SEC Company Response from LYNCH INTERACTIVE CORP (CIK 0001088771) — Jul 29, 2005
LYNCH INTERACTIVE CORP (CIK 0001088771)
Date: July 29, 2005 · CIK: 0001088771 · Accession: 0000921895-05-001222
AI Filing Summary & Sentiment
Letter
DIRECT DIAL:212.451.2245 EMAIL:DADLER@OLSHANLAW.COM July 29, 2005 Ms. Michele Anderson Legal Branch Chief Division of Corporations Securities and Exchange Commission Washington, D.C. 20549
RE: LYNCH INTERACTIVE CORPORATION AMENDED PRELIMINARY PROXY MATERIALS
Dear Ms. Anderson:
We are securities counsel to Lynch Interactive Corporation (the "Company") and are submitting, on behalf of the Company, its responses to the comment letter from the Division of Corporation Finance, dated July 8, 2005, relating to the filing of the Company's amended preliminary proxy materials. The Company's responses are numbered to correspond to the Staff's comments and are filed together with the Company's amended preliminary proxy statement (the "Amended Preliminary Proxy Statement"), amending the previous proxy statement filed on June 22, 2005.
SCHEDULE 14A
GENERAL
1. WE NOTE YOUR RESPONSE TO OUR PRIOR COMMENT SIX. YET IT APPEARS THAT THESE PROPOSED ACTIONS ARE SEPARATE MATTERS THAT REQUIRE SEPARATE CONSIDERATION BY YOUR SHAREHOLDERS. PLEASE REVISE TO UNBUNDLE THE MATTERS AS SEPARATE PROPOSALS ON THE PROXY CARD AND PROVIDE A BALANCED DISCUSSION OF THE
NEW JERSEY OFFICE 2001 ROUTE 46/ SUITE 202 PARSIPPANY, NEW JERSEY 07054 TELEPHONE: 973.335.7400 FACSIMILE: 973.335.8018
July 29, 2005 Page 2
POSITIVE AND NEGATIVE ASPECTS OF THE PROPOSAL RELATING TO THE RIGHT OF FIRST REFUSAL OPTION IN THE PROXY STATEMENT. ALSO NOTE THAT YOU MAY CONDITION EACH PROPOSAL UPON THE APPROVAL OF THE OTHER TO ADDRESS THE CONCERN EXPRESSED IN YOUR RESPONSE. ALTERNATIVELY, IF SHAREHOLDER APPROVAL OF THE PORTION OF THE AMENDMENT THAT DESCRIBES THE RIGHT OF FIRST REFUSAL IS REQUIRED BY STATE LAW, YOUR CHARTER OR BYLAWS, THEN PLEASE PROVIDE US WITH A DETAILED ANALYSIS IN YOUR RESPONSE LETTER OF WHY THIS PROPOSED PORTION IS SO IMMATERIAL AS TO NOT MERIT SEPARATE CONSIDERATION BY YOUR SHAREHOLDERS.
The proposals to amend the Company's Certificate of Incorporation have been unbundled and are now presented as separate proposals to (1) approve the reverse stock and (2) grant a right of first refusal to the Company in the event a shareholder wishes to sell its shares in the future. The proposals are inter-dependent, I.E., if both are not approved, neither will be given effect.
2. REVISE THE LETTER TO SHAREHOLDERS TO INDICATE THAT YOU HAVE ADDED A FIFTH PROPOSAL RELATING TO ADJOURNING THE MEETING TO SOLICIT ADDITIONAL PROXIES.
The requested revision has been made.
SUMMARY TERM SHEET, PAGE 1
3. PROVIDE AN EXAMPLE OF THE FAIR MARKET VALUE TO BE PAID IN LIEU OF FRACTIONAL SHARES IN THE REVERSE STOCK SPLIT AS OF THE MOST RECENT DATE PRACTICABLE.
An example of the fair market value to be paid in lieu of fractional shares has been added to the first bullet point under the heading "Reverse Stock Split; "Going Dark;" "Pink Sheet" Quotation" on page 1.
SPECIAL FACTORS, PAGE 12
4. PLEASE DISCLOSE WHEN YOU EXPECT TO MAKE YOUR DECISION ON FILING THE AMENDMENT THAT EFFECTS THE REVERSE STOCK SPLIT, AS INDICATED IN YOUR RESPONSE TO OUR PRIOR COMMENT 10.
The Company has revised the Amended Preliminary Proxy Statement to disclose on page 13 that it expects to make a decision with respect to the filing of the amendment within 60 days after approval by stockholders.
BACKGROUND OF THE PROPOSAL, PAGE 12
5. AS STATED IN PRIOR COMMENT 12, YOUR BACKGROUND SECTION SHOULD DISCLOSE THE SUBSTANCE OF ALL MEETINGS, NEGOTIATIONS, CONTACTS, ETC., AMONG BOARD MEMBERS AND EXECUTIVE OFFICERS DURING THE CONSIDERATION OF THE RULE 13E-3 TRANSACTION. PLEASE REVISE TO PROVIDE AN EXPANDED DESCRIPTION OF ALL CONTACTS LEADING UP TO THE BOARD'S DECISION TO APPROVE THE REVERSE SPLIT TRANSACTION. FOR EXAMPLE, DISCLOSE WHO FIRST PROPOSED THE POSSIBILITY OF TAKING THE COMPANY PRIVATE AND WHEN THIS OCCURRED. ALSO, IT IS UNCLEAR WHAT TOOK PLACE BETWEEN THE MEETING OF THE AUDIT COMMITTEE ON JANUARY 12, 2005, WHERE DELOITTE & TOUCHE EXPRESSED CONCERNS ABOUT THE COMPANY'S READINESS TO COMPLY WITH SECTION 404, AND THE SUBSEQUENT MEETINGS IN JANUARY AND
July 29, 2005 Page 3
FEBRUARY 2005 AT WHICH THE BOARD CONSIDERED THE SPECIFIC PRICE TO PAY FOR FRACTIONAL SHARES IN A REVERSE STOCK SPLIT. IN ADDITION, EXPLAIN WHY THE BOARD CONSIDERED THE CASH OUT PRICE IN THE REVERSE STOCK SPLIT BEFORE IT EVALUATED ALTERNATIVE WAYS TO TAKE THE COMPANY PRIVATE AT THE MEETING ON MARCH 9, 2005. THE DISCLOSURE SHOULD MAKE CLEAR HOW AND WHEN THE BOARD DETERMINED TO PURSUE A GOING PRIVATE TRANSACTION AND, SPECIFICALLY, A REVERSE STOCK SPLIT.
The Company has expanded its description of all contacts leading up to the Board's decision to approve the reverse stock split, including the fact that the possibility of taking the Company private was first proposed by the Chairman of the Board.
Although the Company's Board of Directors did not formally consider alternative transactions until its meeting on March 9, 2005, all of the Board members are sophisticated business people who were aware of and considered the alternatives to the reverse stock split. As they were aware that the alternatives were not practical - for example, the sale of telecommunications companies can involve regulatory delays at both the federal and state levels - they began to consider the cash out price in the reverse stock split prior to formal consideration of the alternative transactions at the March 9, 2005 meeting.
6. DISCLOSE THE SPECIFIC CONCERNS THAT DELOITTE & TOUCHE EXPRESSED AND ANY ADVICE IT GAVE TO THE AUDIT COMMITTEE IN CONNECTION WITH THE COMPANY'S SECTION 404 COMPLIANCE.
Deloitte & Touche was concerned that the limited personnel resources at each of the Company's subsidiaries could make Section 404 compliance difficult. In addition, each subsidiary is geographically dispersed and there is a lack of centralization of subsidiary processes and controls. Further, at the January 12, 2005 audit committee meeting, Deloitte & Touche expressed concern that, given the pace of the Company's progress toward compliance with the Sarbanes-Oxley Act using primarily internal resources to document key processes and controls, the Company's ability to complete its work, including management's testing, as of December 31, 2005 was in question. Deloitte & Touche advised the audit committee to consider expanding its use of external resources to supplement the Company's efforts.
7. REVISE TO DESCRIBE THE NATURE OF THE "UNCERTAINTIES AS TO WHEN AND IF THE PROPOSAL WOULD BE ACTED UPON" THAT LED THE BOARD TO USE A FORMULA PRICE. ALSO DISCLOSE WHAT PROMPTED THE BOARD TO INCREASE THE PRICE FROM 110% TO 120% OF THE AVERAGE MARKET PRICE AND HOW IT DETERMINED TO USE A 20-DAY AVERAGE. FURTHERMORE, EXPLAIN WHAT THE BOARD LEARNED FROM THE CAYMUS PARTNERS DRAFT REPORT AND OPINION THAT RESULTED IN THE ADDITION OF THE $29 PER SHARE FLOOR.
The Company has revised its disclosure to explain that the "uncertainties as to when and if the proposal would be acted upon" include the fact that it cannot be predicted with certainty when stockholder approval will take place and the fact that the Company's Board of Directors has discretion with respect to the timing of the filing of the amendment to its Restated Certificate of Incorporation.
July 29, 2005 Page 4
The Board increased the price from 110% to 120% of the average market price because it felt that the 20% premium was a fairer price, particularly given then recent declines in the stock price. Management suggested the use of a 20-day average because it is a relatively common convention used to determine fair market value.
Caymus Partners' report utilized a number of methodologies in order to analyze the Company's value. The discounted cash flow analysis, which Caymus considers to be the most accurate measure of a company's going concern value, resulted in a mean implied equity per share value of $29.00. Based in part on this analysis, the Board determined that the $29.00 per share "floor" was appropriate. Please see "Background of the Proposal," pages 11-12.
OPINION OF FINANCIAL ADVISOR, PAGE 20
8. AS REQUESTED IN PRIOR COMMENT 20, PLEASE FILE THE CAYMUS PARTNERS DRAFT AND FINAL REPORTS AS EXHIBITS TO THE SCHEDULE 13E-3 PURSUANT TO ITEM 9 OF SCHEDULE 13E-3 AND ITEM 1016(C) OF REGULATION M-A, AS THEY APPEAR TO BE MATERIALLY RELATED TO THE RULE 13E-3 TRANSACTION.
The Company has filed the Caymus Partners draft and final reports as exhibits to its Schedule 13E-3.
9. INDICATE THAT THE ADVISOR'S OPINION ADDRESSES FAIRNESS TO THE COMPANY'S "PUBLIC SHAREHOLDERS" AND EXPLAIN THAT THE TERM REFERS TO "UNAFFILIATED SECURITY HOLDERS" AS INDICATED IN YOUR RESPONSE TO PRIOR COMMENT 36.
The Company has revised its disclosure accordingly. See "Opinion of Financial Advisor," page 19.
10. SO THAT INVESTORS MAY REALIZE THE SIGNIFICANCE OF EACH ANALYSIS, PLEASE INDICATE THE MULTIPLES CAYMUS PARTNERS UTILIZED. SEE PRIOR COMMENT 21.
The Company has revised its disclosure to indicate the multiples utilized by Caymus Partners. See "Opinion of Financial Advisor," at pages 23-24.
11. WE REISSUE PRIOR COMMENT 32 AND REQUEST THAT YOU REVISE THE DOCUMENT TO DISCLOSE THE FINANCIAL FORECASTS THAT THE AUDIT COMMITTEE AND BOARD UTILIZED OR PROVIDED TO CAYMUS PARTNERS AND THE ASSUMPTIONS UNDERLYING THE FORECASTS.
The financial forecasts that the Audit Committee and Board utilized and the assumptions underlying the forecasts have been included as Exhibit C to the Company's Amended Preliminary Proxy Statement.
ALTERNATIVE TRANSACTIONS CONSIDERED, PAGE 26
12. REVISE THE DISCUSSION OF THE ISSUER TENDER OFFER ALTERNATIVE TO INCLUDE YOUR RESPONSE TO PRIOR COMMENT 25.
July 29, 2005 Page 5
The Company has revised its disclosure accordingly. See "Alternative Transactions Considered," page 26.
13. QUANTIFY THE COMPANY'S EXPENSES TO DATE RELATING TO ITS DEFENSE OF THE TAYLOR FALSE CLAIMS ACT CASE. ALSO PROVIDE FURTHER DETAILS ABOUT WHY DEFENDING THE CASE IMPACTED THE BOARD'S DECISION NOT TO CONSIDER A THIRD PARTY BUY-OUT.
To date, the Company's expenses relating to its defense of the Taylor False Claims Act case are approximately $5,000,000. Although the Company believes that the lawsuit is completely without merit, the alleged damages sought by plaintiff in the case are in excess of $1 billion, an indeterminate proportion of which might have to be borne by the Company, making the Company an unattractive candidate for a third party buy-out at this time. As a result, the Company did not consider a third party buy-out.
FAIRNESS OF THE REVERSE STOCK SPLIT, PAGE 28
14. WE REISSUE PRIOR COMMENT 30 IN PART. DISCLOSE WHETHER OR NOT THE TRANSACTION IS SUBSTANTIVELY AND PROCEDURALLY FAIR TO BOTH UNAFFILIATED SECURITY HOLDERS WHO WILL BE CASHED OUT IN THE REVERSE STOCK SPLIT AND THOSE UNAFFILIATED SECURITY HOLDERS WHO WILL RETAIN THEIR INVESTMENT IN THE COMPANY. AGAIN, WE REFER YOU TO QUESTION AND ANSWER NO. 19 IN EXCHANGE ACT RELEASE NO. 34-17719, WHICH EXPLAINS THAT THE DISCUSSION SHOULD ADDRESS FAIRNESS OF THE TRANSACTION TO DIFFERENT GROUPS OF UNAFFILIATED SECURITY HOLDERS IF THE TRANSACTION MAY HAVE A DIFFERENT IMPACT ON THEM.
The Board of Directors believes the transaction is substantively and procedurally fair to both unaffiliated stockholders who will be cashed out in the reverse stock split and to unaffiliated stockholders who will continue to be stockholders following the reverse stock split. As described in the eighth and ninth questions and answers under "Questions and Answers About the Meeting and the Proposals," all unaffiliated stockholders will have the ability to be cashed out or to remain stockholders as they see fit. Cashed out stockholders will be paid the greater of 120% of the fair market value of their shares or $29.00 per share. Continuing Stockholders have the advantage of continuing as stockholders in a company that will not be subject to the costs associated with compliance with applicable securities laws, including Section 404 of the Sarbanes Oxley Act. This savings will significantly decrease the Company's expenses going forward, improving liquidity.
15. REVISE TO STATE THAT THE RULE 13E-3 TRANSACTION WAS APPROVED BY A MAJORITY OF DIRECTORS WHO ARE NOT EMPLOYEES OF THE COMPANY IN ACCORDANCE WITH ITEM 1014(E) OF REGULATION MA. SEE PRIOR COMMENT 31.
The requested revision has been made. See "Fairness of the Reverse Stock Split," at page 28.
16. REVISE TO INDICATE HOW THE BOARD SPECIFICALLY EVALUATED THE COMPANY'S GOING CONCERN VALUE AND EXPLAIN HOW THE CASH TO BE PAID IN LIEU OF FRACTIONAL SHARES COMPARES IN RELATION TO THAT VALUE. QUANTIFY THE COMPANY'S GOING CONCERN VALUE TO THE EXTENT POSSIBLE.
July 29, 2005 Page 6
In evaluating the Company's going concern value, the Board of Directors reviewed the report of Caymus Partners, which presented a number of financial analyses of the Company. The Board felt that the 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). Based on this analysis and in light of the fact that the Company's stock price has ranged between $19.25 and $37.95 since the beginning of 2003, the Board of Directors determined that the cash to be paid in lieu of fractional shar
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OLSHAN
Olshan Grundman Frome Rosenzweig & Wolosky LLP
PARK AVENUE TOWER
65 EAST 55TH STREET
NEW YORK, NEW YORK 10022
TELEPHONE: 212.451.2300
FACSIMILE: 212.451.2222
WWW.OLSHAN.COM
DIRECT DIAL:212.451.2245
EMAIL:DADLER@OLSHANLAW.COM
July 29, 2005
Ms. Michele Anderson
Legal Branch Chief
Division of Corporations
Securities and Exchange Commission
Washington, D.C. 20549
RE: LYNCH INTERACTIVE CORPORATION
AMENDED PRELIMINARY PROXY MATERIALS
Dear Ms. Anderson:
We are securities counsel to Lynch Interactive Corporation (the
"Company") and are submitting, on behalf of the Company, its responses to the
comment letter from the Division of Corporation Finance, dated July 8, 2005,
relating to the filing of the Company's amended preliminary proxy materials. The
Company's responses are numbered to correspond to the Staff's comments and are
filed together with the Company's amended preliminary proxy statement (the
"Amended Preliminary Proxy Statement"), amending the previous proxy statement
filed on June 22, 2005.
SCHEDULE 14A
GENERAL
1. WE NOTE YOUR RESPONSE TO OUR PRIOR COMMENT SIX. YET IT APPEARS THAT THESE
PROPOSED ACTIONS ARE SEPARATE MATTERS THAT REQUIRE SEPARATE CONSIDERATION
BY YOUR SHAREHOLDERS. PLEASE REVISE TO UNBUNDLE THE MATTERS AS SEPARATE
PROPOSALS ON THE PROXY CARD AND PROVIDE A BALANCED DISCUSSION OF THE
NEW JERSEY OFFICE
2001 ROUTE 46/ SUITE 202
PARSIPPANY, NEW JERSEY 07054
TELEPHONE: 973.335.7400
FACSIMILE: 973.335.8018
July 29, 2005
Page 2
POSITIVE AND NEGATIVE ASPECTS OF THE PROPOSAL RELATING TO THE RIGHT OF
FIRST REFUSAL OPTION IN THE PROXY STATEMENT. ALSO NOTE THAT YOU MAY
CONDITION EACH PROPOSAL UPON THE APPROVAL OF THE OTHER TO ADDRESS THE
CONCERN EXPRESSED IN YOUR RESPONSE. ALTERNATIVELY, IF SHAREHOLDER APPROVAL
OF THE PORTION OF THE AMENDMENT THAT DESCRIBES THE RIGHT OF FIRST REFUSAL
IS REQUIRED BY STATE LAW, YOUR CHARTER OR BYLAWS, THEN PLEASE PROVIDE US
WITH A DETAILED ANALYSIS IN YOUR RESPONSE LETTER OF WHY THIS PROPOSED
PORTION IS SO IMMATERIAL AS TO NOT MERIT SEPARATE CONSIDERATION BY YOUR
SHAREHOLDERS.
The proposals to amend the Company's Certificate of Incorporation have been
unbundled and are now presented as separate proposals to (1) approve the
reverse stock and (2) grant a right of first refusal to the Company in the
event a shareholder wishes to sell its shares in the future. The proposals
are inter-dependent, I.E., if both are not approved, neither will be given
effect.
2. REVISE THE LETTER TO SHAREHOLDERS TO INDICATE THAT YOU HAVE ADDED A FIFTH
PROPOSAL RELATING TO ADJOURNING THE MEETING TO SOLICIT ADDITIONAL PROXIES.
The requested revision has been made.
SUMMARY TERM SHEET, PAGE 1
3. PROVIDE AN EXAMPLE OF THE FAIR MARKET VALUE TO BE PAID IN LIEU OF
FRACTIONAL SHARES IN THE REVERSE STOCK SPLIT AS OF THE MOST RECENT DATE
PRACTICABLE.
An example of the fair market value to be paid in lieu of fractional shares
has been added to the first bullet point under the heading "Reverse Stock
Split; "Going Dark;" "Pink Sheet" Quotation" on page 1.
SPECIAL FACTORS, PAGE 12
4. PLEASE DISCLOSE WHEN YOU EXPECT TO MAKE YOUR DECISION ON FILING THE
AMENDMENT THAT EFFECTS THE REVERSE STOCK SPLIT, AS INDICATED IN YOUR
RESPONSE TO OUR PRIOR COMMENT 10.
The Company has revised the Amended Preliminary Proxy Statement to disclose
on page 13 that it expects to make a decision with respect to the filing of
the amendment within 60 days after approval by stockholders.
BACKGROUND OF THE PROPOSAL, PAGE 12
5. AS STATED IN PRIOR COMMENT 12, YOUR BACKGROUND SECTION SHOULD DISCLOSE THE
SUBSTANCE OF ALL MEETINGS, NEGOTIATIONS, CONTACTS, ETC., AMONG BOARD
MEMBERS AND EXECUTIVE OFFICERS DURING THE CONSIDERATION OF THE RULE 13E-3
TRANSACTION. PLEASE REVISE TO PROVIDE AN EXPANDED DESCRIPTION OF ALL
CONTACTS LEADING UP TO THE BOARD'S DECISION TO APPROVE THE REVERSE SPLIT
TRANSACTION. FOR EXAMPLE, DISCLOSE WHO FIRST PROPOSED THE POSSIBILITY OF
TAKING THE COMPANY PRIVATE AND WHEN THIS OCCURRED. ALSO, IT IS UNCLEAR WHAT
TOOK PLACE BETWEEN THE MEETING OF THE AUDIT COMMITTEE ON JANUARY 12, 2005,
WHERE DELOITTE & TOUCHE EXPRESSED CONCERNS ABOUT THE COMPANY'S READINESS TO
COMPLY WITH SECTION 404, AND THE SUBSEQUENT MEETINGS IN JANUARY AND
July 29, 2005
Page 3
FEBRUARY 2005 AT WHICH THE BOARD CONSIDERED THE SPECIFIC PRICE TO PAY FOR
FRACTIONAL SHARES IN A REVERSE STOCK SPLIT. IN ADDITION, EXPLAIN WHY THE
BOARD CONSIDERED THE CASH OUT PRICE IN THE REVERSE STOCK SPLIT BEFORE IT
EVALUATED ALTERNATIVE WAYS TO TAKE THE COMPANY PRIVATE AT THE MEETING ON
MARCH 9, 2005. THE DISCLOSURE SHOULD MAKE CLEAR HOW AND WHEN THE BOARD
DETERMINED TO PURSUE A GOING PRIVATE TRANSACTION AND, SPECIFICALLY, A
REVERSE STOCK SPLIT.
The Company has expanded its description of all contacts leading up to the
Board's decision to approve the reverse stock split, including the fact
that the possibility of taking the Company private was first proposed by
the Chairman of the Board.
Although the Company's Board of Directors did not formally consider
alternative transactions until its meeting on March 9, 2005, all of the
Board members are sophisticated business people who were aware of and
considered the alternatives to the reverse stock split. As they were aware
that the alternatives were not practical - for example, the sale of
telecommunications companies can involve regulatory delays at both the
federal and state levels - they began to consider the cash out price in the
reverse stock split prior to formal consideration of the alternative
transactions at the March 9, 2005 meeting.
6. DISCLOSE THE SPECIFIC CONCERNS THAT DELOITTE & TOUCHE EXPRESSED AND ANY
ADVICE IT GAVE TO THE AUDIT COMMITTEE IN CONNECTION WITH THE COMPANY'S
SECTION 404 COMPLIANCE.
Deloitte & Touche was concerned that the limited personnel resources at
each of the Company's subsidiaries could make Section 404 compliance
difficult. In addition, each subsidiary is geographically dispersed and
there is a lack of centralization of subsidiary processes and controls.
Further, at the January 12, 2005 audit committee meeting, Deloitte &
Touche expressed concern that, given the pace of the Company's progress
toward compliance with the Sarbanes-Oxley Act using primarily internal
resources to document key processes and controls, the Company's ability to
complete its work, including management's testing, as of December 31, 2005
was in question. Deloitte & Touche advised the audit committee to
consider expanding its use of external resources to supplement the
Company's efforts.
7. REVISE TO DESCRIBE THE NATURE OF THE "UNCERTAINTIES AS TO WHEN AND IF THE
PROPOSAL WOULD BE ACTED UPON" THAT LED THE BOARD TO USE A FORMULA PRICE.
ALSO DISCLOSE WHAT PROMPTED THE BOARD TO INCREASE THE PRICE FROM 110% TO
120% OF THE AVERAGE MARKET PRICE AND HOW IT DETERMINED TO USE A 20-DAY
AVERAGE. FURTHERMORE, EXPLAIN WHAT THE BOARD LEARNED FROM THE CAYMUS
PARTNERS DRAFT REPORT AND OPINION THAT RESULTED IN THE ADDITION OF THE $29
PER SHARE FLOOR.
The Company has revised its disclosure to explain that the "uncertainties
as to when and if the proposal would be acted upon" include the fact that
it cannot be predicted with certainty when stockholder approval will take
place and the fact that the Company's Board of Directors has discretion
with respect to the timing of the filing of the amendment to its Restated
Certificate of Incorporation.
July 29, 2005
Page 4
The Board increased the price from 110% to 120% of the average market price
because it felt that the 20% premium was a fairer price, particularly given
then recent declines in the stock price. Management suggested the use of a
20-day average because it is a relatively common convention used to
determine fair market value.
Caymus Partners' report utilized a number of methodologies in order to
analyze the Company's value. The discounted cash flow analysis, which
Caymus considers to be the most accurate measure of a company's going
concern value, resulted in a mean implied equity per share value of $29.00.
Based in part on this analysis, the Board determined that the $29.00 per
share "floor" was appropriate. Please see "Background of the Proposal,"
pages 11-12.
OPINION OF FINANCIAL ADVISOR, PAGE 20
8. AS REQUESTED IN PRIOR COMMENT 20, PLEASE FILE THE CAYMUS PARTNERS DRAFT AND
FINAL REPORTS AS EXHIBITS TO THE SCHEDULE 13E-3 PURSUANT TO ITEM 9 OF
SCHEDULE 13E-3 AND ITEM 1016(C) OF REGULATION M-A, AS THEY APPEAR TO BE
MATERIALLY RELATED TO THE RULE 13E-3 TRANSACTION.
The Company has filed the Caymus Partners draft and final reports as
exhibits to its Schedule 13E-3.
9. INDICATE THAT THE ADVISOR'S OPINION ADDRESSES FAIRNESS TO THE COMPANY'S
"PUBLIC SHAREHOLDERS" AND EXPLAIN THAT THE TERM REFERS TO "UNAFFILIATED
SECURITY HOLDERS" AS INDICATED IN YOUR RESPONSE TO PRIOR COMMENT 36.
The Company has revised its disclosure accordingly. See "Opinion of
Financial Advisor," page 19.
10. SO THAT INVESTORS MAY REALIZE THE SIGNIFICANCE OF EACH ANALYSIS, PLEASE
INDICATE THE MULTIPLES CAYMUS PARTNERS UTILIZED. SEE PRIOR COMMENT 21.
The Company has revised its disclosure to indicate the multiples utilized
by Caymus Partners. See "Opinion of Financial Advisor," at pages 23-24.
11. WE REISSUE PRIOR COMMENT 32 AND REQUEST THAT YOU REVISE THE DOCUMENT TO
DISCLOSE THE FINANCIAL FORECASTS THAT THE AUDIT COMMITTEE AND BOARD
UTILIZED OR PROVIDED TO CAYMUS PARTNERS AND THE ASSUMPTIONS UNDERLYING THE
FORECASTS.
The financial forecasts that the Audit Committee and Board utilized and the
assumptions underlying the forecasts have been included as Exhibit C to the
Company's Amended Preliminary Proxy Statement.
ALTERNATIVE TRANSACTIONS CONSIDERED, PAGE 26
12. REVISE THE DISCUSSION OF THE ISSUER TENDER OFFER ALTERNATIVE TO INCLUDE
YOUR RESPONSE TO PRIOR COMMENT 25.
July 29, 2005
Page 5
The Company has revised its disclosure accordingly. See "Alternative
Transactions Considered," page 26.
13. QUANTIFY THE COMPANY'S EXPENSES TO DATE RELATING TO ITS DEFENSE OF THE
TAYLOR FALSE CLAIMS ACT CASE. ALSO PROVIDE FURTHER DETAILS ABOUT WHY
DEFENDING THE CASE IMPACTED THE BOARD'S DECISION NOT TO CONSIDER A THIRD
PARTY BUY-OUT.
To date, the Company's expenses relating to its defense of the Taylor False
Claims Act case are approximately $5,000,000. Although the Company believes
that the lawsuit is completely without merit, the alleged damages sought by
plaintiff in the case are in excess of $1 billion, an indeterminate
proportion of which might have to be borne by the Company, making the
Company an unattractive candidate for a third party buy-out at this time.
As a result, the Company did not consider a third party buy-out.
FAIRNESS OF THE REVERSE STOCK SPLIT, PAGE 28
14. WE REISSUE PRIOR COMMENT 30 IN PART. DISCLOSE WHETHER OR NOT THE
TRANSACTION IS SUBSTANTIVELY AND PROCEDURALLY FAIR TO BOTH UNAFFILIATED
SECURITY HOLDERS WHO WILL BE CASHED OUT IN THE REVERSE STOCK SPLIT AND
THOSE UNAFFILIATED SECURITY HOLDERS WHO WILL RETAIN THEIR INVESTMENT IN THE
COMPANY. AGAIN, WE REFER YOU TO QUESTION AND ANSWER NO. 19 IN EXCHANGE ACT
RELEASE NO. 34-17719, WHICH EXPLAINS THAT THE DISCUSSION SHOULD ADDRESS
FAIRNESS OF THE TRANSACTION TO DIFFERENT GROUPS OF UNAFFILIATED SECURITY
HOLDERS IF THE TRANSACTION MAY HAVE A DIFFERENT IMPACT ON THEM.
The Board of Directors believes the transaction is substantively and
procedurally fair to both unaffiliated stockholders who will be cashed out
in the reverse stock split and to unaffiliated stockholders who will
continue to be stockholders following the reverse stock split. As described
in the eighth and ninth questions and answers under "Questions and Answers
About the Meeting and the Proposals," all unaffiliated stockholders will
have the ability to be cashed out or to remain stockholders as they see
fit. Cashed out stockholders will be paid the greater of 120% of the fair
market value of their shares or $29.00 per share. Continuing Stockholders
have the advantage of continuing as stockholders in a company that will not
be subject to the costs associated with compliance with applicable
securities laws, including Section 404 of the Sarbanes Oxley Act. This
savings will significantly decrease the Company's expenses going forward,
improving liquidity.
15. REVISE TO STATE THAT THE RULE 13E-3 TRANSACTION WAS APPROVED BY A MAJORITY
OF DIRECTORS WHO ARE NOT EMPLOYEES OF THE COMPANY IN ACCORDANCE WITH ITEM
1014(E) OF REGULATION MA. SEE PRIOR COMMENT 31.
The requested revision has been made. See "Fairness of the Reverse Stock
Split," at page 28.
16. REVISE TO INDICATE HOW THE BOARD SPECIFICALLY EVALUATED THE COMPANY'S GOING
CONCERN VALUE AND EXPLAIN HOW THE CASH TO BE PAID IN LIEU OF FRACTIONAL
SHARES COMPARES IN RELATION TO THAT VALUE. QUANTIFY THE COMPANY'S GOING
CONCERN VALUE TO THE EXTENT POSSIBLE.
July 29, 2005
Page 6
In evaluating the Company's going concern value, the Board of Directors
reviewed the report of Caymus Partners, which presented a number of
financial analyses of the Company. The Board felt that the 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). Based on this analysis
and in light of the fact that the Company's stock price has ranged between
$19.25 and $37.95 since the beginning of 2003, the Board of Directors
determined that the cash to be paid in lieu of fractional shar