately prior
to the reverse stock split.
STOCKHOLDERS WHO RECEIVE CASH IN CONNECTION WITH THE REVERSE STOCK SPLIT
If you (1) receive cash in exchange for fractional shares as a result of
the reverse stock split, (2) you do not continue to hold any Common Stock
directly immediately after the reverse stock split, and (3) you are not related
to any person or entity that holds Common Stock immediately after the reverse
stock split, you will recognize capital gain or loss on the reverse stock split
for federal income tax purposes, with such gain measured by the difference
between the cash you received for your cashed-out shares and your aggregate
adjusted tax basis in such Common Stock.
If you receive cash in exchange for fractional shares of our Common Stock
as a result of the reverse stock split, but either continue to directly own
stock immediately after the reverse stock split, or are related to a person or
entity who continues to hold stock immediately after the reverse stock split,
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 is "not
essentially equivalent to a dividend," or constitutes a "substantially
disproportionate redemption of stock," as described below.
o "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 Lynch Interactive resulting from the reverse
stock split (taking into account for this purpose the Common Stock
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 a corporation will satisfy this test.
o "Substantially Disproportionate Redemption of Stock." The receipt of
cash in the reverse stock split will be a "substantially
disproportionate redemption of stock" for you if the percentage of the
outstanding shares of our Common Stock owned by you (and by persons
related to you) immediately after the reverse stock split is (a) less
than 50% of all outstanding shares and (b) less than 80% of the
percentage of shares of our Common Stock owned by you immediately
before the reverse stock split.
In applying these tests, you will be treated as owning shares of our Common
Stock actually or constructively owned by certain individuals and entities
related to you. If your receipt of cash in exchange for Common Stock is not
treated as capital gain or loss under any of the tests, it will be treated first
as ordinary dividend income to the extent of your ratable share of Lynch
Interactive'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.
36
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 stock split
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 shares of our Common
Stock 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
Stockholders 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 stock split to avoid backup
withholding requirements that might otherwise apply. The letter of transmittal
will require each Stockholder to deliver such information when the Common Stock
certificates are surrendered following the effective time of the reverse stock
split. Failure to provide such information may result in backup withholding at a
rate of 28%.
As explained above, the amounts paid to you as a result of the reverse
stock split 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.
THE PRECEDING DISCUSSION OF THE MATERIAL U.S. FEDERAL INCOME TAX
CONSEQUENCES OF THE REVERSE STOCK SPLIT IS GENERAL AND DOES NOT INCLUDE ALL
CONSEQUENCES TO EVERY STOCKHOLDER UNDER FEDERAL, STATE, LOCAL, OR FOREIGN TAX
LAWS. ACCORDINGLY, EACH STOCKHOLDER SHOULD CONSULT ITS OWN TAX ADVISOR AS TO THE
PARTICULAR TAX CONSEQUENCES TO IT OF THE REVERSE STOCK SPLIT, INCLUDING THE
APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS, AND OF ANY
PROPOSED CHANGES IN APPLICABLE LAW.
37
APPRAISAL RIGHTS
Under the Delaware General Corporation Law, our Restated Certificate of
Incorporation and our Bylaws, our stockholders are not entitled to appraisal
rights. We are not aware of any similar rights available under any applicable
law, regulation, custom or contract to security holders who object to the
transaction.
VOTES REQUIRED
In order to approve the reverse stock split, stockholders holding a
majority of the shares of our Common Stock outstanding and entitled to vote at
the Annual Meeting of stockholders, voting together as a single class, must
approve the filing of the certificate of amendment to our Restated Certificate
of Incorporation to effect the reverse stock split. Following this stockholder
approval, our Board of Directors will determine when, and if, to file the
amendment with the Secretary of State of the State of Delaware. Mr. Gabelli has
indicated that he intends to vote shares beneficially owned by him in favor of
the proposal.
RECOMMENDATION OF OUR BOARD OF DIRECTORS
Our Board of Directors has unanimously determined that the reverse stock
split is fair to, and in the best interests of, us and our stockholders.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" THE
APPROVAL AND ADOPTION OF THE CERTIFICATE OF AMENDMENT TO LYNCH INTERACTIVE'S
RESTATED CERTIFICATE OF INCORPORATION TO EFFECT THE REVERSE STOCK SPLIT.
Please note that voting "FOR" the proposal does not mean that the reverse
stock split will be consummated. By voting "FOR" the proposal, you are giving
our Board of Directors the discretion to reject (and not implement) the reverse
stock split (even after the amendment is approved by the stockholders). If for
any reason the reverse stock split is not approved, or, if approved, not
implemented, the shares of our Common Stock will not be deregistered under the
Exchange Act or delisted from the AMEX, unless and until such time as we are
eligible to do so and our Board of Directors decides to do so.
PLEASE NOTE THAT BOTH PROPOSAL NO. 1, THE REVERSE STOCK SPLIT, AND PROPOSAL
NO. 2 BELOW, THE OPTION TO REPURCHASE SHARES, MUST BOTH BE APPROVED BY OUR
STOCKHOLDERS OR NEITHER PROPOSAL WILL TAKE EFFECT.
PROPOSAL NO. 2
AMENDMENT TO
RESTATED CERTIFICATE ON INCORPORATION
TO GRANT OPTION TO REPURCHASE SHARES
In connection with the reverse stock split described above, we are seeking
approval of an amendment to our Restated Certificate of Incorporation granting
to us an option to repurchase any shares of Common Stock proposed to be
transferred if the proposed transfer would cause the number of holders of record
of our Common Stock to equal or exceed 300. The purpose of the option is to
ensure that the Corporation does not, inadvertently, become subject to federal
securities law reporting requirements and Section 404 in the future. If approved
by our stockholders, and upon subsequent final action of our Board of Directors,
we will file an amendment to our Restated Certificate of Incorporation to effect
the option to repurchase shares of our Common Stock.
38
The price to be paid for the shares pursuant to this option would be equal
to (i) the mean between the bid and asked prices (as published in the pink
sheets) averaged over the 20 trading days immediately preceding the date of
exercise of the option on which the shares of Common Stock were actually quoted
or (ii) if the Common Stock is not then quoted in the pink sheets, or if such
determination cannot otherwise be made, the fair market value for such shares as
determined by our Board of Directors in good faith.
We will have 15 days to exercise our option upon becoming aware of a
proposed transfer that would cause the number of holders of record of our Common
Stock to equal or exceed 300.
The following discussion, together with the "Special Factors" section set
forth above in this proxy statement, describes in more detail the standing
option on the part of the Corporation to reacquire shares to keep the number of
holders of record below 300.
SPECIAL INTERESTS OF AFFILIATED PERSONS IN THE TRANSACTION
In considering the recommendation of our Board of Directors with respect to
the standing option to repurchase shares, our stockholders should be aware that
our executive officers and directors have interests in the transaction, which
are in addition to, or may be different from, our stockholders generally. These
interests may create potential conflicts of interest including, but not limited
to, the significant increase in legal exposure for members of boards of
directors of public reporting companies, especially in the aftermath of recent
legislation and related regulations. While there are still significant controls,
regulations and liabilities for directors and executives officers of
unregistered companies, the legal exposure for the members of our Board of
Directors and our executive officers will be reduced after the reverse stock
split.
APPRAISAL RIGHTS
Under the Delaware General Corporation Law, our Restated Certificate of
Incorporation and our Bylaws, our stockholders are not entitled to appraisal
rights. We are not aware of any similar rights available under any applicable
law, regulation, custom or contract to security holders who object to the
transaction.
VOTES REQUIRED
In order to approve the standing option to repurchase shares, stockholders
holding a majority of the shares of our Common Stock outstanding and entitled to
vote at the Annual Meeting of stockholders, voting together as a single class,
must approve the filing of the certificate of amendment to our Restated
Certificate of Incorporation to grant us the option to repurchase shares.
Following this stockholder approval, our Board of Directors will determine when,
and if, to file the amendment with the Secretary of State of the State of
Delaware. Mr. Gabelli has indicated that he intends to vote shares beneficially
owned by him in favor of the proposal.
RECOMMENDATION OF OUR BOARD OF DIRECTORS
Our Board of Directors has unanimously determined that the option to
repurchase shares is fair to, and in the best interests of, us and our
stockholders.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" THE
APPROVAL AND ADOPTION OF THE CERTIFICATE OF AMENDMENT TO LYNCH INTERACTIVE'S
RESTATED CERTIFICATE OF INCORPORATION TO EFFECT THE OPTION TO REPURCHASE SHARES.
39
Please note that voting "FOR" the proposal does not mean that the we will
exercise our option to repurchase shares. By voting "FOR" the proposal, you are
giving our Board of Directors the option to repurchase shares at its discretion
if a proposed transfer would cause the number of holders of record of our Common
Stock to equal or exceed 300.
PLEASE NOTE THAT BOTH PROPOSAL NO. 1 ABOVE, THE REVERSE STOCK SPLIT, AND
PROPOSAL NO. 2, THE OPTION TO REPURCHASE SHARES, MUST BOTH BE APPROVED BY OUR
STOCKHOLDERS OR NEITHER PROPOSAL WILL TAKE EFFECT.
PROPOSAL NO. 3
RE-APPROVAL OF THE PRINCIPAL EXECUTIVE BONUS PLAN
In 2000, our Board of Directors and stockholders approved the Principal
Executive Bonus Plan, to provide our chief executive officer and, if so
designated, certain other key employees with a performance-based annual bonus
for calendar years beginning January 1, 2000.
The Principal Executive Bonus Plan is designed to satisfy Section 162(m) of
the Code. Section 162(m) of the Code denies a deduction by an employer for
certain compensation in excess of $1 million per year paid by a publicly held
corporation to the chief executive officer and the four other most highly
compensated executive officers who are employed at the end of the fiscal year.
Certain compensation, including compensation paid based on the achievement of
pre-established performance goals, is excluded from this deduction limit. In
general, the performance goals must be disclosed to, and approved by, the
stockholders in a separate vote every five years. Accordingly, the Principal
Executive Bonus Plan is being resubmitted to stockholders so that payments
thereunder will not fail to be deductible under Section 162(m) of the Code.
The following description of the Principal Executive Bonus Plan is a
summary of its key provisions and is qualified in its entirety by reference to
the Principal Executive Bonus Plan, a copy of which was previously filed with
the 2000 annual proxy statement and a copy of which may be obtained upon request
by contacting our Secretary.
ADMINISTRATION
The Principal Executive Bonus Plan is administered by a subcommittee of the
Executive Compensation and Benefits Committee, consisting of Messrs. Berkowitz
and Moats, who qualify as "outside directors" under Section 162(m) of the Code.
The subcommittee has the authority to designate the key employees eligible to
participate in the Principal Executive Bonus Plan (other than the chief
executive officer), establish individual bonus pool percentages, determine
performance criteria, certify attainment of performance goals and other material
terms, to construe and interpret the Principal Executive Bonus Plan and make all
other determinations it deems necessary or advisable for the administration of
the Principal Executive Bonus Plan.
ELIGIBILITY AND PARTICIPATION
Our chief executive officer participates in the Principal Executive Bonus
Plan during each calendar year automatically. In addition, the subcommittee may,
in its sole discretion, select other key executive officers or key employees of
ours (including our subsidiaries) to be eligible to participate in the Principal
Executive Bonus Plan for any calendar year. However, no other executive
currently participates in the Principal Executive Bonus Plan.
40
DETERMINATION OF ANNUAL BONUS
Each participant's annual bonus under the Principal Executive Bonus Plan
for each calendar year will be equal to the participant's individual bonus pool
percentage multiplied by the achieved annual bonus pool for the respective
calendar year. The annual bonus pool is determined pursuant to an objective
formula or standard based on the attainment of pre-established performance goals
specified by the subcommittee. The individual bonus pool percentage is
determined by the subcommittee and is expressed as a percentage of the annual
bonus pool for each calendar year. In no event may the total of all
participants' individual bonus pool percentages exceed 100% of the annual bonus
pool for any calendar year. Unless otherwise reduced by the subcommittee,
payment of a participant's annual bonus shall be made only if and to the extent
performance goals for the relevant calendar year are attained.
PERFORMANCE GOALS
The subcommittee generally has the authority to determine the performance
goals that will be in effect for each calendar year. The performance goals with
respect to the annual bonus pool are based on the attainment of certain target
levels of, or a percentage increase in, pre-tax profits (as defined below) in
excess of certain target levels or percentages of stockholders' equity (as
defined below). In addition, the subcommittee has the authority to incorporate
provisions in the performance goals allowing for adjustments in recognition of
unusual or non-recurring events affecting us or our financial statements, or in
response to changes in applicable laws, regulations or accounting principles, to
the extent permitted by Section 162(m) of the Code.
LIMITS ON ANNUAL BONUS
Notwithstanding the attainment of performance goals, the subcommittee has
the discretion to reduce (but not increase) a participant's annual bonus under
the Principal Executive Bonus Plan for any calendar year, regardless of the
degree of attainment of the performance goals. In any event, the maximum annual
bonus permitted under the Principal Executive Bonus Plan with respect to any
calendar year may not exceed, in the case of any participant, 80% of an amount
equal to 20% of the excess of (a) pre-tax profits (as defined below) for such
calendar year less (b) 25% of stockholders' equity (as defined below).
Pre-tax profits means income before income taxes (excluding any provision
for annual bonuses under the Principal Executive Bonus Plan and under the bonus
plan applicable to other corporate employees), minority interest (if any),
extraordinary items (if any), cumulative changes in accounting (if any) and
discontinued operations (if any) in our Statement of Consolidated Income
reported in our annual financial statements adjusted by (i) minority interest
effects on such pre-tax profits; and (ii) pre-tax effect of income or loss
associated with discontinued operation net of minority interest effects.
Stockholders' equity means the average of stockholders' equity at the beginning
of the plan year (i.e., the calendar year) and at the beginning of the two
preceding plan years, in each case as reported in our consolidated balance sheet
in our annual financial statements.
FORM AND PAYMENT OF ANNUAL BONUS
With respect to each participant, payment under the Principal Executive
Bonus Plan will be made in cash in an amount equal to the achieved annual bonus
and may be made only after attainment of the performance goals has been
certified in writing by the subcommittee. Unless otherwise determined by the
subcommittee in its sole discretion, each participant shall, to the extent the
applicable performance goals with respect to the annual bonus pool are attained
at the end of each calendar year, have the right to receive payment of a
prorated portion of such participant's annual bonus under the Principal
Executive Bonus Plan for any calendar year during which the participant's
employment with us is terminated for any reason other than for "cause" (as
determined by the subcommittee in its sole discretion).
41
AMENDMENT AND TERMINATION OF PRINCIPAL EXECUTIVE BONUS PLAN
The subcommittee may at any time and from time to time alter, amend,
suspend or terminate the Principal Executive Bonus Plan in whole or in part;
provided, that no amendment shall, without the prior approval of our
stockholders to the extent required under Code Section 162(m): (i) materially
alter the performance goals, (ii) increase the maximum annual bonus for any
calendar year, (iii) change the class of persons eligible to participate in the
Principal Executive Bonus Plan, or (iv) implement any change to a provision of
the Principal Executive Bonus Plan requiring stockholder approval in order for
the Principal Executive Bonus Plan to continue to comply with the requirements
of Section 162(m) of the Code. Notwithstanding the foregoing, no amendment shall
affect adversely any of the rights of any participant, without such
participant's consent, under an award theretofore granted under the Principal
Executive Bonus Plan.
PERFORMANCE AWARDS
Mr. Gabelli, the only participant in the Principal Executive Bonus Plan,
did not receive a bonus in respect of 2004. For a description of awards made
over the last five years under the Principal Executive Bonus Plan, see
"Executive Compensation and Benefits Committee Report on Executive Compensation
- Executive Officer Compensation Program," and " - Chief Executive Officer
Compensation."
VOTES REQUIRED
Approval of this Proposal requires the affirmative vote of a majority of
the shares of our Common Stock voting on the proposition, excluding any
abstentions. Mr. Gabelli has indicated he intends to vote the shares
beneficially owned by him in favor of the proposal.
RECOMMENDATION OF OUR BOARD OF DIRECTORS
THE BOARD OF DIRECTORS (OTHER THAN MR. GABELLI, WHO IS MAKING NO
RECOMMENDATION) RECOMMENDS A VOTE "FOR" THE RE-APPROVAL OF THE PRINCIPAL
EXECUTIVE BONUS PLAN.
MARKET RELATED INFORMATION
MARKET FOR COMMON STOCK
Our Common Stock currently trades on the AMEX under the symbol "LIC". On
March 17, 2005, the most recent practicable date prior to the printing of this
proxy statement, the closing price for our Common Stock was $25.75 per share,
and there were 889 stockholders of record. The following table lists the high
and low sales prices of our Common Stock for the periods indicated below.
PERIOD HIGH LOW
------ ---- ---
Fiscal Year Ended December 31, 2003
1st Quarter $28.00 $21.50
2nd Quarter 24.80 19.50
3rd Quarter 27.75 23.95
4th Quarter 27.41 21.80
Fiscal Year Ended December 31, 2004
1st Quarter $27.50 $21.50
2nd Quarter 37.95 28.00
3rd Quarter 36.50 29.50
4th Quarter 34.75 30.45
Fiscal Year Ending December 31, 2005
1st Quarter $31.99 $19.25
2nd Quarter $30.75 $20.25
3 Quarter (through July __, 2005)
42
DIVIDEND POLICY
We have not paid cash dividends on our Common Stock since our inception and
intend to continue to retain earnings for operations.
PROPOSAL NO. 4
ELECTION OF DIRECTORS
Upon the recommendation of our nominating committee, our Board of Directors
has nominated Morris Berkowitz, Paul J. Evanson, John C. Ferrara, Mario J.
Gabelli, Daniel R. Lee, Lawrence R. Moats and Salvatore Muoio to be elected at
the 2005 Annual Meeting as members of our Board of Directors, to serve until the
next Annual Meeting and until their respective successors are elected. If for
any reason any nominee does not stand for election, the proxies solicited by
this proxy statement will be voted in favor of the remainder of those named and
may be voted for a substitute nominee in place of such nominee. Our management,
however, has no reason to expect that any of the nominees will not stand for
election.
Our Bylaws provide that our Board of Directors shall consist of no less
than two and no more than nine members and that any vacancies on our Board of
Directors, from whatever cause arising, including newly-created directorships,
may be filled by the remaining directors until the next meeting of our
stockholders.
Biographical summaries and ages of the nominees as of March 31, 2005, are
set forth below. Data with respect to the number of shares of our Common Stock
beneficially owned by each of them appears elsewhere in this proxy statement.
All such information has been furnished to us by the nominees.
DIRECTOR
NOMINEE AGE PROFESSIONAL BACKGROUND
------- --- -----------------------
Morris Berkowitz 82 Mr. Berkowitz has served as a director of
Lynch Interactive since 2004. He has acted
as a consultant and an advisor to Lynch
Interactive and its predecessor, Lynch
Corporation, since 1998. He has also served
as an advisor to GGCP, Inc., a private
investment company, since 1998. Mr.
Berkowitz is currently retired.
43
Paul J. Evanson 64 Mr. Evanson has served as a director of
Lynch Interactive since 1999. He has served
as Chairman, President and Chief Executive
Officer of Allegheny Energy, Inc. since
June 2003. Prior to that, he served as
President of Florida Power & Light Company
from 1995 to May 2003. He also served as
President and Chief Operating Officer of
Lynch Corporation prior to 1995.
John C. Ferrara 53 Mr. Ferrara has served as a director of
Lynch Interactive since 1999. He has served
as President and Chief Executive Officer of
Lynch Corporation, a holding company with
diversified manufacturing operations, since
October 2004. He was a private investor
from 2002 to 2004. Prior to that, he served
as President and Chief Executive Officer of
Space Holding Corporation, a private
multimedia company dedicated to space,
science and technology, from 2001 to March
2002 and as Chief Financial Officer from
1999 to 2000. Mr. Ferrara is a Director of
Gabelli Asset Management Inc.
Mario J. Gabelli 62 Mr. Gabelli has served as a director and
Chief Executive Officer of Lynch
Interactive since 1999. He has served as
our Chairman since December 2004 (and also
from September 1999 to December 2002) and
as our Vice Chairman from December 2002 to
December 2004. Mr. Gabelli has also served
as the Chairman and Chief Executive Officer
and a director of Gabelli Asset Management
Inc. and its predecessors since November
1976 (and in connection with those
responsibilities, he serves as director or
trustee and/or an officer of registered
investment companies managed by
subsidiaries of Gabelli Asset Management).
Mr. Gabelli also serves as Chairman and
Chief Executive Officer of GGCP, Inc., a
private investment company. Mr. Gabelli
serves on the Board of Advisors of
Healthpoint and Caymus Partners LLC. Mr.
Gabelli (i) is a former Governor of the
AMEX; and (ii) serves as an Overseer of
Columbia University Graduate School of
Business; Trustee of Fairfield University,
Roger Williams University, the Winston
Churchill Foundation and the E.L. Wiegand
Foundation; as a Director of the National
Italian American Foundation and the
American-Italian Cancer Foundation; and as
the Chairman of the Patron's Committee of
Immaculate Conception School.
Daniel R. Lee 48 Mr. Lee has served as a director of Lynch
Interactive since 2000. He has served as
Chairman and Chief Executive Officer of
Pinnacle Entertainment, Inc., a public
company operating resorts and casinos since
2002. From 2000 to 2002, Mr. Lee was a
private investor. Prior to that, he served
as Chief Financial Officer and Senior Vice
President of HomeGrocer.com, Inc. from 1999
to 2000. From 1992 to 1999, Mr. Lee served
as the Chief Financial Officer, Treasurer
and Senior Vice President, Development of
Mirage Resort, Incorporated.
Lawrence R. Moats 57 Mr. Moats has served as a director of Lynch
Interactive since January 2005. He has
served as President and Chief Executive
Officer of Arlington Electrical
Construction Company Inc. since 1970. He
also serves as President and Chief
Executive Officer of Moats Office
Properties, Inc., a private real estate
company, since 1992. Mr. Moats served for
15 years as a Trustee of Harper College.
Since 1991, Mr. Moats has also been a
Director and Chairman of the Audit
Committee of Royal American Bank, a private
banking institution.
Salvatore Muoio 45 Mr. Muoio has served as a director of Lynch
Interactive since 1999. He has served as
Principal and Chief Investment Officer of
S. Muoio & Co. LLC, a securities advisory
firm, since 1996. From 1995 to 1996, Mr.
Muoio served as a Securities Analyst and
Vice President of Lazard Freres & Co.,
L.L.C., an investment banking firm. From
1985 to 1995, Mr. Muoio served as a
Securities Analyst at Gabelli & Company,
Inc.
44
VOTES REQUIRED
Except where authority to vote for nominees has been withheld, it is
intended that the proxies received pursuant to this solicitation will be voted
"FOR" the nominees named below. Nominees receiving the greatest number of votes
duly cast for the election of directors will be elected to our Board of
Directors. Abstentions and broker "non-votes" are not counted as votes cast for
purpose of electing directors.
RECOMMENDATION OF OUR BOARD OF DIRECTORS
OUR BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF EACH OF OUR
NOMINEES TO OUR BOARD OF DIRECTORS.
GOVERNANCE OF LYNCH INTERACTIVE
BOARD OF DIRECTORS
Our Board of Directors currently has seven members, five of whom meet the
AMEX standard for independence. Only independent directors serve on our audit
committee, nominating committee and the executive compensation and benefits
committee. During 2004, our Board of Directors held four meetings and the
committees held a total of 10 meetings. All of our directors attended at least
75% of the meetings of our Board of Directors and the committees of which they
are members.
COMMITTEES OF BOARD OF DIRECTORS
In 2004, our Board of Directors had four ongoing committees: the executive
committee, the audit committee, the executive compensation and benefits
committee, and the nominating committee. In 2004, the executive committee did
not meet, the audit committee met nine times, the executive compensation and
benefits committee met one time; and the nominating committee did not meet.
These committees are described below.
EXECUTIVE COMMITTEE
In 2004, Mario Gabelli (Chairman) and Paul Evanson were the members of our
executive committee. Our executive committee is vested with all the power and
authority of our Board of Directors, except as otherwise provided by Delaware
law or by our Bylaws, during intervals between meetings of our Board of
Directors.
AUDIT COMMITTEE
In 2004, John Ferrara (Chairman), Morris Berkowitz and Salvatore Muoio were
the members of our audit committee. In January 2005, Lawrence Moats was also
appointed to our audit committee. In March 2005, Mr. Ferrara announced his
resignation both as chairman and as a member of that committee. Mr. Moats was
thereupon appointed chairman. Our Board of Directors has determined that the
audit committee members meet the AMEX standard for independence. In addition,
our Board of Directors has determined that at least one member of our audit
committee meets the AMEX standard of having accounting or related financial
management expertise. Our Board of Directors has also determined that Morris
Berkowitz meets the SEC criteria of an "audit committee financial expert." Mr.
Berkowitz's extensive background and experience includes professional training
and experience as a CPA and an attorney; service as the chief financial officer
and general counsel of two publicly-traded corporations; and experience as a tax
and legal advisor as well as a consultant.
45
Our audit committee operates pursuant to a charter, which can be viewed on
our web site at www.lynchinteractivecorp.com. The charter gives our audit
committee the authority and responsibility for the appointment, retention,
compensation and oversight of our independent auditors, including pre-approval
of all audit and non-audit services to be performed by our independent auditors.
Our audit committee charter gives this committee broad authority to fulfill its
obligations under SEC and AMEX rules and regulations. The audit committee report
is set forth elsewhere herein.
EXECUTIVE COMPENSATION AND BENEFITS COMMITTEE
In 2004, Paul Evanson, John Ferrara and Morris Berkowitz were members of
our executive compensation and benefits committee. In March 2005, Mr. Ferrara
resigned his membership on this committee and Lawrence R. Moats was appointed in
his place. Our Board of Directors has determined that the committee members meet
the AMEX standard for independence. Our executive compensation and benefits
committee develops and makes recommendations to our Board of Directors with
respect to our executive compensation policies; recommends to our Board of
Directors the compensation to be paid to executive officers; administers the
Lynch Interactive Corporation Bonus Plan and 401(k) Savings Plan; and performs
such other duties as may be assigned to it by our Board of Directors. In 2004, a
subcommittee consisting of Messrs. Berkowitz and Ferrara addressed matters
relating to the Principal Executive Benefits Plan. Mr. Moats replaced Mr.
Ferrara on this subcommittee in March 2005.
NOMINATING COMMITTEE
In 2004, Paul Evanson, John Ferrara, Salvatore Muoio and Morris Berkowitz
were all members of our nominating committee. In March 2005, Mr. Ferrara
resigned from the committee and Lawrence R. Moats was appointed in his place.
Our nominating committee is responsible for recommending to our Board of
Directors nominees for election as our directors. The committee believes
candidates for our Board of Directors should have the ability to exercise
objectivity and independence in making informed business decisions; extensive
knowledge, experience and judgment; the highest integrity; loyalty to our
interests and to our stockholders; a willingness to devote the extensive time
necessary to fulfill a director's duties; the ability to contribute to the
diversity of perspectives present in our Board of Directors' deliberations; and
an appreciation of the Corporation's role in society. Our nominating committee
considers candidates meeting these criteria who are suggested by directors,
management or stockholders. Stockholders may submit recommendations in writing
by letter addressed to our Corporate Secretary. Our nominating committee
operates pursuant to a charter setting out the functions and responsibilities of
this committee. Its charter can be viewed on our web site at
www.lynchinteractivecorp.com.
COMPENSATION OF DIRECTORS
Directors, other than the Chairman and directors considered to be our
employees, receive a monthly cash retainer of $1,500, a fee of $2,000 for each
in person Board of Directors meeting attended and a fee of $1,000 for each
telephonic meeting of the Board of Directors (which lasts for at least one hour)
attended and each committee meeting the director attended.
46
In addition, each non-employee director (other than the Chairman) serving
as a committee chairman receives an additional $2,000 annual cash retainer. We
also purchase accident and dismemberment insurance coverage of $100,000 for each
member of our Board of Directors and maintain a liability insurance policy that
provides for indemnification of each director (and officer) against certain
liabilities that he may incur in his capacity as such.
EMPLOYEE CODE OF ETHICS AND CONFLICTS OF INTEREST POLICY
Since our spin-off from Lynch Corporation in 1999, we have had a code of
conduct and conflicts of interest policy. In December 2003, we adopted a code of
ethics that applies to all of our employees, officers and directors, including
our principal executive officer and our senior financial officers. We require
all of our employees to adhere to our code of ethics in addressing legal and
ethical issues encountered in conducting their work. Our code of ethics requires
that our employees avoid conflicts of interest, comply with all laws and other
legal requirements, conduct business in an honest and ethical manner and
otherwise act with integrity and in our best interest. All of our employees are
required to certify that they have reviewed and understood our code of ethics.
In addition, all employees who because of their responsibilities are
thought to be in sensitive positions and who may, therefore, be placed in
conflicts of interest situations, are required to certify as to their compliance
with our conflicts of interest policy. Copies of our code of ethics and
conflicts of interest policy were filed with the SEC as exhibits to our December
31, 2003 annual report on Form 10-K and are posted on our website at
www.lynchinteractivecorp.com.
POLICY REGARDING REPORTS OF ACTIONS THAT MAY BE VIOLATIONS OF LAW
In December 2003, our Board of Directors adopted a Policy Regarding Reports
of Actions That May Be Violations of Law, more commonly called our Violations
Policy. Our Violations Policy reaffirms our policy to comply with all applicable
laws that protect employees against unlawful discrimination or retaliation by
their employer as a result of their lawfully reporting information regarding, or
their participating in, investigations involving alleged corporate fraud or
other alleged violations by us or our agents of federal or state law. Our
Violations Policy further establishes a procedure by which our employees may
file anonymous complaints regarding our business practices including, but not
limited to, fraud, violations of law or accounting, internal accounting controls
or auditing matters.
Our Violations Policy also provides that we will offer a reward of $10,000
(also made on an anonymous basis) to any employee who reports information
regarding corporate fraud or other alleged violations by us or our agents of
federal or state law and such information leads to a finding of wrongdoing by
either our Board of Directors or a competent state or federal adjudicatory body.
A copy of our Violations Policy is posted on our website at
www.lynchinteractivecorp.com.
STOCKHOLDER COMMUNICATIONS
Our stockholders may send communications by letter addressed to our Board
of Directors at Lynch Interactive Corporation, 401 Theodore Fremd Avenue, Rye,
New York 10580. All communications will be received and reviewed by our
Corporate Secretary. The receipt of concerns about our accounting, internal
controls, auditing matters or business practices will be reported to the audit
committee. The receipt of other concerns will be reported to our Board of
Directors or an appropriate committee of our Board of Directors.
47
EXECUTIVE COMPENSATION
The following tables set forth compensation received by our Chief Executive
Officer and each of our executive officers for the last three fiscal years:
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
------------------- ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($)(1) COMPENSATION
--------------------------- ---- --------- ----------- ------------
Mario J. Gabelli 2004 350,000 --- -
Vice Chairman and 2003 250,000 850,000 -
Chief Executive Officer 2002 350,000 195,000 -
Robert E. Dolan 2004 285,146 125,000 -
Chief Financial Officer 2003 260,000 300,000 -
2002 250,000 85,000 -
Evelyn C. Jerden 2004 244,467 6,928 24,269(2)
Senior Vice President-- 2003 191,659 7,228 24,469(2)
Operations 2002 148,674 6,083 23,080(2)
John A. Cole(3) 2004 17,692 10,000 -
Vice President, Corporate
Development, General Counsel
and Secretary
---------------------------
(1) Bonuses earned in any fiscal year are generally paid during the following
fiscal year.
(2) Represents Western New Mexico Telephone Company's contribution to Ms.
Jerden's account with Western New Mexico's Employee Profit Sharing Plan.
(3) Mr. Cole's employment commenced on December 1, 2004.
We have no outstanding stock options or stock appreciation rights and we
have not made any long-term incentive plan awards to our executive officers.
EXECUTIVE COMPENSATION AND BENEFITS COMMITTEE
REPORT ON EXECUTIVE COMPENSATION
OVERVIEW AND PHILOSOPHY
The Executive Compensation and Benefits Committee, or the
compensation committee, of our Board of Directors is responsible for developing
and making recommendations to our Board of Directors with respect to our
executive compensation policies and administering the various executive
compensation plans. In addition, this committee recommends to our Board of
Directors the annual compensation to be paid to our Chief Executive Officer and
each of our other executive officers, as well as to other key employees. The
committee comprises three independent, non-employee directors.
48
The objectives of our executive compensation program are to:
o Support the achievement of our desired performance;
o Provide compensation that will attract and retain superior talent and
reward performance;
o Ensure that there is appropriate linkage between executive
compensation and the enhancement of stockholder value; and
o Evaluate the effectiveness of our incentives for key executives.
The executive compensation program is designed to provide an overall level
of compensation opportunity that is competitive with companies of comparable
size, capitalization and complexity. Actual compensation levels, however, may be
greater or less than average competitive levels based upon our annual and
long-term performance, as well as individual performance. The compensation
committee uses its discretion to recommend executive compensation at levels
warranted in its judgment by such performance.
EXECUTIVE OFFICER COMPENSATION PROGRAM
Our executive officer compensation program is comprised of base salary,
cash bonus compensation, our 401(k) Savings Plan, and other benefits generally
available to our employees.
BASE SALARY
Base salary levels for our executive officers are intended to be
competitive. In recommending salaries, the compensation committee takes into
account an individual's experience and performance, as well as specific issues
relating to us. The adjustments made to salaries for 2004 were based upon a
variety of judgmental factors, including the individual performances of the
officers in 2003 and their anticipated contributions to us in 2004, the
prevailing industry conditions and our general financial and strategic
performance.
BONUS PLAN
We have in place a bonus plan that is based on an objective measure of
corporate performance and on subjective evaluation of individual performance for
our executive officers, other than Mr. Gabelli our principal executive officer,
and other key personnel. In general, this plan provides for an annual bonus pool
equal to (i) 20% of the excess of our consolidated pre-tax profits for a
calendar year less (ii) 25% of our average stockholders equity at the beginning
of such year. Stockholders' equity is the average of stockholders equity at the
beginning of the period and at the beginning of the two preceding years. The
bonus pool will also be reduced by amounts paid pursuant to the Principal
Executive Bonus Plan, as described below. The compensation committee, in its
discretion, may take into consideration other factors and circumstances in
determining the amount of the bonus pool and awarding bonuses, such as progress
toward achievement of strategic goals and qualitative aspects of management
performance. The allocation of the bonus pool among the executives is not based
upon a formula but upon judgmental factors. In 2004, the annual bonus pool was
equal to approximately $265,000, which was paid to executive officers (other
than Mr. Gabelli) and other personnel, taking into consideration the factors
discussed above.
Mr. Gabelli is the sole participant in the Principal Executive Bonus Plan
that was adopted by our Board of Directors and approved by stockholders in 2000.
The Principal Executive Bonus Plan is described under Proposal No. 2 and is
similar to the regular bonus plan, except that it (i) specifies a maximum annual
bonus (as defined in the Principal Executive Bonus Plan) which is based on a
maximum percentage (80%) of a specified bonus pool and (ii) removes the
discretion of the committee to award annual bonuses above the established
maximum annual bonus. The Principal Executive Bonus Plan is designed to satisfy
an exemption from Section 162(m) of the Code, which denies a deduction by an
employer for certain compensation in excess of $1,000,000 per year. In 2002,
from the annual bonus pool of $310,000, Mr. Gabelli was awarded a bonus of
$195,000. In 2003, from the annual bonus pool of $1,600,000 Mr. Gabelli was paid
a bonus of $850,000. In 2004, from an annual bonus pool of $205,000, Mr. Gabelli
was paid no bonus.
49
LYNCH INTERACTIVE CORPORATION 401(K) SAVINGS PLAN
All our employees are eligible to participate in our 401(k) Savings Plan,
after having completed one year of service and having reached the age of 18.
Our 401(k) Savings Plan permits employees to make contributions by
deferring a portion of their compensation. We may make discretionary
contributions to our 401(k) Savings Plan accounts of participating employees. A
participant's interest in both employee and employer contributions and earnings
thereupon are fully vested at all times.
Employee and employer contributions are invested in certain mutual funds or
our Common Stock, as determined by the participants. With respect to the
individuals listed in the Summary Compensation Table, each of Messrs. Gabelli
and Dolan deferred $12,000 under the 401(k) Savings Plan during 2004, which
amounts have been included for each individual in the Summary Compensation
Table.
BENEFITS
We provide medical, life insurance and disability benefits to the executive
officers that are generally available to all of our employees. The amount of
perquisites, as determined in accordance with the rules of the SEC relating to
executive compensation, did not exceed 10% of salary and bonus for 2004.
CHIEF EXECUTIVE OFFICER COMPENSATION
The following table sets forth compensation received by Mr. Gabelli for the
last five years, for serving as our Chief Executive Officer:
2000 2001 2002 2003 2004
---- ---- ---- ---- ----
Salary 350,000 350,000 350,000 250,000 350,000
Bonus 0 0 195,000 850,000 0
Mr. Gabelli performs the usual functions of a chief executive officer and
is particularly involved in the development of acquisition, investment and
financial strategies. The compensation committee considers a number of factors
in determining the compensation of the Chief Executive Officer, including our
size and scope, the role of leadership, particularly that of Mr. Gabelli, in
developing existing businesses and in making strategic acquisitions, our
financial performance as reflected by the increase in our internally estimated
private market value as well as our public market value, and return on
stockholders' equity. Effective in 2000, Mr. Gabelli's prior $500,000 salary was
reduced to $350,000, in connection with our spin off from Lynch Corporation,
with no raise until 2004. Following Mr. Gabelli's resignation as Chairman and
his appointment as Vice Chairman, effective January 1, 2003, Mr. Gabelli's
salary was reduced to $250,000. In 2003, based on the formula set forth in the
Principal Executive Bonus Plan, the annual bonus pool was $1,600,000, with the
maximum bonus payable to Mr. Gabelli not to exceed 80% of the annual bonus pool.
The compensation committee, which has the discretion to reduce the bonus payable
to Mr. Gabelli, approved a bonus of $850,000, representing approximately 53.1%
of the annual bonus pool, to be paid to Mr. Gabelli. In 2004, Mr. Gabelli's
salary was increased to $350,000 following his resumption of his Chief Executive
Officer duties, but he was awarded no bonus in respect of 2004.
50
Morris Berkowitz (Member)
Paul J. Evanson (Member)
Lawrence R. Moats (Member)
John C. Ferrara (Retired Member)
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of the record date, certain information
with respect to all persons known to us to each beneficially own more than 5% of
our shares of Common Stock, which is our only class of voting stock outstanding.
The table also sets forth information with respect to our Common Stock
beneficially owned by the directors, by each nominee for director, by each of
the executive officers named in the Summary Compensation Table, and by all
directors, nominees for director and executive officers as a group. The number
of shares beneficially owned is determined under rules of the SEC, and the
information is not necessarily indicative of beneficial ownership for any other
purpose. Under such rules, beneficial ownership includes any shares as to which
a person has the sole or shared voting or investment power or any shares that
the person can acquire within 60 days, such as through exercise of stock options
or conversions of securities. Except as otherwise indicated, our stockholders
listed in the table have sole voting and investment powers with respect to the
Common Stock set forth in the table. The following information is either
reflected in filings with the SEC or has otherwise been furnished to us by
persons named in the table. Unless otherwise indicated, the address of each
entity listed in the table is c/o 401 Theodore Fremd Avenue, Rye, New York
10580.
NAME OF AMOUNT AND NATURE PERCENT
BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP OF CLASS
---------------- ----------------------- --------
Kinetics Asset Management, Inc.
470 Park Avenue South
New York, New York 10016........................ 209,000(1) 7.6%
MJG-IV Limited Partnership...................... 620,000(2) 22.5%
Mario J. Gabelli................................ 658,583(2)(3) 23.9%
Morris Berkowitz................................ 504 *
Paul J. Evanson................................. 11,304 *
John C. Ferrara................................. 2,828 *
Daniel R. Lee................................... 0 0
Lawrence R. Moats............................... 27,700(4) 1.0%
Salvatore Muoio................................. 16,004(5) *
Robert E. Dolan................................. 960(6) *
Evelyn C. Jerden................................ 105 *
John A. Cole.................................... 0 0
All directors and named executive officers
as a group (10 persons)..................... 717,988 26.1%
----------------------------
* Represents holdings of less than one percent.
51
(1) Because of its investment and/or voting power over shares of our Common
Stock held in the accounts of its investment advisory clients, Kinetics
Asset Management, Inc., an investment adviser, is deemed to be the
beneficial owner of 209,000 shares. Kinetics disclaims beneficial ownership
of all such shares.
(2) MJG-IV Limited Partnership, a limited partnership of which Mr. Gabelli is
the general partner, has the right to receive and the power to direct the
receipt of dividends from, or the proceeds from the sale of, 620,000
shares. Mr. Gabelli has approximately a 5% interest in the partnership,
except in respect of 480,000 shares of our Common Stock sold by Mr. Gabelli
to the partnership in January 2004 in which Mr. Gabelli has no interest.
Mr. Gabelli holds an irrevocable proxy to vote such 480,000 shares until
January 16, 2007.
(3) Represents 620,000 shares owned by a limited partnership in which Mr.
Gabelli is the general partner (see footnote 2 above), 6,008 shares owned
directly by Mr. Gabelli, 11,075 shares owned by Mr. Gabelli through our
401(k) Savings Plan, and 21,500 shares owned by GGCP, Inc., in which Mr.
Gabelli is the majority stockholder. Mr. Gabelli disclaims beneficial
ownership of the shares owned by MJG-IV and GGCP, Inc. except to the extent
of his interest therein.
(4) Includes 700 shares owned directly by Mr. Moats, 100 shares held as
custodian for a child, 100 shares held by a family member and 26,800 shares
held by a foundation of which Mr. Moats is the president. With respect to
all such shares except the 700 shares held by him directly, Mr. Moats
disclaims beneficial ownership.
(5) Consists of (i) 1,704 shares owned directly by Mr. Muoio; (ii) 14,100
shares owned by investment funds of which S. Muoio & Co. LLC is the general
partner or investment manager and (iii) 200 shares owned by S. Muoio & Co.
LLC Profit Sharing Plan. Mr. Muoio is the managing member of S. Muoio & Co.
LLC. Mr. Muoio disclaims beneficial ownership of the shares owned by such
investment funds, except for his interest therein.
(6) Includes 70 shares registered in the name of Mr. Dolan's children with
respect to which Mr. Dolan has voting and investment power and 238 shares
owned by Mr. Dolan through our 401(k) Savings Plan.
52
PERFORMANCE GRAPH
The graph below compares the cumulative total stockholder return on our
Common Stock for the period January 1, 2000 through December 31, 2004, with the
cumulative total return over the same period on the broad market, as measured by
the American Stock Exchange Market Value Index, and on a peer group. The peer
group index is based on the total returns earned on the stock of the
publicly-traded companies included in the Media General Financial Services
database under SIC Code 4813, Telephone Communications, except Radio Telephone
(135 companies). The data presented in the graph assumes that $100 was invested
in our Common Stock and in each of the indexes on January 1, 2000 and that all
dividends were reinvested. The stock price performance shown on the following
graph is not necessarily indicative of future price performance.
[OBJECT OMITTED]
53
TRANSACTIONS WITH CERTAIN AFFILIATED PERSONS
Mario Gabelli is affiliated with various entities that he directly or
indirectly controls and that are engaged in various aspects of the securities
business, such as an investment adviser to various institutional and individual
clients, including registered investment companies and pension plans, as a
broker-dealer, and as managing general partner of various private investment
partnerships. During 2004, Lynch Interactive and its subsidiaries engaged in
various transactions and arrangements with certain of these entities. The amount
of commissions, fees, and other remuneration paid to such entities, excluding
reimbursement of certain expenses related to Mr. Gabelli's employment with us
(including approximately $40,000 reimbursement in connection with an airplane
owned in part by a subsidiary of GGCP, Inc.), was approximately $63,000,
primarily for administrative and staff support functions, including charges for
shared employee expenses ($34,000), telephone charges ($24,000), shared travel
and automobile expenses ($2,500) and miscellaneous other office charges
($2,500).
In 1998, Lynch Corporation, our predecessor, entered into a lease for
approximately 5,000 square feet in a building in Rye, New York, owned by an
affiliate of Mr. Gabelli. Following the spin-off, we became the lessee of such
lease and in May 2001 the parties agreed to reduce the leased space to
approximately 3,300 square feet. The lease was renewed in December 2002 and
provides for rent at approximately $28 per square foot per annum plus a minimum
of $3 per square foot per annum for utilities, subject to adjustment for
increases in taxes and other operating expenses. The total amount paid for rent
and utilities in 2004 under this lease was $112,000. An unaffiliated entity also
leasing space in the same building pays rent on substantially the same basis.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our directors, executive
officers and holders of more than 10% of our Common Stock to file with the SEC
and AMEX initial reports of ownership and reports of changes in the ownership of
our Common Stock and other equity securities. Such persons are required to
furnish us with copies of all Section 16(a) filings. Based solely on our review
of the copies of such filings we have received and written representations of
directors and officers, we believe that during the fiscal year ended December
31, 2004, our officers, directors, and 10% stockholders were in compliance with
all Section 16(a) filing requirements applicable to them.
INDEPENDENT PUBLIC ACCOUNTANTS
On January 12, 2005, our audit committee appointed Deloitte & Touche LLP to
serve as our independent auditor to audit our and our subsidiaries' consolidated
financial statements as of and for the year ended December 31, 2004. Deloitte &
Touche LLP also audited our 2003 consolidated financial statements.
Representatives of Deloitte & Touche LLP are expected to be available at the
Annual Meeting with the opportunity to make a statement if they desire to do so
and to answer appropriate questions.
The audit committee has not yet selected a principal auditor for fiscal
year 2005. Consistent with the past practice, the audit committee begins the
selection process for our principal auditor following completion of the prior
year's audit.
RESIGNATION OF ERNST & YOUNG LLP
Following the completion of its review of our condensed consolidated
financial statements for the quarter ended September 30, 2003, on November 14,
2003, Ernst & Young LLP notified us of its resignation as our independent
auditor. Ernst & Young's decision was based, in part, on the existence of
pending litigation against it initiated by Morgan Group Holding Co., an entity
that was created through a spin-off from us. Morgan Group Holding Co. brought an
action against Ernst & Young in its capacity as the independent auditor of The
Morgan Group, Inc., a public company in which Morgan Group Holding Co. had a
majority interest.
54
The reports of Ernst & Young, as our principal auditor, on our consolidated
financial statements for the fiscal years ended December 31, 2001 and 2002
(which reports were based on the work of Siepert & Co., L.L.P. insofar as it
relates to the amounts included in the consolidated financial statements for our
following subsidiaries: Cuba City Telephone Exchange Corporation and Belmont
Telephone Corporation in 2002 and 2001, Upper Peninsula Telephone Corporation in
2002 and Lynch Michigan Telephone Holding Corporation in 2001) did not contain
any adverse opinion or disclaimer of opinion, nor were they qualified or
modified as to uncertainty, audit scope or accounting principles.
In connection with the audits of our financial statements for each of 2002
and 2001 and in the subsequent interim periods through November 14, 2003, there
were no disagreements with Ernst & Young on any matters of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure,
which disagreements, if not resolved to the satisfaction of Ernst & Young, would
have caused Ernst & Young to make reference to the subject matter of the
disagreements in connection with its reports. There were no reportable events as
described in Item 304(a)(1)(v) of Regulation S-K.
A copy of the disclosure under this subheading has been furnished to Ernst
& Young and Deloitte & Touche in order to give each such auditor the opportunity
to present its views in this proxy statement if it believes that the statements
made are incorrect or incomplete.
AUDIT FEES
The aggregate fees billed or to be billed by Deloitte & Touche for
professional services rendered for the audit of our 2003 and 2004 financial
statements is $1.2 million and $1.1 million, respectively The aggregate fees
billed by Deloitte & Touche for professional services rendered for the reviews
of the financial statements included in our quarterly reports on Forms 10-Q for
2004 was approximately $215,000. The aggregate fees billed by Ernst & Young for
the audit of our 2002 financial statements and review of financial statements
included in our Form 10-Q's for that year was $615,000. In addition, Ernst &
Young billed us $263,000 for review of the financial statements included in our
Form 10-Q for 2003 and $50,000 for audit-related work in 2004.
AUDIT-RELATED FEES
No fees were billed by Deloitte & Touche for assurance and related services
for 2004 that are reasonably related to the performance of the audit of our 2004
financial statements and/or performance of a review of our financial statements
during 2004 that are not reported as audit fees above. The aggregate fees billed
by Ernst & Young for assurance and related services for 2003 that are reasonably
related to the performance of the review of our financial statements and not
reported as audit fees above was $7,500.
TAX FEES
The aggregate fees billed by Deloitte & Touche for professional services
rendered to us in 2004 for tax compliance, tax advice, and tax planning was
approximately $15,000. These services included miscellaneous tax-related
research. The aggregate fees billed by Ernst & Young for professional services
rendered to us in 2003 for tax compliance, tax advice, and tax planning was
$5,000.
55
ALL OTHER FEES
No fees were billed by Deloitte & Touche or by Ernst & Young for 2004 or
2003, respectively, for services other than as set forth above.
AUDIT COMMITTEE'S PRE-APPROVAL POLICIES AND PROCEDURES
In December 2002, our audit committee adopted policies and procedures that
require that any non-audit services to be provided by our independent auditor
that are not otherwise proscribed by Sarbanes-Oxley must be pre-approved by a
member of our audit committee and that any such pre-approval must then be
ratified by our audit committee at its next meeting.
The revised audit committee charter also provides that our audit committee
shall pre-approve all auditing provided to us by the independent auditors.
Prior to December 2002, our audit committee did not have an established
pre-approval procedure with respect to the provision of services other than the
audit by its independent auditor. For the year ended 2002, our audit committee
considered that the provisions of all non-audit services were compatible with
maintaining the independence of our independent auditor. For the years ended
2003 and 2004, our audit committee pre-approved all the fees incurred by our
independent auditors.
AUDIT COMMITTEE REPORT
The audit committee of our Board of Directors comprises directors who meet
the AMEX standards for independence. The audit committee operates under a
written charter adopted by our Board of Directors.
The audit committee met with management periodically during the year to
consider the adequacy of our internal controls and the objectivity of our
financial reporting. The audit committee discussed these matters with Deloitte &
Touche LLP, our independent auditors, and with our chief financial officer. The
audit committee also discussed with our senior management and independent
auditors our compliance with Sarbanes-Oxley.
The audit committee met privately with the independent auditors, as well as
with the chief financial officer, on a number of occasions.
The audit committee also held meetings to deliberate the selection of
independent auditors for 2004.
The audit committee has reviewed and discussed our audited 2004 financial
statements with both management and our independent auditors for 2004. The audit
committee has also discussed with our independent auditors any matters required
to be discussed by Statement on Auditing Standards No. 61 (Communications with
Audit Committees). The audit committee has received the written disclosures and
the letter from our independent auditors required by Independent Standards Board
No. 1, Independent Discussions with Audit Committees and has discussed with
Deloitte & Touche LLP their independence.
Management has primary responsibility for our financial statements and the
overall reporting process, including our systems of internal controls.
Management has represented to the audit committee that the 2004 financial
statements were prepared in accordance with generally accepted accounting
principles.
56
Based on the foregoing reviews and discussions, the audit committee
recommended to our Board of Directors that our 2004 audited financial statements
be included in our Annual Report on Form 10-K for the fiscal year ended December
31, 2004.
Morris Berkowitz (Member)
Lawrence R. Moats (Chairman)
Salvatore Muoio (Member)
John C. Ferrara (Retired Chairman and Member)
PROPOSALS OF STOCKHOLDERS
If our Exchange Act registration is not terminated in connection with the
reverse stock split, proposals of stockholders intended to be presented at our
2006 Annual Meeting must be received by the Corporate Secretary, Lynch
Interactive Corporation, 401 Theodore Fremd Avenue, Rye, NY 10580, no later than
December 15, 2005, for inclusion in our proxy statement and form of proxy
relating to the that meeting.
MISCELLANEOUS
Our Board of Directors knows of no other matters that are likely to come
before the Annual Meeting. If any other matters should properly come before the
Annual Meeting, it is the intention of the persons named in the accompanying
form of proxy to vote on such matters in accordance with their best judgment.
ANNUAL REPORT
Our Annual Report for the fiscal year ended December 31, 2004, on Form
10-K/A, has been sent to each stockholder. The Form 10-K/A was amended on or
about August __, 2005. The Form-10-K/A, as amended and the Form 10-Q for the
quarter ended June 30, 2005 are incorporated herein by reference.
57
EXHIBIT A
CERTIFICATE OF AMENDMENT
OF THE
RESTATED CERTIFICATE OF INCORPORATION
OF
LYNCH INTERACTIVE CORPORATION
================================================================================
It is hereby certified that:
1. The name of the corporation is LYNCH INTERACTIVE CORPORATION (the
"Corporation").
2. The Restated Certificate of Incorporation of the Corporation is hereby
amended to reflect a 1-for-100 reverse stock split of the
Corporation's common stock and to provide the Corporation with an
option to buy back shares of its common stock proposed to be
transferred after the reverse stock split is effective.
3. To accomplish the foregoing amendment, the Restated Certificate of
Incorporation of the Corporation is hereby amended by revising Article
FOURTH in its entirety to read as follows:
"FOURTH: The Corporation shall have the authority to
issue 10,000,000 shares of common stock, $.01 per share
(the "Common Stock").
Simultaneously with the effective time of the filing of
this amendment to the Corporation's Restated
Certificate of Incorporation (the "Effective Time"),
each share of common stock, par value $.0001 per share,
of the Corporation issued and outstanding or held as
treasury shares immediately prior to the Effective Time
(the "Old Common Stock") shall automatically be
reclassified as and reduced to (the "Reverse Split"),
without any action on the part of the holder thereof,
1/100 of one share of Common Stock (the "New Common
Stock"). Each holder of a certificate of Old Common
Stock shall be entitled to receive, upon surrender of
such certificate to the Corporation's transfer agent
for cancellation, a certificate of New Common Stock
that will equal the number of shares of Old Common
Stock divided by one hundred PROVIDED, HOWEVER, that
holders of Old Common Stock who are entitled to less
than one share of New Common Stock on account of the
Reverse Split shall not receive fractional shares, but
rather shall receive, upon surrender of the stock
certificates formerly representing shares of the Old
Common Stock, in lieu of such fractional share, an
amount in cash equal to the fractional share that a
holder would otherwise be entitled to, multiplied by
___________ ($______.00).
A-1
Subject to the fractional share treatment described
above, certificates for Old Common Stock will be deemed
for all purposes to represent the appropriately reduced
number of shares of New Common Stock; PROVIDED,
HOWEVER, that the holder of unexchanged certificates
will not be entitled to receive any distributions
payable by the Corporation after the Effective Time,
until the certificates for Old Common Stock have been
surrendered for exchange. Such distributions, if any,
will be accumulated and, at the time of surrender of
the Old Common Stock certificate, all such unpaid
distributions will be paid without interest.
After the Effective Time, the Corporation shall have
the right to buy back shares of Common Stock proposed
to be transferred by any stockholder if such transfer
would cause the number of holders of record of the
Corporation's Common Stock to equal or exceed 300. The
price to be paid for the shares pursuant to this option
shall be equal to (i) the mean between the bid and
asked prices (as published in the pink sheets) averaged
over the 20 trading days immediately preceding the date
of exercise of the option, on which the shares of
Common Stock were quoted or, (ii) if the Common Stock
is not then quoted in the pink sheets (or if such
determination cannot otherwise be made), the fair
market value for such shares as determined by the
Corporation's Board of Directors in good faith.
At such time as the Corporation becomes aware of a
proposed transfer that would cause the number of
holders of record of the Corporation's Common Stock to
equal or exceed 300, the Corporation shall have 15 days
to exercise its right to buy back such shares of Common
Stock.
4. The Amendment to the Restated Certificate of Incorporation of the
Corporation effected by this Certificate was duly authorized and
declared advisable by the Board of Directors of the Corporation in
accordance with the provisions of Section 242 of the General
Corporation Law of the State of Delaware, and approved by the
affirmative vote of a majority of the stockholders entitled to vote
thereon in accordance with the provisions of Section 242 of the
General Corporation Law of the State of Delaware.
A-2
IN WITNESS WHEREOF, the undersigned has executed this Certificate of
Amendment to the Restated Certificate of Incorporation of Lynch Interactive
Corporation on this ______ day of _______________.
-----------------------------------
Robert E. Dolan
Chief Financial Officer
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EXHIBIT B
CAYMUS PARTNERS LLC
April 17, 2005
CONFIDENTIAL
------------
Board of Directors
Lynch Interactive Corporation
401 Theodore Fremd Avenue
Rye, New York 10580
RE: FAIRNESS OPINION
Gentlemen:
Lynch Interactive Corporation ("Interactive" or the "Company") proposes a
1-for-100 reverse stock split ("Stock Split") of the Company's common stock
("Common Stock") with the result that (i) holdings prior to such Stock Split of
fewer than 100 shares of Common Stock will be converted to a fractional share,
which will be immediately cancelled and converted into a right to receive the
cash consideration described in the attached proxy statement ("Transaction"),
and (ii) the Corporation will have fewer than 300 holders of record, allowing it
to delist the Common Stock from the American Stock Exchange (the "AMEX") and to
deregister its Common Stock. As part of the Transaction, holders of record of
less than 100 shares prior to the Stock Split would receive cash compensation
equal to 120% of the average of the Company's stock price for the 20 trading
days, on which the Company's shares were traded, immediately preceding the date
of when the Company's restated certificate of incorporation is filed with the
Office of the Secretary of the State of Delaware.
You have asked Caymus Partners LLC ("Caymus Partners," "we" or "us")
whether or not, in our opinion, the Transaction is fair to the public
shareholders of the Company from a financial point of view (the "Opinion").
In arriving at the Opinion set forth below, we have, among other things:
1) Reviewed and analyzed the March 31, 2005 draft of the proxy statement
(Schedule 14A) ("Proxy Statement") in connection with the Transaction
that was provided by the Company;
2) Reviewed publicly available historical financial information and other
data concerning the Company, including Interactive's Annual Report and
audited financial statements on Form 10-K for the fiscal year ended
December 31, 2004 filed with the Securities and Exchange Commission
(the "SEC");
3) Reviewed and analyzed certain financial characteristics of companies
we deemed to have characteristics comparable to the Company;
B-1
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4) Reviewed and analyzed certain financial terms of transactions
involving target companies we deemed to have characteristics
comparable to the Company;
5) Reviewed certain internal financial analyses and forecasts of the
Company related to the business, earnings, cash flow, assets and
prospects of Interactive, which were provided to us by management of
Interactive;
6) Had discussions with representatives or members of management of the
Company concerning its businesses, operations, assets, present
condition and future prospects;
7) Considered the historical financial results and present financial
condition of the Company;
8) Reviewed the stock prices and trading history of the Company's common
stock;
9) Reviewed such other financial studies and analyses and performed such
other investigations and took into account such other matters as we
deemed necessary, including our assessment of general economic, market
and monetary conditions; and
10) Presented our preliminary findings to the Board of Directors of the
Company and answered and discussed a variety of questions posed by the
Board of Directors.
In preparing our Opinion, we have relied on the accuracy and completeness
of all information publicly available, supplied or otherwise communicated to us
by the Company, and we have not assumed any responsibility to independently
verify such information. With respect to the financial forecasts provided to us
by the Company, we have assumed that such forecasts have been reasonably and
accurately prepared and represent management's best currently available
judgments and estimates as to the future financial performance of Interactive,
and we express no opinion with respect to such forecasts or the assumptions upon
which they are based. We have also relied upon assurances of the management of
the Company that they are unaware of any facts that would make the information
provided to us incomplete or misleading. We have not made any independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of the Company nor have we been furnished with any such evaluations or
appraisals. We also have assumed that, in all material respects to our analysis,
the representations and warranties contained in the Proxy Statement are true and
correct, each of the parties to the Proxy Statement will perform all of the
covenants and agreements to be performed by it under the Proxy Statement and
that the Transaction will be consummated in all material respects in accordance
with the terms and conditions described in the Proxy Statement without any
waiver or modification thereof. We have also assumed that the final Proxy
Statement will be substantially the same as the March 31, 2004 draft of the
Proxy Statement reviewed by us.
This Opinion does not constitute a recommendation to any shareholder of
Interactive. This Opinion does not address the relative merits of the
Transaction and any other transactions or business strategies discussed by the
Board of Directors of the Company as alternatives to the Stock Split or the
decision of the Board of Directors of the Company to proceed with the Stock
Split. Our Opinion is based on economic, monetary and market conditions existing
on the date hereof.
Caymus Partners is currently acting as financial advisor to the Company and
will be receiving a fee in connection with the rendering of this Opinion. No
portion of Caymus Partners' fee is contingent upon the conclusions reached in
our Opinion.
B-2
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On the basis of, and subject to the foregoing, we are of the opinion that
the proposed Transaction is fair to the public shareholders of Interactive from
a financial point of view.
This Opinion has been prepared for the information of the Board of
Directors of the Company in connection with the Transaction and shall not be
reproduced, summarized, described or referred to, provided to any person or
otherwise made public or used for any other purpose without the prior written
consent of Caymus Partners, except that the Company may include this opinion in
its entirety in any disclosure document to be sent to the Company's stockholders
or filed with the SEC relating to the Transaction.
Very truly yours,
CAYMUS PARTNERS LLC
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LYNCH INTERACTIVE CORPORATION
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Robert E. Dolan and John A. Cole, and each
of them, with full power of substitution, to vote as indicated below, and act
with respect to all shares of common stock of Lynch Interactive Corporation., a
Delaware corporation (the "Corporation"), standing in the name of the
undersigned, at the Annual Meeting of Stockholders to be held at _____ p.m.,
Eastern time, on _____________, ________, 2005, at the
____________________________________, or at any adjournment thereof, with all
the power the undersigned would possess if personally present:
1. Amendment of Lynch Interactive Corporation's Restated Certificate of
Incorporation to effect the reverse stock split.
/_/ FOR /_/ AGAINST /_/ ABSTAIN
2. Amendment of Lynch Interactive Corporation's Restated Certificate of
Incorporation granting the option to repurchase shares.
/_/ FOR /_/ AGAINST /_/ ABSTAIN
3. To re-approve the Principal Executive Bonus Plan.
/_/ FOR /_/ AGAINST /_/ ABSTAIN
4. Election of the following nominees as directors of the Company: Morris
Berkowitz, Paul J. Evanson, John C. Ferrara, Mario J. Gabelli, Daniel R. Lee,
Lawrence R. Moats and Salvatore Muoio.
/_/ FOR all the nominees (except as /_/ WITHHOLD AUTHORITY
otherwise marked above) to vote for all nominees.
INSTRUCTIONS To withhold authority to vote for any particular nominee, strike
through such person's name in the above list.
5. To adjourn the Annual Meeting , if necessary, to solicit additional
proxies.
/_/ FOR /_/ AGAINST /_/ ABSTAIN
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6. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting or any adjournment(s) thereof.
/_/ FOR /_/ AGAINST /_/ ABSTAIN
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED
ABOVE. IF NO DIRECTION IS MADE, THE PROXY WILL BE VOTED FOR PROPOSALS 1, 2 AND
3.
IMPORTANT: To ensure a quorum and to avoid the expense and delay of sending
follow-up letters, please mark, sign, date and mail this proxy in the
accompanying envelope.
Date: ______________________________, 2005
______________________________, 2005
______________________________, 2005
PRELIMINARY COPY
Please sign exactly as name
appears hereon. For a joint account,
each owner should sign. Persons
signing as attorney, executor,
administrator, trustee or guardian
or in any other representative
capacity should indicate their full
title. If a corporation, please sign
in full corporate name by president
or other authorized officer. If a
partnership, please sign in
partnership name by authorized
person.