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Section 1: DEFM14A (DEFM14A)

DEFM14A
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

(Amendment No.     )

 

 

Filed by the Registrant   ☒                            Filed by a Party other than the Registrant  ☐

Check the appropriate box:

 

  Preliminary Proxy Statement
  Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
  Definitive Proxy Statement
  Definitive Additional Materials
  Soliciting Material under Rule 14a-12

LUMOS NETWORKS CORP.

(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):

  No fee required.
  Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
  (1)  

Title of each class of securities to which transaction applies:

 

 

  (2)  

Aggregate number of securities to which transaction applies:

 

 

  (3)  

Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

 

 

  (4)  

Proposed maximum aggregate value of transaction:

 

 

  (5)  

Total fee paid:

 

 

  Fee paid previously with preliminary materials.
  Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.
  (1)  

Amount Previously Paid:

 

     

  (2)  

Form, Schedule or Registration Statement No.:

 

     

  (3)  

Filing Party:

 

     

  (4)  

Date Filed:

 

     

 

 

 


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LOGO

 

TIMOTHY G. BILTZ    One Lumos Plaza
   P.O. Box 1068
   Waynesboro, VA 22980
   Telephone: (540) 946-2000
   Facsimile: (540) 946-2020

April 21, 2017

Dear Stockholder:

You are cordially invited to attend our 2017 Annual Meeting of Stockholders of Lumos Networks Corp., which we refer to as “Lumos Networks” or the “Company,” which will be held at 9:00 a.m. (local time) on May 24, 2017, at the offices of Troutman Sanders LLP, 1001 Haxall Point, 15th Floor, Richmond, Virginia. We will conduct the business ordinarily held at our annual meeting, which is listed in the attached Notice of Annual Meeting of Stockholders.

In addition, on February 18, 2017, we entered into an agreement and plan of merger, which we refer to as the “Merger Agreement,” with MTN Infrastructure TopCo, Inc., a Delaware corporation, which we refer to as “Parent,” and MTN Infrastructure BidCo, Inc., a Delaware corporation and a wholly owned subsidiary of Parent, which we refer to as “Merger Sub,” pursuant to which, subject to the satisfaction or waiver of the conditions set out in the Merger Agreement, Merger Sub will be merged with and into the Company, with the Company surviving the merger as a wholly-owned subsidiary of Parent, which we refer to as the “Merger.” At the 2017 Annual Meeting of Stockholders, we will ask you to consider and vote upon a proposal to adopt the Merger Agreement, thereby approving the Merger, and certain other Merger-related matters as set forth in the attached Notice of Annual Meeting of Stockholders and the accompanying proxy statement. If the Merger is completed, you will be entitled to receive $18.00 in cash for each share of Lumos Networks common stock, par value $0.01 per share, which we refer to as the “Lumos Networks Common Stock,” that you own.

Adoption of the Merger Agreement and the transactions contemplated thereby, including the Merger, requires the affirmative vote of the holders of a majority of the outstanding shares of Lumos Networks Common Stock entitled to vote at the 2017 Annual Meeting of Stockholders. After considering various factors, all members of our Board of Directors voting on the Merger determined that the Merger Agreement and the transactions contemplated thereby, including the Merger, are in the best interests of Lumos Networks’ stockholders, and approved and adopted and declared advisable, the Merger Agreement and the Merger.

You may read, print and download our annual report on Form 10-K and proxy statement at http://www.envisionreports.com/LMOS.

If you do not attend the 2017 Annual Meeting of Stockholders, we request that you vote by telephone or Internet, or if you received a paper copy of the proxy card by mail, by signing your proxy card and mailing it in the envelope provided. The proxy card materials provide you with details on how to vote by these three methods. The prompt vote by telephone or Internet or return of your proxy card will be appreciated. If you decide to attend the 2017 Annual Meeting of Stockholders, you may revoke your proxy and personally cast your vote.

Your vote is very important, regardless of the number of shares you own. We cannot consummate the Merger unless the holders of a majority of the outstanding shares of Lumos Networks Common Stock entitled to vote at the annual meeting vote in favor of the adoption of the Merger Agreement. If you fail to vote on the Merger Agreement or fail to instruct your broker, bank or other nominee on how to vote, the effect will be the same as a vote against the adoption of the Merger Agreement.


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Thank you, and we look forward to seeing you at the 2017 Annual Meeting of Stockholders or receiving your proxy vote.

 

Sincerely yours,

LOGO

Timothy G. Biltz

President and Chief Executive Officer

This transaction has not been approved or disapproved by the Securities and Exchange Commission or any state securities commission. Neither the Securities and Exchange Commission nor any state securities commission has passed upon the merits or fairness of this transaction or upon the adequacy or accuracy of the information contained in the proxy statement. Any representation to the contrary is a criminal offense.

The accompanying proxy statement is dated April 21, 2017 and is first being mailed to Lumos Networks stockholders on or about April 25, 2017.


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LOGO

LUMOS NETWORKS CORP.

One Lumos Plaza

Waynesboro, Virginia 22980

(540) 946-2000

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

Notice is hereby given that the 2017 Annual Meeting of Stockholders of Lumos Networks Corp., which we refer to as “Lumos Networks” or the “Company,” will be held at 9:00 a.m. (local time) on May 24, 2017, at the offices of Troutman Sanders LLP, 1001 Haxall Point, 15th Floor, Richmond, Virginia. The meeting is called for the following purposes:

 

  1. To adopt the agreement and plan of merger, which we refer to as the “Merger Agreement,” with MTN Infrastructure TopCo, Inc., a Delaware corporation, which we refer to as “Parent,” and MTN Infrastructure BidCo, Inc., a Delaware corporation and a wholly-owned subsidiary of Parent, which we refer to as “Merger Sub,” pursuant to which, subject to the satisfaction or waiver of the conditions set forth in the Merger Agreement, Merger Sub will be merged with and into the Company, with the Company surviving the merger as a wholly-owned subsidiary of Parent;

 

  2. To approve a non-binding advisory resolution approving the Merger-related compensation of our named executive officers;

 

  3. To approve the adjournment of the 2017 Annual Meeting of Stockholders from time to time if necessary or appropriate;

 

  4. To elect nine directors to serve until the 2018 Annual Meeting of Stockholders;

 

  5. To approve a non-binding advisory resolution approving the compensation of our named executive officers;

 

  6. To ratify the appointment of KPMG LLP as our independent registered public accounting firm for the year ending December 31, 2017; and

 

  7. To transact such other business as may properly come before the meeting.

The Board of Directors has fixed the close of business on April 19, 2017 as the record date for the purpose of determining the stockholders who are entitled to notice of and to vote at the meeting and any adjournment or postponement thereof.

 

By order of the Board of Directors,

LOGO

Mary McDermott

Corporate Secretary

Waynesboro, Virginia

April 21, 2017

IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. PLEASE VOTE YOUR SHARES ACCORDING TO THE INSTRUCTIONS CONTAINED IN THE PROXY MATERIALS YOU RECEIVED SO THAT YOUR SHARES WILL BE REPRESENTED AT THE MEETING. IF YOU DECIDE TO ATTEND THE 2017 ANNUAL MEETING OF STOCKHOLDERS, YOU MAY REVOKE YOUR PROXY AND PERSONALLY CAST YOUR VOTE.


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SUMMARY

     2  

QUESTIONS AND ANSWERS ABOUT THE ANNUAL MEETING AND THE MERGER

     16  

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

     27  

THE ANNUAL MEETING

     29  

Date, Time and Place

     29  

Purpose of the Annual Meeting

     29  

Recommendations of the Board

     29  

Record Date; Shares Entitled to Vote; Quorum

     30  

Vote Required; Abstentions and Broker Non-Votes

     31  

Stock Ownership and Interests of Certain Persons

     32  

Voting of Proxies

     32  

Revocability of Proxies

     32  

THE MERGER

     33  

Parties Involved in the Merger

     33  

Certain Effects of the Merger on Lumos Networks

     34  

Effect on Lumos Networks if the Merger is Not Completed

     34  

Merger Consideration

     34  

Background of the Merger

     35  

Recommendation of Our Board of Directors and Reasons for the Merger

     46  

Opinions of Financial Advisors

     50  

Summary of Financial Analyses of Lumos Networks’ Financial Advisors

     56  

Certain Financial Projections

     58  

Interests of the Directors and Executive Officers of Lumos Networks in the Merger

     64  

Golden Parachute Compensation

     71  

Financing of the Merger

     73  

Termination Equity Commitment Letter

     75  

Appraisal Rights

     76  

Accounting Treatment

     81  

U.S. Federal Income Tax Consequences of the Merger

     81  

Regulatory Approvals Required for the Merger

     84  

Litigation Related to the Merger

     86  

THE MERGER AGREEMENT

     86  

Explanatory Note Regarding the Merger Agreement and the Summary of the Merger Agreement

     86  

Effects of the Merger; Directors and Officers; Certificate of Incorporation; Bylaws

     87  

Closing and Effective Time of the Merger; Marketing Period

     87  


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Merger Consideration

     88  

Termination of the 2011 Company Equity and Cash Incentive Plan and the Company Employee Stock Purchase Plan

     89  

Dissenting Shares

     89  

Surrender and Payment

     89  

Representations and Warranties

     90  

Conduct of Business Pending the Merger

     94  

Access to Information

     97  

No Solicitation of Other Offers; Change of Recommendation

     97  

Company Stockholder Approval

     100  

Required Governmental Approvals and Other Consents

     101  

Continuing Employees

     103  

Directors’ and Officers’ Indemnification and Insurance

     104  

Parent Financing

     105  

Transaction Litigation

     110  

Stock Exchange Delisting and Deregistration of Our Common Stock

     110  

Notice of Certain Events

     110  

Conditions to the Closing of the Merger

     111  

Termination of the Merger Agreement

     112  

Effect of Termination

     114  

Termination Fees

     114  

Specific Performance

     118  

Costs and Expenses

     118  

Binding Effect; Benefit; Assignment

     118  

Amendments; Waivers

     119  

Governing Law; Jurisdiction; Waiver of Jury Trial

     119  

MARKET PRICES AND DIVIDEND DATA

     120  

PROPOSAL 1 – ADOPTION OF THE MERGER AGREEMENT

     121  

PROPOSAL 2 – ADJOURNMENT OF THE ANNUAL MEETING

     122  

PROPOSAL 3 – ADVISORY VOTE ON MERGER-RELATED NAMED EXECUTIVE OFFICER COMPENSATION

     123  

PROPOSAL 4 – ELECTION OF DIRECTORS

     124  

EXECUTIVE OFFICERS

     135  

BENEFICIAL OWNERSHIP OF COMMON STOCK

     137  

EXECUTIVE COMPENSATION

     139  


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Summary Compensation Table

     150  

Grants of Plan-Based Awards

     152  

Outstanding Equity Awards at Fiscal Year-End

     153  

Pension Benefits

     155  

PROPOSAL 5 – NON-BINDING ADVISORY RESOLUTION TO APPROVE THE COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS

     163  

AUDIT COMMITTEE

     164  

PROPOSAL 6 – RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

     167  

OTHER MATTERS

     168  

SOLICITATION OF PROXIES

     168  

STOCKHOLDER PROPOSALS FOR 2018 ANNUAL MEETING

     168  

BENEFICIAL OWNERS

     169  

WHERE YOU CAN FIND MORE INFORMATION

     169  

MISCELLANEOUS

     170  

APPENDICES

APPENDIX A – AGREEMENT AND PLAN OF MERGER

APPENDIX B – SECTION 262 OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE

APPENDIX C – RECONCILIATION OF ADJUSTED EBITDA

APPENDIX D – OPINION OF WELLS FARGO SECURITIES, LLC

APPENDIX E – OPINION OF UBS SECURITIES, LLC

 


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LOGO

LUMOS NETWORKS CORP.

One Lumos Plaza

Waynesboro, Virginia 22980

PROXY STATEMENT

For the Annual Meeting of Stockholders

to be held May 24, 2017

This proxy statement is furnished by and on behalf of the Board of Directors of Lumos Networks Corp., or Lumos Networks, in connection with the solicitation of proxies for use at our 2017 Annual Meeting of Stockholders to be held at 9:00 a.m. (local time) on May 24, 2017, at the offices of Troutman Sanders LLP, 1001 Haxall Point, 15th Floor, Richmond, Virginia, and at any adjournments or postponements thereof. This proxy statement and the proxy card are being made available to our stockholders of record on April 19, 2017, the record date.

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF

PROXY MATERIALS FOR THE 2017 ANNUAL MEETING OF

STOCKHOLDERS TO BE HELD ON MAY 24, 2017

The Proxy Statement and Annual Report on Form 10-K are Available

at

http://www.envisionreports.com/LMOS.

THE BOARD OF DIRECTORS URGES YOU TO PROMPTLY VOTE YOUR SHARES IN ACCORDANCE WITH THE INSTRUCTIONS IN THE PROXY MATERIALS YOU RECEIVED SO THAT YOUR SHARES WILL BE REPRESENTED AT THE MEETING.

YOUR VOTE IS IMPORTANT!

 

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SUMMARY

This summary highlights selected information from this proxy statement related to the merger of MTN Infrastructure BidCo, Inc. with and into Lumos Networks, with Lumos Networks surviving as a wholly owned subsidiary of MTN Infrastructure TopCo, Inc., a subsidiary of an investment fund advised by EQT Partners Inc., which we refer to as “EQT,” which transaction we refer to as the “Merger,” and may not contain all of the information that is important to you. To understand the Merger more fully and for a more complete description of the legal terms of the Merger, you should read carefully this entire proxy statement, the appendices to this proxy statement, including the Merger Agreement, and the documents we incorporate by reference in this proxy statement. We have included page references in this summary to direct you to a more complete description of the topics presented below. You may obtain the documents and information incorporated by reference in this proxy statement without charge by following the instructions under “Where You Can Find More Information” beginning on page 169. The Merger Agreement is attached as Appendix A to this proxy statement. Except as otherwise specifically noted in this proxy statement or as context otherwise requires, “Lumos Networks,” “Company,” “we,” “our,” “us” and similar words in this proxy statement refer to Lumos Networks Corp., including, in certain cases, our subsidiaries. Throughout this proxy statement we refer to MTN Infrastructure TopCo, Inc. as Parent and MTN Infrastructure BidCo, Inc. as “Merger Sub.” In addition, throughout this proxy statement we refer to the Agreement and Plan of Merger, dated February 18, 2017, as it may be amended from time to time, by and among Parent, Merger Sub and Lumos Networks, as the “Merger Agreement.”

Parties Involved in the Merger (page 33)

Lumos Networks Corp.

One Lumos Plaza

Waynesboro, VA 22980

(540) 946-2000

Lumos Networks Corp., a Delaware corporation, is a fiber-based bandwidth infrastructure and service provider in the Mid-Atlantic region. We provide services to carrier and enterprise customers, including healthcare providers, local government agencies, financial institutions, educational institutions, and other enterprises over our approximately 10,112 route-mile fiber network. Our principal products and services include Multiprotocol Label Switching, or “MPLS,” based Ethernet, Metro Ethernet, or “Metro E,” Fiber to the Cell site, or “FTTC,” wireless backhaul and data transport services, wavelength transport services and IP services.

Lumos Networks’ common stock is listed on The NASDAQ Stock Market LLC, which we refer to as “NASDAQ,” under the symbol “LMOS.”

Our principal executive offices are located at One Lumos Plaza, Waynesboro, Virginia 22980. The telephone number at that address is (540) 946-2000. For more information about Lumos Networks, please visit our website at www.lumosnetworks.com. Our website address is provided as an inactive textual reference only. The information contained on our website is not incorporated to, and does not form a part of, this proxy statement or any other report or document on file with or furnished to the Securities and Exchange Commission, which we refer to as the “SEC.” See also “Where You Can Find More Information” beginning on page 169.

MTN Infrastructure TopCo, Inc.

c/o EQT Partners Inc.

1114 Avenue of the Americas, 45th Floor

New York, NY 10036

(917) 281-0850

MTN Infrastructure TopCo, Inc., or Parent, is a Delaware corporation that was formed by affiliates of EQT solely for the purpose of entering into the Merger Agreement and completing the transactions contemplated by the Merger Agreement and the related financing transactions. Parent has not engaged in any business except for activities incidental to its formation and as contemplated by the Merger Agreement. Parent is currently controlled by investment funds affiliated with EQT. Upon completion of the Merger, Lumos Networks will be a wholly owned subsidiary of Parent.

 



 

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EQT is a leading global private equity group with approximately EUR 35 billion in raised capital across 22 funds. EQT funds have portfolio companies in Europe, Asia and the US with total sales of more than EUR 15 billion and approximately 100,000 employees. EQT works with portfolio companies to achieve sustainable growth, operational excellence and market leadership. For more information, please visit www.eqt.se. The website address of EQT is provided as an inactive textual reference only. The information contained on EQT’s website is not incorporated to, and does not form a part of, this proxy statement or any other report or document on file with or furnished to the SEC.

MTN Infrastructure BidCo, Inc.

c/o EQT Partners Inc.

1114 Avenue of the Americas, 45th Floor

New York, NY 10036

(917) 281-0850

MTN Infrastructure BidCo, Inc., or Merger Sub, is a Delaware corporation that was formed solely for the purpose of entering into the Merger Agreement and completing the transactions contemplated by the Merger Agreement and the related financing transactions. Merger Sub is a wholly owned subsidiary of Parent and has not engaged in any business except for activities incidental to its formation and as contemplated by the Merger Agreement and the related financing transactions. Upon the completion of the Merger, Merger Sub will cease to exist and Lumos Networks will continue as the surviving corporation.

The Annual Meeting (page 29)

Date, Time and Place

The 2017 Annual Meeting of Stockholders will be held at 9:00 a.m. (local time) on May 24, 2017, at the offices of Troutman Sanders LLP, 1001 Haxall Point, 15th Floor, Richmond, Virginia, unless it is postponed or adjourned.

Purpose of the Annual Meeting (page 29)

At the 2017 Annual Meeting of Stockholders, we will ask our stockholders of record as of the record date to consider and vote on the following proposals:

 

  (1) a proposal to adopt the Merger Agreement, approving the transactions contemplated thereby, including the Merger, which we refer to as the “merger proposal;”

 

  (2) a proposal to approve a non-binding advisory resolution approving the Merger-related compensation of our named executive officers, which we refer to as the “Merger-related named executive officer compensation proposal;”

 

  (3) a proposal to approve the adjournment of the 2017 Annual Meeting of Stockholders from time to time if necessary or appropriate, which we refer to as the “adjournment proposal;”

 

  (4) a proposal to elect nine directors to serve until the 2018 Annual Meeting of Stockholders, which we refer to as the “election of directors;”

 

  (5) a proposal to approve a non-binding advisory resolution approving the compensation of our named executive officers, which we refer to as the “say on pay proposal;” and

 

  (6) a proposal to ratify the appointment of KPMG LLP as our independent registered public accounting firm for the year ending December 31, 2017, which we refer to as the “auditor ratification proposal.”

Stockholders may also be asked to transact such other business as may properly be brought before the 2017 Annual Meeting of Stockholders or any postponements or adjournments of the 2017 Annual Meeting of Stockholders.

 



 

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Recommendations of the Board

The board of directors of Lumos Networks, which we refer to as the “Board,” recommends that you vote:

 

  (1) FOR” the proposal to adopt the Merger Agreement, approving the transactions contemplated thereby, including the Merger;

 

  (2) FOR” the proposal to approve a non-binding advisory resolution approving the Merger-related compensation of our named executive officers;

 

  (3) FOR” the proposal to approve the adjournment of the 2017 Annual Meeting of Stockholders from time to time if necessary or appropriate;

 

  (4) FOR” the proposal to elect nine directors to serve until the 2018 Annual Meeting of Stockholders;

 

  (5) FOR” the proposal to approve a non-binding advisory resolution approving the compensation of our named executive officers; and

 

  (6) FOR” the proposal to ratify the appointment of KPMG LLP as our independent registered public accounting firm for the year ending December 31, 2017.

Record Date; Shares Entitled to Vote; Quorum (page 30)

Only holders of record of shares of our common stock, $0.01 par value per share, which we refer to as “Lumos Networks Common Stock,” as of the close of business on the record date will be entitled to vote at the 2017 Annual Meeting of Stockholders. Holders of shares authorized to vote are entitled to cast one vote per share on all matters voted upon at the 2017 Annual Meeting of Stockholders. As of the close of business on the record date, there were 23,944,060 shares of Lumos Networks Common Stock outstanding. According to our bylaws, the holders of a majority of the shares entitled to be voted must be present or represented by proxy to constitute a quorum.

Vote Required; Abstentions and Broker Non-Votes (page 31)

The approval of the Merger Agreement requires the affirmative vote of a majority of the outstanding shares of Lumos Networks Common Stock entitled to vote at the 2017 Annual Meeting of Stockholders. Approval of each of the Merger-related named executive officer compensation proposal, the adjournment proposal, the auditor ratification proposal and the say on pay proposal requires the affirmative vote of a majority of the shares present or represented and entitled to vote at the 2017 Annual Meeting of Stockholders to be approved. Under our bylaws, a nominee for director at the 2017 Annual Meeting of Stockholders will be elected to the Board if the votes cast for such nominee’s election exceed the votes cast against such nominee’s election.

Stock Ownership and Interests of Certain Persons (page 32)

As of the record date, our directors and executive officers beneficially owned and were entitled to vote, in the aggregate, 1,076,494 shares of Lumos Networks Common Stock outstanding on the record date (excluding any shares of Lumos Networks Common Stock that would be delivered upon exercise or conversion of options), representing approximately 4.5% of the outstanding shares of Lumos Networks Common Stock. Our directors and executive officers have informed us that they currently intend to vote all of their 1,076,494 shares of Lumos Networks Common Stock:

 

  (1) FOR” the proposal to adopt the Merger Agreement, approving the transactions contemplated thereby, including the Merger;

 

  (2) FOR” the proposal to approve a non-binding advisory resolution approving the Merger-related compensation of our named executive officers;

 

  (3) FOR” the proposal to approve the adjournment of the 2017 Annual Meeting of Stockholders from time to time if necessary or appropriate;

 



 

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  (4) FOR” the proposal to elect nine directors to serve until the 2018 Annual Meeting of Stockholders;

 

  (5) FOR” the proposal to approve a non-binding advisory resolution approving the compensation of our named executive officers; and

 

  (6) FOR” the proposal to ratify the appointment of KPMG LLP as our independent registered public accounting firm for the year ending December 31, 2017.

Voting of Proxies (page 32)

Proxies will be voted as specified by the stockholder or stockholders granting the proxy. Stockholders can vote in person at the 2017 Annual Meeting of Stockholders or by proxy. There are three ways to vote by proxy:

 

    By Telephone — Stockholders located in the United States can vote by telephone by following the instructions provided in the proxy card or voting instruction;

 

    By Internet — Stockholders located in the United States can vote by Internet by following the instructions provided in the proxy card or voting instruction; or

 

    By Mail — If you received your proxy materials by mail, you can vote by mail by signing, dating and mailing the enclosed proxy card.

Internet and telephone facilities will be available 24 hours a day and close at 12:00 a.m. (Eastern time) on May 24, 2017.

A stockholder who submits a proxy may change or revoke it at any time before it is voted by filing with our Secretary either a written revocation or an executed proxy bearing a later date, by attending and voting in person at the 2017 Annual Meeting of Stockholders or granting a subsequent proxy through the Internet or by telephone.

Unless contrary instructions are specified, if the proxy card is executed and returned (and not revoked) prior to the 2017 Annual Meeting of Stockholders, the shares of Lumos Networks Common Stock represented thereby will be voted “FOR” each of the proposals set forth in this proxy statement. The submission of a proxy will not affect a stockholder’s right to attend and to vote in person at the 2017 Annual Meeting of Stockholders.

Neither the SEC nor any state securities regulatory agency has approved or disapproved of the transactions described in this document, including the Merger, or determined if the information contained in this document is accurate or adequate. Any representation to the contrary is a criminal offense.

The Merger (page 33)

Certain Effects of the Merger on Lumos Networks (page 34)

Upon the terms and subject to the conditions of the Merger Agreement, Merger Sub will merge with and into Lumos Networks, with Lumos Networks continuing as the surviving corporation and a wholly owned subsidiary of Parent. As a result of the Merger, Lumos Networks will cease to be a publicly traded company, and the directors of Merger Sub will continue as the directors of the surviving corporation. Throughout this proxy statement, we use the term surviving corporation to refer to Lumos Networks as the surviving corporation following the Merger. If the Merger is consummated, you will not own any shares of the capital stock of the surviving corporation, and instead will only be entitled to receive the merger consideration described in “The Merger—Merger Consideration” beginning on page 34 (unless you have properly demanded appraisal for your shares of Lumos Networks Common Stock in accordance with, and have complied in all respects with, Section 262 of the General Corporation Law of the State of Delaware, as amended, which we refer to as the “DGCL,” in which case you will be entitled only to those rights granted under Section 262 of the DGCL as described below under “The Merger—Appraisal Rights” beginning on page 76).

 



 

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The time at which the Merger will become effective, which we refer to as the effective time of the Merger, will occur upon the filing of the certificate of merger with the Secretary of State of the State of Delaware (or at such later time as we and Parent may agree and specify in the certificate of merger).

Effect on Lumos Networks if the Merger is Not Completed (page 34)

If the Merger Agreement is not adopted by Lumos Networks stockholders or if the Merger is not completed for any other reason, Lumos Networks stockholders will not receive any payment for their shares of Lumos Networks Common Stock. Instead, Lumos Networks will remain a public company, Lumos Networks Common Stock will continue to be listed and traded on the NASDAQ, and registered under the Securities Exchange Act of 1934, as amended, which we refer to as the “Exchange Act,” and we will continue to file periodic reports with the SEC. Under specified circumstances, Lumos Networks may be required to pay Parent a termination fee, or may be entitled to receive a reverse termination fee from Parent, upon the termination of the Merger Agreement, as described under “The Merger Agreement—Termination Fees” beginning on page 114.

Merger Consideration (page 34)

At the effective time of the Merger, each outstanding share of Lumos Networks Common Stock (other than (i) shares held by Lumos Networks as treasury stock, held by any direct or indirect wholly owned subsidiary of Lumos Networks or of Parent (other than Merger Sub) or held directly by Parent or Merger Sub, which we refer to as “cancelled shares;” and (ii) shares of Lumos Networks Common Stock held by stockholders who have not voted in favor of the Merger and who are entitled to demand and have properly demanded appraisal with respect to such shares, in accordance with and who comply in all respects with Delaware law, which we refer to as “dissenting shares”) will be converted automatically into the right to receive $18.00 in cash, which amount we refer to as the “Merger Consideration,” without interest and less any applicable withholding taxes. All shares of Lumos Networks Common Stock converted into the right to receive the Merger Consideration will automatically be cancelled and cease to exist at the effective time of the Merger, and each certificate formerly representing such shares of Lumos Networks Common Stock will thereafter represent only the right to receive the Merger Consideration.

Lumos Investment Holdings, Ltd., an affiliate of Pamplona Capital Management, which we refer to as “Pamplona,” the holder of a warrant to purchase Lumos Networks Common Stock dated August 5, 2015, which we refer to as the “Warrant,” has agreed, subject to the effectiveness of the Merger, to exercise the Warrant. Upon exercise, Pamplona will receive 1,225,278 shares of Lumos Networks Common Stock that will be exchanged for the Merger Consideration.

After the Merger is completed, under the terms of the Merger Agreement, you will have the right to receive the Merger Consideration, but you will no longer have any rights as a Lumos Networks stockholder as a result of the Merger (except that stockholders who hold dissenting shares will not have the right to receive the Merger Consideration but will have the right to receive instead a payment for the “fair value” of their dissenting shares as determined by the Delaware Court of Chancery pursuant to an appraisal proceeding as contemplated by Delaware law, as described below under “The Merger—Appraisal Rights” beginning on page 76).

Treatment of Equity and Equity-Based Awards (page 64)

The Merger Agreement provides for the following treatment of equity and equity-based awards relating to Lumos Networks Common Stock:

Stock Options

Immediately prior to the effective time of the Merger, each option to purchase Lumos Networks Common Stock (whether or not vested and exercisable) that is then outstanding will automatically and without any required action on the part of the holder thereof, vest and be cancelled and entitle the option holder to receive an amount in cash equal to the product of (i) the total number of shares of Lumos Networks Common Stock subject to the option and (ii) the amount, if any, by which the Merger Consideration exceeds the applicable exercise price per share of Lumos Networks Common Stock underlying the option (less any applicable withholding taxes). Notwithstanding the foregoing, effective as of seven business days

 



 

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prior to the closing of the Merger (and conditional on the closing), each holder of an outstanding and unexercised option to purchase Lumos Networks Common Stock will be entitled to exercise such option and shares of Lumos Networks Common Stock received upon such exercise will be treated the same as other outstanding shares of Lumos Networks Common Stock in the Merger.

Restricted Stock

Immediately prior to the effective time of the Merger, each share of Lumos Networks Common Stock which is subject to vesting or other lapse restrictions, which is referred to in the Merger Agreement as Company restricted stock, that is then outstanding will automatically and without any required action on the part of the holder thereof, vest and the restrictions thereon will lapse and entitle the holder of such share of Company restricted stock to receive the Merger Consideration, less any applicable withholding taxes and in accordance with the same terms and conditions applied to holders of Lumos Networks Common Stock generally.

Employee Stock Purchase Plan

Each right to purchase Lumos Networks Common Stock under the Company Employee Stock Purchase Plan that was outstanding as of February 18, 2017, and remains outstanding will automatically be exercised on a purchase date specified with respect to that purchase right under the Company Employee Stock Purchase Plan and related award agreement. If such purchase date is on or before the effective time of the Merger, the holder of that purchase right will receive shares of Lumos Networks Common Stock in accordance with the terms of the Company Employee Stock Purchase Plan and if the purchase date is after the effective time of the Merger, the holder of that purchase right will receive an amount in cash equal to the product of (i) the Merger Consideration and (ii) the number of shares of Lumos Networks Common Stock that would have otherwise been delivered with respect to that purchase right.

Recommendation of Our Board of Directors and Reasons for the Merger (page 46)

All members of our Board voting on the Merger, after consulting with Lumos Networks’ outside legal counsel, Troutman Sanders LLP, which we refer to as “Troutman Sanders,” and financial advisors, Wells Fargo Securities, LLC, which we refer to as “Wells Fargo Securities,” and UBS Securities LLC, which we refer to as “UBS,” and, together with Wells Fargo Securities, the “Financial Advisors,” and after review and consideration of various factors described in the section below entitled “The Merger—Recommendation of Our Board of Directors and Reasons for the Merger—Reasons for the Merger” beginning on page 47, (i) approved the execution, delivery and performance by Lumos Networks of the Merger Agreement and the consummation of the transactions contemplated by the Merger Agreement, including the Merger, (ii) determined that the Merger Agreement and the transactions contemplated by the Merger Agreement, including the Merger, are fair to, and in the best interests of, Lumos Networks and its stockholders, (iii) directed that the Merger Agreement be submitted to the stockholders of Lumos Networks for adoption and (iv) declared that the Merger Agreement and the transactions contemplated thereby are advisable.

The Board recommends that you vote (i) “FOR” the merger proposal and thereby approve the transactions contemplated by the Merger Agreement, including the Merger; (ii) “FOR” the adjournment proposal; and (iii) “FOR” the Merger-related named executive officer compensation proposal.

Opinions of Financial Advisors (page 50)

Lumos Networks engaged Wells Fargo Securities and UBS to act as its financial advisors to advise the Board in connection with the Merger. On February 18, 2017, Wells Fargo Securities rendered its oral opinion to the Board (which was subsequently confirmed in writing by delivery of Wells Fargo Securities’ written opinion addressed to the Board dated February 18, 2017), as of February 18, 2017, that, based upon and subject to the full text of Wells Fargo Securities’ opinion, including various assumptions and limitations contained therein, its experience as an investment bank, its work as described in its opinion and other factors Wells Fargo Securities deemed relevant, the Merger Consideration to be received in the Merger by the holders of Lumos Networks Common Stock (other than Parent and Lumos Networks and its subsidiaries) pursuant to the Merger Agreement was fair, as of the date of Wells Fargo Securities’ opinion, from a

 



 

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financial point of view, to such holders. On February 18, 2017, at a meeting of the Board held to evaluate the Merger, UBS delivered to the Board an oral opinion, which opinion was subsequently confirmed by delivery of a written opinion, dated February 18, 2017, to the effect that, as of February 18, 2017 and based on and subject to various assumptions made, matters considered and limitations described in its written opinion, the Merger Consideration to be received in the Merger by holders of Lumos Networks Common Stock (other than holders of dissenting shares, Parent and Lumos Networks and its subsidiaries) was fair, from a financial point of view, to such holders.

The summary of Wells Fargo Securities’ opinion in this proxy statement is qualified in its entirety by reference to the full text of its written opinion, which is attached as Annex D to this proxy statement and describes the procedures followed, assumptions made, qualifications and limitations on the review undertaken and other matters considered by Wells Fargo Securities in connection with the preparation of its opinion. However, neither Wells Fargo Securities’ opinion nor the summary of its opinion and the related analyses set forth in this proxy statement are intended to be, and do not constitute, advice or a recommendation to our Board or any other person or entity in respect of the Merger or otherwise, including, without limitation, as to how any holder of Lumos Networks Common Stock or any other person should vote or act in connection with any matter relating to the Merger, the Merger Agreement or any other matters.

The full text of UBS’s written opinion to the Board describes the assumptions made, procedures followed, matters considered and limitations on the review undertaken by UBS. This opinion is attached to this proxy statement as Annex E and is incorporated into this proxy statement by reference. Holders of Lumos Networks Common Stock are encouraged to read this opinion carefully in its entirety. UBS’s opinion was provided for the benefit of the Board (in its capacity as such) in connection with, and for the purpose of, the Boards’ evaluation of the fairness, from a financial point of view, to the holders of Lumos Networks Common Stock (other than holders of dissenting shares, Parent and Lumos Networks and its subsidiaries) of the Merger Consideration, and did not address any other aspect or implication of the Merger or the Merger Agreement, including, without limitation, the relative merits of the Merger or any related transaction as compared to other business strategies or transactions that might be available with respect to Lumos Networks, or Lumos Networks’ underlying business decision to effect the Merger or any related transaction. UBS’s opinion does not constitute a recommendation to any holder of Lumos Networks Commons Stock as to how such holder should vote or act with respect to the Merger or any related transaction.

Interests of the Directors and Executive Officers of Lumos Networks in the Merger (page 64)

When considering the recommendation of the Board that you vote “FOR” the merger proposal, you should be aware that certain of our directors and executive officers may have interests in the Merger that may be different from, or in addition to, your interests as a stockholder generally. The members of the Board voting on the Merger were also aware of these interests in, among other matters, approving the Merger Agreement and the Merger and in recommending that the Merger Agreement be adopted by the stockholders of Lumos Networks. See the sections entitled “Merger—Background of the Merger” and “Merger—Recommendation of Our Board of Directors and Reasons for the Merger” beginning on pages 35 and 46, respectively. You should take these interests into account in deciding whether to vote “FOR” the adoption of the Merger Agreement.

These interests are described in more detail below, including the compensation that may become payable in connection with the Merger to our President and Chief Executive Officer, Timothy G. Biltz, our Executive Vice President and Chief Financial Officer, Johan G. Broekhuysen, our Senior Vice President and General Manager of our residential and small business, or “R&SB,” segment, Diego B. Anderson, our Senior Vice President and Chief Technology Officer, Thomas E. Ferry, and our Senior Vice President and General Counsel, Mary McDermott, who constitute our named executive officers, which is subject to a non-binding, advisory vote of Lumos Networks’ stockholders and is quantified in the narrative below and under the heading “Proposal 3: Advisory Vote on Merger-Related Named Executive Officer Compensation” beginning on page 123. The dates used below to quantify these interests have been selected for illustrative purposes only and do not necessarily reflect the dates on which certain events will occur.

 



 

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Financing of the Merger (page 73)

Parent estimates that the total amount required to complete the Merger and the related transactions and to pay related fees and expenses will be approximately $1,003 million. Parent expects this amount to be funded through a combination of the following:

 

    Debt Financing. Debt financing in an aggregate principal amount of $485 million of senior secured first lien term loans as well as a committed $50 million senior secured revolving facility. In the event additional revolving commitments are obtained prior to the closing of the Merger, the amount of the revolving credit facility may be increased to up to $75 million. Parent has received firm commitments from a consortium of financial institutions to provide the debt financing and revolving credit facility. See the section entitled “The Merger—Financing of the Merger—Debt Financing” beginning on page 73; and

 

    Equity Financing. Equity financing to be provided by EQT Infrastructure III SCSp, which we refer to as the “EQT Fund,” in an aggregate amount of up to $517.9 million to be funded at the closing of the Merger. See the section entitled “The Merger—Financing of the Merger—Equity Financing” beginning on page 74.

The consummation of the Merger is not subject to a financing condition (although the funding of the equity financing and the debt financing is subject to the satisfaction of the conditions set forth in the applicable commitment letter under which such financing will be provided).

Termination Equity Commitment Letter (page 75)

Parent has received a commitment letter, which we refer to as the “termination equity commitment letter,” from the EQT Fund pursuant to which the EQT Fund has committed to provide funds to Parent for the purpose of paying the parent termination fee if the Merger Agreement is terminated by the Company under certain specified circumstances (see the section entitled “The Merger Agreement—Termination Fees” beginning on page 114). The obligation of the EQT Fund under the termination equity commitment letter with respect to the parent termination fee is subject to an aggregate cap equal to the amount of $32.1 million, plus certain costs and expenses of enforcement, if applicable. See the section entitled “The Merger—Termination Equity Commitment Letter” beginning on page 75.

Appraisal Rights (page 76)

If the Merger Agreement is adopted and the Merger becomes effective, holders of Lumos Networks Common Stock who do not vote their shares in favor of the Merger will be entitled to statutory appraisal rights if they strictly comply with Section 262 of the DGCL. This means that such stockholders are entitled to seek appraisal of his, her or its shares of Lumos Networks Common Stock and to receive payment in cash for the “fair value” of his, her or its shares of Lumos Networks Common Stock, exclusive of any element of value arising from the accomplishment or expectation of the Merger, as determined by the Delaware Court of Chancery, together with interest, if any, to be paid upon the amount determined to be fair value. The ultimate amount holders receive in an appraisal proceeding may be less than, equal to or more than the amount a holder would have received under the Merger Agreement. For a description of the rights of such holders and of the procedures to be followed in order to assert such rights and obtain payment of the fair value of their shares of Lumos Networks Common Stock, see “The Merger—Appraisal Rights” beginning on page 76 and the text of Section 262 of the DGCL, which is reproduced in its entirety as Appendix B, as well as the information set forth below.

IN ORDER TO PROPERLY EXERCISE YOUR APPRAISAL RIGHTS IN CONNECTION WITH THE MERGER, YOU MUST DELIVER A WRITTEN DEMAND FOR APPRAISAL TO LUMOS NETWORKS BEFORE THE VOTE IS TAKEN ON THE ADOPTION OF THE MERGER AGREEMENT AT THE ANNUAL MEETING, MUST NOT VOTE, IN PERSON OR BY PROXY, IN FAVOR OF THE MERGER PROPOSAL AND MUST CONTINUE TO HOLD THE SHARES OF LUMOS NETWORKS COMMON STOCK OF RECORD FROM THE DATE OF MAKING THE DEMAND FOR APPRAISAL THROUGH THE EFFECTIVE TIME. AS SUCH, MERELY VOTING AGAINST, OR ABSTAINING OR FAILING TO VOTE ON THE MERGER PROPOSAL WILL NOT PRESERVE YOUR RIGHT TO APPRAISAL UNDER THE DGCL. BECAUSE A PROXY THAT IS SIGNED AND SUBMITTED BUT DOES NOT OTHERWISE CONTAIN VOTING INSTRUCTIONS WILL, UNLESS REVOKED, BE VOTED IN FAVOR OF THE MERGER PROPOSAL, IF YOU SUBMIT A PROXY AND WISH TO EXERCISE YOUR APPRAISAL RIGHTS, YOU MUST INCLUDE VOTING INSTRUCTIONS TO VOTE YOUR SHARES OF LUMOS NETWORKS COMMON STOCK AGAINST OR ABSTAIN WITH RESPECT TO THE MERGER PROPOSAL. NEITHER VOTING AGAINST

 



 

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THE MERGER PROPOSAL, NOR ABSTAINING FROM VOTING OR FAILING TO VOTE ON THE MERGER PROPOSAL, WILL IN AND OF ITSELF CONSTITUTE A WRITTEN DEMAND FOR APPRAISAL SATISFYING THE REQUIREMENTS OF SECTION 262 OF THE DGCL. THE WRITTEN DEMAND FOR APPRAISAL MUST BE IN ADDITION TO AND SEPARATE FROM ANY PROXY OR VOTE ON THE MERGER PROPOSAL. IF YOU HOLD YOUR SHARES OF LUMOS NETWORKS COMMON STOCK THROUGH A BANK, BROKERAGE FIRM OR OTHER NOMINEE AND YOU WISH TO EXERCISE APPRAISAL RIGHTS, YOU SHOULD CONSULT WITH YOUR BANK, BROKERAGE FIRM OR OTHER NOMINEE TO DETERMINE THE APPROPRIATE PROCEDURES FOR THE MAKING OF A DEMAND FOR APPRAISAL BY SUCH BANK, BROKERAGE FIRM OR NOMINEE. IN VIEW OF THE COMPLEXITY OF THE DGCL, STOCKHOLDERS WHO MAY WISH TO PURSUE APPRAISAL RIGHTS SHOULD CONSULT THEIR LEGAL AND FINANCIAL ADVISORS PROMPTLY.

U.S. Federal Income Tax Consequences of the Merger (page 81)

The receipt of cash in exchange for shares of Lumos Networks Common Stock pursuant to the Merger generally will be a taxable transaction for U.S. federal income tax purposes. The receipt of cash by a U.S. holder (as defined under “The Merger—U.S. Federal Income Tax Consequences of the Merger” beginning on page 81) in exchange for such U.S. holder’s shares of Lumos Networks Common Stock in the Merger generally will result in the recognition of gain or loss in an amount measured by the difference between the cash such U.S. holder receives in the Merger and such U.S. holder’s adjusted tax basis in the shares of Lumos Networks Common Stock surrendered in the Merger. A non-U.S. holder (as defined under “The Merger—U.S. Federal Income Tax Consequences of the Merger” beginning on page 81) generally will not be subject to U.S. federal income tax with respect to the exchange of Lumos Networks Common Stock for cash in the Merger unless such non-U.S. holder has certain connections to the United States (as described in “The Merger—U.S. Federal Income Tax Consequences of the Merger” beginning on page 81) or Lumos Networks is, or was during the relevant period, treated as a United States real property holding corporation for U.S. federal income tax purposes. Stockholders should refer to the discussion in the section entitled “The Merger—U.S. Federal Income Tax Consequences of the Merger,” beginning on page 81, and consult their own tax advisors concerning the U.S. federal income tax consequences relating to the Merger in light of their particular circumstances and any consequences arising under the laws of any state, local or foreign taxing jurisdiction.

Regulatory Approvals Required for the Merger (page 84)

Under the Merger Agreement, the Merger cannot be completed until the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, which we refer to as the “HSR Act,” has expired or been terminated. Lumos Networks and Parent filed their respective HSR Act premerger notifications on March 3, 2017 with the Federal Trade Commission, which we refer to as the “FTC,” and the Antitrust Division of the Department of Justice, which we refer to as the “DOJ,” under the HSR Act. The HSR waiting period expired at 11:59 p.m. on April 3, 2017.

While the HSR Act review has been completed in a timely manner, there is no certainty that a regulatory challenge to the Merger will not subsequently be made.

Federal Communications Commission Approval

Lumos Networks is also subject to regulation by the Federal Communications Commission, which we refer to as the “FCC,” under the Communications Act of 1934, as amended, which we refer to as the “Communications Act.” Lumos Networks holds a number of FCC authorizations related to the provision of regulated services. FCC approval is required before Lumos Networks may transfer control of its authorizations to Parent. The FCC will not issue its approval until it receives the consent of certain executive branch government agencies that undertake a national security review of FCC-notified transactions involving potential foreign ownership of U.S. telecommunications assets. These agencies include the Department of Justice, Federal Bureau of Investigation, Department of Homeland Security, and Department of Defense, which we refer to collectively as “Team Telecom.” While we believe that FCC approval will ultimately be obtained, this approval is not assured.

 



 

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CFIUS Approval

The Merger is also subject to review and clearance by the Committee on Foreign Investment in the United States, which we refer to as “CFIUS,” under the Defense Production Act of 1950, as amended, including by the Foreign Investment and National Security Act of 2007, which we refer to collectively as the “DPA,” which provides for national security reviews of foreign acquisitions of U.S. companies that may have an impact on national security. CFIUS notification is voluntary, but provides a means to assure that the President of the United States will not exercise his authority to block the transaction or require divestiture after closing.

State

In addition to U.S. federal regulatory and antitrust approvals, regulatory approvals are also being sought and filings have been made in a number of states in the United States.

Timing of Regulatory Approvals

We currently anticipate that required regulatory approvals will be received by the third quarter of 2017, although the receipt of these approvals and their timing cannot be assured or predicted at this time.

The Merger Agreement (page 86)

No Solicitation of Other Offers; Change of Recommendation (page 97)

Subject to certain exceptions, until the earlier to occur of the effective time of the Merger and the termination of the Merger Agreement in accordance with its terms, Lumos Networks will generally not be permitted to solicit or discuss alternative proposals with third parties (as described in “The Merger Agreement—No Solicitation of Other Offers; Change of Recommendation” beginning on page 97). Lumos Networks has agreed that it will not, directly or indirectly, among other things:

 

    solicit, initiate, or take any action to knowingly facilitate or encourage the submission of any acquisition proposal or any inquiry, offer or proposal that could reasonably be expected to lead to any acquisition proposal;

 

    enter into or participate in any discussions or negotiations with, furnish any information relating to the Company or any of its subsidiaries or afford access to the business, properties, assets, books or records of the Company or any of its subsidiaries to, or otherwise knowingly cooperate in any way with, any third party that is seeking to make, or has made, or could reasonably be expected to make any acquisition proposal; or

 

    enter into any letter of intent or other agreement with respect to any acquisition proposal (except for an acceptable confidentiality agreement that satisfies the requirements of the Merger Agreement) with any third party.

Notwithstanding these restrictions, if at any time prior to obtaining the affirmative vote to adopt the Merger Agreement of the holders of a majority of the outstanding shares of Lumos Networks Common Stock, which we refer to as the “Company stockholder approval,” (i) the Company receives a bona fide acquisition proposal that the Board reasonably believes, in good faith, after consultation with outside legal counsel and financial advisors, constitutes or would reasonably be expected to lead to a superior proposal (as described in “The Merger Agreement—No Solicitation of Other Offers; Change of Recommendation” beginning on page 97) and (ii) the Board determines in good faith, after consultation with outside legal counsel, that the failure to take such action would be reasonably likely to be inconsistent with its fiduciary duties under applicable law, then the Company may (A) engage in negotiations or discussions with such third party and (B) furnish to such third party non-public information relating to the Company or any of its subsidiaries pursuant to an acceptable confidentiality agreement that satisfies the requirements of the Merger Agreement.

 



 

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Except as expressly permitted by the Merger Agreement (as described in “The Merger Agreement—No Solicitation of Other Offers; Change of Recommendation” beginning on page 97) and described below), the Board will not:

 

    withdraw or withhold, or modify or qualify in a manner adverse to Parent, the Board’s recommendation that the Merger Agreement be adopted by the stockholders of Lumos Networks or publicly announce that it has proposed or resolved to take such action;

 

    fail to include the Board’s recommendation in this proxy statement;

 

    in the event any tender or exchange offer is commenced that would constitute an acquisition proposal, fail to publish, send or provide to the Lumos Networks stockholders, pursuant to Rule 14e-2(a) under the Exchange Act, and within ten business days after such tender or exchange offer is first commenced, or subsequently amended in any material respect, a statement recommending that the Lumos Networks stockholders reject such tender or exchange offer and publicly affirming the Board’s recommendation; or

 

    recommend, adopt, approve or enter into, or publicly propose or resolve to recommend, adopt, approve or enter into, any acquisition proposal or any letter of intent, agreement in principle or definitive agreement.

We refer to each of the actions or events in the bullets above as an adverse recommendation change.

The Board is permitted to (i) make an adverse recommendation change in the event of an intervening event (as described in “The Merger Agreement—No Solicitation of Other Offers; Change of Recommendation” beginning on page 97) or in the case of a superior proposal, and/or (ii) terminate the Merger Agreement to enter into a definitive written agreement providing for a superior proposal if, in each case, the Board determines in good faith (after consultation its outside legal counsel and financial advisors) that the failure to take action with respect to such superior proposal would be reasonably likely to be inconsistent with its fiduciary duties under applicable law subject further to Lumos Networks’ compliance with certain notice and other requirements as set forth in the Merger Agreement. In addition, the Board shall not be permitted to terminate the Merger Agreement for a superior proposal unless Lumos Networks pays the company termination fee (as described in “The Merger Agreement—Termination Fees” beginning on page 114) and, at the election of Parent, is available to engage in good faith negotiations with Parent during a specified period.

For a further discussion of the limitations on solicitation of acquisition proposals from third parties and the Board’s ability to make an adverse recommendation change, see “The Merger Agreement—No Solicitation of Other Offers; Change of Recommendation” beginning on page 97.

Conditions to the Closing of the Merger (page 111)

The parties expect to complete the Merger after the marketing period (as described in The Merger Agreement—Closing and Effective Time of the Merger; Marketing Period” beginning on page 87) has ended and all of the conditions to the Merger in the Merger Agreement are satisfied or waived. The parties currently expect to complete the Merger in the third quarter of 2017. However, it is possible that factors outside of each party’s control could require them to complete the Merger at a later time or not to complete it at all. The following are some of the conditions that must be satisfied or, where permitted by law, waived, before the Merger may be consummated:

 

    the affirmative vote to adopt the Merger Agreement of the holders of a majority of the outstanding shares of Lumos Networks Common Stock shall have been obtained;

 

    no restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or governmental authority or other legal restraint or prohibition preventing the consummation of the Merger shall have taken effect and no applicable law shall have been adopted or promulgated that prohibits or makes illegal the consummation of the Merger;

 

    the required governmental approvals shall have been obtained (or in the case of required governmental approvals that only require notification, such notification shall have been made);

 



 

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    the representations and warranties of Lumos Networks and Parent in the Merger Agreement, subject in some instances to materiality or “material adverse effect” qualifiers, at and as of the date of the Merger Agreement and the closing date of the Merger are true and correct;

 

    Lumos Networks and Parent each shall have performed in all material aspects their respective obligations and covenants required to be performed by them under the Merger Agreement on or before the closing date of the Merger;

 

    Lumos Networks’ receipt of a certificate signed by an executive officer of Parent and dated as of the closing date, certifying to the effect that the conditions with respect to the accuracy of the representations and warranties of Parent and the performance of the obligations of Parent have been satisfied;

 

    since the date of the Merger Agreement there shall not have occurred a company material adverse effect (as described in “The Merger Agreement—Representations and Warranties” beginning on page 90); and

 

    Parent’s receipt of a certificate signed by the chief executive officer or chief financial officer of Lumos Networks dated as of the closing date certifying to the effect that the conditions with respect to the accuracy of the representations and warranties of Lumos Networks and the performance of the obligations of Lumos Networks and there not having occurred a company material adverse effect have been satisfied.

The “marketing period” refers to the first period of 17 consecutive business days throughout which Parent and its financing sources have certain financial information and throughout which certain conditions are satisfied. If the marketing period has not ended on or prior to August 18, 2017, then such period shall not start until September 5, 2017. The marketing period is subject to certain other timing restrictions and conditions described in further detail in “The Merger Agreement—Closing and Effective Time of the Merger; Marketing Period” beginning on page 87.

Termination of the Merger Agreement (page 112)

The Merger Agreement provides that it may be terminated and the Merger may be abandoned at any time prior to the effective time of the Merger, whether before or, except as described below, after approval of the merger proposal by the stockholders of Lumos Networks as follows:

 

    By mutual written agreement of Parent and Lumos Networks;

 

    By either Parent or Lumos Networks, if:

 

    the Merger has not been consummated on or before November 18, 2017, which we refer to as the end date, subject to the ability to extend the end date in specified circumstances;

 

    there shall be any permanent injunction or other order issued by any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Merger and such injunction or other order, restraint or prohibition shall have become final and nonappealable;

 

    Lumos Networks’ stockholders fail to approve the merger proposal at the 2017 Annual Meeting of Stockholders or any stockholder meeting at which a vote on such proposal is taken; or

 

    By Parent, if:

 

    the Board (i) makes a change of recommendation with respect to the Merger, (ii) fails to include the Board recommendation in the proxy statement, (iii) in the event an acquisition proposal has been publicly announced, fails to reaffirm its recommendation within 10 business days or (iv) recommends, adopts, approves or enters into any acquisition proposal or any letter of intent, agreement in principle or definitive agreement (as described in “The Merger Agreement—No Solicitation of Other Offers; Change of Recommendation” beginning on page 97);

 



 

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    Lumos Networks has breached any of its representations or warranties or failed to perform any covenant or agreement set forth in the Merger Agreement such that specified conditions in the Merger Agreement (i) would result in the failure of a related closing condition and (ii) are not capable of being cured, or is not cured, before the date that is at least 3 business days prior to the end date or at least 30 days have elapsed since the date of delivery of written notice of such breach to Lumos Networks by Parent; or

 

    By Lumos Networks, if:

 

    the Board authorizes Lumos Networks to enter into a written agreement concerning a superior proposal and Lumos Networks enters into such agreement substantially concurrently with the termination of the Merger Agreement and pays the company termination fee (as described in “The Merger Agreement—Closing and Effective Time of the Merger; Marketing Period” beginning on page 87);

 

    Parent has breached any of its representations or warranties or failed to perform any covenant or agreement set forth in the Merger Agreement such that specified conditions in the Merger Agreement (i) would result in the failure of a related closing condition and (ii) are not capable of being cured, or is not cured, before the date that is at least 3 business days prior to the end date or at least 30 days have elapsed since the date of delivery of written notice of such breach to Parent by Lumos Networks; or

 

    each of the following is satisfied: (i) all of the conditions to Lumos Networks’, Parent’s and Merger Sub’s obligation to consummate the Merger are satisfied or waived (other than those conditions that by their terms are to be satisfied at the closing, but subject to such condition being satisfied assuming a closing would occur), (ii) Lumos Networks has given written notice to Parent that it is prepared to consummate the closing and (iii) Parent and Merger Sub fail to consummate the transactions contemplated by the Merger Agreement by the date required by the Merger Agreement.

Termination Fees (page 114)

Under the Merger Agreement, Lumos Networks may be required to pay to Parent a termination fee of $16.1 million if the Merger Agreement is terminated under specified circumstances.

Under the Merger Agreement, Parent may be required to pay to Lumos Networks a termination fee of $32.1 million if the Merger Agreement is terminated under specified circumstances. In no event will either Lumos Networks or Parent be required to pay a termination fee more than once. See “The Merger Agreement—Termination Fees” beginning on page 114 for a discussion of the circumstances under which either party will be required to pay a termination fee.

Specific Performance (page 118)

The Merger Agreement provides that the parties shall be entitled to an injunction or injunctions to prevent breaches of the Merger Agreement or to enforce specifically the performance of the terms and provisions thereof, in addition to any other remedy to which they are entitled at law or in equity, and provides for the parties’ waiver of any requirement for the securing or posting of any bond or proof of actual damages in connection with any such remedy. While the parties may pursue both a grant of specific performance to the extent permitted by the Merger Agreement and the payment of the company termination fee or parent termination fee, under no circumstances shall a party be permitted or entitled to receive both a grant of specific performance to require a party to consummate the closing and payment of the company termination fee or parent termination fee (as described in “The Merger Agreement—Termination Fees” beginning on page 114).

The Merger Agreement also specifically provides that the Company shall be entitled to seek specific performance of Parent’s obligation to cause the equity financing to be funded in accordance with the terms of the equity commitment letter and to cause Parent and Merger Sub to consummate the Merger and the transactions contemplated by the Merger Agreement to occur at the closing, including by demanding Parent to fully enforce the EQT Fund’s obligations under the equity commitment letter and Parent’s rights thereunder, if, and only if: (i) all of the conditions to the obligation of Parent and Merger Sub to close the Merger (other than those conditions that by their nature cannot be satisfied until the closing

 



 

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date, but each of which conditions shall be capable of being satisfied upon the closing date) have been satisfied, (ii) Parent and Merger Sub fail to complete the closing on the date the closing is required to have occurred, (iii) the debt financing provided for by the debt commitment letters has been funded or the debt financing sources have confirmed that the debt financing will be funded at the closing, if the equity financing is funded at the closing, and (iv) the Company has irrevocably confirmed to Parent in writing that it is ready, willing and able for the closing to occur if specific performance is granted and that if the equity financing and debt financing are funded, then the closing will occur.

Costs and Expenses (page 118)

The Merger Agreement provides that all costs and expenses incurred in connection with the transactions contemplated by the Merger Agreement will be paid by the party incurring such costs or expenses, except that Lumos Networks may be required to reimburse certain expenses of Parent (up to $3.5 million) if the Merger Agreement is terminated under circumstances where stockholders have failed to approve the merger proposal at the 2017 Annual Meeting of Stockholders or any stockholder meeting at which a vote on such proposal is taken.

Stock Exchange Delisting and Deregistration of Our Common Stock (page 110)

As promptly as practicable after the effective time of the Merger, Lumos Networks Common Stock will be delisted from the NASDAQ and deregistered under the Exchange Act and we will no longer be required to file periodic reports with the SEC on account of Lumos Networks Common Stock.

Market Prices and Dividend Data (page 120)

Lumos Networks Common Stock is listed on the NASDAQ under the symbol “LMOS.” On February 17, 2017, the last trading day prior to the public announcement of the execution of the Merger Agreement, the closing price of Lumos Networks Common Stock on the NASDAQ was $15.23 per share. On April 19, 2017, the latest practicable trading day before the printing of this proxy statement, the closing price of Lumos Networks Common Stock on the NASDAQ was $17.83 per share. You are encouraged to obtain current market prices of Lumos Networks Common Stock in connection with voting your shares of Lumos Networks Common Stock.

Under the terms of the Merger Agreement, from the date of the Merger Agreement until the earlier of the effective time of the Merger or the termination of the Merger Agreement, we may not declare or pay dividends to holders of Lumos Networks Common Stock without Parent’s written consent. On March 4, 2015, our Board terminated our quarterly dividend in favor of allocating capital to growth opportunities.

 



 

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QUESTIONS AND ANSWERS ABOUT THE ANNUAL MEETING AND THE MERGER

The following questions and answers are intended to address briefly some commonly asked questions regarding the Merger, the Merger Agreement and the 2017 Annual Meeting of Stockholders. These questions and answers may not address all questions that may be important to you as a stockholder of Lumos Networks. Please refer to the “Summary” and the more detailed information contained elsewhere in this proxy statement, the appendices to this proxy statement and the documents incorporated by reference or referred to in this proxy statement, which you should read carefully and in their entirety.

 

Q: Why am I receiving these materials?

 

A: On February 18, 2017, Lumos Networks entered into the Merger Agreement pursuant to which, among other things, Merger Sub will merge with and into Lumos Networks, with Lumos Networks continuing as the surviving corporation in the Merger and a wholly owned subsidiary of Parent. A copy of the Merger Agreement is attached to this proxy statement as Appendix A and is incorporated herein by reference. The Board is furnishing this proxy statement and form of proxy card to the holders of Lumos Networks Common Stock in connection with the solicitation of proxies in favor of the proposal to adopt the Merger Agreement and the other matters to be voted on at the 2017 Annual Meeting of Stockholders or at any adjournments or postponements of the 2017 Annual Meeting of Stockholders.

 

  This proxy statement, which you should read carefully, contains important information about the Merger, the Merger Agreement and the 2017 Annual Meeting of Stockholders and the matters to be voted on thereat. The enclosed materials allow you to submit a proxy to vote your shares of Lumos Networks Common Stock without attending the 2017 Annual Meeting of Stockholders and to ensure that your shares of Lumos Networks Common Stock are represented and voted at the 2017 Annual Meeting of Stockholders.

 

  Your vote is very important. Even if you plan to attend the 2017 Annual Meeting of Stockholders, we encourage you to submit a proxy as soon as possible.

 

Q: When and where is the annual meeting?

 

A: The 2017 Annual Meeting of Stockholders will take place at 9:00 a.m. (local time) on May 24, 2017 at the offices of Troutman Sanders LLP, 1001 Haxall Point, 15th Floor, Richmond, Virginia.

 

Q: Who is entitled to vote at the annual meeting?

 

A: All Lumos Networks stockholders of record as of the close of business on April 19, 2017, the record date, are entitled to notice of the 2017 Annual Meeting of Stockholders and to vote at the 2017 Annual Meeting of Stockholders or at any adjournments or postponements thereof. Each holder of Lumos Networks Common Stock is entitled to cast one vote on each matter properly brought before the 2017 Annual Meeting of Stockholders for each share of Lumos Networks Common Stock that such holder owned as of the record date. As of the record date, there were 23,944,060 shares of Lumos Networks Common Stock outstanding and entitled to be voted at the 2017 Annual Meeting of Stockholders.

 

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Q: May I attend the annual meeting and vote in person?

 

A: Yes. All stockholders of record as of the record date may attend the 2017 Annual Meeting of Stockholders and vote in person. Proof of stock ownership as of the record date and some form of government-issued photo identification (such as a valid driver’s license or passport) will be required for admission to the 2017 Annual Meeting of Stockholders. If you hold your shares of Lumos Networks Common Stock in a brokerage account or through another nominee, you are the beneficial owner of those shares but not the record holder and you will need to obtain a “legal proxy” from the record holder to attend the 2017 Annual Meeting of Stockholders.

 

  Even if you plan to attend the 2017 Annual Meeting of Stockholders in person, we encourage you to complete, sign, date and return the enclosed proxy or to submit a proxy to vote electronically over the Internet or via telephone to ensure that your shares of Lumos Networks Common Stock will be represented at the 2017 Annual Meeting of Stockholders. If you attend the 2017 Annual Meeting of Stockholders and wish to vote in person, your vote by ballot will revoke any proxy previously submitted.

 

  If you are a beneficial owner and hold your shares of Lumos Networks Common Stock in “street name” through a broker, bank or other nominee, you should instruct your broker, bank or other nominee on how you wish to vote your shares of Lumos Networks Common Stock using the instructions provided by your broker, bank or other nominee. Your broker, bank or other nominee cannot vote on any of the proposals, except the auditor ratification proposal, without your instructions. If you hold your shares of Lumos Networks Common Stock in “street name,” because you are not the stockholder of record, you may not vote your shares of Lumos Networks Common Stock in person at the 2017 Annual Meeting of Stockholders unless you request and obtain a valid proxy in your name from your broker, bank or other nominee.

 

Q: What am I being asked to vote on at the annual meeting?

 

A: You are being asked to consider and vote on the following proposals:

 

  (1) a proposal to adopt the Merger Agreement, approving the transactions contemplated thereby, including the Merger;

 

  (2) a proposal to approve a non-binding advisory resolution approving the Merger-related compensation of our named executive officers;

 

  (3) a proposal to approve the adjournment of the 2017 Annual Meeting of Stockholders from time to time if necessary or appropriate;

 

  (4) a proposal to elect nine directors to serve until the 2018 Annual Meeting of Stockholders;

 

  (5) a proposal to approve a non-binding advisory resolution approving the compensation of our named executive officers; and

 

  (6) a proposal to ratify the appointment of KPMG LLP as our independent registered public accounting firm for the year ending December 31, 2017.

 

Q: What is the proposed Merger and what effects will it have on Lumos Networks?

 

A: The proposed Merger is the acquisition of Lumos Networks by Parent pursuant to the Merger Agreement. If the merger proposal is approved by the holders of Lumos Networks Common Stock and the other closing conditions under the Merger Agreement have been satisfied or waived, Merger Sub will merge with and into Lumos Networks, with Lumos Networks continuing as the surviving corporation. As a result of the Merger, Lumos Networks will become a wholly owned subsidiary of Parent. Lumos Networks will cooperate with Parent to de-list the Lumos Networks Common Stock from NASDAQ and de-register under the Exchange Act as promptly as practicable following the effective time of the Merger, and at such time, we will no longer be a publicly traded company and will no longer file periodic reports with the SEC. If the Merger is consummated, you will not own any shares of the capital stock of the surviving corporation.

 

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Q: What will I receive if the Merger is completed?

 

A: Upon completion of the Merger, you will be entitled to receive the Merger Consideration of $18.00 in cash, without interest and less any applicable withholding taxes, for each share of Lumos Networks Common Stock that you own, unless you have properly exercised and not withdrawn your appraisal rights under Section 262 of the DGCL with respect to such shares. For example, if you own 100 shares of Lumos Networks Common Stock, you will receive $1,800.00 in cash in exchange for your shares, less any applicable withholding taxes. In either case, as a result of the Merger, your shares of Lumos Networks Common Stock will be cancelled and you will not own shares in the surviving corporation.

 

Q: How does the Merger Consideration compare to the market price of Lumos Networks Common Stock prior to the public announcement of the Merger Agreement?

 

A: The Merger Consideration represents a premium of approximately 18.2% over the year to date volume weighted average closing price of Lumos Networks Common Stock ending as of February 17, 2017, the last trading day before the Merger Agreement was announced, and a premium of approximately 34.9% over the volume-weighted price average of the 12 months ended February 17, 2017 of $13.35 and a 16.5% premium to $15.45, the average closing price of Lumos Networks Common Stock of the last 20 trading days before the Merger Agreement was announced.

 

Q: What do I need to do now? If I am going to attend the annual meeting, should I still submit a proxy?

 

A: We encourage you to read this proxy statement, the appendices to this proxy statement, including the Merger Agreement, and the documents we refer to in this proxy statement carefully and consider how the Merger affects you. Whether or not you expect to attend the 2017 Annual Meeting of Stockholders in person, we encourage you to complete, sign, date and return, as promptly as possible, the enclosed proxy card in the accompanying reply envelope or grant your proxy electronically over the Internet or by telephone, so that your shares of Lumos Networks Common Stock may be represented and can be voted at the 2017 Annual Meeting of Stockholders. If you hold your shares of Lumos Networks Common Stock in “street name,” please refer to the voting instruction forms provided by your broker, bank or other nominee to vote your shares of Lumos Networks Common Stock.

 

Q: Should I send in my stock certificates now?

 

A: No. If the proposal to adopt the Merger Agreement is approved, shortly after the Merger is completed, under the terms of the Merger Agreement, you will receive a letter of transmittal containing instructions for how to send your stock certificates or surrender your book-entry shares to paying agent in order to receive the cash payment of the Merger Consideration for each share of Lumos Networks Common Stock represented by the stock certificates or book-entry shares. You should use the letter of transmittal to exchange your stock certificates or book-entry shares for the cash payment to which you are entitled upon completion of the Merger. If your shares of Lumos Networks Common Stock are held in “street name” through a bank, brokerage firm or other nominee, you will receive instructions from your bank, brokerage firm or other nominee as to how to effect the surrender of your “street name” shares of Lumos Networks Common Stock in exchange for the Merger Consideration. Please do not send in your stock certificates now.

 

Q: What happens if I sell or otherwise transfer my shares of Lumos Networks Common Stock after the record date but before the annual meeting? What happens if I sell or otherwise transfer my shares of Lumos Networks Common Stock after the annual meeting but before the effective time of the Merger?

 

A:

The record date for the 2017 Annual Meeting of Stockholders is earlier than the date of the 2017 Annual Meeting of Stockholders and earlier than the date the Merger is expected to be completed. If you sell or transfer your shares of Lumos Networks Common Stock after the record date but before the 2017 Annual Meeting of Stockholders, unless special arrangements (such as provision of a proxy) are made between you and the person to

 

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  whom you transfer your shares of Lumos Networks Common Stock and each of you notifies Lumos Networks in writing of such special arrangements, you will retain your right to vote such shares at the 2017 Annual Meeting of Stockholders but will transfer the right to receive the Merger Consideration if the Merger is completed to the person to whom you transfer your shares of Lumos Networks Common Stock.

 

  If you sell or transfer your shares of Lumos Networks Common Stock after the 2017 Annual Meeting of Stockholders, but before the effective time, you will transfer the right to receive the Merger Consideration if the Merger is completed. In order to receive the Merger Consideration, you must hold your shares of Lumos Networks Common Stock through the completion of the Merger.

Even if you sell or otherwise transfer your shares of Lumos Networks Common Stock after the record date, we encourage you to sign, date and return the enclosed proxy or submit your proxy to vote via the Internet or by telephone.

 

Q: What is the position of the Board regarding the Merger?

 

A: All members of our Board voting on the Merger, after consulting with its outside legal counsel and Financial Advisors and after review and consideration of various factors described in the section below entitled “The Merger—Recommendation of Our Board of Directors and Reasons for the Merger—Reasons for the Merger” beginning on page 46, (i) approved the execution, delivery and performance by Lumos Networks of the Merger Agreement and the consummation of the transactions contemplated by the Merger Agreement, including the Merger, (ii) determined that the Merger Agreement and the transactions contemplated by the Merger Agreement, including the Merger, are fair to, and in the best interests of, Lumos Networks and its stockholders, (iii) directed that the Merger Agreement be submitted to the stockholders of Lumos Networks for adoption and (iv) declared that the Merger Agreement and the transactions contemplated thereby are advisable.

 

Q: How does the Board recommend that I vote?

 

A: The Board recommends that you vote:

 

  (1) FOR” the proposal to adopt the Merger Agreement, approving the transactions contemplated thereby, including the Merger;

 

  (2) FOR” the proposal to approve a non-binding advisory resolution approving the Merger-related compensation of our named executive officers;

 

  (3) FOR” the proposal to approve the adjournment of the 2017 Annual Meeting of Stockholders from time to time if necessary or appropriate;

 

  (4) FOR” the proposal to elect nine directors to serve until the 2018 Annual Meeting of Stockholders;

 

  (5) FOR” the proposal to approve a non-binding advisory resolution approving the compensation of our named executive officers; and

 

  (6) FOR” the proposal to ratify the appointment of KPMG LLP as our independent registered public accounting firm for the year ending December 31, 2017.

 

Q: How will our directors and executive officers vote on the proposal to adopt the Merger Agreement?

 

A: We currently expect that our directors and current executive officers will vote all of their shares of Lumos Networks Common Stock in favor of the adoption of the Merger Agreement, although no director or executive officer has entered into any agreement containing an obligation to do so. As of April 19, 2017, the record date for the 2017 Annual Meeting of Stockholders, our directors and executive officers beneficially owned and were entitled to vote, in the aggregate, 1,076,494 shares of Lumos Networks Common Stock outstanding on the record date (excluding any shares of Lumos Networks Common Stock that would be delivered upon exercise or conversion of stock options), representing approximately 4.5% of the outstanding shares of Lumos Networks Common Stock.

 

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Q: What happens if the Merger is not completed?

 

A: If the Merger Agreement is not adopted by Lumos Networks stockholders or if the Merger is not consummated for any other reason, Lumos Networks stockholders will not receive any payment for their shares of Lumos Networks Common Stock. Instead, Lumos Networks will remain a public company, Lumos Networks Common Stock will continue to be listed and traded on the NASDAQ and registered under the Exchange Act and we will continue to file periodic reports with the SEC.

 

  Under specified circumstances, Lumos Networks may be required to pay Parent a termination fee, or may be entitled to receive a reverse termination fee from Parent, upon the termination of the Merger Agreement, as described under “The Merger Agreement—Termination Fees” beginning on page 114.

 

Q: Do any of Lumos Networks’ directors or officers have interests in the Merger that may differ from those of Lumos Networks stockholders generally?

 

A: In considering the recommendation of the Board with respect to the merger proposal, you should be aware that certain of our directors and executive officers may have interests in the Merger that may be different from, or in addition to, your interests as a stockholder generally. The members of the Board voting on the Merger were aware of these interests in evaluating and negotiating the Merger Agreement, approving the Merger Agreement and the Merger and recommending that the Merger Agreement be adopted by the stockholders of Lumos Networks. For a description of the interests of our directors and executive officers in the Merger, see “The Merger—Interests of the Directors and Executive Officers of Lumos Networks in the Merger” beginning on page 64.

 

Q: What vote is required to adopt the Merger Agreement?

 

A: The affirmative vote of the holders of a majority of the shares of Lumos Networks Common Stock issued and outstanding as of the record date and entitled to vote at the 2017 Annual Meeting of Stockholders is required to approve the merger proposal.

 

  The failure of any stockholder of record to submit a signed proxy card, grant a proxy electronically over the Internet or by telephone or to vote in person by ballot at the 2017 Annual Meeting of Stockholders will have the same effect as a vote “AGAINST” the merger proposal. Abstentions and broker non-vote will have the same effect as a vote “AGAINST” the merger proposal.

 

  As of April 19, 2017, the record date for determining who is entitled to vote at the 2017 Annual Meeting of Stockholders, there were 23,944,060 shares of Lumos Networks Common Stock issued and outstanding. Each holder of Lumos Networks Common Stock is entitled to one vote per share of Lumos Networks Common Stock owned by such holder as of the record date.

 

Q: What vote is required to approve the Merger-related named executive officer compensation proposal?

 

A: Approval of the Merger-related named executive officer compensation proposal requires the affirmative vote of a majority of the shares present or represented and entitled to vote at the 2017 Annual Meeting of Stockholders to be approved. Abstentions and broker non-votes will not affect the outcome of the votes on this proposal.

 

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Q: What is “Merger-related compensation”?

 

A: “Merger-related compensation” is certain compensation that is tied to or based on the completion of the Merger and may be payable to Lumos Networks’ named executive officers under our existing plans or agreements, which is the subject of the Merger-related named executive officer compensation proposal. See “Proposal 2: Advisory Vote on Merger-Related Named Executive Officer Compensation” beginning on page 122.

 

Q: Why am I being asked to cast a non-binding, advisory vote to approve “Merger-related compensation” payable to Lumos Networks’ named executive officers under its plans or agreements?

 

A: In accordance with the rules promulgated by the SEC under Section 14A of the Exchange Act, Lumos Networks is required to seek from its stockholders a non-binding, advisory vote on certain compensation that will or may become payable to our named executive officers in connection with the Merger.

 

Q: What will happen if the stockholders do not approve the “Merger-related compensation” in the Merger-related named executive officer compensation proposal at the 2017 Annual Meeting of Stockholders?

 

A: Approval of the Merger-related named executive officer compensation proposal is not a condition to the completion of the Merger. The vote with respect to the Merger-related named executive officer compensation proposal is an advisory vote and will not be binding on Lumos Networks or Parent. Further, the underlying compensation plans and agreements are contractual in nature and are not, by their terms, subject to stockholder approval. Accordingly, payment of the “Merger-related compensation” is not contingent on stockholder approval of the Merger-related named executive officer compensation proposal. Therefore, if the Merger Agreement is adopted by Lumos Networks stockholders and the Merger is completed, this compensation will or may become payable regardless of the outcome of the vote on the Merger-related named executive officer compensation proposal.

 

Q: What vote is required to approve the adjournment proposal?

 

A: Approval of the adjournment proposal requires the affirmative vote of a majority of the shares present or represented and entitled to vote at the 2017 Annual Meeting of Stockholders to be approved. Abstentions will have the same effect as a vote against these proposals and broker non-votes will not affect the outcome of the vote on this proposal.

 

Q: What vote is required for the election of directors?

 

A: Under our bylaws, at the 2017 Annual Meeting of Stockholders a nominee for director will be elected to the Board if the votes cast for such nominee’s election exceed the votes cast against such nominee’s election. Only votes actually cast will be counted for the purpose of determining whether a particular nominee received the required vote. Abstentions and broker non-votes will have no effect on the outcome of the election of directors.

 

Q: What vote is required to adopt the auditor ratification proposal?

 

A: Approval of the auditor ratification proposal requires the affirmative vote of a majority of the shares present or represented and entitled to vote at the 2017 Annual Meeting of Stockholders to be approved. Abstentions will have the same effect as a vote against these proposals and broker non-votes will not affect the outcome of the vote on this proposal.

 

Q: What vote is required to adopt the say on pay proposal?

 

A: Approval of the say on pay proposal requires the affirmative vote of a majority of the shares present or represented and entitled to vote at the 2017 Annual Meeting of Stockholders to be approved. Abstentions will have the same effect as a vote against these proposals and broker non-votes will not affect the outcome of the vote on this proposal.

 

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Q: Who will pay for the cost of this proxy solicitation?

 

A: The cost of the solicitation of proxies on behalf of Lumos Networks will be borne by us. Lumos Networks has engaged the services of Georgeson LLC to solicit proxies for the 2017 Annual Meeting of Stockholders. In connection with its retention by us, Georgeson LLC has agreed to provide consulting, analytic and proxy solicitation services in connection with the 2017 Annual Meeting of Stockholders. Lumos Networks has agreed to pay Georgeson LLC a fee of approximately $10,000, plus reasonable out-of-pocket expenses for its services, and Lumos Networks will indemnify Georgeson LLC for certain losses arising out of its proxy solicitation services. In addition, our directors, officers and other employees, or representatives of Georgeson LLC, may, without additional compensation except reimbursement for actual expenses, solicit proxies by mail, in person or by telecommunication. We will reimburse brokers, fiduciaries, custodians and other nominees for out-of-pocket expenses incurred in sending our proxy materials to, and obtaining instructions relating to such materials from, beneficial owners.

 

Q: What is the quorum required?

 

A: According to our bylaws, the holders of a majority of the shares entitled to be voted must be present or represented by proxy to constitute a quorum. Each outstanding share is entitled to one vote on all matters. For purposes of the quorum, the stockholders who are present at the 2017 Annual Meeting of Stockholders in person or by proxy and who abstain from voting are considered stockholders who are present and entitled to vote and they count toward a quorum. Abstentions and shares of record held by a broker or its nominee that are voted on any matter are included in determining whether a quorum is present. Broker shares that are not voted on any matter, or “broker non-votes,” will not be included in determining whether a quorum is present.

 

Q: What is the difference between holding shares of Lumos Networks Common Stock as a stockholder of record and as a beneficial owner?

 

A: Most of our stockholders hold their shares of Lumos Networks Common Stock through a broker, bank or other nominee rather than directly in their own names. As summarized below, there are some distinctions between shares of Lumos Networks Common Stock held of record and those owned beneficially.

 

    Stockholder of Record. If your shares of Lumos Networks Common Stock are registered directly in your name with our transfer agent, Computershare Trust Company, N.A., you are considered, with respect to those shares of Lumos Networks Common Stock, to be the “stockholder of record.” In this case, this proxy statement and your proxy card have been sent directly to you by Lumos Networks. As the stockholder of record, you have the right to vote in person at the 2017 Annual Meeting of Stockholders or to grant your proxy to vote your shares of Lumos Networks Common Stock directly to the individuals named on the enclosed proxy card.

 

    Beneficial Owner. If your shares of Lumos Networks Common Stock are held through a broker, bank or other nominee, you are considered the “beneficial owner” of the shares of Lumos Networks Common Stock held in “street name.” In that case, this proxy statement has been forwarded to you by your broker, bank or other nominee who is considered, with respect to those shares of Lumos Networks Common Stock, to be the stockholder of record. As the beneficial owner, you have the right to direct your broker, bank or other nominee on how to vote your shares of Lumos Networks Common Stock by following their instructions for voting. You are also invited to attend the 2017 Annual Meeting of Stockholders. However, because you are not the stockholder of record, you may not vote your shares of Lumos Networks Common Stock in person at the 2017 Annual Meeting of Stockholders unless you request and obtain a valid proxy from your broker, bank or other nominee giving you the right to vote the shares of Lumos Networks Common Stock at the 2017 Annual Meeting of Stockholders.

 

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Q: How may I vote?

 

A: If you are a stockholder of record (that is, if your shares of Lumos Networks Common Stock are registered in your name with Computershare Trust Company, N.A., our transfer agent), there are four ways to vote or submit a proxy:

 

    At the 2017 Annual Meeting of Stockholders – You can attend the 2017Annual Meeting of Stockholders and vote in person by a ballot we will give you at the meeting.

 

    By Telephone — Stockholders located in the United States can vote by telephone by following the instructions provided in the proxy card or voting instruction;

 

    By Internet — Stockholders located in the United States can vote by Internet by following the instructions provided in the proxy card or voting instruction; or

 

    By Mail — If you received your proxy materials by mail, you can vote by mail by signing, dating and mailing the enclosed proxy card.

Internet and telephone facilities will be available 24 hours a day and close at 12:00 a.m. (Eastern Time) on May 24, 2017.

 

  Even if you plan to attend the 2017Annual Meeting of Stockholders, you are strongly encouraged to complete and mail the enclosed card for your shares of Lumos Networks Common Stock or submit a proxy by telephone or the Internet. If you are a record holder or if you obtain a valid proxy to vote shares of Lumos Networks Common Stock which you beneficially own, you may still vote your shares of Lumos Networks Common Stock in person at the 2017Annual Meeting of Stockholders. Any such vote will automatically revoke any proxy you previously submitted.

 

  If your shares of Lumos Networks Common Stock are held in “street name” through a broker, bank or other nominee, you may provide voting instructions through your broker, bank or other nominee by completing and returning the voting form provided by your broker, bank or other nominee, or electronically over the Internet or by telephone through your broker, bank or other nominee if such a service is provided. To provide voting instructions via the Internet or via telephone through your broker, bank or other nominee, you should follow the instructions on the voting form provided by your broker, bank or nominee.

 

Q: If my broker holds my shares of Lumos Networks Common Stock in “street name,” will my broker vote my shares of Lumos Networks Common Stock for me?

 

A: Other than for the auditor ratification proposal, your broker, bank or other nominee will only be permitted to vote your shares if you instruct your broker, bank or other nominee how to vote. You should follow the procedures provided by your broker, bank or other nominee regarding the voting of your shares. If you do not instruct your broker, bank or other nominee to vote your shares, your shares will not be voted, which will be treated as a vote “AGAINST” the proposal to adopt the Merger Agreement.

 

  If you do not provide voting instructions to your broker, bank or other nominee, your broker, bank or other nominee has discretion to vote your shares only on the auditor ratification proposal. Your broker, bank or other nominee may not vote your shares on the merger proposal, the Merger-related named executive officer compensation proposal, the adjournment proposal, the election of directors or the say on pay proposal without specific instructions from you. If you do not vote, your broker, bank or other nominee may vote your shares only on the auditor ratification proposal in which case your shares will be counted toward the quorum for the annual meeting, but will be voted only on the auditor ratification proposal.

 

Q: May I change my vote after I have mailed my signed proxy card or otherwise submitted my vote by proxy?

 

A: Yes. If you are a stockholder of record, you may change your vote or revoke your proxy at any time before it is voted at the 2017 Annual Meeting of Stockholders by:

 

    Filing with our Secretary either a written revocation or an executed proxy bearing a later date;

 

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    Attending and voting in person at the 2017 Annual Meeting of Stockholders; or

 

    Granting a subsequent proxy through the Internet or by telephone.

If you hold your shares of Lumos Networks Common Stock in “street name,” you should contact your broker, bank or other nominee for instructions regarding how to change your vote. You may also vote in person at the 2017 Annual Meeting of Stockholders if you obtain a valid proxy from your broker, bank or other nominee.

 

Q: What is a proxy?

 

A: A proxy is your legal designation of another person, referred to as a “proxy,” to vote your shares of Lumos Networks Common Stock. The written document describing the matters to be considered and voted on at the 2017 Annual Meeting of Stockholders is called a “proxy statement.” The document used to designate a proxy to vote your shares of Lumos Networks Common Stock is called a “proxy card.” The Board has designated Timothy G. Biltz and Johan G. Broekhuysen, each of them with full power of substitution, as proxies for the 2017 Annual Meeting of Stockholders.

 

Q: If a stockholder gives a proxy, how are the shares of Lumos Networks Common Stock voted?

 

A: Regardless of the method you choose to submit your proxy, the individuals named on the enclosed proxy card will vote your shares of Lumos Networks Common Stock in the way that you indicate. When completing the Internet or telephone process or the proxy card, you may specify whether your shares of Lumos Networks Common Stock should be voted for or against or to abstain from voting on all, some or none of the specific items of business to come before the 2017 Annual Meeting of Stockholders.

Unless contrary instructions are specified, if the proxy card is executed and returned (and not revoked) prior to the 2017 Annual Meeting of Stockholders, the shares of Lumos Networks Common Stock represented thereby will be voted “FOR” all of the proposals set forth in this proxy statement. It is not currently anticipated that any other proposals for consideration will be presented at the 2017 Annual Meeting of Stockholders. If other proposals requiring a vote of stockholders are brought before the 2017 Annual Meeting of Stockholders in a proper manner, the persons named in the enclosed proxy card, if properly authorized, will have discretion to vote the shares of Lumos Networks Common Stock they represent in accordance with their best judgment.

 

Q: What should I do if I receive more than one set of voting materials?

 

A: You may receive more than one set of voting materials, including multiple copies of this proxy statement and multiple proxy cards or voting instruction cards. For example, if you hold your shares of Lumos Networks Common Stock in more than one brokerage account, you will receive a separate voting instruction card for each brokerage account in which you hold shares of Lumos Networks Common Stock. If you are a stockholder of record and your shares of Lumos Networks Common Stock are registered in more than one name, you will receive more than one proxy card. Please complete, date, sign and return (or grant a proxy to vote via the Internet or telephone with respect to) each proxy card and voting instruction card that you receive in order to ensure that all of your shares of Lumos Networks Common Stock are voted. Each proxy card you receive comes with its own prepaid return envelope; if you submit a proxy by mail, make sure you return each proxy card in the return envelope that accompanies that proxy card.

 

Q: Who will count the votes?

 

A: The votes will be counted by the independent inspector of election appointed for the 2017 Annual Meeting of Stockholders.

 

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Q: Where can I find the voting results of the 2017 Annual Meeting of Stockholders?

 

A: Lumos Networks intends to announce preliminary voting results at the 2017 Annual Meeting of Stockholders and publish final results in a Current Report on Form 8-K that will be filed with the SEC following the 2017 Annual Meeting of Stockholders. All reports that Lumos Networks files with the SEC are publicly available when filed. See “Where You Can Find More Information” beginning on page 169.

 

Q: Will I be subject to U.S. federal income tax upon the exchange of Lumos Networks Common Stock for cash pursuant to the Merger?

 

A: If you are a U.S. holder (as defined under “The Merger—U.S. Federal Income Tax Consequences of the Merger” beginning on page 81), the exchange of Lumos Networks Common Stock for cash pursuant to the Merger generally will require you to recognize gain or loss for U.S. federal income tax purposes in an amount equal to the difference between the amount of cash you received pursuant to the Merger and your adjusted tax basis in the shares of Lumos Networks Common Stock surrendered pursuant to the Merger. A non-U.S. holder (as defined under “The Merger—U.S. Federal Income Tax Consequences of the Merger” beginning on page 81) generally will not be subject to U.S. federal income tax with respect to the exchange of Lumos Networks Common Stock for cash in the Merger unless such non-U.S. holder has certain connections to the United States or (as described in “The Merger—U.S. Federal Income Tax Consequences of the Merger” beginning on page 81) Lumos Networks is, or was during the relevant period, treated as a United States real property holding corporation for U.S. federal income tax purposes. Because particular circumstances may differ, we recommend that you consult your own tax advisor to determine the U.S. federal income tax consequences relating to the Merger in light of your own particular circumstances and any consequences arising under the laws of any state, local or foreign taxing jurisdiction. A more complete description of the U.S. federal income tax consequences of the Merger is provided under “The Merger—U.S. Federal Income Tax Consequences of the Merger” beginning on page 81.

 

Q: What will the holders of Lumos Networks options and restricted stock receive in the Merger?

 

A: Immediately prior to the effective time of the Merger, each option to purchase Lumos Networks Common Stock (whether or not vested and exercisable) that is then outstanding will automatically and without any required action on the part of the holder thereof, vest and be cancelled and entitle the option holder to receive an amount in cash equal to the product of (i) the total number of shares of Lumos Networks Common Stock subject to the option and (ii) the amount, if any, by which the Merger Consideration exceeds the applicable exercise price per share of Lumos Networks Common Stock underlying the option (less any applicable withholding taxes). Notwithstanding the foregoing, effective as of seven business days prior to the closing of the Merger (and conditional on the closing), each holder of an outstanding and unexercised option to purchase Lumos Networks Common Stock will be entitled to exercise such option and shares of Lumos Networks Common Stock received upon such exercise will be treated the same as other outstanding shares of Lumos Networks Common Stock in the Merger. At or as soon as practicable after the effective time of the Merger, the surviving corporation will make the option payments due to option holders, if any, pursuant to the Company’s ordinary payroll practices.

Immediately prior to the effective time of the Merger, each share of Company restricted stock that is then outstanding will automatically and without any action on the part of the holder thereof, vest and the restrictions thereon will lapse and entitle the holder of such share of Company restricted stock to receive the Merger Consideration, less any applicable withholding taxes and in accordance with the same terms and conditions applied to holders of Lumos Networks Common Stock generally. At or as soon as practicable after the effective time of the Merger, the surviving corporation will make the restricted stock payments, if any, due to each holder of such Company restricted stock pursuant to the Company’s ordinary payroll practices. See “The Merger Agreement—Merger Consideration—Outstanding Equity Awards and Other Awards” beginning on page 88.

 

Q: When do you expect the Merger to be completed?

 

A: We are working toward completing the Merger as quickly as possible and currently expect to consummate the Merger in the third quarter of 2017 (as described in the section entitled “The Merger Agreement—Closing and Effective Time of the Merger; Marketing Period” beginning on page 87). However, the exact timing of completion of the Merger cannot be predicted because the Merger is subject to certain closing conditions, including the adoption of the Merger Agreement by our stockholders and the receipt of regulatory approvals.

 

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Q: Am I entitled to appraisal rights under the DGCL?

 

A: Yes. As a holder of Lumos Networks Common Stock, you are entitled to exercise appraisal rights under the DGCL in connection with the Merger if you take certain actions and meet certain conditions, including that you do not vote (in person or by proxy) in favor of the adoption of the Merger Agreement. See “The Merger—Appraisal Rights” beginning on page 76. For the full text of Section 262 of the DGCL, please see Appendix B attached hereto.

Failure to strictly comply with all procedures required by Section 262 of the DGCL will result in a loss of your right to appraisal. We encourage you to read these provisions carefully and in their entirety and, in view of their complexity, to promptly consult with your legal and financial advisors if you wish to pursue your appraisal rights in connection with the Merger.

 

Q: What is householding and how does it affect me?

 

A: Unless we have received contrary instructions, we may send a single copy of our Annual Report on Form 10-K, proxy statement and notice of Annual Meeting to any household at which two or more stockholders reside if we believe the stockholders are members of the same family. Each stockholder in the household will continue to receive a separate proxy card. This process, known as “householding,” reduces the volume of duplicate information received at your household and helps to reduce our expenses.

If you would like to receive your own set of our annual disclosure documents this year or in future years, follow the instructions described below. Similarly, if you share an address with another stockholder and together both of you would like to receive only a single set of our annual disclosure documents, follow these instructions.

If your shares are registered in your own name, please contact us at our executive offices at One Lumos Plaza, P.O. Box 1068, Waynesboro, Virginia 22980, Attention: Vice President – Investor Relations, to inform us of your request. If a bank, broker or other nominee holds your shares, please contact your bank, broker or other nominee directly.

 

Q: Who can help answer my questions?

 

A: If you have any questions concerning the Merger, the 2017 Annual Meeting of Stockholders or this proxy statement, would like additional copies of this proxy statement or need help submitting your proxy or voting your shares of Lumos Networks Common Stock, please contact Georgeson LLC, our proxy solicitor, toll-free at (800) 905-7281 or by email at LumosNetworks@georgeson.com.

If your broker, bank or other nominee holds your shares of Lumos Networks Common Stock, you may call your broker, bank or other nominee for additional information.

 

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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

Any statements contained in this proxy statement, and the documents to which we refer you in this proxy statement, as well as information included in oral statements or other written statements made or to be made by us or on our behalf, that are not statements of historical fact, including statements about our beliefs and expectations, are “forward-looking” statements within the meaning of the within the meaning of Section 27A of the Securities Act of 1933, as amended, which we refer to as the “Securities Act,” and Section 21E of the Exchange Act, including statements regarding the Merger and the ability to consummate the Merger, and should be evaluated as such. The words “anticipates,” “believes,” “expects,” “intends,” “plans,” “estimates,” “targets,” “projects,” “should,” “may,” “will” and similar words and expressions are intended to identify forward-looking statements. Such forward-looking statements reflect, among other things, our current expectations, plans and strategies, and anticipated financial results, all of which are subject to known and unknown risks, uncertainties and factors that may cause our actual results to differ materially from those expressed or implied by these forward-looking statements. Many of these risks are beyond our ability to control or predict. Because of these risks, uncertainties and assumptions, you should not place undue reliance on these forward-looking statements. Furthermore, forward-looking statements speak only as of the date they are made. We do not undertake any obligation to update or review any forward-looking information, whether as a result of new information, future events or otherwise. Important factors with respect to any such forward-looking statements, including certain risks and uncertainties that could cause actual results to differ from those contained in the forward-looking statements, include, but are not limited to:

 

    the successful closing of the Merger, including obtaining the requisite regulatory, governmental and stockholder approvals and satisfying other closing conditions;

 

    the risk that required governmental and regulatory approvals may delay the transaction or result in the imposition of conditions that could cause the parties to abandon the transaction or materially impact the financial benefits of the Merger;

 

    the timing to consummate the proposed Merger;

 

    any disruption from the proposed Merger making it more difficult to maintain relationships with customers, employees or suppliers;

 

    the diversion of management time on transaction-related issues;

 

    the Merger may involve unexpected costs, liabilities or delays;

 

    the outcome of any legal proceedings related to the Merger;

 

    the failure by EQT to obtain the necessary financing set forth in commitment letters received in connection with the Merger;

 

    the occurrence of any event, change or other circumstances that could give rise to the termination of the Merger Agreement;

 

    the impact of our previous acquisitions of Clarity Communications Group, which we refer to as “Clarity,” and DC 74 Data Centers, which we refer to as “DC74,” on our operations;

 

    rapid development and intense competition with resulting pricing pressure in the telecommunications and high speed data transport industry;

 

    our ability to grow our data business on an organic or inorganic basis in order to offset expected revenue declines in legacy voice and access products;

 

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    our ability to obtain new carrier contracts or expand services under existing carrier contracts at competitive pricing levels to offset churn and achieve revenue growth from our carrier businesses;

 

    our ability to separate our legacy business on a timely basis;

 

    our ability to effectively allocate capital and timely implement network expansion plans necessary to accommodate organic growth initiatives;

 

    our ability to complete customer installations in a timely manner;

 

    adverse economic conditions;

 

    operating and financial restrictions imposed by our senior credit facility and our unsecured debt obligations;

 

    our cash and capital requirements;

 

    our ability to maintain and enhance our network;

 

    the potential to experience a high rate of customer turnover;

 

    federal and state regulatory fees, requirements and developments;

 

    our reliance on certain suppliers and vendors; and

 

    other unforeseen difficulties that may occur, including the risk that the Merger will not be consummated within the expected time period or at all.

Consequently, all of the forward-looking statements we make in this proxy statement are qualified by the information contained or incorporated by reference herein, including, but not limited to, (a) the information contained under this heading and (b) the information contained under the headings “Risk Factors” and information in our consolidated financial statements and notes thereto included in our filings with the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2016 and Current Reports on Form 8-K filed with the SEC (see “Where You Can Find More Information” beginning on page 169). These risks and uncertainties are not intended to represent a complete list of all risks and uncertainties inherent in our business and no assurance can be given that these are all of the factors that could cause actual results to vary materially from the forward-looking statements. Lumos Networks stockholders are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date thereof.

 

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THE ANNUAL MEETING

Date, Time and Place

The 2017 Annual Meeting of Stockholders will be held at 9:00 a.m. (local time) on May 24, 2017, at the offices of Troutman Sanders LLP, 1001 Haxall Point, 15th Floor, Richmond, Virginia, unless it is postponed or adjourned.

Purpose of the Annual Meeting

At the 2017 Annual Meeting of Stockholders, we will ask our stockholders of record as of the record date to consider and vote on the following proposals:

 

  (1) a proposal to adopt the Merger Agreement, approving the transactions contemplated thereby, including the Merger;

 

  (2) a proposal to approve a non-binding advisory resolution approving the Merger-related compensation of our named executive officers;

 

  (3) a proposal to approve the adjournment of the 2017 Annual Meeting of Stockholders from time to time if necessary or appropriate;

 

  (4) a proposal to elect nine directors to serve until the 2018 Annual Meeting of Stockholders;

 

  (5) a proposal to approve a non-binding advisory resolution approving the compensation of our named executive officers; and

 

  (6) a proposal to ratify the appointment of KPMG LLP as our independent registered public accounting firm for the year ending December 31, 2017.

Stockholders may also be asked to transact such other business as may properly be brought before the 2017 Annual Meeting of Stockholders or any postponements or adjournments of the 2017 Annual Meeting of Stockholders.

Stockholders must approve the proposal to adopt the Merger Agreement in order for the Merger to occur. If our stockholders fail to approve the proposal to adopt the Merger Agreement, the Merger will not occur. The vote on the Merger-related named executive officer compensation proposal is a vote separate and apart from the vote to approve the merger proposal. Accordingly, a stockholder may vote to approve the merger proposal and vote not to approve the Merger-related named executive officer compensation proposal, and vice versa. Because the vote on the Merger-related named executive officer compensation proposal is only advisory in nature, it will not be binding on Lumos Networks, Parent or the surviving corporation. Accordingly, because Lumos Networks is contractually obligated to pay such Merger-related compensation, the compensation will or may become payable, subject only to the conditions applicable thereto, if the merger proposal is approved, regardless of the outcome of the advisory vote.

Recommendations of the Board

All members of our Board voting on the Merger, after consulting with Lumos Networks’ outside legal counsel, and Financial Advisors, and after review and consideration of various factors described in the section entitled “The Merger—Recommendation of Our Board of Directors and Reasons for the Merger—Reasons for the Merger” (beginning on page 47, (i) approved the execution, delivery and performance by Lumos Networks of the Merger Agreement and the consummation of the transactions contemplated by the Merger Agreement, including the Merger, (ii) determined that the Merger Agreement and the transactions contemplated by the Merger Agreement, including the Merger, are fair to, and in the best interests of, Lumos Networks and its stockholders, (iii) directed that the Merger Agreement be submitted to the stockholders of Lumos Networks for adoption and (iv) declared that the Merger Agreement and the transactions contemplated thereby are advisable.

 

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The Board recommends that you vote:

 

  (1) FOR” the proposal to adopt the Merger Agreement, approving the transactions contemplated thereby, including the Merger;

 

  (2) FOR” the proposal to approve a non-binding advisory resolution approving the Merger-related compensation of our named executive officers;

 

  (3) FOR” the proposal to approve the adjournment of the 2017 Annual Meeting of Stockholders from time to time if necessary or appropriate;

 

  (4) FOR” the proposal to elect nine directors to serve until the 2018 Annual Meeting of Stockholders;

 

  (5) FOR” the proposal to approve a non-binding advisory resolution approving the compensation of our named executive officers; and

 

  (6) FOR” the proposal to ratify the appointment of KPMG LLP as our independent registered public accounting firm for the year ending December 31, 2017.

Record Date; Shares Entitled to Vote; Quorum

Only holders of record of Lumos Networks Common Stock as of the close of business on the record date will be entitled to vote at the 2017 Annual Meeting of Stockholders. Holders of shares authorized to vote are entitled to cast one vote per share on all matters voted upon at the 2017 Annual Meeting of Stockholders. As of the close of business on the record date, there were 23,944,060 shares of Lumos Networks Common Stock outstanding.

If your shares are held in the name of a bank, broker or other holder of record, you will receive instructions from the holder of record. You must follow the instructions of the holder of record in order for your shares to be voted. Telephone and internet voting also will be offered to stockholders owning shares through certain banks and brokers. Please follow the instructions provided on your proxy card or voting instructions. If your shares are not registered in your own name and you plan to vote your shares in person at the 2017 Annual Meeting of Stockholders, you should contact your broker or agent to obtain a legal proxy or broker’s proxy card and bring it to the 2017 Annual Meeting of Stockholders in order to vote.

With respect to shares held in the Lumos Networks Savings and Security Plan, your proxy card, when signed and returned, or your telephone or Internet vote, will also constitute voting instructions to John Hancock, who we refer to as the “Trustee,” for these shares. Shares for which voting instructions are not received, subject to the Trustee’s fiduciary obligations, will be voted by the Trustee in the same proportion as the shares for which voting instructions are received from other participants in the plan. To allow sufficient time for voting by the Trustee, your voting instructions must be received by 12:00 a.m. (Eastern Time) on May 19, 2017.

Only stockholders who own Lumos Networks Common Stock as of the close of business on April 19, 2017 will be entitled to attend the 2017 Annual Meeting of Stockholders. Proof of stock ownership as of this date and some form of government-issued photo identification (such as a valid driver’s license or passport) will be required for admission to the 2017 Annual Meeting of Stockholders. If you hold your shares of Lumos Networks Common Stock in a brokerage account or through another nominee, you are the beneficial owner of those shares but not the record holder and you will need to obtain a “legal proxy” from the record holder to attend the 2017 Annual Meeting of Stockholders.

According to our bylaws, the holders of a majority of the shares entitled to be voted must be present or represented by proxy to constitute a quorum. Each outstanding share is entitled to one vote on all matters. For purposes of the quorum and the discussion below regarding the vote necessary to take stockholder action, the stockholders who are present at the 2017 Annual Meeting of Stockholders in person or by proxy and who abstain from voting are considered stockholders who are present and entitled to vote and they count toward a quorum. Abstentions and shares of record held by a broker or its nominee that are voted on any matter are included in determining whether a quorum is present. Broker shares that are not voted on any matter, or “broker non-votes,” will not be included in determining whether a quorum is present.

 

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Vote Required; Abstentions and Broker Non-Votes

Under rules of self-regulatory organizations governing brokers, your bank, broker or other nominee may vote your shares in its discretion on “routine” matters. These rules also provide, however, that when a proposal is not a “routine” matter and your bank, broker or other nominee has not received your voting instructions with respect to such proposal, your bank, broker or other nominee cannot vote your shares on that proposal. When a bank, broker or other nominee does not cast a vote for a routine or a non-routine matter, it is called a “broker non-vote.” Your bank, broker or other nominee may not vote your shares with respect to (i) the Merger Agreement; (ii) the non-binding advisory resolution to approve the Merger-related compensation of named executive officers; (iii) the adjournment of the 2017 Annual Meeting of Stockholders from time to time if necessary or appropriate; (iv) the election of the nominees for director or (v) the non-binding advisory resolution to approve the compensation for our named executive officers, in the absence of your specific instructions as to how to vote with respect to such proposals, because under the rules these proposals are not considered “routine” matters. The ratification of the appointment of KPMG LLP is considered a routine matter.

The approval of the Merger Agreement requires the affirmative vote of a majority of the outstanding shares of Lumos Networks Common Stock entitled to vote at the 2017 Annual Meeting of Stockholders. Abstentions and broker non-votes will have the same effect as a vote against this proposal. The approval of the non-binding advisory resolution to approve the Merger-related compensation of named executive officers and the approval of the adjournment of the 2017 Annual Meeting of Stockholders from time to time if necessary or appropriate each require the affirmative vote of a majority of the shares present or represented and entitled to vote at the 2017 Annual Meeting of Stockholders. Abstentions and broker non-votes will not affect the outcome of the votes on these proposals.

Under our bylaws, at the 2017 Annual Meeting of Stockholders a nominee for director will be elected to the Board if the votes cast for such nominee’s election exceed the votes cast against such nominee’s election. Only votes actually cast will be counted for the purpose of determining whether a particular nominee received the required vote. A stockholder may withhold votes from any or all nominees by notation on the proxy card. Except to the extent that a stockholder withholds votes from any or all nominees, the persons identified as proxies and attorneys-in-fact, in their sole discretion, will vote such proxy for the election of the nominees listed below as directors. Abstentions and broker non-votes will have no effect on the outcome of the election of directors.

If a nominee does not receive the required vote, he or she shall offer to resign. The Board will consider whether to accept the resignation in accordance with the procedures set forth in our Corporate Governance Guidelines.

Pursuant to the terms of the Investors Rights Agreement, dated as of August 6, 2015, which we refer to as the “Investors Rights Agreement,” which was entered into in connection with the associated Note Agreement and Warrant Agreement, among us and Pamplona, Pamplona currently has the right to designate two directors. In accordance with the Investors Rights Agreement (as such terms are defined in the Investors Rights Agreement), if Pamplona’s ownership of the 8% Notes falls below 65% of the aggregate principal amount of the 8% Notes, Pamplona is entitled to designate one director to the Board; and if Pamplona’s ownership of the 8% Notes falls below 35% of the aggregate principal amount of the 8% Notes, Pamplona is no longer entitled to designate a director to the Board. The Investors Rights Agreement will remain in effect so long as the Warrants and the Lumos Networks Common Stock underlying the Warrants remain outstanding. These rights are not transferrable other than to commonly controlled affiliates.

With respect to the other matters to be voted upon at the 2017 Annual Meeting of Stockholders, approving the non-binding advisory resolution approving the compensation of our named executive officers and ratifying the appointment of KPMG LLP, each requires the affirmative vote of a majority of the shares present or represented and entitled to vote at the 2017 Annual Meeting of Stockholders to be approved. Abstentions will have the same effect as a vote against these proposals and broker non-votes will not affect the outcome of the vote on these proposals.

With respect to any other matters that may come before the 2017 Annual Meeting of Stockholders, including consideration of a motion to adjourn the 2017 Annual Meeting of Stockholders to another time or place, if proxies are returned, such proxies will be voted in a manner deemed by the proxy representatives named therein to be in our best interests and the best interests of our stockholders.

 

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Stock Ownership and Interests of Certain Persons

As of the record date, our directors and executive officers beneficially owned and were entitled to vote, in the aggregate, 1,076,494 shares of Lumos Networks Common Stock outstanding on the record date (excluding any shares of Lumos Networks Common Stock that would be delivered upon exercise or conversion of options), representing approximately 4.5% of the outstanding shares of Lumos Networks Common Stock. Our directors and executive officers have informed us that they currently intend to vote all of their 1,076,494 shares of Lumos Networks Common Stock:

 

  (1) FOR” the proposal to adopt the Merger Agreement, approving the transactions contemplated thereby, including the Merger;

 

  (2) FOR” the proposal to approve a non-binding advisory resolution approving the Merger-related compensation of our named executive officers;

 

  (3) FOR” the proposal to approve the adjournment of the 2017 Annual Meeting of Stockholders from time to time if necessary or appropriate;

 

  (4) FOR” the proposal to elect nine directors to serve until the 2018 Annual Meeting of Stockholders;

 

  (5) FOR” the proposal to approve a non-binding advisory resolution approving the compensation of our named executive officers; and

 

  (6) FOR” the proposal to ratify the appointment of KPMG LLP as our independent registered public accounting firm for the year ending December 31, 2017.

Voting of Proxies

Proxies will be voted as specified by the stockholder or stockholders granting the proxy. Stockholders can vote in person at the 2017 Annual Meeting of Stockholders or by proxy. There are three ways to vote by proxy:

 

    By Telephone — Stockholders located in the United States can vote by telephone by following the instructions provided in the proxy card or voting instruction;

 

    By Internet — Stockholders located in the United States can vote by Internet by following the instructions provided in the proxy card or voting instruction; or

 

    By Mail — If you received your proxy materials by mail, you can vote by mail by signing, dating and mailing the enclosed proxy card.

Internet and telephone facilities will be available 24 hours a day and close at 12:00 a.m. (Eastern time) on May 24, 2017.

Unless contrary instructions are specified, if the proxy card is executed and returned (and not revoked) prior to the 2017 Annual Meeting of Stockholders, the shares of Lumos Networks Common Stock represented thereby will be voted “FOR” each of the proposals set forth in this proxy statement. The submission of a proxy will not affect a stockholder’s right to attend and to vote in person at the 2017 Annual Meeting of Stockholders.

Revocability of Proxies

A stockholder who submits a proxy may change or revoke it at any time before it is voted by filing with our Secretary either a written revocation or an executed proxy bearing a later date, by attending and voting in person at the 2017 Annual Meeting of Stockholders or granting a subsequent proxy through the Internet or by telephone.

 

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THE MERGER

This discussion of the Merger is qualified in its entirety by reference to the Merger Agreement, which is attached to this proxy statement as Appendix A and incorporated into this proxy statement by reference. You should read the entire Merger Agreement carefully as it is the legal document that governs the Merger.

Parties Involved in the Merger

Lumos Networks Corp.

One Lumos Plaza

Waynesboro, VA 22980

(540) 946-2000

Lumos Networks Corp., a Delaware corporation, is a fiber-based bandwidth infrastructure and service provider in the Mid-Atlantic region. We provide services to carrier and enterprise customers, including healthcare providers, local government agencies, financial institutions, educational institutions, and other enterprises over our approximately 10,112 route-mile fiber network. Our principal products and services include MPLS based Ethernet, Metro E, FTTC wireless backhaul and data transport services, wavelength transport services and IP services.

We became an independent, publicly traded company on October 31, 2011, as a result of our spin-off from NTELOS Holdings Corp., which we refer to as “NTELOS.” Lumos Networks Common Stock has been publicly traded on the NASDAQ under the ticker symbol “LMOS” since November 1, 2011. We conduct all of our business through our wholly-owned subsidiary Lumos Networks Operating Company and its subsidiaries. Our principal executive offices are located at One Lumos Plaza, Waynesboro, Virginia 22980. The telephone number at that address is (540) 946-2000. For more information about Lumos Networks, please visit our website at www.lumosnetworks.com. Our website address is provided as an inactive textual reference only. The information contained on our website is not incorporated to, and does not form a part of, this proxy statement or any other report or document on file with or furnished to the SEC. See also “Where You Can Find More Information” beginning on page 169.

MTN Infrastructure TopCo, Inc.

c/o EQT Partners Inc.

1114 Avenue of the Americas, 45th Floor

New York, NY 10036

(917) 281-0850

MTN Infrastructure TopCo, Inc., which we refer to as “Parent,” is a Delaware corporation that was formed by affiliates of EQT solely for the purpose of entering into the Merger Agreement and completing the transactions contemplated by the Merger Agreement and the related financing transactions. Parent has not engaged in any business except for activities incidental to its formation and as contemplated by the Merger Agreement. Parent is currently controlled by investment funds affiliated with EQT. Upon completion of the Merger, Lumos Networks will be a wholly owned subsidiary of Parent.

EQT is a leading global private equity group with approximately EUR 35 billion in raised capital across 22 funds. EQT funds have portfolio companies in Europe, Asia and the US with total sales of more than EUR 15 billion and approximately 100,000 employees. EQT works with portfolio companies to achieve sustainable growth, operational excellence and market leadership. For more information, please visit www.eqt.se. The website address of EQT is provided as an inactive textual reference only. The information contained on EQT’s website is not incorporated to, and does not form a part of, this proxy statement or any other report or document on file with or furnished to the SEC.

MTN Infrastructure BidCo, Inc.

c/o EQT Partners Inc.

1114 Avenue of the Americas, 45th Floor

New York, NY 10036

(917) 281-0850

 

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MTN Infrastructure BidCo, Inc., which we refer to as “Merger Sub,” is a Delaware corporation that was formed solely for the purpose of entering into the Merger Agreement and completing the transactions contemplated by the Merger Agreement and the related financing transactions. Merger Sub is a wholly owned subsidiary of Parent and has not engaged in any business except for activities incidental to its formation and as contemplated by the Merger Agreement and the related financing transactions. Upon the completion of the Merger, Merger Sub will cease to exist and Lumos Networks will continue as the surviving corporation.

Certain Effects of the Merger on Lumos Networks

Upon the terms and subject to the conditions of the Merger Agreement, Merger Sub will merge with and into Lumos Networks, with Lumos Networks continuing as the surviving corporation. As a result of the Merger, Lumos Networks will become a wholly owned subsidiary of Parent. Lumos Networks will cooperate with Parent to de-list Lumos Networks Common Stock from the NASDAQ and de-register under the Exchange Act as soon as reasonably practicable following the effective time of the Merger, and at such time, we will no longer be a publicly traded company and will no longer file periodic reports with the SEC. In addition, the directors of Merger Sub will continue as the directors of the surviving corporation. If the Merger is consummated, you will not own any shares of the capital stock of the surviving corporation, and instead will only be entitled to receive the Merger Consideration described in “—Merger Consideration” beginning on page 34.

The effective time of the Merger will occur upon the filing of certificate of merger with the Secretary of State of the State of Delaware (or at such later time as we and Parent may agree and specify in the certificate of merger).

Effect on Lumos Networks if the Merger is Not Completed

If the Merger Agreement is not adopted by Lumos Networks stockholders or if the Merger is not completed for any other reason, Lumos Networks stockholders will not receive any payment for their shares of Lumos Networks Common Stock. Instead, Lumos Networks will remain a public company, Lumos Networks Common Stock will continue to be listed and traded on the NASDAQ and registered under the Exchange Act and we will continue to file periodic reports with the SEC.

Furthermore, if the Merger is not consummated, and depending on the circumstances that caused the Merger not to be consummated, it is possible that the price of Lumos Networks Common Stock will decline significantly. If that were to occur, it is uncertain when, if ever, the price of Lumos Networks Common Stock would return to the price at which it trades as of the date of this proxy statement.

Accordingly, if the Merger is not consummated, there can be no assurance as to the effect of these risks and opportunities on the future value of your shares of Lumos Networks Common Stock. If the Merger is not consummated, the Board will continue to evaluate and review Lumos Networks’ business operations, properties, dividend policy and capitalization, among other things, make such changes as are deemed appropriate and continue to seek to enhance stockholder value. If the Merger Agreement is not adopted by Lumos Networks’ stockholders or if the Merger is not consummated for any other reason, there can be no assurance that any other transaction acceptable to Lumos Networks will be offered or that Lumos Networks’ business, prospects or results of operation will not be adversely impacted.

In addition, under specified circumstances, Lumos Networks may be required to pay Parent a termination fee, or may be entitled to receive a reverse termination fee from Parent, upon the termination of the Merger Agreement, as described under “The Merger Agreement—Termination Fees” beginning on page 114.

Merger Consideration

At the effective time of the Merger, each outstanding share of Lumos Networks Common Stock issued and outstanding immediately prior to the effective time of the Merger (other than (i) shares held by Lumos Networks as treasury stock, held by any direct or indirect wholly owned subsidiary of Lumos Networks or of Parent (other than Merger Sub) or held directly by Parent or Merger Sub; and (ii) shares of Lumos Networks Common Stock held by stockholders who have not voted in favor of the Merger and who have properly demanded appraisal rights for such shares and have properly exercised and not withdrawn appraisal rights under Delaware law with respect to such shares) will be converted automatically into the right to receive the Merger Consideration of $18.00 in cash, without interest and less any applicable

 

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withholding taxes, and without any action by the holders of such shares, will cease to be outstanding, be cancelled and cease to exist, and each certificate formerly representing such shares of Lumos Networks Common Stock will thereafter represent only the right to receive the Merger Consideration.

Lumos Investment Holdings, Ltd., an affiliate of Pamplona, the holder of the Warrant, has agreed, subject to the effectiveness of the Merger, to exercise the Warrant. Upon exercise, Pamplona will receive 1,225,278 shares of Lumos Networks Common Stock that will be exchanged for the Merger Consideration.

After the Merger is completed, under the terms of the Merger Agreement, you will have the right to receive the Merger Consideration, but you will no longer have any rights as a Lumos Networks stockholder as a result of the Merger (except that stockholders who have not voted in favor of the Merger and who have properly demanded their appraisal rights and have properly exercised and not withdrawn appraisal rights under Delaware law, will have the right to receive a payment for the “fair value” of their shares of Lumos Networks Common Stock as determined by the Delaware Court of Chancery pursuant to an appraisal proceeding as contemplated by Delaware law, as described below under “—Appraisal Rights” beginning on page 76).

Background of the Merger

Since we became a public company following our spin-off from NTELOS in November 2011, our Board and management have periodically reviewed and assessed our operations and financial performance, business strategy, the various trends and conditions affecting our industry, our businesses generally and a variety of strategic alternatives reasonably available to the Company, including business combinations, acquisitions and other financial and strategic alternatives. In addition, from time to time, members of our senior management team and Board members have met with senior management from other companies within our industry to discuss industry developments and potential strategic alternatives.

In May 2014, we engaged Wells Fargo Securities as our financial advisor to assist us in a strategic alternatives review. With Wells Fargo Securities’ assistance we engaged in a broad sellside process in late 2014 in which 31 strategic parties and 49 financial sponsors were contacted. During this process, first round bids were received and management presentations and other due diligence occurred. We then received two second round bids. One of these bids was a cash offer of $18.00 per share. This bid was withdrawn following subsequent due diligence. The other bid involved a stock merger with a privately held company with an implied per share value for Company stockholders of substantially less than $18.00 per share. One concern that was expressed within the universe of potential buyers during this process was the Company’s mix of assets among legacy local exchange carrier and competitive local exchange carrier assets, on the one hand, and fiber assets, on the other hand, which limited both the number of parties interested in participating in the process and the level of the preliminary offer prices that were made. However, in August 2015 we received a strategic investment from one of the financial sponsors contacted in the process, Pamplona Capital Management, as the Company pursued capital raising alternatives.

Following August 2015, our Board continued to regularly review and evaluate our strategic plan and objectives. In connection with these reviews, management and the Board discussed a number of concerns with the longer-term risk profile of the Company, including the competitive environment for our FTTC and enterprise businesses, resulting in increasing pricing pressure; continued erosion of the legacy revenue base, making consolidated top-line growth challenging; less visibility on timing and sizing of large FTTC RFPs than in past years; scale issues in a rapidly consolidating fiber/bandwidth sector; and the fact that Lumos Networks’ market capitalization remained below $500 million, with accompanying issues such as trading liquidity and research attention. The Board also remained aware of the concern within the 2014 potential buyer universe with the Company’s asset mix.

As part of this review of strategic alternatives, on March 4, 2016, at a regular quarterly meeting in New York City, the Board received a presentation from representatives of UBS about a possible divestiture of our regulated, lower growth segments (Residential and Small Business and RLEC Access, which we refer to as our “LEC business”) and authorized management to engage UBS as our financial advisor in connection with such a transaction. Thereafter, during our 2015 earnings call in March 2016, we announced we were beginning the process to plan for the separation of the LEC business to transform into a pure-play fiber company. Following the announcement of this separation strategy, we received several inbound inquiries from both strategic and financial buyers regarding a potential sale or merger of the entire Company.

 

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In mid-March 2016, a representative of a potential strategic acquirer, which we refer to as “Party A,” contacted Mr. Biltz, our Chief Executive Officer, to discuss a possible acquisition of the Company by Party A.

In mid-April 2016, an industry contact of Mr. Biltz informed Mr. Biltz that EQT was interested in speaking with him about a potential transaction with the Company. Mr. Biltz had a call with representatives of EQT on April 21, 2016.

Also in mid-April 2016, Mr. Guth, our Chairman of the Board, was contacted by a representative of a potential strategic merger partner, which we refer to as “Party B,” and discussed Party B’s interest in a potential transaction with Lumos Networks.

In late April 2016, Mr. Biltz spoke with Mr. Guth regarding his earlier discussion with EQT. Mr. Guth then reached out to an EQT representative to schedule a call. On May 2, 2016, Mr. Guth and the EQT representative discussed EQT’s interest in pursuing a potential acquisition of Lumos Networks.

On May 4, 2016, our Board met at a regularly scheduled meeting in New York City, together with representatives of management, UBS and our outside counsel, Troutman Sanders. Mr. Guth informed the Board of the contacts with Party A, Party B and EQT and, following a discussion of our strategic alternatives and the background of the potential acquirers, the Board authorized Mr. Guth to contact EQT and Party B (due to Mr. Guth’s prior conversations with these parties), and Mr. Biltz to contact Party A (due to Mr. Biltz’s prior conversation with this party), to continue the discussions regarding a potential transaction. At this same meeting, representatives of UBS presented the Board with updated information about a possible LEC divestiture transaction. The Board appointed a Transaction Review Committee to review next steps with regard to a possible LEC divestiture transaction.

Shortly following the May 4, 2016 Board meeting, Mr. Guth and Mr. Biltz reached out to EQT and Party B and Party A, respectively, about a potential transaction with Lumos Networks. Following those contacts, Party B stated that its board of directors would consider a possibility of a combination with Lumos Networks, but Party A stated that it was currently pursuing other opportunities.

On May 7, 2016, EQT initiated its due diligence process with Lumos Networks and sent over a preliminary due diligence request list. Management provided an initial response to this request during the week of May 9, 2016, but the information provided was limited because the companies had not entered into a non-disclosure agreement.

On May 17, 2016, Mr. Guth and another member of our Board, Mr. Pruellage, had a lunch meeting with representatives of EQT in New York City discussing a potential acquisition, and management had a follow-up call with EQT representatives later that week. Following these meetings, an EQT representative contacted Mr. Guth regarding next steps and indicated that EQT would be in a position to submit an acquisition proposal later in the month.

In late May 2016, the CEO of Party B contacted Mr. Guth and submitted an oral proposal for an all-stock strategic merger transaction in which Lumos Networks stockholders would receive an unspecified premium.

On May 29, 2016, EQT delivered a letter of intent for the acquisition of Lumos Networks for $17.50 per share in cash. Our Board met that same day by conference call and reviewed the terms of the EQT letter of intent and the expectations regarding the proposal from Party B. The Board discussed the adequacy of the price per share in the EQT letter and discussed tactics for responding. The Board determined to inform EQT that it would need to increase the proposed acquisition price for the Board to seriously consider the offer.

On May 30, 2016, Mr. Guth received a term sheet from Party B for an all stock strategic merger transaction, with a per share value of approximately $14.50 to $16.00 per share.

 

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On May 31, 2016, representatives of UBS made a presentation to the Transaction Review Committee regarding a potential divestiture of the LEC business to a strategic party, which we refer to as “Party C.”

On June 3, 2016, Mr. Guth and Mr. Pruellage spoke with representatives of EQT and expressed the Board’s disappointment with the $17.50 per share price. The following week, a representative of EQT contacted Mr. Guth and indicated that EQT would be submitting a revised letter of intent. In describing the increased offer that EQT was preparing, the EQT representative informed Mr. Guth that the new offer would represent a “stretched” price. On June 8, 2016, EQT delivered a revised letter of intent, with an increased price of $18.00 per share and requesting exclusivity to allow EQT to commit to the time and expense of conducting confirmatory due diligence.

Also in mid-June, a representative of a potential strategic party, which we refer to as “Party D,” contacted Mr. Biltz about a possible acquisition of Lumos Networks, and proposing a valuation of $15.00 to $16.00 per share. Around the same time, a representative of a potential financial sponsor, which we refer to as “Party E,” contacted Mr. Biltz about a combination of one of its portfolio companies and Lumos Networks.

On June 14, 2016, our Board met by conference call, together with representatives of management and Troutman Sanders, to consider the strategic alternatives then under consideration. The Board noted that the Company’s stock was currently trading in the $12.00—$13.00 range and expressed its view that the $18.00 offer from EQT could be in the best interests of stockholders but also that it would be important for EQT to confirm this offer following due diligence and for the Board to engage the assistance of experts in evaluating this offer and considering other steps to take. In light of these considerations as well as the business combination activity in the industry in general, the Board determined that the Company should evaluate a possible business combination transaction in addition to evaluating the LEC separation strategy and authorized Mr. Biltz to start the process of selecting a financial advisor to assist with this process. Remembering the 2014 sale process, the Board took into account both EQT’s $18.00 offer price and EQT’s expressed interest in both the LEC business and the fiber business in determining to proceed with the engagement of financial advisors. The Board considered the respective qualifications, expertise, reputation and knowledge of our business and industry of Wells Fargo Securities and UBS, as well as the benefits of engaging Wells Fargo Securities due to its experience with the Company in the 2014 strategic alternatives process and the benefits of engaging UBS due to its experience with the Company in the LEC business strategic alternatives review. In addition to considering the individual qualifications of Wells Fargo Securities and UBS, the Board also considered the benefits of having joint financial advisors. These benefits included obtaining diverse perspectives and additional resources to assist the Board in its review of strategic alternatives and to assist management if a potential transaction were to be pursued.

Following the meeting, and at the direction of our Board, Mr. Guth informed EQT that we would sign a confidentiality agreement to facilitate the due diligence process, but that we would not grant them exclusivity at that time. Mr. Biltz contacted a representative of Party D and notified him that the suggested purchase price of $15.00—$16.00 per share would need to be increased before the Board would seriously consider the proposal. Mr. Guth contacted the representative of Party B and notified him that the suggested valuation of $14.50—$16.00 per share would need to be increased before the Board would seriously consider the proposal.

Also following the meeting, Mr. Biltz reached out to representatives of UBS and Wells Fargo Securities regarding their respective potential engagements as our financial advisors and discussed with each of them the engagement terms and parameters authorized by our Board.

On June 17, 2016, we entered into a confidentiality agreement with EQT. In light of the premium $18.00 represented to current stock trading prices and the short duration of the restriction, we agreed to be restricted from soliciting additional proposals until July 8, 2016, while remaining able to discuss existing proposals and to receive unsolicited proposals.

Also on June 17, 2016, Party D submitted an indication of interest to acquire Lumos Networks for $15.00 per share in an all stock deal.

On June 21, 2016, Mr. Biltz met with representatives of EQT during an industry conference.

On June 22, 2016, Mr. Biltz and a representative of the Board met with a representative of Party E. Around that same time, Mr. Guth informed a representative of Party B that the Board would be moving in a different direction if the valuation was not increased. The Company and Party B had no further discussions about a transaction after that time.

On June 24, 2016, EQT informed Mr. Guth that it could not pursue a transaction at the time because its existing infrastructure fund had entered into another acquisition agreement that would utilize substantially all of its remaining financing capacity, but that EQT remained interested in pursuing a transaction with the Company once it had raised another infrastructure investment fund. Subsequently, we and EQT agreed to terminate the non-solicitation provisions in the confidentiality agreement.

 

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On June 27, 2016, our Board met by conference call, together with representatives of management and Troutman Sanders, to discuss the various outstanding strategic alternatives, including that EQT had indicated an interest in resuming discussions at a later date, and approved the engagement of UBS and Wells Fargo Securities as its financial advisors. At that time the Board reviewed disclosures provided by UBS and Wells Fargo Securities about prior investment banking relationships with certain possible counterparties including, to the extent applicable, any current or recent EQT relationships. The Board considered the disclosures made and determined that each of Wells Fargo Securities and UBS was qualified to serve as its financial advisor. We entered into an engagement letter with Wells Fargo Securities on June 29, 2016 and with UBS on June 30, 2016.

On July 7, 2016, members of management, together with the representatives from UBS, met with Party C and presented information regarding a transaction involving the sale of the LEC business.

On July 12, 2016, we entered into a confidentiality agreement with Party D. Members of our management team and representatives of Party D met in New York City to discuss a possible transaction.

The confidentiality agreement with Party D contained a customary “standstill” provision restricting each of Party D and the Company from making offers to acquire the other without the prior approval of the other’s board of directors. Nearly all of the additional confidentiality agreements entered into by the Company that are referred to in this “Background of the Merger” contained similar standstill provisions. These confidentiality agreements also contained provisions prohibiting the parties from asking the Company to waive the standstill provisions (“don’t ask to waive” provisions). As discussed below in “The Merger Agreement” beginning on page 86, the Merger Agreement specifically allows the Company to waive these “don’t ask to waive” provisions to the extent the Board determines that the failure to take such action would be reasonably likely to be inconsistent with its fiduciary duties under applicable law.

On July 29, 2016, our Board met by conference call, together with representatives of management and Troutman Sanders, to review events that had occurred since the last Board meeting. On August 2, 2016, our Board met, together with representatives of management, Wells Fargo Securities, UBS and Troutman Sanders, in New York City at a regularly scheduled meeting and reviewed the status of various strategic alternatives. Representatives of Wells Fargo Securities and UBS provided updates on the discussions with EQT, Party C, Party D and Party E. The Board considered next steps and instructed Wells Fargo Securities and UBS to contact (a) EQT to discuss possible next steps; (b) Party D to inform Party D that if it were to increase its offer the Board would consider approving the exchange of due diligence information; and (c) Party E to discuss whether it desired to schedule a meeting to discuss a possible transaction. The Board also considered information regarding a possible acquisition by Lumos Networks of Clarity.

During the following week, as directed by the Board, representatives of Wells Fargo Securities and UBS communicated with EQT’s financial advisor, Morgan Stanley & Co. LLC, which we refer to as “Morgan Stanley,” and with Party D and Party E.

On August 4, 2016, members of management met with representatives of another potential financial sponsor, which we refer to as “Party F.”

During the following week, Mr. Biltz attended an industry conference where he had conversations with representatives of EQT, Party A and Party E.

In mid-August, 2016, we provided a draft of a confidentiality agreement to Party E, but Party E never responded to the draft.

On August 26, 2016, the Transaction Review Committee discussed possible next steps regarding a sale of the LEC business to Party C and on August 31, 2016 we received a response from Party C on our LEC divestiture transaction proposal.

On August 29, 2016, Mr. Biltz met with management of another potential strategic acquirer, which we refer to as “Party G.”

On September 8, 2016, the Board met by conference call, together with representatives of management, Wells Fargo Securities, UBS and Troutman Sanders. Management and representatives of Wells Fargo Securities and UBS provided updates on meetings with parties that had occurred since the August 2, 2016 Board meeting. After discussion, the Board authorized management to continue discussions with Party C regarding a sale of the LEC business and requested that UBS provide the Board with more information regarding a transaction with Party C at a future meeting. The Board also directed Wells Fargo Securities and UBS to inform EQT that we were interested in resuming discussions with EQT once EQT was closer to raising its new infrastructure fund.

 

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On September 19, 2016, Party C informed representatives of UBS that its board of directors was having reservations about a transaction for the LEC business, but that they would reconsider it at their October meeting. Following Party C’s October Board meeting, representatives of Party C informed representatives of UBS that Party C had determined not to proceed with a transaction.

On September 20, 2016, the Board met by conference call to discuss the latest updates from management with respect to an acquisition of Clarity. Management noted that while Clarity would be a small acquisition, it would both contribute Adjusted EBITDA immediately following closing and provide the Company with a new North Carolina enterprise market.

On October 4, 2016, Party A submitted a preliminary proposal to acquire Lumos Networks for $14.77 per share payable in a mix of cash and common stock.

The Board met the following day by conference call, together with representatives of management, Wells Fargo Securities, UBS and Troutman Sanders, to discuss the proposal from Party A and to receive updates on the LEC divestiture discussions with Party C as well as on other strategic discussions. The Board asked the representatives of Wells Fargo Securities and UBS to contact EQT about the status of its new fund raise and to contact Party A to express its disappointment with the offer.

Representatives of Wells Fargo Securities and UBS communicated with representatives of Party A on October 7, 2016, as directed by the Board.

Our financial advisors also contacted representatives of Morgan Stanley regarding the status of EQT’s new fund raise. On October 12, 2016, Mr. Guth and representatives of EQT discussed EQT’s interest in renewing discussions with us and performing due diligence in order to confirm an $18.00 price. On October 13, 2017, EQT provided us with a due diligence request list and proposed timetable.

In October 2016, Party D notified the Company that it had determined not to proceed with a transaction.

On October 17, 2016, Party G submitted an indication of interest for a merger with us for $16.24 per share payable in common stock, with the potential for a portion of the consideration to be paid in cash. Thereafter, we entered into a confidentiality agreement with Party G.

On October 27, 2016, the Board held a regular quarterly meeting in New York City, at which representatives of management, Wells Fargo Securities, UBS and Troutman Sanders were present. Among other items, the Board received an update from members of management on discussions management was having about a possible acquisition opportunity, DC74. Management noted that while, like Clarity, DC74 would be a small acquisition, it would both increase Lumos Network’s data center business and the North Carolina addressable market share. The Board reviewed preliminary breakage cost estimates relating to a possible separation of the LEC business. UBS representatives reviewed alternatives for a LEC divestiture transaction now that Party C had determined not to proceed. Representatives of Wells Fargo Securities and UBS reviewed their preliminary financial analysis of the Company. A representative of Troutman Sanders reviewed the Board’s duties under Delaware law. In light of the possible interest in a business combination transaction expressed by parties with whom we had discussions to date, the Board determined to consider other parties who might be contacted, in addition to parties that have previously contacted the Company, with respect to a potential transaction for the entire Company, while continuing to monitor alternatives for a LEC only transaction. The Directors who had been members of the Board during the 2014 sale process referred to the parties which had shown the most interest in the Company during the process. The Board discussed potential other parties who could be contacted. The Board discussed the preliminary operating model that had been presented by management (see “—Certain Financial Projections” beginning on page 58). The Board directed management to prepare an investment case model that could be reviewed by the Board. The Board determined to appoint a Strategic Planning Preparation Committee, which we refer to as the “Strategic Committee,” consisting of Messrs. Guth, Pruellage and Robinson to assist the Board in preparing

 

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for possible strategic discussions with other parties. The Board also authorized the Strategic Committee to consider the parties who might be contacted with respect to a strategic transaction and, in connection therewith to consult with representatives of Wells Fargo Securities and UBS, and thereafter to present recommendations to the full Board.

On November 3, 2016, and as directed by the Board, management and representatives of Wells Fargo Securities and UBS met with representatives of EQT and Morgan Stanley to discuss possible next steps.

The Strategic Committee met by conference call on November 7 together with representatives of management, Wells Fargo Securities, UBS and Troutman Sanders. The Strategic Committee received a review of Director duties from a representative of Troutman Sanders and considered various strategic alternatives as well as possible next steps, including conducting a “market check” and preparing an “investment case” model that could be shared with potential acquirers.

On November 9, 2016, in our third quarter earnings release we announced that UBS was assisting us in exploring strategic alternatives for our LEC business. Following this disclosure, UBS received a number of in-bound calls from various parties in response to the Company’s announcement.

The Strategic Committee met by conference call on November 13, 2016, together with representatives of management, Wells Fargo Securities, UBS and Troutman Sanders. The Strategic Committee reviewed management’s “investment case” model. In addition to updates on conversations with EQT and Party A provided by representatives of Wells Fargo Securities and UBS, representatives of UBS notified the Strategic Committee of an in-bound call they received from another potential financial sponsor, which we refer to as “Party H,” and in-bound calls received in response to the announcement of the Company’s exploration of strategic alternatives for the LEC business. The Strategic Committee authorized management to provide the “investment case” model (see “—Certain Financial Projections” beginning on page 58) to the rest of the Board for comment and then to the third-party bidders.

On November 11, 2016, a representative of EQT contacted Mr. Guth to discuss next steps.

In mid-November, management held diligence meetings with representatives of Party G.

On November 30, 2016, the Board met, together with representatives of management and Troutman Sanders, by conference call in order to review information relating to the Company’s possible acquisition of DC74. During this call, Mr. Biltz provided an update on the discussions with EQT, Party A and Party G. The same day, Party A submitted a revised preliminary proposal to acquire Lumos Networks for a purchase price of $17.00 per share, payable in a mix of cash and stock.

On December 1, 2016, management met with representatives of EQT for diligence meetings.

On December 2 and 4, 2016, the Strategic Committee met by conference call, together with representatives of management, Wells Fargo Securities, UBS and Troutman Sanders, and considered options for performing a “market check.” A representative of Troutman Sanders reviewed director fiduciary duties. The Strategic Committee and the Wells Fargo Securities and UBS representatives discussed possible risks in running a full auction process as was done in 2014, including the risk of rumors and resulting publicity (as occurred in 2014); the fact that the Company has had other preliminary discussions both in 2014 and in 2016 with parties about a potential business combination, none of which included potential purchase prices as high as that under discussion with EQT other than one that was withdrawn in 2014 following due diligence; and the possible delay that could occur in being able to respond to current potentially attractive inbound inquiries with the result that these parties might move on to other alternatives. Representatives of Wells Fargo Securities and UBS also reviewed the process that was run in 2014, the extensive industry consolidation that has occurred since 2014 and the parties who might be interested in and able to execute a transaction with the Company. The Strategic Committee discussed alternatives for extending the engagements of Wells Fargo Securities and UBS in light of the fact that these engagements were then scheduled to expire on December 31, 2016. The Strategic Committee approved a list of possible parties to contact, in addition to the parties with whom we had already engaged in discussions, to provide to the Board. In identifying such parties, the Strategic Committee focused on those parties with anticipated interest in an acquisition of the Company (including parties who had participated in the process in 2014), including a demonstrated track record of paying a competitive price, and a perceived ability to offer acceptable value and to finance such an acquisition.

 

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On December 5, 2016, the Board met by conference call together with representatives of management, Wells Fargo Securities, UBS and Troutman Sanders. The Board received a review of fiduciary duties from Troutman Sanders. The Board and the Wells Fargo Securities and UBS representatives discussed the risks in running a full auction process as was done in 2014, including risk of rumors and the fact that the Company has had other preliminary discussions both in 2014 and 2016 with parties about a potential business combination, only one of which included a potential purchase price as high as was currently under discussion with EQT but was withdrawn following due diligence; and the possible delay that could occur in being able to respond to current attractive in-bound inquiries with the result that these parties might move on to other alternatives. Representatives of Wells Fargo Securities and UBS reviewed the process that was run in 2014, the industry consolidation that has occurred since 2014, and the parties who might be interested in and able to execute a transaction with the Company and not have to undergo the risks of running a full auction process in order to be able to maximize shareholder value. The Board reviewed the proposed list of parties to contact prepared by the Strategic Committee and representatives of Wells Fargo Securities and UBS. The Board approved the list and directed our financial advisors to contact 10 parties in addition to the seven parties with whom the Company had already had discussions in 2016. Following this meeting representatives of Wells Fargo Securities and UBS contacted these parties.

In early December 2016, a representative of EQT had calls with Mr. Guth and Mr. Biltz to discuss next steps.

In early December 2016, a representative of another potential financial sponsor, which we refer to as “Party I,” contacted Mr. Biltz about its possible interest in acquiring Lumos Networks.

In early-mid December 2016, we entered into confidentiality agreements with Party A and four new potential strategic acquirers, which we refer to as “Party J,” “Party K,” “Party L” and “Party M,” respectively, and a new potential financial sponsor, which we refer to as “Party N,” all of whom entered the process as a result of the market check contacts from our financial advisors. Shortly, thereafter, Party J determined not to participate in further discussions. Later in December, Party K, Party M and Party N each notified us that they were no longer interested in participating in discussions.

The Strategic Committee met by conference call on December 12, 2016, together with representatives of management, Wells Fargo Securities, UBS and Troutman Sanders, to review the status of discussions with EQT, Party A and Party G and to hear from the financial advisors about the responses from their outbound inquiries. Following this discussion, the Strategic Committee authorized Wells Fargo Securities and UBS to contact another potential financial sponsor, which we refer to as “Party O,” who was not initially included on the market check list. Party O later informed our financial advisors that it was declining to participate in discussions.

On December 14, 2016, management and our financial advisors met with Party A and its advisors for due diligence meetings. On December 15, 2016, management met with a potential purchaser of the LEC. On that day, we also entered into a confidentiality agreement with Party I.

On December 16, 2016, representatives of management had conference calls with representatives of EQT to discuss diligence topics.

The Strategic Committee met by conference call on December 16, 2016, together with representatives of management, Wells Fargo Securities, UBS and Troutman Sanders, to review the status of discussions with the various parties. The Strategic Committee directed the financial advisors to inform Party A and Party G that they would have to increase their offers if they desired to be competitive. The Strategic Committee also determined to permit Party H to submit a joint bid with another potential financial sponsor. In connection with Party H’s joint bid, the Strategic Committee determined to recommend to the Board that Mr. Askowitz be recused from further Board deliberations of the process due to Mr. Askowitz’s serving as an employee of an investment banking firm that would be providing services to Party H. Following the meeting, we entered into a confidentiality agreement with Party H. The Strategic Committee also discussed amending the engagement letters with our financial advisors to extend the terms of the letters.

Throughout December 2016, the discussions continued with potential acquirers, including EQT. Wells Fargo Securities and UBS again informed Party A that it should use the due diligence process to find additional value for its proposal if it wanted to be competitive. Mr. Biltz also had calls with a representative of Party F.

 

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The Strategic Committee and the Board each met by conference call on December 21, 2016, together with representatives of management, Wells Fargo Securities, UBS and Troutman Sanders, to review the status of the discussions with various parties and to discuss amending the terms of the engagement letters with Wells Fargo Securities and UBS. The Board determined that Mr. Askowitz should be recused from further Board deliberations of the process due to his serving as an employee of an investment banking firm that would be providing services to Party H. Representatives of Wells Fargo Securities and UBS presented an update to the Board on the status of the discussions with the various parties and summaries of the contacted parties. The Board reviewed contextual information from management about the Company’s recent solid operating performance but also the Company’s longer-term risk profile, which it determined had not changed in any material way from earlier in the year. Representatives of Wells Fargo Securities and UBS provided information about current conditions in the institutional term loan and high yield markets for mergers and acquisitions financing. A representative of Troutman Sanders reviewed Director fiduciary duties. The Board reviewed disclosures provided by representatives of Wells Fargo Securities and UBS, respectively, about their respective investment banking relationships with counterparties including, to the extent applicable, any current or recent EQT relationships. The Board considered the disclosures made and determined that each of Wells Fargo Securities and UBS was qualified to continue to serve as its financial advisor. Management reviewed with the Board a five year operating model that had been updated as a result of discussions with the Board and the Strategic Committee in late October and November (see “—Certain Financial Projections” beginning on page 58). The Board approved extending the terms of the Wells Fargo Securities and UBS engagement letters.

On December 22, 2016, EQT delivered a letter of intent confirming its interest in acquiring the Company for $18.00 per share in cash and including a “highly confident” letter from a potential source of debt financing and requesting exclusivity. EQT stated in the letter of intent that EQT had substantially completed its commercial due diligence and requested exclusivity to allow EQT to commit to the time and expense of conducting remaining confirmatory due diligence. On that same date, at the direction of the Board, representatives of Wells Fargo Securities and UBS contacted Party A to give it additional valuation expectations if it desired to be competitive.

On December 27, 2016, Party H submitted a letter of intent to acquire Lumos Networks for $16.00—$17.00 per share, while orally informing representatives of Wells Fargo Securities and UBS that it could not meet the Board’s valuation expectations. No further discussions occurred between the Company and Party H. In late December Party L informed representatives of Wells Fargo Securities and UBS that it was not going to pursue a transaction.

The Board met by conference call on December 28, 2016, together with representatives of management, Wells Fargo Securities, UBS and Troutman Sanders, to review the status of the discussions with the various parties. The Board also reviewed management’s updated five year operating model (see “—Certain Financial Projections” beginning on page 58). Representatives of Wells Fargo Securities and UBS reviewed certain preliminary financial analyses of Party A and the Company. The Board discussed potential conditions to granting EQT exclusivity. The Board received information from management about the federal regulatory approval process that would be required for a transaction with EQT due to EQT’s foreign ownership.

The Strategic Committee met by conference call on January 3, 2017, together with representatives of management, Wells Fargo Securities, UBS and Troutman Sanders, in order to prepare for a meeting of the Board to be held later that day. The Strategic Committee received an update on discussions with Party A and EQT.

Later on January 3, the Board met by conference call, together with representatives of management, Wells Fargo Securities, UBS and Troutman Sanders, to receive further updates on events since December 28, 2016. The Board determined to request follow-up information regarding EQT’s letter of intent. Representatives of Troutman Sanders reviewed possible terms of a merger agreement, including a possible “go shop” and termination scenarios and termination fees.

That same day Party G notified representatives of our financial advisors that it had determined not to participate in further discussions. Party A also told representatives of Wells Fargo Securities and UBS that it could value Lumos Networks at $17.25 per share in a part stock/part cash transaction, but that it did not intend to perform any additional due diligence at that point in light of the fact that this offer may not be competitive and that it may not remain interested in a transaction with the Company at a later date given other transactions it was considering.

 

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On January 4, 2017, we entered into a confidentiality agreement with Party F. During the subsequent week Party F advised us that they were not going to pursue discussions about a transaction.

On January 4, 2017, the Company closed on its acquisition of Clarity.

On January 4, 2017, a representative of EQT contacted Mr. Guth to discuss next steps.

On January 4, 2017, Troutman Sanders distributed a first draft of the Merger Agreement to EQT. In addition, representatives of the financial advisors communicated to representatives of EQT the Board’s requests for additional information before the Board could approve exclusivity, including (1) a Merger Agreement issues list, (2) additional financing information, (3) the approval status for the transaction within the EQT organization, (4) the status of the new fund being raised by EQT, (5) whether it was a condition to EQT’s offer that the Company’s management remain with the Company following closing of a transaction, and (6) information about the federal regulatory approval process in light of EQT’s foreign ownership.

On January 6, 2017, Party A informed Wells Fargo Securities and UBS that it could not meet the Board’s valuation expectations.

During early January, Mr. Biltz met a representative of Party F at an industry conference, which meeting was followed by due diligence requests from Party F. During this period, Party I notified us that it had determined not to participate in further discussions with the Company. Additionally, the Company did not hear further from Party E.

On January 7, 2017, a representative of EQT contacted Mr. Biltz to provide a preview of EQT’s responses to the Board’s request for additional information.

On January 9, 2017, EQT provided responses to the Board’s questions and its counsel Simpson Thacher and Bartlett LLP, which we refer to as “Simpson Thacher,” identified high level issues regarding the Company’s initial Merger Agreement draft, including (1) whether the Merger Agreement would provide for a “go-shop” period, (2) the amount of the termination fee payable by the Company and whether such termination fee would be an exclusive remedy, (3) the amount of the reverse termination fee payable by EQT, (4) the terms of the covenant relating to EQT’s obligation to obtain regulatory approvals and whether a termination fee would be payable by EQT for failure to obtain certain regulatory approvals, (5) EQT’s request for reimbursement of expenses in the event the Company breaches the Merger Agreement or the Company’s stockholders do not vote in favor the Merger, and (6) the Merger Agreement closing conditions. EQT again requested that the Company enter into an exclusivity agreement. Representatives from EQT and Lumos Networks and their advisors continued to hold due diligence meetings. Included in these meetings were a regulatory information call with the Company’s and EQT’s respective legal advisors and a call providing information on the status of EQT’s new fund.

The Committee met by conference call on January 9 and 10, 2017, together with representatives of management, Wells Fargo Securities, UBS and Troutman Sanders, to review EQT’s high level issues list and its responses to the request for additional information and to prepare for a Board meeting.

Representatives of Troutman Sanders and Simpson Thacher held a conference call on January 10, 2017 to review EQT’s high level issues list.

On January 11, 2017, the Board met by conference call, together with representatives of management, Wells Fargo Securities, UBS and Troutman Sanders, and received an update from the Strategic Committee and the financial advisors on the status of the market check process and a report on EQT’s responses to the Board’s questions and the Merger Agreement high level issues raised by EQT. Representatives of Wells Fargo Securities and UBS reported that the other highest offer received was for $17.25 a share from Party A and that Party A’s offer seemed uncertain since Party A had discontinued due diligence. Representatives of Wells Fargo Securities and UBS reviewed their preliminary financial analysis of the Company. The Board discussed that EQT had indicated in its responses to the Board’s questions that it was EQT’s preference for the current management team to continue leading the Company, although such continuation would not be a condition to closing. Additionally, in discussions about EQT’s responses, representatives of EQT had indicated to representatives of Wells Fargo Securities and UBS that they desired to talk with Mr. Biltz about his and other members of management’s post closing employment arrangements. Following discussion of the responses provided by EQT and taking into account EQT’s offer price compared to others the Company had received, the Board authorized management to enter into an exclusivity agreement with EQT. The Board determined that following execution of the exclusivity agreement, the objectives behind forming the Strategic Committee would have been achieved. However, in light of EQT’s desire to talk with Mr. Biltz about post-closing employment arrangements, the Board designated two independent directors, Mr. Robinson and Mr. Sicoli, to work with Troutman Sanders on the terms of the Merger Agreement, subject to the oversight of the full Board, in order to protect against potential conflicts of interest.

 

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On January 12, 2017, Troutman Sanders delivered the Company’s response to EQT’s high level issues list.

On January 13, 2017, we entered into an exclusivity agreement with EQT that extended until February 13, 2017. Thereafter, EQT and its representatives and the Company and its representatives engaged in confirmatory due diligence up until the execution of the Merger Agreement.

On January 18 and 23, 2017, Simpson Thacher and Troutman Sanders exchanged revised drafts of the Merger Agreement to address open matters not covered in the high level issues list.

On January 25, 2017, the Board met in Richmond, Virginia, together with representatives of management, Wells Fargo Securities, UBS and Troutman Sanders, and reviewed the Company’s proposed 2017 operating plan prepared by management. Representatives of Wells Fargo Securities and UBS reviewed their preliminary financial analyses of the Company relating to EQT’s offer of $18.00 per share. The Board also discussed responses to significant open issues in the Merger Agreement with its legal and financial advisors, including the “go shop” and the termination fee amounts. In light of the market check that had occurred as well as the 2014 sale process, and of the importance of certainty of closing, the Board authorized its advisers to relinquish the “go shop” in exchange for obtaining a reasonable Company termination fee and an EQT “reverse” termination fee equal to two times the Company termination fee. Also, in light of the additional comfort it had received on the federal regulatory approval process from legal advisors, the Board was willing to forego a regulatory termination fee. Troutman Sanders representatives reviewed information relating to the interests of executive officers in the Merger and the impact on Pamplona of the transaction, both resulting from publicly disclosed change in control arrangements, including (1) information with respect to officers and directors of the type set forth in “—Interests of the Directors and Executive Officers of Lumos Networks in the Merger” beginning on page 64 and (2) the fact that Pamplona’s Warrant would become exerciseable for 1,222,278 shares of Lumos Networks Common Stock and the 8% Notes will be prepaid at 108% of their principal amount in the Merger.

On January 30, 2017, Simpson Thacher provided a mark-up of the Merger Agreement to Troutman Sanders.

Mr. Biltz met with representatives of EQT and representatives from the parties’ respective financial advisors during an industry conference on January 30, 2017 to discuss EQT’s plans for retaining management of the Company. As a result of EQT’s statement of the importance of our CEO participating in management post-closing, our Board authorized EQT to provide an overview of its management participation program to be shared with Mr. Guth, Mr. Robinson, Troutman Sanders and Mr. Biltz.

On February 2, 2017, we announced the completion of our acquisition of DC74.

On February 2, 2017 the Board met by conference call, together with representatives of management, Wells Fargo Securities, UBS and Troutman Sanders. Representatives of Troutman Sanders reviewed significant open issues in the Merger Agreement, including new issues posed by Simpson Thacher’s mark-up. Following discussion, the Board authorized representatives of Wells Fargo Securities and UBS to communicate to EQT that the Board would agree to the following changes to the Merger Agreement: (1) remove the “go-shop,” (2) set the Company termination fee at 3.5% of equity value, (3) set EQT’s reverse termination fee at 7% of equity value, and (4) remove the regulatory termination fee. In agreeing to these changes, the Board directed the advisors to communicate that it is expecting EQT to participate in constructive negotiations of the remaining Merger Agreement issues. EQT agreed to this proposal on February 3 and on February 4, 2017 Troutman Sanders prepared an updated Merger Agreement issues list that was provided to Simpson Thacher.

Also on February 6, 2017, representatives of Simpson Thacher sent a draft of the equity commitment letter and termination equity commitment letter to Troutman Sanders and discussed Merger Agreement issues. The parties exchanged drafts of the Merger Agreement and ancillary documents, including disclosure schedules, and negotiated remaining issues throughout that week.

On February 6, 2017, EQT provided a presentation on its management participation program and a draft of a term sheet to Mr. Biltz, with copies being provided to Mr. Guth, Mr. Robinson and Troutman Sanders as requested by the Board so it would be informed about EQT’s discussions with management. The parties, along with representatives from UBS, Wells Fargo Securities and Troutman Sanders, discussed these materials by conference call with EQT later that day. On February 7, 2017, EQT provided additional information to Mr. Biltz about the management participation program, with copies being provided to Mr. Guth, Mr. Robinson and Troutman Sanders. On February 10, 2017, Mr. Biltz shared with Mr. Guth, Mr. Robinson and Troutman Sanders his proposed response to EQT’s presentation. On February 11, 2017, representatives of EQT met with Mr. Biltz, with Mr. Guth present, to continue discussions on the management participation program. Following several discussions between February 11 and February 14, on February 14, 2017, EQT and Mr. Biltz agreed in principle to a management incentive plan that contemplated, among other things, (1) an equity pool of 9% of the equity of the surviving corporation in the form of a stock option plan, (2) a $2 million investment by Mr. Biltz, and (3) that the equity acquired by management would be subject to certain transfer restrictions and call rights of Parent, and would also be granted certain registration rights. Mr. Biltz informed Mr. Guth, Mr. Robinson and Troutman Sanders about this agreement in principle on February 14 and provided the term sheet reflecting this agreement in principle to them on February 15. (For a summary of this term sheet, see “Interests of the Directors and Executive Officers of Lumos Networks in the Merger—Management Term Sheet” on page 69.)

 

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The Board met by conference call on February 13, 2017, together with representatives of management, Wells Fargo Securities, UBS and Troutman Sanders. The advisors provided an update on numerous items, including due diligence matters, Merger Agreement negotiations and the status of the equity and debt financing commitment letters. The Board discussed various matters relating to the EQT Merger Agreement, including (1) what the “end date” should be in the Merger Agreement in light of the federal regulatory approval process and (2) the need for firm debt financing commitments. In light of the progress being made in the negotiations, the Board determined to extend the exclusivity period, subject to EQT’s investment committee indicating its support for the transaction. Following the Board call on February 13, representatives of EQT informed representatives of Wells Fargo Securities and UBS that its investment committee had met that day and indicated its support for the transaction.

Over the following days, representatives of the Company and EQT and their respective legal advisors negotiated the remaining points on the Merger Agreement, including (1) EQT’s financing and regulatory covenants, (2) expense reimbursement provisions in the event Company stockholders did not approve the transaction and (3) interim operating covenants.

Following a discussion with management regarding the final 2017 business plan, the Company’s 2016 results and the addition of the then-completed acquisitions of Clarity and DC74, the Board authorized the use of the “updated projections” referred to in “—Certain Financial Projections” beginning on page 58 for use in the financial analysis being performed by Wells Fargo Securities and UBS.

On February 17, 2017, the Board met by conference call with representatives of management, Wells Fargo Securities, UBS and Troutman Sanders present. At this meeting:

 

    representatives of Wells Fargo Securities and UBS provided an update on events that had occurred since the February 13 Board meeting;

 

    representatives of Troutman Sanders reviewed with the Board its fiduciary duties when considering the proposed transaction;

 

    management and representatives of our advisors, as appropriate, reviewed with the Board the status of negotiations with EQT and its representatives and the revised terms and conditions of the proposed Merger Agreement, including as to (1) EQT’s financing and regulatory covenants, (2) expense reimbursement provisions in the event Company stockholders did not approve the transaction and (3) interim operating covenants;

 

    representatives of Troutman Sanders reviewed the EQT term sheet with Mr. Biltz, information relating to interest of officers and directors in the transaction and information relating to the impact on Pamplona of the transaction, both resulting from publicly disclosed change in control arrangements and again reviewed the fact that Pamplona’s Warrant would become exerciseable for 1,222,278 shares of Lumos Networks Common Stock and the 8% Notes will be prepaid at 108% of their principal amount in the Merger; and

 

    representatives of Wells Fargo Securities and UBS reviewed their preliminary financial analyses of the Company and EQT’s offer of $18.00 cash per share.

Following this discussion, the Board determined to reconvene over the weekend once the Merger Agreement negotiations had been completed.

EQT and the Company ultimately agreed to terms on the Merger Agreement and ancillary documents on February 18, 2017.

 

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On the afternoon of February 18, 2017, the Board held a meeting to consider approval of the proposed Merger Agreement. At this meeting:

 

    representatives of Troutman Sanders reviewed with the Board its fiduciary duties when considering the proposed transaction;

 

    management and representatives of our advisors, as appropriate, reviewed with the Board the outcome of negotiations with EQT and its representatives and the revised terms and conditions of the proposed Merger Agreement; and

 

    representatives of each financial advisor reviewed its financial analysis of the proposed transaction and orally delivered their respective opinions to the Board (each of which were subsequently confirmed in writing by delivery of written opinions dated as of February 18, 2017) that, as of February 18, 2017, and based on and subject to various assumptions made, matters considered and limitations described in their respective written opinions, the $18.00 per share Merger Consideration to be received in the Merger by holders of Lumos Networks Common Stock (other than Parent and Lumos Networks and its subsidiaries and, in the case of UBS’s opinion, holders of dissenting shares) was fair, from a financial point of view, to such holders. See “—Opinions of Financial Advisors” beginning on page 50.

Our Board considered various reasons to approve the Merger Agreement (see “—Recommendation of Our Board of Directors and Reasons for the Merger” beginning on page 47), including certain countervailing factors. After discussions with its financial and legal advisors and members of our senior management, and in light of the reasons considered, the Board members voting on the transaction:

 

    approved the execution, delivery and performance by Lumos Networks of the Merger Agreement and the consummation of the transactions contemplated by the Merger Agreement, including the Merger;

 

    determined the terms of the Merger Agreement, the transactions contemplated by the Merger Agreement, including the Merger, are fair to, and in the best interests of, Lumos Networks and its stockholders;

 

    directed that the Merger Agreement be submitted to the stockholders of Lumos Networks for adoption;

 

    declared that the Merger Agreement is advisable; and

 

    recommended the adoption of the Merger Agreement by Lumos Networks’ stockholders.

Following the Board meeting, each of the Company, Parent, Merger Sub and EQT executed and delivered the Merger Agreement and ancillary documents (including equity and debt commitment letters), as applicable, each of them effective as of February 18, 2017.

On February 20, 2017, the Company issued a press release announcing the execution of the Merger Agreement.

Recommendation of Our Board of Directors and Reasons for the Merger

Recommendation of Our Board of Directors

All members of the Board voting on the Merger, after consulting with Lumos Networks’ outside legal counsel and financial advisors and after review and consideration of various factors described in the section below entitled “—Reasons for the Merger” beginning on page 47, (i) approved the execution, delivery and performance by Lumos Networks of the Merger Agreement and the consummation of the transactions contemplated by the Merger Agreement, including the Merger, (ii) determined that the terms of the Merger Agreement and the transactions contemplated by the Merger Agreement, including the Merger, are fair to, and in the best interests of, Lumos Networks and its stockholders, (iii) directed that the Merger Agreement be submitted to the stockholders of Lumos Networks for adoption, and (iv) declared that the Merger Agreement is advisable.

 

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The Board recommends that you vote (i) “FOR” the merger proposal, approving the transactions contemplated by the Merger Agreement, including the Merger; (ii) “FOR” the adjournment proposal; and (iii) “FOR” the Merger-related named executive officer compensation proposal.

When you consider the Board’s recommendation, you should be aware that our directors may have interests in the Merger that may be different from, or in addition to, the interests of stockholders generally. These interests are described below under “—Interests of the Directors and Executive Officers of Lumos Networks in the Merger” beginning on page 64.

Reasons for the Merger

In evaluating the Merger Agreement, the Board consulted with Lumos Networks’ executive management regarding the business and financial condition of Lumos Networks, trends in Lumos Networks’ industry, future prospects and the terms and conditions of the Merger. In addition, the Board consulted with Lumos Networks’ outside legal advisors, Troutman Sanders, regarding the proposed terms and conditions of the Merger and the obligations of the members of the Board in their consideration of the Merger and related transactions, and Lumos Networks’ financial advisors, Wells Fargo Securities and UBS regarding the fairness, from a financial point of view, to Lumos Networks’ stockholders of the Merger Consideration to be paid to the holders of Lumos Networks Common Stock in the Merger. In the course of reaching its determination to approve the Merger Agreement and the Merger, and to recommend that the stockholders vote in favor of the Merger, the Board carefully considered numerous potentially positive factors, including, without limitation, the following factors (which are not listed in any relative order of importance):

 

    the fact that the Merger Consideration represents a premium of 18.2% to the February 17, 2017 closing price of Lumos Networks Common Stock, a premium of 34.9% to the volume-weighted price average of the 12 months ended February 17, 2017 and a premium of 16.5% to the average closing price of the last 20 trading days before the Merger Agreement was announced;

 

    the belief of the Board, after a thorough review of Lumos Networks’ business, market trends, results of operations, competitive landscape, execution risks and financial condition, and discussions with Lumos Networks’ management and advisors, that the value offered to stockholders pursuant to the Merger is more favorable to our stockholders than the potential long-term and sustainable value that might have resulted from remaining an independent public company, considering:

 

    the outlook of Lumos Networks’ industry and market, including consolidation in the fiber/bandwidth industry;

 

    the execution and other risks and uncertainties relating to future execution of Lumos Networks’ strategic plan;

 

    challenges of achieving consolidated growth rates necessary to meet financial projections;

 

    costs and risks of other strategic alternatives, including expected breakage costs of a potential separation of the LEC business;

 

    the competitive environment in the telecommunications industry, and specifically in the FTTC and enterprise businesses, resulting in increasing pricing pressure;

 

    the reduced visibility of the timing and size of potential new FTTC business; and

 

    risks inherent with a smaller market capitalization company, including trading liquidity;

 

    the fact that the Merger Consideration of $18.00 per share will be paid in cash, and provides certainty, immediate value and liquidity to our stockholders;

 

    the fact that the Merger Consideration, along with Lumos Networks’ current net debt and certain change of control payments, represents an enterprise value of approximately $950 million and an implied multiple of 9.5x to pro forma EBITDA (as defined below in the section entitled “—Certain Financial Projections” beginning on page 58) for the 12 months ended December 31, 2016, 9.4x to projected 2017 EBITDA and 8.7x to projected 2018 EBITDA;

 

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    the alternatives evaluated and considered by Lumos Networks, in consultation with its advisors, including (i) continuing to run the Company in the ordinary course, (ii) divestiture of the LEC business and (iii) selling the Company;

 

    the market check activities conducted as discussed above under “—Background of the Merger” and the number of potential strategic and financial bidders solicited prior to the signing of the Merger Agreement;

 

    the course of negotiations between Lumos Networks and EQT, in which Lumos Networks was advised by independent legal and financial advisors, which resulted in an increase from the $17.50 price per share initially offered by EQT to $18.00 per share, which price was confirmed following substantial due diligence by EQT;

 

    the belief of the Board based upon arm’s-length negotiations with EQT that the price to be paid by EQT was the highest price per share that EQT was willing to pay for Lumos Networks and the fact that other bidders declined to make an offer equal to or above such price;

 

    the benefits that Lumos Networks and its advisors were able to obtain during their extensive negotiations with EQT and that the Merger Agreement was a product of arm’s-length negotiations and contained terms and conditions that were, in the Board’s view, advisable and favorable to our stockholders;

 

    the oral opinion delivered by Wells Fargo Securities to the Board on February 18, 2017, which opinion was subsequently confirmed by delivery of its written opinion addressed to the Board, dated February 18, 2017, to the effect that, as of February 18, 2017 and based on and subject to the assumptions made, matters considered, and qualifications and limitations described in its written opinion, the Merger Consideration to be received by the holders of Lumos Networks Common Stock (other than Parent and Lumos Networks and its subsidiaries) in the Merger was fair, from a financial point of view, to such holders, as more fully described below under the caption “—Opinions of Financial Advisors” beginning on page 50. The full text of the written opinion of Wells Fargo Securities, dated February 18, 2017, which sets forth, among other things, the procedures followed, assumptions made, qualifications and limitations on the review undertaken and other matters considered in rendering the opinion, is attached as Appendix D to this proxy statement;

 

    the oral opinion delivered by UBS to the Board on February 18, 2017, which opinion was subsequently confirmed by delivery of its written opinion addressed to the Board, dated February 18, 2017, to the effect that, as of February 18, 2017 and based on and subject to various assumptions made, matters considered and limitations described in its written opinion, the Merger Consideration to be received in the Merger by holders of Lumos Networks Common Stock (other than holders of dissenting shares, Parent and Lumos Networks and its subsidiaries) was fair, from a financial point of view, to such holders, as more fully described below under the caption “—Opinions of Financial Advisors” beginning on page 50. The full text of the written opinion of UBS, dated February 18, 2017, which sets forth, among other things, the assumptions made, procedures followed, factors and matters considered and limitations on the review undertaken in rendering the opinion, is attached as Appendix E to this proxy statement;

 

    the likelihood that the Merger will be consummated, based on, among other things, the likelihood of receiving the Lumos Networks stockholder approval necessary to complete the Merger in a timely manner, the limited number of conditions to the Merger, the relative likelihood of obtaining required regulatory approvals and the remedies available under the Merger Agreement to Lumos Networks in the event of various breaches of the Merger Agreement by Parent or Merger Sub;

 

    the terms and conditions of the Merger Agreement and other transaction agreements, including the following related factors:

 

    the ability of the Board under the Merger Agreement to withdraw or modify its recommendation that our stockholders vote in favor of the adoption of the Merger Agreement in certain circumstances, including in connection with a superior proposal, and our right to terminate the Merger Agreement in order to accept a superior proposal and enter into a definitive agreement with respect to such superior proposal, in both cases subject to payment of a customary termination fee;

 

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    the conclusion of the Board that the termination fees and the circumstances when such termination fees may be payable are reasonable in light of the benefit of the Merger and would not be a significant impediment to third parties interested in making a superior proposal;

 

    the right of Lumos Networks and the Board to respond to a competing acquisition proposal from any bidder prior to obtaining the stockholder approval if the Board determines in good faith, after consultation with its outside legal counsel and financial advisors, that such acquisition proposal either constitutes a superior proposal or is reasonably likely to lead to a superior proposal and that failure to take such action would reasonably be inconsistent with the directors’ fiduciary duties under applicable law;

 

    the absence of a financing condition to Parent and Merger Sub’s obligation to consummate the Merger;

 

    the fact that Parent has received equity and debt commitment letters that will be sufficient for Parent to consummate the Merger;

 

    the fact that the Merger Agreement provides that, in the event of a failure of the Merger to be consummated under certain circumstances, and as an alternative to specific performance under the Merger Agreement, Parent will pay us a termination fee of approximately $32 million, without our having to establish any damages;

 

    the fact that the definition of “material adverse effect” contains customary exceptions;

 

    the fact that pursuant to the Merger Agreement we are entitled to specific performance and other equitable remedies to prevent breaches of the Merger Agreement, and can, under appropriate circumstances, enforce Parent’s obligation to enforce the equity commitment letter in order to cause the equity financing to be timely completed; and

 

    the availability of statutory appraisal rights to our stockholders who do not vote in favor of the adoption of the Merger Agreement and otherwise comply with all required procedures under the DGCL.

The Board also considered a variety of risks and other potentially negative factors of the Merger Agreement and the transactions contemplated by the Merger Agreement, including the following (which are not listed in any relative order of importance):

 

    the restrictions in the Merger Agreement on our actively soliciting competing bids to acquire Lumos Networks;

 

    that, under certain circumstances in connection with the termination of the Merger Agreement, we will be required to pay Parent a termination fee of approximately $16 million and, if the Merger Agreement is terminated because the Lumos Networks stockholders do not approve the transaction, we will be required to reimburse Parent up to $3.5 million in expenses;

 

    the fact that Lumos Networks stockholders will not participate in any potential future earnings or growth of Lumos Networks and will not benefit from any appreciation in the value of the Company as a private company;

 

    the fact that there can be no assurance that all of the conditions to the consummation of the Merger will be satisfied and, as a result, it is possible that the Merger may not be completed in a timely manner or at all, even if the Merger Agreement is adopted by the Lumos Networks stockholders;

 

    the potential negative effects if the Merger is not consummated, including:

 

    the trading price of Lumos Networks Common Stock could be adversely affected;

 

    we will have incurred significant transaction and opportunity costs attempting to consummate the Merger;

 

    we could lose customers, suppliers, business partners and employees, including key sales and other personnel, after the announcement of the entry into the Merger Agreement;

 

    our business may be subject to significant disruption and decline;

 

    the market’s perceptions of Lumos Networks’ prospects could be adversely affected; and

 

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    Lumos Networks’ directors, officers and other employees will have expended considerable time and effort to consummate the Merger;

 

    the fact that Parent and Merger Sub are newly formed entities with essentially no assets other than equity and debt commitments, and that, notwithstanding our specific performance remedy under the Merger Agreement, our remedy in the event of breach of the Merger Agreement by Parent or Merger Sub may be limited to receipt of the termination fee provided under the Merger Agreement, and that under certain circumstances we may not be entitled to a termination fee at all;

 

    the termination fee payable by Lumos Networks to Parent upon the occurrence of certain events, including the potential effect of such termination fee to deter other potential acquirers from making a competing proposal for Lumos Networks that might be more advantageous to our stockholders, and the impact of the termination fee on our ability to engage in another transaction if the Merger Agreement is terminated in certain circumstances;

 

    the fact that the gain realized by our stockholders as a result of the Merger generally will be taxable to the stockholders for U.S. federal income tax purposes;

 

    the restrictions in the Merger Agreement on the conduct of our business prior to the consummation of the Merger, which may delay or prevent us from undertaking business or other opportunities that may arise prior to the consummation of the Merger; and

 

    the fact that our executive officers and directors may have interests in the Merger that may be different from, or in addition to, those of our stockholders. See “—Interests of the Directors and Officers of Lumos Networks in the Merger” beginning on page 64.

After taking into account all of the factors set forth above, as well as others, the Board concluded that the risks, uncertainties, restrictions and potentially negative factors associated with the Merger were outweighed by the potential benefits of the Merger to Lumos Networks’ stockholders. Accordingly, all members of the Board voting on the Merger determined that the Merger, Merger Agreement and other transactions contemplated by the Merger Agreement are advisable, fair to and in the best interests of the Company and its stockholders.

The foregoing discussion of factors considered by the Board is not intended to be exhaustive, but summarizes the material factors considered by the Board. In light of the variety of factors considered in connection with their evaluation of the Merger, the Board did not find it practicable to, and did not, quantify or otherwise assign relative weights to the specific factors considered in reaching their determinations and recommendations. Moreover, each member of the Board applied his or her own personal business judgment to the process and may have given different weight to different factors. The Board did not undertake to make any specific determination as to whether any factor, or any particular aspect of any factor, supported or did not support their ultimate determinations. The Board based their recommendations on the totality of the information presented, including thorough discussions with, and questioning of, Lumos Networks’ senior management and outside financial advisors and legal counsel. It should be noted that this explanation of the reasoning of the Board and certain information presented in this section is forward-looking in nature and should be read in light of the factors set forth in “Cautionary Statement Concerning Forward-Looking Statements” beginning on page 27.

Opinions of Financial Advisors

Lumos Networks retained Wells Fargo Securities and UBS as its Financial Advisors to advise the Board in connection with the Merger. Pursuant to the respective engagements of each of Wells Fargo Securities and UBS, Lumos Networks requested each of Wells Fargo Securities and UBS to evaluate the fairness, from a financial point of view, to the holders of Lumos Networks Common Stock (other than Parent and Lumos Networks and its subsidiaries, and in the case of the opinion of UBS, holders of dissenting shares) of the Merger Consideration to be received by such holders pursuant to the Merger Agreement.

 

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The respective opinions of each of Wells Fargo Securities and UBS were based solely upon the information available to the Financial Advisors as of February 18, 2017, the date on which their respective written opinions were rendered. These opinions do not take into account or reflect, and the Financial Advisors were not asked to take into account or reflect, any changes or developments occurring subsequent to February 18, 2017.

Opinion of Wells Fargo Securities, LLC

On February 18, 2017, Wells Fargo Securities rendered its oral opinion to the Board (which was subsequently confirmed in writing by delivery of Wells Fargo Securities’ written opinion addressed to the Board dated February 18, 2017), as of February 18, 2017, that, based upon and subject to the full text of Wells Fargo Securities’ opinion, including various assumptions and limitations contained therein, its experience as an investment bank, its work as described in its opinion and other factors Wells Fargo Securities deemed relevant, the Merger Consideration to be received in the Merger by the holders of Lumos Networks Common Stock (other than Parent and Lumos Networks and its subsidiaries) pursuant to the Merger Agreement was fair, as of the date of Wells Fargo Securities’ opinion, from a financial point of view, to such holders.

Wells Fargo Securities’ opinion was for the information and use of our Board (in its capacity as such) in connection with its evaluation of the Merger. Wells Fargo Securities’ opinion only addressed the fairness, from a financial point of view, to the holders of Lumos Networks Common Stock (excluding the cancelled shares) of the Merger Consideration to be received by the holders of Lumos Networks Common Stock in the Merger pursuant to the Merger Agreement and did not address any other aspect or implication of the Merger or any agreement, arrangement or understanding entered into in connection therewith or otherwise. The summary of Wells Fargo Securities’ opinion in this proxy statement is qualified in its entirety by reference to the full text of its written opinion, which is attached as Annex D to this proxy statement and describes the procedures followed, assumptions made, qualifications and limitations on the review undertaken and other matters considered by Wells Fargo Securities in connection with the preparation of its opinion. However, neither Wells Fargo Securities’ opinion nor the summary of its opinion and the related analyses set forth in this proxy statement are intended to be, and do not constitute, advice or a recommendation to our Board or any other person or entity in respect of the Merger or otherwise, including, without limitation, as to how any holder of Lumos Networks Common Stock or any other person should vote or act in connection with any matter relating to the Merger, the Merger Agreement or any other matters.

In arriving at its opinion, Wells Fargo Securities, among other things:

 

    reviewed the Merger Agreement;

 

    reviewed certain business, financial, and other information regarding Lumos Networks that was publicly available or was furnished to Wells Fargo Securities by and discussed with the management of Lumos Networks;

 

    reviewed certain updated financial projections for Lumos Networks prepared by the management of Lumos Networks, and that were approved for Wells Fargo Securities’ use by the Board;

 

    discussed with the management of Lumos Networks the operations and prospects of Lumos Networks, including the historical financial performance and trends in the results of operations of Lumos Networks;

 

    reviewed certain net operating loss projections for Lumos Networks prepared by the management of Lumos Networks, and that were approved for Wells Fargo Securities’ use by the Board;

 

    participated in discussions among representatives of Lumos Networks, EQT and their respective advisors regarding the proposed Merger;

 

    reviewed the historical prices and implied trading multiples of Lumos Networks Common Stock;

 

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    compared certain business, financial and other information regarding Lumos Networks that was publicly available or was furnished to Wells Fargo Securities by Lumos Networks with publicly available business, financial and other information regarding certain publicly traded companies that Wells Fargo deemed relevant;

 

    compared the proposed financial terms of the Merger Agreement with the financial terms of certain other business combinations and transactions that Wells Fargo Securities deemed relevant;

 

    prepared a discounted cash flow analysis of Lumos Networks based upon the updated financial forecasts and estimates referred to above and assumptions relating thereto discussed with and confirmed as reasonable by the management of Lumos Networks; and

 

    considered other information, such as financial studies, analyses, and investigations, as well as financial, economic and market criteria, that Wells Fargo Securities deemed relevant.

In connection with its review, Wells Fargo Securities assumed and relied upon the accuracy and completeness of the financial and other information provided, discussed with or otherwise made available to it, including all accounting, tax, regulatory and legal information, and Wells Fargo Securities did not make (and did not assume any responsibility for) any independent verification of the accuracy or completeness of such information. Wells Fargo Securities assumed, with our consent, that we were not aware of any facts or circumstances that would make such information inaccurate or misleading in any way meaningful to its analysis. With respect to the updated financial forecasts, estimates and other information utilized in Wells Fargo Securities analyses, including the net operating loss forecasts, Wells Fargo Securities assumed, with our consent, that they were reasonably prepared and reflect the best then current estimates, judgments and assumptions of the management of Lumos Networks as to the future financial performance of Lumos Networks. Wells Fargo Securities assumed no responsibility for, and expressed no view as to, such forecasts, estimates or other information utilized in its analyses or the judgments or assumptions upon which they were based. Wells Fargo Securities also assumed that there had been no material changes in the condition (financial or otherwise), results of operations, business or prospects of Lumos Networks since the respective dates of the then most recent financial statements and other information provided to it.

In rendering its opinion, Wells Fargo Securities assumed, with our consent, that the Merger will be consummated in accordance with the Merger Agreement and in compliance with all applicable laws and other requirements, without waiver, modification or amendment of any material terms or conditions, and that in the course of obtaining any necessary legal, regulatory or third party consents or approvals for the Merger, no delays, limitations, conditions or restrictions will be imposed or actions will be taken that will have an adverse effect on Lumos Networks or the Merger in any way meaningful to its analyses.

Wells Fargo Securities’ opinion was necessarily based on economic, market, financial and other conditions existing, and the information made available to it, as of the date of its opinion. Although subsequent developments may affect the matters set forth in Wells Fargo Securities’ opinion, Wells Fargo Securities does not have any obligation to update, revise, reaffirm or withdraw its opinion or otherwise comment on or consider any such events occurring or coming to its attention after the date of its opinion.

Wells Fargo Securities’ opinion only addressed the fairness, from a financial point of view, to the holders of Lumos Networks Common Stock of the Merger Consideration to be received by such holders in the Merger pursuant to the Merger Agreement and did not address any other terms, aspects of the Merger, including, without limitation, the form or structure of the Merger, any tax or accounting matters relating to the Merger or otherwise, any financing arrangements or any aspect or implication of any other agreement or arrangement entered into in connection with or contemplated by the Merger or otherwise. In addition, its opinion did not address the fairness of the amount or nature of, or any other aspect relating to, any compensation to be received by any officers, directors or employees of any parties to the Merger, or class of such persons, relative to the Merger Consideration or otherwise. Wells Fargo Securities did not express any opinion with respect to any amounts or consideration to be received by, or paid or not paid, to the holders of the cancelled shares in connection with the Merger.

 

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Wells Fargo Securities’ opinion does not address the merits (financial or otherwise) of the underlying decision by Lumos Networks to enter into the Merger Agreement or the relative merits of the Merger compared with other business strategies or transactions available or that have been or might be considered by the management or the Board or in which Lumos Networks might engage. Wells Fargo Securities did not express any view, opinion or interpretation as to matters that require legal, regulatory, accounting, insurance, tax, environmental, employee compensation or other similar professional advice. Wells Fargo Securities assumed that Lumos Networks has or will obtain such opinions, counsel or interpretations from appropriate professional sources. Furthermore, Wells Fargo Securities has, with our consent, relied upon the assessments of Lumos Networks and its advisors as to all legal, regulatory, accounting, insurance, tax and environmental matters with respect to Lumos Networks and the Merger. Wells Fargo Securities’ opinion does not constitute a recommendation to the Board or to any other person or entity in respect of the Merger or otherwise, including, without limitation, as to how any holder of Lumos Networks Common Stock should vote or act in connection with any matter relating to the Merger, the Merger Agreement or any other matters.

In connection with rendering its opinion, Wells Fargo Securities performed certain financial, comparative and other analyses, including those summarized below. This summary is not a complete description of the financial analyses performed and factors considered in connection with such opinion. In arriving at its opinion, Wells Fargo Securities made its determinations as to the fairness, from a financial point of view, of the Merger Consideration to be received by holders of Lumos Networks Common Stock (excluding the cancelled shares) in the Merger pursuant to the Merger Agreement, on the basis of various financial and comparative analyses taken as a whole.

In performing its analyses, Wells Fargo Securities considered general business, economic, industry and market conditions, financial and otherwise, and other matters as they existed on, and could be evaluated as of, the date of its opinion. No company, transaction or business used in Wells Fargo Securities’ analyses for comparative purposes is identical to Lumos Networks or the proposed Merger and an evaluation of the results of those analyses is not entirely mathematical. The financial analyses performed by Wells Fargo Securities were performed for analytical purposes only and are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than those suggested by the analyses. In addition, any analyses relating to the value of assets, businesses or securities do not purport to be appraisals or to reflect the prices at which businesses or securities actually may be sold, which may depend on a variety of factors, many of which are beyond the control of Lumos Networks.

While the results of each analysis were taken into account in reaching its overall conclusion with respect to fairness, Wells Fargo Securities did not make separate or quantifiable judgments regarding individual analyses. Much of the information used in, and accordingly the results of, Wells Fargo Securities’ analyses are inherently subject to substantial uncertainty. Wells Fargo Securities’ opinion was only one of many factors considered by our Board in evaluating the proposed Merger. Neither Wells Fargo Securities’ opinion nor its analyses were determinative of the Merger Consideration or of the views of our Board or management with respect to the Merger or the Merger Consideration. The type and amount of consideration payable in the Merger were determined through negotiation between the representatives of Lumos Networks and the representatives of Parent, and the decision to enter into the Merger Agreement was solely that of our Board.

Wells Fargo Securities is the trade name for certain capital markets and investment banking services of Wells Fargo & Company and its subsidiaries, including Wells Fargo Securities, LLC. Wells Fargo Securities is an internationally recognized investment banking firm which is regularly engaged in providing financial advisory services in connection with mergers and acquisitions. The issuance of Wells Fargo Securities’ opinion was approved by an authorized committee of Wells Fargo Securities. The Company has agreed to pay Wells Fargo Securities for its financial advisory services in connection with the Merger an aggregate fee currently estimated to be approximately $8.5 million, a portion of which was payable upon delivery of its opinion and approximately $7.5 million of which is contingent upon consummation of the Merger.

Wells Fargo Securities and its affiliates provide a full range of investment banking and financial advisory, securities trading, brokerage and lending services in the ordinary course of business, for which Wells Fargo Securities and such affiliates receive customary fees. In that regard, Wells Fargo Securities or its affiliates in the past have provided, currently are providing or in the future may provide banking and other financial services to Lumos Networks, Parent, EQT, and certain of their respective affiliates, for which Wells Fargo Securities or such affiliates have received or expect to receive

 

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fees, including, during the past two years, having acted as financial advisor to Lumos Networks in connection with a strategic investment, for which Wells Fargo Securities received aggregate fees of $6 million. During the past two years, no material relationship existed between Wells Fargo Securities and Parent or Parent’s affiliates for which any compensation was received or is expected to be received by Wells Fargo Securities. In the ordinary course of business, Wells Fargo Securities and its affiliates may actively trade or otherwise effect transactions in or hold the securities or financial instruments of Lumos Networks, Parent, EQT, and/or certain of their respective affiliates for its own account and for the accounts of its customers and, accordingly, may at any time hold a long or short position in such securities or financial instruments.

Opinion of UBS Securities LLC

On February 18, 2017, at a meeting of the Board held to evaluate the Merger, UBS delivered to the Board an oral opinion, which opinion was subsequently confirmed by delivery of a written opinion, dated February 18, 2017, to the effect that, as of February 18, 2017 and based on and subject to various assumptions made, matters considered and limitations described in its written opinion, the Merger Consideration to be received in the Merger by holders of Lumos Networks Common Stock (other than holders of dissenting shares, Parent and Lumos Networks and its subsidiaries) was fair, from a financial point of view, to such holders.

The full text of UBS’s written opinion to the Board describes the assumptions made, procedures followed, matters considered and limitations on the review undertaken by UBS. This opinion is attached to this proxy statement as Annex E and is incorporated into this proxy statement by reference. Holders of Lumos Networks Common Stock are encouraged to read this opinion carefully in its entirety. UBS’s opinion was provided for the benefit of Lumos Networks’ board of directors (in its capacity as such) in connection with, and for the purpose of, the Board’s evaluation of the fairness, from a financial point of view, to the holders of Lumos Networks Common Stock (other than holders of dissenting shares, Parent and Lumos Networks and its subsidiaries) of the Merger Consideration, and did not address any other aspect or implication of the Merger or the Merger Agreement, including, without limitation, the relative merits of the Merger or any related transaction as compared to other business strategies or transactions that might be available with respect to Lumos Networks, or Lumos Networks’ underlying business decision to effect the Merger or any related transaction. UBS’s opinion does not constitute a recommendation to any holder of Lumos Networks Common Stock as to how such holder should vote or act with respect to the Merger or any related transaction.

In arriving at its opinion, UBS, among other things:

 

    reviewed certain publicly available business and financial information relating to Lumos Networks;

 

    reviewed certain internal financial information and other data relating to the business and financial prospects of Lumos Networks that were not publicly available, including updated financial forecasts and estimates prepared by the management of Lumos Networks that Lumos Networks directed UBS to utilize for purposes of its analysis;

 

    conducted discussions with members of the senior management of Lumos Networks concerning the business and financial prospects of Lumos Networks;

 

    performed a discounted cash flow analysis of Lumos Networks in which UBS analyzed the future cash flows of Lumos Networks using the updated financial forecasts and estimates prepared by the management of Lumos Networks;

 

    reviewed publicly available financial and stock market data with respect to certain other companies UBS believed to be generally relevant;

 

    compared the financial terms of the Merger with the publicly available financial terms of certain other transactions UBS believed to be generally relevant;

 

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    reviewed current and historical market prices of Lumos Networks Common Stock;

 

    reviewed a draft of the Merger Agreement captioned “Execution Version” provided for UBS’s review on February 18, 2017; and

 

    conducted such other financial studies, analyses and investigations, and considered such other information, as UBS deemed necessary or appropriate.

In connection with UBS’s review, with the consent of the Board, UBS assumed and relied upon, without independent verification, the accuracy and completeness in all material respects of the information provided to or reviewed by UBS for the purpose of its opinion. In addition, with the consent of the Board, UBS did not make any independent evaluation or appraisal of any of the assets or liabilities (contingent or otherwise) of Lumos Networks, nor was UBS furnished with any such evaluation or appraisal.

With respect to the updated financial forecasts and estimates referred to above, UBS assumed, at Lumos Networks’ direction, that they were reasonably prepared in good faith on a basis reflecting the best currently available estimates and judgments of the management of Lumos Networks as to the future financial performance of Lumos Networks. In addition, UBS assumed with Lumos Networks’ approval that the updated financial forecasts and estimates referred to above will be achieved at the times and in the amounts projected. UBS further relied upon and assumed at Lumos Networks’ direction, without independent verification, that there were no changes in the business, assets, liabilities, financial condition, results of operations, cash flows or prospects of Lumos Networks since the respective dates of the most recent financial statements and other information, financial or otherwise, provided to UBS except for such changes as would not be material to UBS’s analysis or opinion, and that there was no information or any facts that would make any of the information discussed with or reviewed by UBS incomplete or misleading. UBS’s opinion was necessarily based on economic, monetary, market and other conditions as in effect on, and the information available to UBS as of, the date of its opinion.

In rendering its opinion, UBS assumed, with the consent of Lumos Networks, that (i) the final executed form of the Merger Agreement would not differ in any material respect from the draft provided for UBS’s review on February 18, 2017, that UBS reviewed, (ii) the parties to the Merger Agreement will comply with all material terms of the Merger Agreement, and (iii) the Merger will be consummated in accordance with the terms of the Merger Agreement and in accordance with all applicable laws and other relevant documents or requirements, without any adverse waiver, modification or amendment of any material term or condition thereof. UBS also assumed that all governmental, regulatory or other consents and approvals necessary for the consummation of the Merger will be obtained without any material adverse effect on Lumos Networks, Parent or the Merger.

UBS did not express any opinion as to any tax or other consequences that may result from the Merger, nor did its opinion address any legal, regulatory, tax or accounting matters. UBS was not asked to address, and did not offer any opinion as to the terms, other than the Merger Consideration to the extent expressly specified in its opinion, of the Merger Agreement or any related documents or the structure or form of the Merger or any related transaction. In addition, UBS expressed no opinion as to the fairness of the amount or nature of any compensation to be received by any officers, directors or employees of any parties to the Merger, or any class of such persons, whether relative to the Merger Consideration or otherwise.

UBS acted as a financial advisor to Lumos Networks in connection with, and participated in certain of the negotiations leading to, the Merger. Under the terms of UBS’s engagement, Lumos Networks agreed to pay UBS for its financial advisory services in connection with the Merger an aggregate fee currently estimated to be approximately $4.8 million, approximately $0.8 million of which has been paid in connection with UBS’s opinion and approximately $4.0 million of which is contingent upon consummation of the Merger. In addition, Lumos Networks agreed to reimburse certain of UBS’s expenses arising, and indemnify UBS against certain liabilities that may arise, out of its engagement. Except for investment banking services to Lumos Networks in connection with the Merger, in the past two years no material relationship existed between UBS and any of Lumos Networks, Parent or the EQT Fund for which any compensation was received or is expected to be received by UBS. Since January 2015, European affiliates of UBS provided certain investment banking services to certain portfolio companies affiliated with EQT located outside of the United States for which such UBS affiliates received customary fees aggregating approximately $15.5 million, and in the future UBS and its affiliates may provide additional investment banking services to companies affiliated with EQT for which UBS and its affiliates may receive compensation. In the ordinary course of business, UBS and its affiliates may hold or trade, for their own accounts and the accounts of their customers, securities of Lumos Networks and Parent, and, accordingly, may at any time hold a long or short position in such securities. Without limiting the foregoing, as of February 28, 2017, the UBS group owned shares of Lumos Networks Common Stock representing less than 0.07% of the outstanding shares of Lumos Networks Common Stock. The issuance of the UBS opinion was approved by an authorized committee of UBS.

 

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Summary of Financial Analyses of Lumos Networks’ Financial Advisors

The following is a summary of certain of the financial analyses performed by Wells Fargo Securities and UBS in connection with the preparation of their respective opinions and reviewed with our Board on February 18, 2017. The summary does not contain all of the financial data that holders of Lumos Networks Common Stock may want or need for purposes of making an independent determination of fair value. Holders of Lumos Networks Common Stock are encouraged to consult their own financial and other advisors before making any investment decision in connection with the proposed Merger. The order of the analyses summarized below does not represent relative importance or weight given to those analyses by either Wells Fargo Securities or UBS. The analyses summarized below include information presented in tabular format. The tables alone do not constitute a complete description of the analyses. Considering the data in the tables below without considering the full narrative description of the analyses, as well as the methodologies underlying, and the assumptions, qualifications and limitations affecting, each analysis, could create an incomplete view of Wells Fargo Securities’ and UBS’s analyses.

The preparation of a financial opinion is a complex process and involves various quantitative and qualitative determinations as to the most appropriate and relevant methods of financial, comparative, and analytical methods and the application of those methods to the particular circumstances. Therefore, a financial opinion is not readily susceptible to summary description. Each of Wells Fargo Securities and UBS arrived at their respective opinions based on the results of all analyses undertaken by them and assessed as a whole and did not draw, in isolation, conclusions from or with regard to any individual analysis, methodology or factor. Accordingly, Wells Fargo Securities and UBS believe that their analyses and the following summary must be considered as a whole and that selecting portions of its analyses, methodologies and factors, without considering all analyses, methodologies and factors or the narrative description of the analyses, could create a misleading or incomplete view of the processes underlying Wells Fargo Securities’ and UBS’ analyses and their respective opinions.

For purposes of their analyses, Wells Fargo Securities and UBS reviewed a number of financial metrics, including the following:

 

    EBITDA – generally the amount of the relevant company’s earnings before interest, taxes, depreciation, amortization, stock-based compensation, pension expense, any non-recurring items and earnings attributable to non-controlling interests for a specified time period.

 

    Enterprise Value – generally the value as of a specified date of the relevant company’s outstanding equity securities (taking into account outstanding options and other securities convertible, exercisable or exchangeable into or for equity securities of the company) plus the value as of such date of its net debt (the value of its outstanding indebtedness, capital lease obligations and non-controlling interests less the amount of cash and cash equivalents on its balance sheet).

Unless the context indicates otherwise, (i) the enterprise values used in the selected companies analyses described below were calculated using the market price of the common stock of the selected companies listed below as of February 16, 2017, (ii) the relevant values for the selected transactions analysis described below were calculated on an enterprise value basis based on the consideration proposed to be paid in the selected transactions, and (iii) the estimates of the future financial performance of Lumos Networks relied upon for the financial analyses described below were based on the updated financial projections provided by Lumos Networks’ management, and estimates of the future financial performance for the selected companies listed below were based on certain publicly available research analyst estimates for those companies.

 

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Selected Companies Analysis

Wells Fargo Securities and UBS reviewed certain data for selected companies with publicly traded equity securities that Wells Fargo Securities and UBS deemed relevant. The selected companies were selected because they were deemed by Wells Fargo Securities and UBS to be similar to Lumos Networks in one or more respects.

The financial data reviewed included:

 

    Equity Value based on publicly available data as of February 16, 2017 and calculated as fully diluted shares outstanding, calculated using treasury stock method at closing share price on February 16, 2017;

 

    Enterprise Value calculated as market value of equity plus net debt, preferred equity, and non-controlling interest;

 

    Enterprise Value as a multiple of projected EBITDA for the calendar year 2017, or “EV / 2017E EBITDA;”

 

    Enterprise Value as a multiple of projected EBITDA for the calendar year 2018, or “EV / 2018E EBITDA;”

The results of this analysis are indicated below:

 

Company Name    Closing
Share Price
as of
2/16/17
     Equity Value
($ in millions)
     Enterprise Value
($ in millions)
(“EV”)
     EV / 2017E
EBITDA
     EV / 2018E
EBITDA
 

CenturyLink, Inc.

   $ 24.28      $ 26,062      $ 63,008        6.4x        6.3x  

Cincinnati Bell Inc.

     20.50        881        2,078        6.9x        6.8x  

Consolidated Communications Holdings, Inc.

     25.72        1,829        3,998        6.6x        6.8x  

Frontier Communications Corporation

     3.29        3,900        22,069        5.6x        5.6x  

Windstream Holdings, Inc.

     7.02        1,360        6,649        4.4x        4.4x  

Zayo Group Holdings, Inc.

     30.99        7,662        13,202        9.9x        9.3x  

The mean, median, high and low of such financial data for the selected companies were:

 

Enterprise Value / EBITDA

   Mean      Median      High      Low  

EV / 2017E EBITDA

     6.6x        6.5x        9.9x        4.4x  

EV / 2018E EBITDA

     6.5x        6.5x        9.3x        4.4x  

Taking into account the results of the selected companies analysis, Wells Fargo Securities and UBS applied a multiple range of 7.5x to 9.0x based on the EV / 2017E EBITDA multiples for the selected companies to Lumos Networks’ estimated EBITDA for the fiscal year ending December 31, 2017, or “FY 2017E EBITDA,” and a multiple range of 7.0x to 8.5x based on the EV / 2018E EBITDA multiples for the selected companies to Lumos Networks’ projected EBITDA for the fiscal year ending December 31, 2018, or “FY 2018E EBITDA.” The selected companies analysis indicated implied valuation reference ranges per share of $12.31 to $17.54 based on Lumos Networks’ FY 2017E EBITDA, and $12.37 to $17.94 based on Lumos Networks’ FY 2018E EBITDA, as compared to the proposed Merger Consideration in the Merger pursuant to the Merger Agreement of $18.00 per share.

Selected Transactions Analysis

Wells Fargo Securities and UBS considered certain financial terms of certain transactions involving target companies that Wells Fargo Securities and UBS deemed relevant. The selected transactions were selected because they involved target companies that were deemed by Wells Fargo Securities and UBS to be similar to Lumos Networks in one or more respects.

The financial data reviewed included Enterprise Value (based on publicly available data as of announcement date and calculated as fully diluted shares outstanding, calculated using treasury stock method at closing share price on announcement date) as a multiple of EBITDA for the last twelve months prior to the announcement of the applicable transaction, which we refer to as “EV / LTM EBITDA,” and Enterprise Value as a multiple of EBITDA for the last quarter prior to the announcement of the applicable transaction annualized, which we refer to as “EV / LQA EBITDA.”

 

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The results of this analysis are indicated below:

 

Announce Date

  

Target

  

Acquiror

   Enterprise Value
($ in millions)
(“EV”)
    EV / LQA
EBITDA
    EV / LTM
EBITDA
 
December-16    Fairpoint Communications, Inc.    Consolidated Communications Holdings, Inc.    $ 1,465       5.7x       5.8x  
October-16    Electric Lightwave, LLC    Zayo Group Holdings, Inc.      1,420       7.9x       N/A  
November-15    Allstream Inc.    Zayo Group Holdings, Inc.      320 (1)      4.4x (1)      N/A  
June-14    Enventis Corporation    Consolidated Communications Holdings, Inc.      346       7.2x       7.2x  

 

(1) Based on publicly available data as of announcement date and not otherwise calculated by Wells Fargo Securities and UBS.

The mean, median, high and low of such financial data for the selected transactions were:

 

Enterprise Value/

   Mean      Median      High      Low  

EV / LTM EBITDA

     6.5x        6.5x        7.2x        5.8x  

EV / LQA EBITDA

     6.3x        6.4x        7.9x        4.4x  

Taking into account the results of the selected transactions analysis, Wells Fargo Securities and UBS applied a multiple range of 7.0x to 8.5x based on the EV / LQA EBITDA multiples for the target companies in the selected transactions to Lumos Networks’ LQA 12/31/2016 EBITDA. The selected transactions analysis indicated an implied valuation reference range per share of $10.13 to $15.77, as compared to the proposed Merger Consideration in the Merger pursuant to the Merger Agreement of $18.00.

Discounted Cash Flow Analysis

Wells Fargo Securities and UBS conducted a discounted cash flow analysis of Lumos Networks using the updated financial forecasts for the fiscal year ending December 31, 2017 through the fiscal year ending December 31, 2021, including projected utilization of net operating losses, provided by Lumos Networks’ management, to determine an implied present value per share of Lumos Networks Common Stock as of December 31, 2016. In conducting this analysis, Wells Fargo Securities and UBS first calculated the net present value of the projected after-tax unlevered free cash flows for Lumos Networks for the fiscal year ending December 31, 2017 through the full fiscal year ending December 31, 2021. Next, Wells Fargo Securities and UBS derived implied terminal values for Lumos Networks in the fiscal year 2021 by applying a range of terminal value EBITDA multiples of 9.0x to 10.0x, which were chosen by Wells Fargo Securities and UBS based on their experience and professional judgment, to the estimated EBITDA of Lumos Networks for the fiscal year 2021 provided by the management of Lumos Networks. The unlevered free cash flows and range of terminal values were discounted to present values using a range of discount rates from 8.0% to 9.0%. Wells Fargo Securities and UBS selected the discount range used in this analysis based on their experience and professional judgment taking into account Lumos Networks’ weighted average cost of capital, which Wells Fargo Securities and UBS calculated using standard corporate finance methodologies. Wells Fargo Securities and UBS then derived a range of implied enterprise values of Lumos Networks by adding the present value (as of December 31, 2016) of the projected cash flows of Lumos Networks for the fiscal year ending December 31, 2017 through the full fiscal year ending December 31, 2021 to the present value (as of December 31, 2016) of the terminal value for Lumos Networks in fiscal year 2021. For purposes of these present value calculations, Wells Fargo Securities and UBS utilized the mid-year cash flow convention. Wells Fargo Securities and UBS calculated a range of implied per share values for Lumos Networks by subtracting Lumos Networks’ estimated net debt ($461 million) and other line items (totaling approximately $16 million) including unfunded pension and post-retirement obligations, non-controlling interest and equity investments as of December 31, 2016 (as provided by Lumos Networks’ management) and adding the estimated net present value of Lumos Networks’ net operating losses as of December 31, 2016 to the range of implied enterprise values of Lumos Networks and then dividing by the number of fully diluted shares outstanding (as of February 16, 2017). These calculations resulted in a range of implied equity values per share of Lumos Networks Common Stock of $15.70 to $19.93. Wells Fargo Securities and UBS noted that the per-share Merger Consideration to be paid in connection with the Merger is $18.00.

Certain Financial Projections

Lumos Networks does not, as a matter of course, develop or publicly disclose long-term projections or internal projections of its future financial performance, financial condition or other results due to, among other reasons, the uncertainty of the underlying assumptions and estimates, though Lumos Networks has in the past provided investors with full-year financial guidance which may cover areas such as revenue, adjusted EBITDA and capital expenditures, among other items, which it may update from time to time during the relevant year. However, in connection with Lumos Networks’ evaluation of a

 

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possible transaction, Lumos Networks prepared and provided the Board and its advisors, including Wells Fargo Securities and UBS, in performing their respective financial analyses, including the financial analyses summarized under “—Opinions of Financial Advisors” beginning on page 50, with certain non-public, unaudited, stand-alone financial projections prepared by management and not for public disclosure. Lumos Networks management prepared four variations of financial projections, which we refer to together as the Management Projections: (i) preliminary operating model projections prepared in October 2016 in preparation for the strategic alternative process described earlier and provided to the Board and the Financial Advisors, which we refer to as the initial projections, (ii) updated operating model projections prepared in November 2016 and provided to the Board and the Financial Advisors, which we refer to as the interim projections, (iii) investment case projections prepared in connection with the strategic alternative process and provided to the Board and potential strategic partners participating in the process (including EQT) beginning in November 2016, which we refer to as the investment case projections, and (iv) revised operating model projections prepared in February 2017 reflecting updated results and management expectations and provided to the Board and the Financial Advisors, which we refer to as the updated projections. The interim projections updated the initial projections to reflect management’s continuing analysis of the operating model and projected performance. The Committee and the Board determined that management should prepare on a reasonable good faith basis the investment case projections based on the initial projections with adjustments to reflect (1) an increase in dark fiber and wavelength sales in future years as a result of increases in FTTC backhaul traffic and backhaul traffic from the Norfolk underwater cable landing site, (2) a higher number of second tenants on FTTC sites, resulting from an increase in demand for denser mobile networks and (3) a moderated CLEC voice services customer churn in future years. While the acquisition of DC74 was included in the initial projections, that acquisition was not included in the interim projections or the investment case projections prepared in November 2016, given the relative uncertainty of the transaction at the time. The updated projections reflected updates relating to estimated 2016 financial results, the 2017 operating model and the projected performance of the recently acquired Clarity and DC74. The updated projections were used for purposes of the financial analyses provided by the Financial Advisors, summarized above under the caption “—Opinions of Financial Advisors” beginning on page 50.

The following tables summarize the Management Projections as described above.

Management Projections

Initial Projections

 

Year Ending December 31,

 
     2016PF(1)      2017E(1)      2018E(1)      2019E      2020E(1)      2021E(1)  
     ($ in millions)  

Total Revenue

   $ 214      $ 217      $ 223      $ 228      $ 240      $ 255  

EBITDA(3)

     96        98        101        105        114        126  

Capital Expenditures

     86        72        74        77        73        83  

 

(1) 2016PF reflects management’s expected revenue, EBITDA and capital expenditures performance of Lumos Networks on a pro forma basis, including the acquisition of Clarity, assuming the acquisition closed on January 1, 2016, but excluding the acquisition of DC74, which was not acquired by Lumos Networks until February 2017.
(2) 2017E-2021E reflect management’s expected revenue, EBITDA and capital expenditures performance of Lumos Networks, including the expected performance of Clarity and DC74.
(3) EBITDA is defined as net income / (loss) attributable to the Company before depreciation and amortization, stock based compensation, pension expenses, cash interest expenses, debt amortization, income before taxes and income taxes.

 

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The following table presents a reconciliation of net income / (loss) to EBITDA for each of the periods indicated above in the initial projections:

 

Year Ending December 31,

 
     2016PF(1)     2017E(1)     2018E(1)     2019E      2020E(1)      2021E(1)  
     ($ in millions)  

EBITDA

   $ 96     $ 99     $ 100     $ 103      $ 112      $ 124  

Depr. & Amort.

     50       56       56       58        62        66  

Stock Based Compensation

     10       7       7       7        7        7  

Pension Expense (R&SB)

     1       2       2       2        2        2  

Cash Interest Expense

     28       27       27       28        27        26  

Debt Amortization

     5       5       5       5        5        6  

Income Before Taxes

     1       2       2       4        9        18  

Income Taxes

     2       2       3       3        5        8  

Net Income / (Loss)

   $ (1   $ (1   $ (0   $ 1      $ 4      $ 10  

 

(1) Reconciliation of net income / (loss) to EBITDA numbers may not foot due to rounding.

Interim Projections

 

Year Ending December 31,

 
     2016PF(1)      2017E(2)      2018E      2019E      2020E      2021E  
     ($ in millions)  

Total Revenue

   $ 214      $ 215      $ 222      $ 230      $ 244      $ 261  

EBITDA

     96        95        100        106        117        131  

Capital Expenditures

     89        79        76        83        75        85  

 

(1) 2016PF reflects management’s expected revenue, EBITDA and capital expenditures performance of Lumos Networks on a pro forma basis, including the acquisition of Clarity as if the acquisition closed on January 1, 2016, but excluding DC74.
(2) 2017E-2021E reflect management’s expected revenue, EBITDA and capital expenditures performance of Lumos Networks, including the expected performance of Clarity, but excluding DC74.

The following table presents a reconciliation of net income to EBITDA for each of the periods indicated above in the interim case projections:

 

Year Ending December 31,

 
     2016PF(1)     2017E(1)     2018E(1)      2019E(1)      2020E(1)      2021E(1)  
     ($ in millions)  

EBITDA

   $ 96     $ 95     $ 100      $ 106      $ 117      $ 131  

Depr. & Amort.

     49       52       53        55        59        64  

Stock Based Compensation

     10       7       7        7        7        7  

Pension Expense (R&SB)

     1       2       2        2        2        2  

Cash Interest Expense

     28       27       27        28        26        26  

Debt Amortization

     4       5       5        5        5        6  

Income Before Taxes

     2       2       6        9        18        27  

Income Taxes

     2       2       4        5        8        12  

Net Income / (Loss)

   $ (0   $ (0   $ 2      $ 4      $ 10      $ 15  

 

(1) Reconciliation of net income / (loss) to EBITDA numbers may not foot due to rounding.

 

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Investment Case Projections

 

Year Ending December 31,

 
     2016E(1)(4)      2016PF(2)(4)      2017E(3)(4)      2018E(4)      2019E(4)      2020E(4)      2021E(4)  
     ($ in millions)         

Total Revenue

   $ 207      $ 214      $ 217      $ 226      $ 238      $ 255      $ 275  

EBITDA

     94        97        97        103        111        124        140  

Capital Expenditures

     88        88        77        77        79        76        86  

 

(1) 2016E reflects management’s expected revenue, EBITDA and capital expenditures performance of Lumos Networks, excluding the expected performance of Clarity and DC74.
(2) 2016PF reflects management’s expected revenue, EBITDA and capital expenditures performance of Lumos Networks on a pro forma basis, including the acquisition of Clarity as if the acquisition closed on January 1, 2016, but excluding DC74.
(3) 2017E-2021E reflect management’s expected revenue, EBITDA and capital expenditures performance of Lumos Networks, including the expected performance of Clarity, but excluding DC74.
(4) Amounts may not foot due to rounding.

The following table presents a reconciliation of net income / (loss) to EBITDA for each of the periods indicated above in the investment case projections:

 

Year Ending December 31,

 
     2016E(1)     2016PF(1)     2017E(1)     2018E(1)      2019E(1)      2020E(1)      2021E(1)  
     ($ in millions)         

EBITDA

   $ 94     $ 97     $ 97     $ 103      $ 111      $ 124      $ 140  

Depr. & Amort

     50       51       53       54        56        60        65  

Stock Based Compensation

     10       10       7       7        7        7        7  

Pension Expense (R&SB)

     1       1       2       2        2        2        2  

Cash Interest Expense

     28       28       27       27        27        26        26  

Debt Amortization

     4       4       5       5        5        5        6  

Income Before Taxes

     (0     1       3       8        14        25        35  

Income Taxes

     2       2       3       5        7        11        16  

Net Income / (Loss)

   $ (2   $ (1   $ (0   $ 3      $ 7      $ 14      $ 20  

(1)    Reconciliation of net income / (loss) to EBITDA numbers may not foot due to rounding.

     

        
Updated Projections                  

Year Ending December 31,

 
      2016PF(1)     2017E(2)     2018E      2019E      2020E      2021E  
      ($ in millions)  

Total Revenue

 

  $ 220     $ 226     $ 231      $ 237      $ 250      $ 266  

EBITDA

 

    100       101       109        112        122        135  

Capital Expenditures

 

    85       78       76        77        74        83  

 

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(1) 2016PF reflects management’s expected revenue, EBITDA and capital expenditures performance of Lumos Networks on a pro forma basis, including the acquisitions of Clarity and DC74 as if both acquisitions closed on January 1, 2016.
(2) 2017E-2021E reflect management’s expected revenue, EBITDA and capital expenditures performance of Lumos Networks, including the expected performance of Clarity and DC74.

The following table presents a reconciliation of net income to EBITDA for each of the periods indicated above in the updated projections:

 

Year Ending December 31,

 
     2016PF(2)      2017E(2)      2018E(2)      2019E(2)      2020E(2)      2021E(2)  
     ($ in millions)  

EBITDA

   $ 100      $ 101      $ 109      $ 112      $ 122      $ 135  

Depr. & Amort. (1)

     49        52        52        54        58        62  

Stock Based Compensation (1)

     11        8        8        8        8        8  

Pension Expense (R&SB)

     1        2        2        2        2        2  

Cash Interest Expense

     28        27        27        27        26        26  

Debt Amortization

     4        5        5        5        5        6  

Income Before Taxes

     6        8        14        16        24        32  

Income Taxes

     3        3        6        6        9        12  

Net Income / (Loss)

   $ 3      $ 4      $ 8      $ 10      $ 15      $ 20  

 

(1) GAAP line items including depreciation & amortization and stock based compensation projections reflect management’s expected book value estimates and may differ materially from taxable values used for calculating free cash flow.
(2) Reconciliation of net income / (loss) to EBITDA numbers may not foot due to rounding.

The Financial Advisors used the unlevered free cash flow amounts set forth below – which were derived from the updated projections and approved by Lumos Networks for use by the Financial Advisors – as part of the financial analyses that the Financial Advisors performed in connection with the delivery of their financial analyses to the Board described under the heading “—Opinions of Financial Advisors” beginning on page 50 and in connection with the delivery of their respective opinions to the Board.

 

Year Ending December 31,

 
     2017E      2018E      2019E      2020E      2021E  
     ($ in millions)  

Unlevered Free Cash Flow

   $ 8      $ 9      $ 9      $ 17      $ 18  

The following table presents a reconciliation of EBITDA to unlevered free cash flow for each of the periods indicated above in the updated unlevered free cash flow amounts.

 

Year Ending December 31,

 
     2017E(1)     2018E(1)     2019E(1)     2020E(1)     2021E(1)  
     ($ in millions)  

EBITDA

   $ 101     $ 109     $ 112     $ 122     $ 135  

Total Tax D&A

     (84     (77     (73     (57     (64

Total Stock-Based Compensation

     (10     (10     (10     (10     (10

Implied Taxes @38.0%

     (3     (8     (11     (21     (23

Total Capital Expenditures (2)

     (78     (82     (82     (74     (83

Change in Net Working Capital

     (3     0       (0     (0     0  

Total Implied Unlevered Free Cash Flow

   $ 8     $ 9     $ 9     $ 17     $ 18  

 

(1) Reconciliation of EBITDA to unlevered free cash flow numbers may not foot due to rounding.
(2) 2018 capital expenditures includes $5.3 million DC74 earn-out; 2019 capital expenditures includes $5 million Clarity earn-out.

 

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The Management Projections were not prepared with a view to public disclosure and are included in this proxy statement only because such information was made available as described above. The Projections were not prepared with a view to compliance with generally accepted accounting principles as applied in the United States, which we refer to as “GAAP,” the published guidelines of the SEC regarding projections and forward-looking statements or the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of prospective financial information. Furthermore, KPMG LLP, our independent auditor, has not examined, reviewed, compiled or otherwise applied procedures to, the Management Projections and, accordingly, assumes no responsibility for, and expresses no opinion on, them. The Management Projections included in this proxy statement have been prepared by, and are the responsibility of, our management. The Management Projections were prepared solely for internal use of Lumos Networks and its Financial Advisors and are subjective in many respects. The investment case projections were prepared solely for the use of potential strategic partners and are also subjective in many respects.

Although a summary of the Management Projections is presented with numerical specificity, they reflect numerous variables, assumptions and estimates as to future events made by our management that our management believed were reasonable at the time the Management Projections were prepared, taking into account the relevant information available to management at the time. However, this information is not fact and should not be relied upon as being necessarily indicative of actual future results. Important factors that may affect actual results and cause the Management Projections not to be achieved include general economic conditions, results or financial condition, industry performance, accuracy of certain accounting assumptions, changes in actual or projected cash flows, competitive pressures, current expansion efforts adversely impacting our business or results, ability to successfully integrate acquisitions, pricing pressures from our customers adversely affecting our profitability, technological changes and competition adversely affecting our sales, profitability or financial condition, any disruption in our information technology systems adversely impacting our business and operations, strengthening of the U.S. dollar and other foreign currency exchange rate fluctuations impacting our results, our contingent liabilities and tax matters causing us to incur losses or costs, any inability to protect our intellectual property rights adversely affecting our business or our competitive position, costs or adverse effects on our business, reputation or results from governmental regulations, changes in government regulation or other policies adversely affecting our revenue and profitability, work stoppages or other labor issues at our facilities or those of our customers or vendors adversely affecting our business, results or financial condition, and changes in tax laws. In addition, the Management Projections do not take into account any circumstances or events occurring after the date that they were prepared and do not give effect to the Merger. As a result, there can be no assurance that the Management Projections will be realized, and actual results may be materially better or worse than those contained in the Management Projections. Since the Management Projections cover multiple years, that information by its nature becomes less predictive with each successive year. The inclusion of this information should not be regarded as an indication that the Board, Lumos Networks, our Financial Advisors, Parent, Parent’s representatives and affiliates (including EQT and the EQT Fund) or any other recipient of this information considered, or now considers, the Management Projections to be material information of Lumos Networks or that actual future results will necessarily reflect the Management Projections, and the Management Projections should not be relied upon as such. The summary of the Management Projections is not included in this proxy statement in order to induce any stockholder to vote in favor of the merger proposal or any of the other proposals to be voted on at the special meeting or to influence any stockholder to make any investment decision with respect to the Merger, including whether or not to seek appraisal rights with respect to shares of Lumos Networks Common Stock.

The Management Projections should be evaluated, if at all, in conjunction with the historical financial statements, risk factors and other information regarding Lumos Networks contained in our public filings with the SEC. See “Where You Can Find More Information” beginning on page 169.

 

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The Management Projections are forward-looking statements. For information on factors that may cause Lumos Networks’ future results to materially vary, see “Cautionary Statement Concerning Forward-Looking Statements” beginning on page 27.

Except to the extent required by applicable federal securities laws, we do not intend, and expressly disclaim any responsibility, to update or otherwise revise the Management Projections to reflect circumstances existing after the date when Lumos Networks prepared the Management Projections or to reflect the occurrence of future events or changes in general economic or industry conditions, even in the event that any of the assumptions underlying the Management Projections are shown to be in error. By including in this proxy statement a summary of certain financial projections, neither Lumos Networks nor any of its representatives or advisors (including Wells Fargo Securities and UBS) nor Parent, Parent’s representatives and affiliates (including EQT and the EQT Fund) makes any representation to any person regarding the ultimate performance of Lumos Networks or the surviving corporation compared to the information contained in such financial projections and should not be read to do so.

In light of the foregoing factors and the uncertainties inherent in the Management Projections, stockholders are cautioned not to unduly rely on the Management Projections included in this proxy statement.

Certain of the measures included in the Management Projections may be considered non-GAAP financial measures, as noted. Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information presented in compliance with GAAP, and non-GAAP financial measures as used by Lumos Networks may not be comparable to similarly titled amounts used by other companies.

Interests of the Directors and Executive Officers of Lumos Networks in the Merger

When considering the recommendation of the Board that you vote “FOR” the merger proposal, you should be aware that certain of our directors and executive officers may have interests in the Merger that may be different from, or in addition to, your interests as a stockholder generally. The members of the Board voting on the Merger were aware of these interests in evaluating and negotiating the Merger Agreement, approving the Merger Agreement and the Merger and recommending that the Merger Agreement be adopted by the stockholders of Lumos Networks. See the sections entitled “—Background of the Merger” and “—Recommendation of Our Board of Directors and Reasons for the Merger” beginning on pages 35 and 46, respectively. You should take these interests into account in deciding whether to vote “FOR” the adoption of the Merger Agreement.

These interests are described in more detail below, and certain of them, including the compensation that may become payable in connection with the Merger to Messrs. Biltz, Broekhuysen, Anderson and Ferry and Ms. McDermott, who constitute our named executive officers, which is subject to a non-binding, advisory vote of Lumos Networks’ stockholders, are quantified in the narrative below and under the heading “Proposal 3: Advisory Vote on Merger-Related Named Executive Officer Compensation” beginning on page 123. The dates used below to quantify these interests have been selected for illustrative purposes only and do not necessarily reflect the dates on which certain events will occur.

Treatment of Equity and Equity-Based Awards

Under the Merger Agreement, the equity-based awards held by Lumos Networks’ directors and executive officers will be treated as follows:

Stock Options

Immediately prior to the effective time of the Merger, each option to purchase Lumos Networks Common Stock (whether or not vested and exercisable) that is then outstanding will automatically and without any required action on the part of the holder thereof, vest and be cancelled and entitle the option holder to receive an amount in cash equal to the product of (i) the total number of shares of Lumos Networks Common Stock subject to the option and (ii) the amount, if any, by which the Merger Consideration exceeds the applicable exercise price per share of Lumos Networks Common Stock underlying

 

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the option (less any applicable withholding taxes). Notwithstanding the foregoing, effective as of seven business days prior to the closing of the Merger (and conditional on the closing), each holder of an outstanding and unexercised option to purchase Lumos Networks will be entitled to exercise such option and shares of Lumos Networks Common Stock received upon such exercise will be treated the same as other outstanding shares of Lumos Networks Common Stock in the Merger.

The table below sets forth information regarding the Lumos Networks options held by each of our executive officers and directors as of April 19, 2017 and the value of such options in the Merger.

 

Executive Officers    Number
of Vested
Company
Options

(#)
     Value of
Vested
Company
Options(1)

($)
     Number of
Unvested
Company
Options

(#)
     Value of
Unvested
Company
Options(1)($)
     Total Value
of Company
Options(1)

($)
 

Diego B. Anderson

     62,059        286,145        5,661        21,147        307,292  

Timothy G. Biltz

     375,000        3,476,250        125,000        1,158,750        4,635,000  

Johan G. Broekhuysen

     70,168        219,861        55,355        126,137        345,999  

William Davis, Jr.

     14,736        85,759        3,184        12,451        98,210  

Thomas Ferry

     7,623        37,901        5,571        24,173        62,074  

Joseph McCourt

     206,327        1,628,276        13,121        87,779        1,716,056  

Jeffrey Miller

     74,000        198,850        126,000        276,850        475,700  

Mary McDermott

     173,338        838,232        7,516        50,282        888,514  

Non-Employee Directors

              

Lawrence J. Askowitz

     —          —          —          —          —    

Peter D. Aquino

     —          —          —          —          —    

Robert E. Guth

     19,617        49,810        —          —          49,810  

Shawn F. O’Donnell

     —          —          —          —          —    

William M. Pruellage

     —          —          —          —          —    

Michael K. Robinson

     7,312        8,538        —          —          8,538  

Michael T. Sicoli

     1,361        4,097        —          —          4,097  

Jerry E. Vaughn

     41,411        49,810        —          —          49,810  

 

(1) Value calculated for each option by multiplying (i) the excess of the $18.00 Merger Consideration over the applicable per-share exercise price of the option by (ii) the number of shares of Lumos Networks Common Stock subject to the option.

 

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Restricted Stock

Immediately prior to the effective time of the Merger, each share of Company restricted stock that is then outstanding will automatically and without any action on the part of the holder thereof become fully vested and restrictions thereon shall lapse and entitle the holder of such Company restricted stock to receive the Merger Consideration, less any applicable withholding taxes and in accordance with the same terms and conditions applied to holders of Lumos Networks Common Stock generally. Already vested shares of Lumos Networks Common Stock held by our non-employee directors and executive officers will be treated in the same manner as outstanding shares of Lumos Networks Common Stock held by other Lumos Networks stockholders entitled to receive the Merger Consideration.

The following table sets forth the number of unvested restricted shares of Lumos Networks Common Stock held by our executive officers and non-employee directors as of April 19, 2017 and the value of these shares in the Merger.

 

Name    Shares of
Restricted
Stock

(#)
     Total Value of
Shares of Restricted
Stock(1)

($)
 

Executive Officers

     

Timothy G. Biltz

     100,000        1,800,000  

Johan G. Broekhuysen

     102,294        1,841,292  

Joseph McCourt

     7,332        131,976  

Jeffrey Miller

     65,007        1,170,126  

Mary McDermott

     23,700        426,600  

Thomas Ferry

     54,133        974,394  

Diego B. Anderson

     26,766        481,788  

William Davis, Jr.

     32,883        591,894  

Non-Employee Directors

     

Lawrence J. Askowitz

     5,581        100,458  

Peter D. Aquino

     5,581        100,458  

Robert E. Guth

     5,581        100,458  

Shawn F. O’Donnell

     5,581        100,458  

William M. Pruellage

     —          —    

Michael K. Robinson

     5,581        100,458  

Michael T. Sicoli

     5,581        100,458  

Jerry E. Vaughn

     5,581        100,458  

 

(1) Calculated by multiplying the $18.00 Merger Consideration by the number of shares.

Employment Arrangements with Lumos Networks

All of our executive officers, other than Mr. Ferry and Mr. Davis, are party to employment agreements. These employment agreements provide that the base salary, Team Incentive Plan, which we refer to as the “TIP,” participation and certain other benefits would continue throughout the term of the employment agreements, and the agreements also contain non-compete provisions, change of control protection and severance arrangements. Specific terms of each employment agreement are as follows:

 

    On May 5, 2015, we entered into an amended and restated employment agreement with our President and Chief Executive Officer, Mr. Biltz. The current term of the employment agreement is through April 30, 2018 and will automatically renew for successive one-year periods thereafter unless notice of termination is previously provided. The employment agreement provides for an annual base salary and a target bonus opportunity, which are currently set at $425,000 and 100% of Mr. Biltz’s base salary. Pursuant to the management term sheet described below, Mr. Biltz and Parent will enter into an amended and restated employment agreement in connection with the Merger.

 

    In connection with his appointment as our Executive Vice President, Chief Financial Officer we entered into an amended and restated employment agreement with Mr. Broekhuysen, dated as of October 3, 2014, which was amended March 4, 2016. The current term of the employment agreement is through April 30, 2018 and will continue to automatically renew for successive one-year periods unless notice of termination is previously provided. The employment agreement provides for an annual base salary and target bonus opportunity, which are currently set at $310,648 and 70% of Mr. Broekhuysen’s base salary.

 

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    We entered into an employment agreement with our Senior Vice President and General Manager, Mr. Anderson on August 28, 2012. The initial term of the employment agreement ended on December 31, 2013 after which time it has been extended through automatic one-year renewals and will continue to automatically renew for successive one-year periods unless notice of termination is previously provided. The employment agreement provides for an annual base salary and target bonus opportunity, which are currently set at $210,000 and 70% of Mr. Anderson’s base salary. In March 2016, Mr. Anderson’s employment agreement was amended to provide that he would receive certain severance benefits in the event the Company sells or otherwise divests its rural local exchange carrier operations and does not offer Mr. Anderson an employment opportunity generally comparable in rank and benefits to his current position.

 

    We entered into an amended and restated employment agreement with our Senior Vice President and General Counsel, Ms. McDermott on June 25, 2014. The initial term of the employment agreement ended on December 31, 2015 at which time it will continue to automatically renew for successive one-year periods unless notice of termination is previously provided. The employment agreement provides for an annual base salary and a target bonus opportunity, which are currently set at $226,324 and 70% of Ms. McDermott’s base salary.

 

    Upon hiring Mr. Miller as our Senior Vice President, Corporate Development, we entered into an employment agreement with him dated May 15, 2013. The initial term of the employment agreement ended on December 31, 2014 after which time it has been extended through automatic one-year renewals and will continue to automatically renew for successive one-year periods unless notice of termination is previously provided. The employment agreement provides for an annual base salary and a target bonus opportunity, which are currently set at $216,300 and 70% of Mr. Miller’s base salary.

 

    Upon hiring Mr. McCourt as our Executive Vice President and Chief Revenue Officer, we entered into an employment agreement with him dated as of May 29, 2012 (as amended and restated as of June 25, 2014). The initial term of the employment agreement ended on December 31, 2015 after which time it has been extended through automatic one-year renewals and will continue to automatically renew for successive one-year periods unless notice of termination is previously provided. The employment agreement provides for an annual base salary and a target bonus opportunity, which are currently set at $216,000 and 70% of Mr. McCourt’s base salary.

The employment agreements we have with our executive officers provide our executive officers with change of control protection. A “change of control” is defined in each of the executive officer’s employment agreements. The proposed Merger would constitute a “change of control” under the employment agreements. If, following the proposed Merger, the executive officer is still employed by Lumos Networks, the term of each employment agreement will be extended so that the term will not expire for at least 24 months from the date of the change of control. If in connection with the change in control (or in the 24 months following the change of control), the executive’s employment is terminated, the executive will receive severance payments for such termination as provided in the employment agreement.

Each executive officer’s employment agreement with us provides for severance arrangements upon the occurrence of certain events. Each executive officer’s employment agreement terminates automatically upon his or her death. In addition, we may terminate the executive officer’s employment if he or she becomes disabled. The Company may also terminate the executive officer’s employment for any other reason with or without cause (as defined in the employment agreement). The executive officer may terminate his or her employment upon prior written notice of at least 60 days. If the executive officer terminates his or her employment for good reason (as defined in the employment agreement), it will be deemed a termination of the executive officer’s employment without cause by Lumos Networks.

If the executive officer’s employment with Lumos Networks is terminated for any reason, the executive officer is entitled under the employment agreement to receive (i) earned and unpaid base salary to the date of termination; (ii) unreimbursed business and entertainment expenses; and (iii) the employee benefits to which such executive is entitled pursuant to the applicable employee benefit plans. If the executive officer’s employment with Lumos Networks is terminated upon the

 

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executive’s disability, the executive will be entitled to a pro-rata portion of such executive’s bonus payments from the TIP for the year of termination. If the executive officer is terminated other than for cause or by reason of death or disability, or if the executive officer terminates his or her employment with Lumos Networks for good reason, such executive officer is entitled to receive (i) earned but unpaid bonus payments from the TIP; (ii) a percentage of his or her base salary (50% for Messrs. Broekhuysen, Anderson, McCourt and Miller and 75% for Ms. McDermott) for a 12 month termination period, with the exception of Mr. Biltz, who would receive 50% of his salary for a 24 month termination period; (iii) a lump sum, determined on a net present value basis, equal to the full bonus potential under the TIP for the year of the termination (except with respect to Mr. Biltz who is entitled to receive 200% of his bonus potential under the TIP for the year of termination); and (iv) continued participation in the employee medical and dental benefit plans for the termination period. To the extent necessary to comply with Section 409A of the Internal Revenue Code of 1986, as amended, which we refer to as the “Code,” Lumos Networks will delay termination payments for a period of six months after termination or, if earlier, until the executive officer’s death, as necessary to avoid any excise tax. After such delay expires, all payments which would have otherwise been required to have been made during such delay period shall be paid to the executive officer in one lump sum payment. Thereafter, the percentage of base salary payments will continue for the remainder of the termination period in such periodic installments as were being paid immediately prior to the termination date.

Ms. McDermott and Mr. McCourt’s employment agreements also provide that if the executive is terminated other than for cause or the executive officer terminates his or her employment with Lumos Networks for good reason in contemplation of or within one year following a change in control, the termination period would extend to 24 months. Therefore, in such case, the base salary payment described in (ii) in the paragraph above would extend for a 24 month period and the TIP bonus described in (iii) in the paragraph above would be equal to 200% of the bonus potential under the TIP for the year of termination.

Mr. Anderson’s employment agreement also provides for certain vesting of options and restricted stock in the event the Company sells or otherwise divests its rural local exchange carrier operations and does not offer Mr. Anderson an employment opportunity generally comparable in rank and benefits to his current position. In connection with the Merger, the options and restricted stock held by the executive officers immediately prior to the effective date of the Merger will automatically vest as provided in the Merger Agreement.

If any benefits payable or to be provided under the employment agreements and any other payments from Lumos Networks or any affiliate would subject the executive officer to any excise taxes and penalties imposed on “parachute payments” within the meaning of Section 280G(b)(2) of the Code, or any similar tax imposed by state or local law, then such payments or benefits will be reduced (but not below $0) if, and only to the extent that, such reduction will allow the executive officer to receive a greater net after tax amount than the executive officer would receive without such reduction.

As part of each executive officer’s employment agreement and as consideration for the termination payments described above, during the executive officer’s employment with Lumos Networks and for a period of time thereafter (24 months for Mr. Biltz and 12 months for Messrs. Broekhuysen, Anderson, Miller and McCourt and Ms. McDermott), which we refer to as the non-competition period, the executive officer will not (i) compete, directly or indirectly, with Lumos Networks or Lumos Networks Operating Company or (ii) solicit certain current and former employees. As consideration for the executive officer’s non-competition and non-solicitation agreement, the executive officer will receive an amount equal to a percentage of such executive officer’s base salary (50% for Messrs. Biltz, Broekhuysen, Anderson, McCourt and Miller and 25% for Ms. McDermott) during the non-competition period (or for 24 months, in the case of a termination in connection with or within one year following a change in control for Ms. McDermott and Mr. McCourt), but only if Lumos Networks has terminated the executive officer without cause or if the executive officer has terminated his or her employment for good reason. If the executive officer breaches any of the non-competition or non-solicitation restrictions, the executive officer will not receive any further payments and the executive officer will repay any payments previously received. The employment agreements also prohibit the executive officer from using any of confidential or proprietary information belonging to Lumos Networks at any time for any reason not connected to their employment with Lumos Networks. Notwithstanding the foregoing, Ms. McDermott’s employment agreement is not intended to restrict her right to practice law following the termination of her employment with Lumos Networks.

Severance Plan

Mr. Ferry and Mr. Davis are participants in the Lumos Networks Operating Company Severance Plan for Eligible Officers, which we refer to as the “Severance Plan.” The Severance Plan provides for severance upon the occurrence of certain terminations of employment. If the eligible officer’s employment with Lumos Networks is terminated without cause (as defined in the Severance Plan) (other than by reason of the officer’s death or disability), the eligible officer is entitled to receive (i) the officer’s base salary for a period of 12 months, less any sums required to be deducted or withheld under applicable law, (ii) subsidized rates for the continuation of medical, dental and vision coverage for the officer and eligible dependents for a period of 12 months, (iii) with respect to certain officers, including Mr. Ferry and Mr. Davis, a lump sum, determined on a net present value basis, equal to the full bonus potential under the TIP for the year of the termination, (iv) any vested payments payable to the officer under the TIP that remain unpaid as of the termination date,

 

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(v) earned and unpaid base salary to the date of termination, (vi) unreimbursed business and entertainment expenses and (vii) the employee benefits to which he or she is entitled pursuant to the applicable employee benefit plans. If the officer is terminated for cause or upon death or disability, or if the officer is otherwise ineligible under the Severance Plan, the officer is entitled to receive (i) earned and unpaid base salary to the date of termination, (ii) unreimbursed business and entertainment expenses and (iii) any vested and accrued employee benefits to which he or she is entitled pursuant to the applicable employee benefit plans.

Mr. Ferry and Mr. Davis are generally subject to the same non-competition and non-solicitation restrictions under the Severance Plan that the other executive officers are subject to under their employment agreements, in addition to an indefinite non-disparagement covenant, but Mr. Ferry and Mr. Davis do not receive any cash consideration for such restrictions in the event of a termination of employment without cause or for good reason.

Management Term Sheet

In connection with the Merger, certain members of Lumos Networks management negotiated a management term sheet with Parent. Pursuant to the management term sheet, Timothy G. Biltz will enter into an amended and restated employment agreement in substantially the same form as in place on the date of the Merger Agreement with the following changes, among others:

 

    his employment term will commence on the closing date of the Merger and continue through the fifth anniversary of the closing date of the Merger; and

 

    the existing provisions regarding stock-based incentive compensation will be replaced by the provisions included in the management term sheet.

Mr. Biltz has also agreed to invest $2 million in common stock of Parent, which we refer to as the “CEO Direct Investment.” Pursuant to the management term sheet, satisfaction of the investment amount may also be made, at Mr. Biltz’s election, by contributing existing shares (but not stock options) which have vested prior to the closing date of the Merger. Other members of Lumos Networks management will also be invited to participate in direct investments in amounts to be mutually agreed upon between such member and EQT. Prior to the effective time of the Merger, Parent may initiate negotiations of these agreements and/or arrangements, and may enter into definitive agreements regarding the right to participate in the common stock of Parent following the completion of the Merger. Notwithstanding the foregoing, a member of management may decide not to invest in the common stock of Parent or may invest more or less than the amount previously specified in the common stock of Parent.

In connection with the closing of the Merger, pursuant to the management term sheet, Parent expects to adopt the “Parent Stock Option Plan,” providing for additional grants of options to purchase approximately 9% of the fully-diluted shares of common stock of Parent. Under this stock option plan, certain members of Lumos Networks management, which we refer to as “Grantees,” will be granted nonqualified options to purchase common stock of Parent, which we refer to as the “Initial Options.” The number of Initial Options granted to Mr. Biltz will represent, together with the CEO Direct Investment, 3% of the common stock of Parent (calculated on a fully diluted basis immediately following the closing of the Merger). Subject to the officer’s continued employment with Lumos Networks or its affiliates through the applicable vesting date, the Initial Options will vest as follows:

 

    50% of the Initial Options will vest as to 20% of such options on each of the first, second, third, fourth and fifth anniversaries of the closing of the Merger; and

 

    the remaining 50% of the Initial Options will be eligible to vest based on specified performance goals of the EQT Fund together with certain other co-investors.

As a condition of the grant of the Initial Options, each Grantee (other than Mr. Biltz or any other Grantee subject to an employment or other effective agreement containing similar restrictive covenants) will be subject to certain non-competition provisions and non-interference/non-solicitation/no-hire provisions and customary confidentiality, ownership of intellectual property and non-disparagement provisions.

 

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Pursuant to the management term sheet, in connection with the issuance of common stock of Parent upon a direct investment and the grant of the Initial Options, each Grantee will become a party to a management stockholders’ agreement which will provide, among other rights and obligations, that (i) all shares of common stock of Parent acquired by an officer whether pursuant to a direct investment, upon the exercise of stock options or otherwise will be subject to certain restrictions on transfer, (ii) each officer will have, under certain circumstances, the right and/or obligation to participate in sales, purchases and registrations of the common stock of Parent and (iii) Parent will have, under certain circumstances, repurchase rights in respect of the common stock of Parent held by each manager.

Continuing Employees

The Merger Agreement provides that, for a period of one year following the effective time of the Merger, each employee of Lumos Networks and any of its subsidiaries who, as of the closing, continues to be employed with Parent or any of its affiliates (including Lumos Networks and its subsidiaries), who we refer to as a continuing employee, will receive (i) annual base compensation and a target annual cash bonus opportunity at least equal to the base compensation and target annual cash bonus opportunity provided to such continuing employee immediately prior to the effective time of the Merger, (ii) severance benefits that are no less favorable than the severance benefits provided to such continuing employee immediately prior to the effective time of the Merger and (iii) benefits, perquisites and other terms and conditions of employment (excluding non-qualified retirement plans, deferred compensation arrangements and equity-based compensation) that are substantially similar in the aggregate to the benefits, perquisites and other terms and conditions of employment provided to such continuing employee immediately prior to the effective time of the Merger.

Insurance and Indemnification of Directors and Executive Officers

From and after the effective time of the Merger, the surviving corporation will, and Parent will cause the surviving corporation to, indemnify and hold harmless, and will advance expenses as incurred to, each current and former director and officer of Lumos Networks and its subsidiaries, which we refer to as “indemnitees,” against any costs or expenses, judgments, fines, losses, claims, damages, liabilities or awards incurred in connection with any proceeding or investigation, whether civil, criminal, administrative or investigative, arising out of, relating to or in connection with matters existing or occurring at or prior to the effective time of the Merger, including the fact that such indemnitee is or was a director or officer of Lumos Networks or any of its subsidiaries or any acts or omissions occurring or alleged to occur prior to the effective time of the Merger, to the same extent any such indemnitee would have been entitled to under Delaware law and under the organizational documents of Lumos Networks or any of its subsidiaries in effect on of the date of the Merger Agreement. Any indemnitee receiving an advancement of expenses will be required to provide, as a condition to such advancement, an undertaking to repay such advances if it is ultimately determined that such indemnitee is not entitled to indemnification.

For a period of six years from the effective time of the Merger, the surviving corporation will assume, and Parent will cause the surviving corporation to assume, the obligations of Lumos Networks and its subsidiaries with respect to rights to indemnification, exculpation and advancement of expenses for acts or omissions occurring at or prior to the effective time of the Merger existing in favor of indemnitees as provided in the organizational documents of Lumos Networks or any of its subsidiaries or in any indemnification contract between an indemnitee and Lumos Networks or any of its subsidiaries, in each case, as in effect on the date of the Merger Agreement.

For six years from the effective time of the Merger, the surviving corporation will maintain, and Parent will cause the surviving corporation to maintain, provisions of the surviving corporation’s organizational documents with respect to limitation of liabilities of directors and indemnification and advancement of expenses of officers and directors of the Company that are no less favorable to the indemnitees than were set forth in the organizational documents of Lumos Networks as in effect on the date of the Merger Agreement. During that period, the surviving corporation will not amend, repeal or otherwise modify any such provisions in any manner that would adversely affect the rights of any indemnitee. If any actual or threatened claim is made during that period, all indemnification rights related to that claim will continue until the disposition or resolution of such the action, suit, proceeding or investigation in accordance with the surviving corporation’s organizational documents.

 

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Prior to the effective time of the Merger, Lumos Networks will or, will cause the surviving corporation as of the effective time of the Merger to, obtain and pay for a six-year non-cancellable extension of the directors’ and officers’ liability coverage of Lumos Networks’ existing directors’ and officers’ insurance policies and existing fiduciary liability insurance policies, which we refer to as “D&O insurance,” with respect to any claim related to any period of time at or prior to the effective time of the Merger. The extension of the D&O insurance, or “tail,” is required to be obtained from an insurance carrier with the same or better credit rating as Lumos Networks’ current insurance carrier with respect to D&O insurance and is required to have terms, conditions, retentions and limits of liability that are no less favorable in the aggregate than the coverage provided under Lumos Networks’ existing D&O insurance policies. If Lumos Networks and the surviving corporation do not obtain such D&O insurance on or prior to the effective time of the Merger, the surviving corporation will, and Parent will cause the surviving corporation to, continue to maintain in effect, for a period of at least six years from and after the effective time of the Merger, the D&O insurance in place as of the date of the Merger Agreement with Lumos Networks’ current insurance carrier or with an insurance carrier with the same or better credit rating and with terms, conditions, retentions and limits of liability that are no less favorable in the aggregate than the coverage provided under Lumos Networks’ existing policies as of the date of the Merger Agreement. Alternatively, the surviving corporation will purchase from Lumos Networks’ current insurance carrier or from an insurance carrier with the same or better credit rating comparable D&O insurance for such six-year period with terms, conditions, retentions and limits of liability that are no less favorable in the aggregate than as provided in Lumos Networks’ existing policies as of the date of the Merger Agreement, but under no circumstance will Lumos Networks pay, or will Parent or the surviving corporation be required to pay, a one-time premium in connection with the “tail” policy in excess of 300% of the amount per year that Lumos Networks paid in its last full fiscal year or annual premiums in excess of 300% of the amount per year that Lumos Networks paid in its last full fiscal year. If the aggregate premiums of the D&O insurance required to be maintained exceed these limits, then Lumos Networks or the surviving corporation will only be required to obtain a D&O insurance policy with the greatest coverage available for a cost not exceeding such limits.

Named Executive Officer Golden Parachute Compensation

The table below provides information about certain compensation for each of our named executive officers that is based on or otherwise relates to the Merger. The amounts in the table were calculated using outstanding option and restricted stock holdings as of April 19, 2017 and a per-share price for Lumos Networks Common Stock of $18.00, which is the Merger Consideration, and assumes the Merger closed on April 19, 2017. The compensation summarized in the table and footnotes below is subject to a non-binding, advisory vote of Lumos Networks’ stockholders, as described below in “Proposal 3: Advisory Vote on Merger-Related Named Executive Officer Compensation” beginning on page 123.

The amounts in the table are estimates based on multiple assumptions that may not actually occur, including assumptions described in this proxy statement, and do not include amounts that were vested as of April 19, 2017 (the latest practicable date prior to the filing of this proxy statement). In addition, certain amounts will vary depending on the actual date of closing of the Merger, which is presently expected to occur in the third quarter of 2017. For purposes of the table below, we have assumed that each named executive officer’s employment is terminated on April 19, 2017 by the Company without cause or by the named executive officer for good reason, as those terms are defined in the named executive officer’s employment agreement with us, even though none of the named executive officers is currently expected to incur a termination of employment in connection with the Merger. As a result, the actual amounts, if any, to be received by an applicable individual may differ in material respects from the amounts set forth below.

Golden Parachute Compensation

 

Name

   Cash(1)($)      Equity(2)($)      Pension/
NQDC(3)($)
     Perquisites/
Benefits(4)($)
     Other($)     Total($)  

Timothy G. Biltz

     1,825,753        2,958,750        —          22,988        (5     4,807,491  

Johan G. Broekhuysen

     592,445        1,967,429        —          —          (5     2,559,874  

Mary McDermott

     816,379        476,882        920,995        22,988        (5     2,237,244  

Thomas Ferry

     420,521        998,567        —          7,518        (5     1,426,606  

Diego B. Anderson

     400,496        502,935        —          11,494        (5     914,925  

 

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(1) The amounts in this column represent cash severance payments that each named executive officer would be entitled to receive under his employment agreement or the Severance Plan if the named executive officer’s employment were terminated by the Company without cause or by the named executive officer for good reason on April 19, 2017. These payments are payable in the event of such an employment termination, regardless of whether the Merger occurs. Refer to “Interests of the Directors and Executive Officers of Lumos Networks in the Merger—Employment Arrangements with Lumos Networks” and “—Severance Plan” beginning on pages 66 and 68, respectively, of this proxy statement for a description of each named executive officer’s severance rights under the employment agreements and the Severance Plan.

The following table provides additional details of the named executive officers’ potential cash severance payments.

 

Named Executive Officer    Termination
Payment ($)
     Non-Compete
Payment ($)
     Earned and
Unpaid TIP
Amounts ($)
     TIP Payment
for Severance
Period ($)
 

Timothy G. Biltz

     425,000        425,000        125,753        850,000  

Johan G. Broekhuysen

     155,324        155,324        64,343        217,454  

Mary McDermott

     339,486        113,162        46,877        316,854  

Thomas Ferry

     220,500        —          45,671        154,350  

Diego B. Anderson

     105,000        105,000        43,496        147,000  

 

(2) The amounts in this column represent the aggregate merger consideration that each named executive officer would receive with respect to Company equity-based awards subject to cancellation or accelerated vesting, as applicable, in connection with the Merger, as described above in “Interests of the Directors and Executive Officers of Lumos Networks in the Merger—Treatment of Equity and Equity-Based Awards” beginning on page 64. These are “single trigger” arrangements. The following table quantifies the value of the unvested options and restricted stock held by the named executive officers. The value of an unvested option has been calculated by multiplying (i) the excess of the $18.00 Merger Consideration over the applicable per-share exercise price of the unvested option by (ii) the number of shares of Lumos Networks Common Stock subject to the unvested option. The value of restricted stock has been calculated by multiplying the number of shares of restricted stock by the $18.00 Merger Consideration.

 

Named Executive Officer    Number of
Unvested
Stock
Options (#)
     Value of
Unvested
Stock
Options ($)
     Number of
Shares of
Restricted
Stock (#)
     Value of
Shares of
Restricted
Stock ($)
 

Timothy G. Biltz

     125,000        1,158,750        100,000        1,800,000  

Johan G. Broekhuysen

     55,355        126,137        102,294        1,841,292  

Mary McDermott

     7,516        50,282        23,700        426,600  

Thomas Ferry

     5,571        24,173        54,133        974,394  

Diego B. Anderson

     5,661        21,147        26,766        481,788  

 

(3) The amount in this column represents accrued pension and SERP benefit, if applicable, such amount payable over time in the form of an annuity commencing at the later of age 55 or the date of termination. $804,032 of this amount is a “single trigger” arrangement and is payable even if a termination does not occur in connection with or following the change in control, calculated as of December 31, 2016. The remaining $116,963 would be payable only under a “double trigger” arrangement upon termination in connection with or following a change in control.

 

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(4) The amounts in this column represent continued participation in the welfare benefit plans during the termination period. These payments are payable in the event of such an employment termination, regardless of whether the Merger occurs.
(5) Certain members of management will receive a grant of Initial Options in Parent as described in the management term sheet. The value of the option grants cannot be determined at this time.

Narrative Disclosure to Named Executive Officer Golden Parachute Compensation Table

For additional information relating to the named executive officers’ cash severance payments and the treatment of our equity-based awards held by the named executive officers, see the section entitled “Interests of the Directors and Executive Officers of Lumos Networks in the Merger” beginning on page 64.

Financing of the Merger

Parent estimates that the total amount required to complete the Merger and the related transactions and to pay related fees and expenses will be approximately $1,003 million. Parent expects this amount to be funded through a combination of the following:

 

    Debt Financing. Debt financing in an aggregate principal amount of $485 million of senior secured first lien term loans as well as a committed $50 million senior secured revolving facility, a portion of which will be available at the closing of the Merger. Parent has received firm commitments from a consortium of financial institutions to provide the debt financing and revolving credit facility. See the section entitled “—Debt Financing” below; and

 

    Equity Financing. Equity financing to be provided by the EQT Fund, in an aggregate amount of up to $517.9 million to be funded at the closing of the Merger. See the section entitled “—Equity Financing” below.

The consummation of the Merger is not subject to a financing condition (although the funding of the equity financing and the debt financing is subject to the satisfaction of the conditions set forth in the applicable commitment letter under which such financing will be provided).

Debt Financing

In connection with the entry into the Merger Agreement, Parent has obtained a commitment letter, which we refer to as the “debt commitment letter,” from Morgan Stanley Senior Funding, Inc. and Goldman Sachs Bank USA, which we refer to collectively as the “debt commitment parties,” to provide, severally but not jointly, upon the terms and subject to the conditions set forth in the debt commitment letter, in the aggregate, up to $535 million in debt financing, consisting of the following:

 

    a $485 million senior secured first lien term loan facility; and

 

    a $50 million senior secured first lien revolving credit facility. In the event additional revolving commitments are obtained prior to the closing of the Merger, the amount of the revolving credit facility may be increased to up to $75 million.

The proceeds of the debt financing will be used (i) to finance, in part, the payment of the amounts payable under the Merger Agreement, (ii) to repay certain existing indebtedness of the Company and (iii) for general corporate purposes.

 

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The obligations of the debt commitment parties to provide the debt financing under the debt commitment letter are subject to a number of customary conditions, including (i) since February 18, 2017 no company material adverse effect (as defined in the section entitled “Merger Agreement—Representations and Warranties” beginning on page 90) with respect to the Company and its subsidiaries taken as a whole shall have occurred, (ii) the consummation, prior to or substantially simultaneous with, the initial borrowing under the debt facilities, of the Merger in all material respects in accordance with the Merger Agreement (without giving effect to any amendment, waiver, consent or other modification to the Merger Agreement that is materially adverse to the debt commitment parties and the other lenders), (iii) the consummation of the equity financing, prior to, or substantially simultaneously with, the initial borrowings under the debt facilities, (iv) the consummation of the repayment of certain existing indebtedness of the Company, prior to, or substantially simultaneously with, the initial borrowings under the debt facilities, (v) the receipt of certain audited, unaudited and pro forma financial statements, (vi) the lenders having been afforded a marketing period of at least 15 consecutive business days (subject to certain customary blackout dates) following receipt of the financial statements described in clause (v) above, (vii) subject to customary “SunGard conditionality” provisions, execution and delivery of guarantees by certain guarantors and the taking of certain actions necessary to establish and perfect a security interest in substantially all assets of the Company and its subsidiaries (subject to certain exceptions), (viii) the accuracy in all material respects of specified representations and warranties in the loan documents under which the debt financing will be provided and of certain representations and warranties in the Merger Agreement, (ix) the receipt of documentation and other information about the borrowers and guarantors required under applicable “know your customer” and anti-money laundering rules and regulations (including the USA Patriot Act of 2001 (Title III of Pub. L. 107-56 (signed into law October 26, 2001))), (x) the consummation of the debt financing under the debt commitment letter on or before November 24, 2017, (xi) delivery of certain customary closing documents and (xii) payment of applicable fees and expenses.

The obligations of the debt commitment parties to provide the debt financing under the debt commitment letter will terminate at the earliest of (i) the termination of the Merger Agreement without the consummation of the Merger having occurred, (ii) the completion of the Merger with or without the funding of the applicable debt financing or (iii) 11:59 p.m., New York City time, on November 24, 2017 if the closing shall not have occurred on or prior to such time and date.

Equity Financing

Parent has received a commitment letter, which we refer to as the “equity commitment letter,” from the EQT Fund pursuant to which the EQT Fund has committed, subject to the conditions of the equity commitment letter, to provide equity financing in an aggregate amount of up to $517.9 million, or such lesser amount as may be required by Parent to complete the Merger and the related transactions as set forth in the Merger Agreement on the terms and subject to the conditions set forth therein and to pay related fees and expenses.

Funding of the equity financing is subject to the conditions provided in the equity commitment letter, which include: (i) the satisfaction or waiver, on or before the closing of the Merger, of all of the conditions precedent to Parent and Merger Sub’s obligations to consummate the Merger, (ii) the prior or substantially concurrent receipt by Parent of the proceeds of the debt financing and (iii) Parent being obligated to effect the consummation of the Merger as contemplated by the Merger Agreement.

The equity commitment letter and the EQT Fund’s obligation to fund all or any portion of the equity financing will terminate automatically and immediately on the first to occur of (i) the assertion, directly or indirectly, by the Company or any of its affiliates of any claim against the EQT Fund, Parent, Merger Sub or any former, current or future director, officer, employee, agent, general or limited partner, manager, member, controlling person, equityholder, incorporator, affiliate or representative of the EQT Fund, Parent or Merger Sub or any of their respective successors, predecessors or assigns, or any former, current or future director, officer, employee, agent, general or limited partner, manager, member, controlling person, equityholder, incorporator, affiliate or representative of any of the foregoing or any of their respective successors, predecessors or assigns (in each case other than the EQT Fund, Parent or Merger Sub in accordance with the terms and conditions of the equity commitment letter), relating to the equity commitment letter, the termination equity commitment letter (as described under “—Termination Equity Commitment Letter” below), the Merger Agreement, the debt commitment letter or any of the transactions contemplated hereby or thereby, other than any claim by the Company (x) against Parent or Merger Sub in accordance with, and solely to the extent permitted under, the Merger Agreement, (y) against the EQT Fund in accordance with, and solely to the extent permitted under, the termination equity commitment

 

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letter and (z) against the EQT Fund under this letter in accordance with, and solely to the extent permitted under the equity commitment letter and the Merger Agreement, (ii) the termination of the Merger Agreement in accordance with its terms, (iii) the effective time of the Merger and (iv) payment of the parent termination fee in accordance with the terms of the Merger Agreement. Upon the valid termination of the equity commitment letter, EQT Fund will not have any further obligations or liabilities under the equity commitment letter.

The Company is an express third party beneficiary of the equity commitment letter for the purpose of, in accordance with the terms and conditions of the Merger Agreement, seeking specific performance of the EQT Fund’s obligation to fund the equity commitment to Parent (see the section entitled “The Merger Agreement—Specific Performance” beginning on page 118).

Termination Equity Commitment Letter

Parent has received a commitment letter, which we refer to as the “termination equity commitment letter,” from the EQT Fund pursuant to which the EQT Fund has committed to provide funds to Parent for the purpose of paying the parent termination fee if the Merger Agreement is terminated by the Company under certain specified circumstances (see the section entitled “The Merger Agreement—Termination Fees” beginning on page 114).

The obligation of the EQT Fund under the termination equity commitment letter with respect to the parent termination fee is subject to an aggregate cap equal to the amount of $32.1 million, plus certain costs and expenses of enforcement, if applicable.

The termination equity commitment letter and the EQT Fund’s obligation to fund the parent termination fee will terminate on the first to occur of (i) the effective time of the Merger, (ii) payment in full of all amounts payable pursuant to the termination equity commitment letter, (iii) the termination of the Merger Agreement under circumstances in which Parent is not required to pay the parent termination fee and (iv) the three-month anniversary of the termination of the Merger Agreement under circumstances in which Parent is required to pay the parent termination fee, except as to this clause (iv) as to any notice of a claim for payment of the amounts payable pursuant to the termination equity commitment letter presented in writing by the Company to Parent or the EQT Fund on or prior to such three-month anniversary (in which case, the date of termination of this termination equity commitment letter shall be extended while such claim is resolved).

The Company’s recourse through Parent against the EQT Fund under the termination equity commitment letter (subject to the terms and conditions set forth in the termination equity commitment letter) is the sole and exclusive remedy against the EQT Fund and any related persons of the EQT Fund (and any related person of such related persons, except, in each case, for Parent and Merger Sub), and neither the EQT Fund nor any related person of the EQT Fund (nor any related person of such related persons, except, in each case, for Parent and Merger Sub), will have any liability or obligations to any person, in each case, in respect of any losses or damages suffered as a result of the failure of the Merger or the other transactions contemplated by the Merger Agreement to be consummated, for any breach or failure to perform under the Merger Agreement, or otherwise relating to or arising out of the Merger Agreement or the transactions contemplated thereunder, except for claims by the Company seeking an injunction or specific performance of the EQT Fund’s obligation to cause the equity financing to be funded, solely pursuant to the terms and subject to the conditions of the equity commitment letter and the Merger Agreement.

The Company is an express third party beneficiary of the termination equity commitment letter for the purpose of, in accordance with the terms and conditions of the Merger Agreement, seeking specific performance of the EQT Fund’s obligation to fund the parent termination fee to Parent.

 

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Appraisal Rights

General

If the Merger is completed, holders of shares of Lumos Networks Common Stock who do not vote in favor of the adoption of the Merger Agreement and who properly demand an appraisal of their shares and who otherwise comply with the requirements set forth in Section 262 of the DGCL will be entitled to appraisal rights in connection with the Merger. Strict compliance with the statutory procedures in Section 262 of the DGCL is required. Failure to timely and properly comply with the statutory requirements will result in the loss of your appraisal rights.

This section summarizes certain material provisions of Delaware law pertaining to appraisal rights. The following discussion, however, is not a full summary of the law pertaining to appraisal rights under the DGCL and is qualified in its entirety by the full text of Section 262 of the DGCL that is attached as Appendix B to this proxy statement and incorporated by reference herein. All references in Section 262 of the DGCL to “stockholder” are to the record holder of shares of Lumos Networks Common Stock. The following discussion does not constitute any legal or other advice, nor does it constitute a recommendation as to whether or not a Lumos Networks stockholder should exercise its right to seek appraisal under Section 262 of the DGCL.

Under the DGCL, if you hold one or more shares of Lumos Networks Common Stock, you do not wish to accept the Merger Consideration provided for in the Merger Agreement, you do not vote in favor of the adoption of the Merger Agreement and you otherwise comply with the requirements set forth in Section 262 of the DGCL, you will be entitled to have your shares appraised by the Delaware Court of Chancery and to receive the “fair value” of such shares (as determined by the Delaware Court of Chancery, exclusive of any element of value arising from the accomplishment or expectation of the Merger) in cash, together with interest, if any, to be paid upon the amount determined to be the fair value. It is possible that any such “fair value” as determined by the Delaware Court of Chancery may be more or less than, or the same as, the $18.00 Merger Consideration which Lumos Networks stockholders will be entitled to receive upon the consummation of the Merger pursuant to the Merger Agreement. These rights are known as appraisal rights.

Under Section 262 of the DGCL, not less than 20 days prior to the Lumos Networks annual meeting at which the adoption of the Merger Agreement will be submitted to the stockholders, Lumos Networks must notify each stockholder who was a Lumos Networks stockholder on the record date for notice of such meeting and who is entitled to exercise appraisal rights that appraisal rights are available and include in the notice a copy of Section 262 of the DGCL. This proxy statement constitutes the required notice, and a copy of Section 262 of the DGCL is attached as Appendix B to this proxy statement.

A HOLDER OF LUMOS NETWORKS COMMON STOCK WHO WISHES TO EXERCISE APPRAISAL RIGHTS OR WHO WISHES TO PRESERVE THE RIGHT TO DO SO SHOULD REVIEW THE FOLLOWING DISCUSSIONS AND APPENDIX B CAREFULLY. FAILURE TO COMPLY PRECISELY WITH THE PROCEDURES OF SECTION 262 OF THE DGCL IN A TIMELY AND PROPER MANNER WILL RESULT IN THE LOSS OF APPRAISAL RIGHTS. BECAUSE OF THE COMPLEXITY OF THE PROCEDURES FOR EXERCISING THE RIGHT TO SEEK APPRAISAL UNDER SECTION 262 OF THE DGCL, A HOLDER OF LUMOS NETWORKS COMMON STOCK WHO IS CONSIDERING WHETHER TO EXERCISE HIS, HER OR ITS APPRAISAL RIGHTS, IS ENCOURAGED TO CONSULT WITH HIS, HER OR ITS OWN LEGAL COUNSEL. ANY SHARES OF LUMOS NETWORKS COMMON STOCK HELD BY A LUMOS NETWORKS STOCKHOLDER WHO FAILS TO PERFECT, SUCCESSFULLY WITHDRAWS OR OTHERWISE LOSES HIS, HER OR ITS APPRAISAL RIGHTS WILL BE DEEMED TO HAVE BEEN CONVERTED AS OF THE EFFECTIVE TIME OF THE MERGER INTO THE RIGHT TO RECEIVE THE MERGER CONSIDERATION.

How to Exercise and Perfect Your Appraisal Rights

If you are a Lumos Networks stockholder and wish to exercise the right to seek an appraisal of your shares of Lumos Networks Common Stock, you must comply with ALL of the following:

 

    you must not vote “FOR, or otherwise consent in writing to, the adoption of the Merger Agreement. Because a proxy that is signed and submitted but does not otherwise contain voting instructions will, unless revoked, be voted in favor of the adoption of the Merger Agreement, if you submit a proxy and wish to exercise your appraisal rights, you must include voting instructions to vote your share “AGAINST, or as an abstention with respect to, the adoption of the Merger Agreement;

 

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    you must continuously hold your shares of Lumos Networks Common Stock from the date of making the demand through the effective time of the Merger. You will lose your appraisal rights if you transfer the shares of Lumos Networks Common Stock before the effective time of the Merger;

 

    prior to the taking of the vote to adopt the Merger Agreement at the special meeting, you must deliver a proper written demand for appraisal of your shares; and

 

    you, another stockholder, an appropriate beneficial owner or the surviving corporation must file a petition in the Delaware Court of Chancery requesting a determination of the fair value of the shares of Lumos Networks Common Stock within 120 days after the effective time of the Merger. The surviving corporation is under no obligation to file any such petition in the Delaware Court of Chancery and has no intention of doing so. Accordingly, it is the obligation of Lumos Networks stockholders to initiate all necessary action to properly demand their appraisal rights in respect of shares of Lumos Networks Common Stock within the time prescribed in Section 262 of the DGCL.

Filing a Written Demand

Neither voting against the adoption of the Merger Agreement, nor abstaining from voting or failing to vote on the merger proposal, will in and of itself constitute a written demand for appraisal satisfying the requirements of Section 262 of the DGCL. Any holder of shares of Lumos Networks Common Stock wishing to exercise appraisal rights must deliver to Lumos Networks, before the taking of the vote on the adoption of the Merger Agreement at the annual meeting (at which the merger proposal will be submitted to the stockholders), a written demand for the appraisal of the stockholder’s shares. A stockholder’s failure to deliver the written demand prior to the taking of the vote on the adoption of the Merger Agreement at the annual meeting of stockholders will constitute a waiver of appraisal rights. The written demand for appraisal must be in addition to and separate from any proxy or vote on the adoption of the Merger Agreement.

A demand for appraisal must be executed by or on behalf of the stockholder of record. Only a holder of record may demand appraisal rights for the shares of Lumos Networks Common Stock registered in that holder’s name. A demand for appraisal must be executed by or on behalf of the holder of record. The demand should specify the stockholder’s name and mailing address and the number of shares of Lumos Networks Common Stock registered in the stockholder’s name and must state that the person intends thereby to demand appraisal of the stockholder’s shares in connection with the Merger. Such demand will be sufficient if it reasonably informs Lumos Networks of the identity of the stockholder and that the stockholder intends to demand appraisal of the “fair value” of his, her or its shares of Lumos Networks Common Stock. Beneficial owners who do not also hold their shares of Lumos Networks Common Stock of record may not directly make appraisal demands to Lumos Networks. The beneficial owner must, in such cases, arrange for the holder of record, such as a bank, broker or other nominee, to timely submit the required demand in respect of those shares of Lumos Networks Common Stock. A holder of record, such as a bank, broker or other nominee, who holds shares of Lumos Networks Common Stock as a nominee or intermediary for others, may exercise appraisal rights with respect to the shares of Lumos Networks Common Stock held for one or more beneficial owners, while not exercising this right for other beneficial owners. The written demand should state the number of shares of Lumos Networks Common Stock as to which appraisal is sought. Where no number of shares of Lumos Networks Common Stock is expressly mentioned, the demand will be presumed to cover all shares of Lumos Networks Common Stock held in the name of the holder of record.

IF YOU HOLD YOUR SHARES OF LUMOS NETWORKS COMMON STOCK IN BANK OR BROKERAGE ACCOUNTS OR OTHER NOMINEE FORMS, AND YOU WISH TO EXERCISE APPRAISAL RIGHTS, YOU SHOULD CONSULT WITH YOUR BANK, BROKER OR NOMINEE TO DETERMINE THE APPROPRIATE PROCEDURES FOR THE BANK, BROKERAGE FIRM OR OTHER NOMINEE TO MAKE A DEMAND FOR APPRAISAL OF THOSE SHARES. IF YOU HAVE A BENEFICIAL INTEREST IN SHARES OF LUMOS NETWORKS COMMON STOCK HELD OF RECORD IN THE NAME OF ANOTHER PERSON, SUCH AS A NOMINEE OR INTERMEDIARY, YOU MUST ACT PROMPTLY TO CAUSE THE HOLDER OF RECORD TO FOLLOW PROPERLY AND IN A TIMELY MANNER THE STEPS NECESSARY TO DEMAND YOUR APPRAISAL RIGHTS. IF YOU HOLD YOUR SHARES OF LUMOS NETWORKS COMMON STOCK THROUGH A BANK OR BROKERAGE WHO IN TURN HOLDS THE SHARES THROUGH A CENTRAL SECURITIES

 

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DEPOSITORY NOMINEE, SUCH AS THE DEPOSITORY TRUST COMPANY, A DEMAND FOR APPRAISAL OF SUCH SHARES MUST BE MADE BY OR ON BEHALF OF THE DEPOSITORY NOMINEE AND MUST IDENTIFY THE DEPOSITORY NOMINEE AS THE HOLDER OF RECORD.

If your shares of Lumos Networks Common Stock are owned of record in a fiduciary capacity, such as by a trustee, guardian or custodian, execution of the demand for appraisal should be made in that capacity, and if your shares are owned of record jointly with one or more other persons, as in a joint tenancy or tenancy in common, the demand for appraisal should be executed by or for you and all other joint owners. An authorized agent, including an agent for two or more joint owners, may execute the demand for appraisal for a stockholder of record; however, the agent must identify the holder or holders of record and expressly disclose the fact that, in exercising the demand, such person is acting as agent for the holder or holders of record. If you hold shares of Lumos Networks Common Stock through a nominee or intermediary who in turn holds the shares through a central securities depository nominee, a demand for appraisal of such shares must be made by or on behalf of the depository nominee and must identify the depository nominee as record holder. Stockholders who hold their shares of Lumos Networks Common Stock in brokerage accounts or other nominee forms and who wish to exercise appraisal rights are urged to consult with their brokers or other nominees to determine the appropriate procedures for the making of a demand for appraisal by such a nominee.

If you elect to exercise appraisal rights under Section 262 of the DGCL, you should mail or deliver a written demand to:

Lumos Networks Corp.

One Lumos Plaza

Waynesboro, VA 22980

(540) 946-2000

At any time within 60 days after the effective time of the Merger, any Lumos Networks stockholder that made a demand for appraisal but has not commenced an appraisal proceeding or joined in such a proceeding as a named party will have the right to withdraw the demand and to accept the Merger Consideration in accordance with the Merger Agreement for his, her or its shares of Lumos Networks Common Stock by delivering to the surviving corporation a written withdrawal of the demand for appraisal, but after such 60-day period a demand for appraisal may be withdrawn only with the written approval of the surviving corporation.

Notice by the Surviving Corporation. Within ten days after the effective date of the Merger, the Company, as the surviving corporation, must notify each holder of Lumos Networks Common Stock who has made a written demand for appraisal pursuant to Section 262 of the DGCL, and who has not voted in favor of the adoption of the Merger Agreement, of the date that the Merger has become effective.

Filing a Petition For Appraisal with the Delaware Court of Chancery. Within 120 days after the effective time of the Merger, but not later, either you, provided you have complied with the requirements of Section 262 of the DGCL and are otherwise entitled to appraisal rights, or the surviving corporation may commence an appraisal proceeding by filing a petition in the Delaware Court of Chancery, with a copy served on the surviving corporation in the case of a petition filed by you, demanding an appraisal of the value of the shares of Lumos Networks Common Stock held by all stockholders who have properly demanded appraisal. None of EQT, the EQT Fund, Parent, Merger Sub or Lumos Networks, as the surviving corporation, is under any obligation to file an appraisal petition or has any intention to do so. If you desire to have your shares of Lumos Networks Common Stock appraised, you should initiate any petitions necessary for properly demanding your appraisal rights within the time periods and in the manner prescribed in Section 262 of the DGCL.

Within 120 days after the effective time of the Merger, provided you have complied with the provisions of Section 262 of the DGCL, you will be entitled to receive from the surviving corporation, upon written request, a statement setting forth the aggregate number of shares of Lumos Networks Common Stock not voted in favor of the adoption of the Merger Agreement and with respect to which Lumos Networks has received demands for appraisal, and the aggregate number of holders of those shares. The surviving corporation must mail this statement to you within the later of (i) 10 days after receipt by the surviving corporation of the request therefor or (ii) 10 days after expiration of the period for delivery of demands for appraisal. If you are the beneficial owner of shares of Lumos Networks Common Stock held in a voting trust or by a nominee or intermediary on your behalf you may, in your own name, file an appraisal petition or request from the surviving corporation the statement described in this paragraph. If a petition for appraisal is not timely filed, then the right to appraisal will cease.

 

 

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If a petition for appraisal is duly filed by you or another holder of record of Lumos Networks Common Stock who has properly exercised his, her or its appraisal rights in accordance with the provisions of Section 262 of the DGCL, and a copy of the petition is delivered to the surviving corporation, the surviving corporation will then be obligated, within 20 days after receiving service of a copy of the petition, to file with the Delaware Court of Chancery a duly verified list containing the names and addresses of all holders who have demanded an appraisal of their shares of Lumos Networks Common Stock and with whom agreements as to the value of their shares of Lumos Networks Common Stock have not been reached by the surviving corporation. After notice to the stockholders as required by the court, the Delaware Court of Chancery is empowered to conduct a hearing on the petition to determine which Lumos Networks stockholders have complied with Section 262 of the DGCL and have become entitled to appraisal rights and may require the Lumos Networks stockholders demanding appraisal who hold certificated shares of Lumos Networks Common Stock to submit their stock certificates to the Register in Chancery for notation thereon of the pendency of the appraisal proceedings, and the Delaware Court of Chancery may dismiss the proceedings as to any Lumos Networks stockholder who fails to comply with this direction. In addition, the Delaware Court of Chancery will dismiss the proceedings as to all holders of such shares who are otherwise entitled to appraisal rights unless (1) the total number of shares of Lumos Networks Common Stock entitled to appraisal exceeds 1% of the outstanding shares of Lumos Networks Common Stock, or (2) the value of the consideration provided in the Merger for such total number of shares of Lumos Networks Common Stock exceeds $1 million.

The appraisal proceeding will be conducted as to the shares of Lumos Networks Common Stock owned by such stockholders, in accordance with the rules of the Delaware Court of Chancery, including any rules specifically governing appraisal proceedings. Through the appraisal proceeding, the Delaware Court of Chancery will determine the fair value of the shares of Lumos Networks Common Stock at the effective time of the Merger held by all Lumos Networks stockholders who have properly demanded their appraisal rights, exclusive of any element of value arising from the accomplishment or expectation of the Merger, together with interest, if any, to be paid upon the amount determined to be the fair value. Unless the Delaware Court of Chancery in its discretion determines otherwise for good cause shown, and except as otherwise provided in Section 262 of the DGCL, interest from the effective time of the Merger through the date of payment of the judgment will be compounded quarterly and will accrue at 5% over the Federal Reserve discount rate (including any surcharge) as established from time to time during the period between the effective time of the Merger and the date of payment of the judgment. At any time before the entry of judgment in the proceedings, the surviving corporation may pay to each stockholder entitled to appraisal an amount in cash, in which case interest shall accrue thereafter as provided herein only upon the sum of (1) the difference, if any, between the amount so paid and the fair value of the shares as determined by the Delaware Court of Chancery, and (2) interest theretofore accrued, unless paid at that time. When the value is determined, the Delaware Court of Chancery will direct the payment of such value, with interest thereon, if any, to the Lumos Networks stockholders entitled to receive the same, forthwith in the case of uncertificated stockholders or upon surrender by certificated stockholders to the surviving corporation of their stock certificates.

In determining the fair value, the Delaware Court of Chancery is required to take into account all relevant factors. In Weinberger v. UOP, Inc., the Delaware Supreme Court discussed the factors that could be considered in determining fair value in an appraisal proceeding, stating that “proof of value by any techniques or methods which are generally considered acceptable in the financial community and otherwise admissible in court” should be considered and that “[f]air price obviously requires consideration of all relevant factors involving the value of a company.” The Delaware Supreme Court has stated that, in making this determination of fair value, the court must consider market value, asset value, dividends, earnings prospects, the nature of the enterprise and any other factors which were known or which could be ascertained as of the date of the Merger which throw any light on future prospects of the merged corporation. Section 262 of the DGCL provides that fair value is to be “exclusive of any element of value arising from the accomplishment or expectation of the Merger.” In Cede & Co. v. Technicolor, Inc., the Delaware Supreme Court stated that such exclusion is a “narrow exclusion [that] does not encompass known elements of value,” but which rather applies only to the speculative elements of value arising from such accomplishment or expectation. In Weinberger, the Delaware Supreme Court

 

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construed Section 262 of the DGCL to mean that “elements of future value, including the nature of the enterprise, which are known or susceptible of proof as of the date of the Merger and not the product of speculation, may be considered.” An opinion of an investment banking firm as to the fairness from a financial point of view of the consideration payable in a Merger is not an opinion as to fair value under Section 262 of the DGCL. The fair value of shares of Lumos Networks Common Stock as determined under Section 262 of the DGCL could be greater than, the same as, or less than the value of the Merger Consideration. Neither EQT, the EQT Fund, Parent, Merger Sub or Lumos Networks, as the surviving corporation, anticipates offering more than the Merger Consideration to any Lumos Networks stockholder exercising appraisal rights and reserves the right to assert, in any appraisal proceeding, that, for purposes of Section 262 of the DGCL, the “fair value” of a share of Lumos Networks Common Stock is less than the Merger Consideration. No representation is made as to the outcome of the appraisal of fair value as determined by the Delaware Court of Chancery.

If no party files a petition for appraisal within 120 days after the effective time of the Merger, then you will lose the right to an appraisal, and will instead receive the Merger Consideration in accordance with the Merger Agreement, without interest thereon, less any withholding taxes.

The Delaware Court of Chancery may determine the costs of the appraisal proceeding (which do not include attorneys’ fees or the fees and expenses of experts) and may tax those costs upon the parties as the Delaware Court of Chancery deems equitable under the circumstances. Upon application of a stockholder, the Delaware Court of Chancery may order all or a portion of the expenses incurred by any stockholder in connection with the appraisal proceeding, including reasonable attorneys’ fees and the fees and expenses of experts, to be charged pro rata against the value of all shares of Lumos Networks Common Stock entitled to appraisal. In the absence of such an order, each party to the appraisal proceeding bears its own expenses.

If you have duly demanded an appraisal in compliance with Section 262 of the DGCL, you will not, from and after the effective time of the Merger, be entitled to vote the shares of Lumos Networks Common Stock subject to the demand for any purpose or receive any dividends or other distributions on those shares, except dividends or other distributions payable to holders of record of Lumos Networks Common Stock as of a record date prior to the effective time of the Merger.

If you have not commenced an appraisal proceeding or joined such a proceeding as a named party you may withdraw a demand for appraisal and accept the Merger Consideration by delivering a written withdrawal of the demand for appraisal and an acceptance of the consideration payable in the Merger to the surviving corporation, except that any attempt to withdraw made more than 60 days after the effective time of the Merger will require written approval of the surviving corporation, and no appraisal proceeding in the Delaware Court of Chancery will be dismissed as to any stockholder without the approval of the Delaware Court of Chancery. Such approval may be conditioned on the terms the Delaware Court of Chancery deems just; provided, however, that this provision will not affect the right of any Lumos Networks stockholder that has made an appraisal demand but who has not commenced an appraisal proceeding or joined such proceeding as a named party to withdraw such stockholder’s demand for appraisal and to accept the terms offered in the Merger within 60 days after the effective time of the Merger. If you fail to properly demand or successfully withdraw your demand for appraisal, or otherwise lose your appraisal rights, your shares of Lumos Networks Common Stock will be deemed to have been converted as of the effective time of the Merger into the right to receive the Merger Consideration, without interest thereon, less any withholding taxes.

Failure to follow the steps required by Section 262 of the DGCL for properly demanding appraisal rights may result in the loss of your appraisal rights. In that event, you will be entitled to receive the Merger Consideration for your shares of Lumos Networks Common Stock in accordance with the Merger Agreement.

THE PROCESS OF DEMANDING AND EXERCISING APPRAISAL RIGHTS REQUIRES STRICT COMPLIANCE WITH THE TECHNICAL PREREQUISITES OF SECTION 262 OF THE DGCL. IF YOU WISH TO EXERCISE YOUR APPRAISAL RIGHTS, YOU SHOULD CONSULT WITH YOUR OWN LEGAL COUNSEL. TO THE EXTENT THERE ARE ANY INCONSISTENCIES BETWEEN THE FOREGOING SUMMARY AND SECTION 262 OF THE DGCL, THE DGCL WILL GOVERN.

 

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Accounting Treatment

The Merger will be accounted for as a “purchase transaction” for financial accounting purposes.

U.S. Federal Income Tax Consequences of the Merger

The following general discussion sets forth the material U.S. federal income tax consequences of the Merger to U.S. holders and non-U.S. holders (each as defined below) who receive cash in exchange for shares of Lumos Networks Common Stock pursuant to the Merger. This discussion is for general informational purposes only and does not purport to be a complete analysis of all potential tax consequences of the Merger. This discussion is based upon the Code, the regulations promulgated thereunder and court and administrative rulings and decisions, all as in effect as of the date hereof. These authorities may change or be subject to differing interpretations, and any such change or differing interpretation may be applied retroactively, and any such change could affect the accuracy of the statements and conclusions set forth in this discussion. There can be no assurance the Internal Revenue Service, which we refer to as the “IRS,” or a court will not take a contrary position to that discussed below regarding the tax consequences of the Merger. This discussion does not address any tax consequences arising under the laws of any state, local or foreign jurisdiction, or under any U.S. federal laws other than those pertaining to income tax, such as estate and gift tax laws. This discussion also does not address any tax consequences under the unearned income Medicare contribution tax pursuant to Section 1411 of the Code.

This discussion is limited to holders of shares of Lumos Networks Common Stock who hold such shares as capital assets within the meaning of Section 1221 of the Code (generally, property held for investment). This discussion does not address all U.S. federal income tax consequences that may be relevant to a holder in light of such holder’s particular circumstances. In addition, this discussion does not address the U.S. federal income tax consequences to holders subject to special rules under the U.S. federal income tax laws, including, without limitation:

 

    U.S. expatriates and former citizens or long-term residents of the United States;

 

    persons holding shares of Lumos Networks Common Stock that are subject to the alternative minimum tax;

 

    U.S. holders whose functional currency is not the U.S. dollar;

 

    persons holding shares of Lumos Networks Common Stock as part of a hedge, straddle or other risk reduction strategy or as part of a conversion transaction or other integrated investment;

 

    banks, thrifts, and other financial institutions;

 

    insurance companies;

 

    brokers or dealers in stocks and securities, or currencies;

 

    traders in securities that elect to apply a mark-to-market method of accounting;

 

    controlled foreign corporations, passive foreign investment companies, and corporations that accumulate earnings to avoid U.S. federal income tax;

 

    S corporations, partnerships or other entities or arrangements classified as partnerships for U.S. federal income tax purposes or other pass-through entities (and investors therein);

 

    real estate investment trusts, mutual funds and regulated investment companies;

 

    tax-exempt organizations or governmental organizations;

 

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    persons deemed to sell their shares of Lumos Networks Common Stock under the constructive sale provisions of the Code;

 

    persons who own an equity interest, actually or constructively, in Parent or the surviving corporation;

 

    persons who hold or received their shares of Lumos Networks Common Stock pursuant to the exercise of any employee stock option, through a tax qualified retirement plan or otherwise as compensation;

 

    retirement plans, individual retirement accounts and other tax-deferred accounts; and

 

    holders of shares of Lumos Networks Common Stock who exercise appraisal rights in connection with the Merger under the DGCL.

If a partnership (including any entity or arrangement, domestic or foreign, treated as a partnership for U.S. federal income tax purposes) holds shares of Lumos Networks Common Stock, the tax treatment of a partner in such partnership will generally depend on the status of the partner and the activities of the partnership. If a holder is a partner in a partnership holding Lumos Networks Common Stock, the holder should consult its tax advisors.

Tax Consequences to U.S. Holders

Definition of a U.S. Holder

For purposes of this discussion, a “U.S. holder” is any beneficial owner of shares of Lumos Networks Common Stock that for U.S. federal income tax purposes is or is treated as:

 

    an individual who is a citizen or resident of the United States;

 

    a corporation (or other entity classified as a corporation for U.S. federal income tax purposes) created or organized under the laws of the United States, any state thereof or the District of Columbia;

 

    an estate, the income of which is subject to U.S. federal income tax regardless of its source; or

 

    a trust that (1) is subject to the primary supervision of a U.S. court and one or more “United States persons” (within the meaning of Section 7701(a)(30) of the Code) are authorized to control all substantial decisions of the trust, or (2) has a valid election in effect to be treated as a “United States person” for U.S. federal income tax purposes.

Effect of the Merger

The receipt of cash by a U.S. holder in exchange for shares of Lumos Networks Common Stock in the Merger will be a taxable transaction for U.S. federal income tax purposes. The amount of any gain or loss realized by a U.S. holder who receives cash for shares of Lumos Networks Common Stock in the Merger generally will equal the difference, if any, between the amount of cash received for such shares and the U.S. holder’s adjusted tax basis in such shares. A U.S. holder’s adjusted tax basis in a share generally will be equal to the amount the U.S. holder paid for the share. Gain or loss and holding period will be determined separately for each block of shares of Lumos Networks Common Stock (that is, shares of Lumos Networks Common Stock acquired at the same cost in a single transaction) exchanged for cash in the Merger. Any gain or loss realized by a U.S. holder upon the receipt of cash in exchange for a share of Lumos Networks Common Stock in the Merger generally will be capital gain or loss, and will be long-term capital gain or loss if the U.S. holder has held such share for more than one year at the effective time of Merger. Otherwise, such gain or loss will be short-term capital gain or loss. Long-term capital gains recognized by certain non-corporate U.S. holders, including individuals, are generally taxable at a reduced rate. The deductibility of capital losses is subject to limitations.

 

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Information Reporting and Backup Withholding

Payments made to a U.S. holder in exchange for shares of Lumos Networks Common Stock pursuant to the Merger may be subject to information reporting and may be subject to backup withholding. To avoid backup withholding on such payments, U.S. holders that do not otherwise establish an exemption should complete and return to the paying agent a properly executed IRS Form W-9 included in the letter of transmittal, certifying that such holder is a U.S. person, the taxpayer identification number provided is correct, and that such holder is not subject to backup withholding. Certain holders (including corporations) are not subject to backup withholding or information reporting rules.

Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit against a U.S. holder’s U.S. federal income tax liability, if any, provided the required information is timely furnished to the IRS. U.S. holders should consult their tax advisors regarding their qualification for an exemption from backup withholding and the procedures for obtaining such an exemption.

Tax Consequences to Non-U.S. Holders

Definition of a Non-U.S. Holder

For purposes of this discussion, a “non-U.S. holder” is a beneficial owner of shares of Lumos Networks Common Stock that is neither a U.S. holder nor an entity or arrangement classified as a partnership for U.S. federal income tax purposes.

Effect of the Merger

A non-U.S. holder generally will not be subject to U.S. federal income tax on any gain realized on the receipt of cash in exchange for shares of Lumos Networks Common Stock in the Merger unless:

 

    the gain is effectively connected with the non-U.S. holder’s conduct of a trade or business within the United States (and, if required by an applicable income tax treaty, such gain is attributable to a permanent establishment maintained by the non-U.S. holder in the United States);

 

    the non-U.S. holder is a nonresident alien individual present in the United States for 183 days or more during the taxable year of the disposition of shares of Lumos Networks Common Stock in the Merger, and certain other requirements are met; or

 

    Lumos Networks is or has been treated as a United States real property holding corporation, which we refer to as “USRPHC,” for U.S. federal income tax purposes at any time during the shorter of the five-year period ending on the date of the Merger or the period that the non-U.S. holder held shares of Lumos Networks Common Stock and the non-U.S. holder held (actually or constructively) more than five percent of shares of Lumos Networks Common Stock at any time during such five-year period.

Gain described in the first bullet point above generally will be subject to U.S. federal income tax on a net income basis at the regular graduated U.S. federal income tax rates, generally in the same manner as if such non-U.S. holder were a U.S. holder. A non-U.S. holder that is a corporation also may be subject to a branch profits tax at a rate of 30%, or lower rate specified in an applicable income treaty, on such effectively connected gain, as adjusted for certain items.

Gain described in the second bullet point above generally will be subject to U.S. federal income tax at a rate of 30% (or such lower rate as may be specified under an applicable income tax treaty), which may be offset by U.S.-source capital losses of the non-U.S. holder (even though the individual is not considered a resident of the United States), provided the non-U.S. holder has timely filed U.S. federal income tax returns with respect to such losses.

With respect to the third bullet point above, the determination of whether Lumos Networks is a USRPHC depends on the fair market value of its United States real property interests relative to the fair market value of its other trade or business assets and its United States and foreign real property interests. Lumos Networks believes it has not been a USRPHC for U.S. federal income tax purposes during the time described above.

 

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Non-U.S. holders should consult their tax advisors regarding potentially applicable income tax treaties that may provide for different rules.

Information Reporting and Backup Withholding

Payments made to non-U.S. holders in the Merger may be subject to information reporting and backup withholding. Non-U.S. holders generally can avoid backup withholding and information reporting by providing the paying agent with the applicable and properly executed IRS Form W-8 certifying the holder’s non-U.S. status or by otherwise establishing an exemption. Copies of information returns that are filed with the IRS may be made available under an applicable tax treaty or information exchange agreement to the tax authorities of the country in which the non-U.S. holder is resident for tax purposes. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit against a non-U.S. holder’s U.S. federal income tax liability, if any, provided the required information is timely furnished to the IRS.

The foregoing discussion of U.S. federal income tax consequences is not intended to constitute a complete description of all tax consequences relating to the Merger. The tax consequences of the Merger to a Lumos Networks stockholder will depend upon the facts of the stockholder’s particular situation. Because individual circumstances may differ, Lumos Networks stockholders are urged to consult with their own tax advisor regarding the applicability of the rules discussed above and the particular tax effects of the Merger, including the application of state, local, non-U.S. and non-income tax laws.

Regulatory Approvals Required for the Merger

General

Lumos Networks and Parent have generally agreed to use their reasonable best efforts to comply with all regulatory notification requirements and obtain all regulatory approvals required to consummate the Merger and the other transactions contemplated by the Merger Agreement. These approvals include the expiration or termination of the applicable waiting period under the HSR Act. Although we expect that all required regulatory clearances and approvals will be obtained, we cannot assure you that these regulatory clearances and approvals will be timely obtained, obtained at all or that the granting of these regulatory clearances and approvals will not involve the imposition of additional conditions on the completion of the Merger, including the requirement to divest assets, or require changes to the terms of the Merger Agreement.

HSR Act and U.S. Antitrust Matters

Under the HSR Act and the rules promulgated thereunder by the FTC, the Merger cannot be completed until Lumos Networks and Parent each file a notification and report form with the FTC and the DOJ under the HSR Act and the applicable waiting period thereunder has expired or been terminated. A transaction notifiable under the HSR Act may not be completed until the expiration of a 30 calendar day waiting period following the parties’ filing of their respective HSR Act notification forms or the early termination of that waiting period. Lumos Networks and Parent and its affiliates filed their respective HSR Act premerger notifications on March 3, 2017 with the FTC and the DOJ under the HSR Act and the HSR waiting period expired at 11:59 p.m. on April 3, 2017.

At any time before or after the consummation of the Merger, notwithstanding the expiration or termination of the waiting period under the HSR Act, the DOJ or the FTC could take such action under the antitrust laws as it deems necessary or desirable in the public interest, including seeking to enjoin the completion of the Merger, seeking divestiture of substantial assets of the parties or requiring the parties to license, or hold separate, assets or terminate existing relationships and contractual rights. At any time before or after the completion of the Merger, and notwithstanding the expiration or termination of the waiting period under the HSR Act, any state could take such action under the antitrust laws as it deems necessary or desirable in the public interest. Such action could include seeking to enjoin the completion of the Merger or seeking divestiture of substantial assets of the parties. Private parties may also seek to take legal action under the antitrust laws under certain circumstances.

 

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Federal Communications Commission Approval

Lumos Networks is subject to regulation by the FCC under the Communications Act. Lumos Networks holds a number of FCC authorizations related to the provision of regulated services. FCC approval is required before Lumos Networks may transfer control of its authorizations to Parent. The FCC will not issue its approval until it receives the consent of the Team Telecom executive branch government agencies that undertake a national security review of certain applications filed with the FCC involving potential foreign ownership of U.S. telecommunications assets. In determining whether to approve the proposed change of control of Lumos Networks, the FCC considers whether such change in ownership serves the public interest, convenience, and necessity. As part of this process, the FCC examines whether a proposed change in ownership is consistent with the policies of the Communications Act, including, among other things, the effect of the proposed transfer on the “public interest” and the FCC’s policies encouraging competition.

Parent and Lumos Networks filed with the FCC applications requesting the FCC’s consent to the change in ownership of Lumos Networks on March 2, 2017. As part of its review process, the FCC will refer the application to Team Telecom. In turn, as part of the Team Telecom process, Lumos Networks expects to enter into an agreement with these agencies to address certain national security, law enforcement, and public safety concerns related to Lumos Networks’ operations. The FCC may condition its approval on the parties’ compliance with the terms of the anticipated agreement.

CFIUS Approval

The Merger Agreement provides for the parties to file a voluntary notice under the DPA with CFIUS, an intergovernmental agency that undertakes national security reviews and, where appropriate, investigations in transactions where a foreign company acquires control of a U.S. company. CFIUS conducts an initial 30-day review of transactions of which it is notified, and may, at the end of the initial 30-day review period, conduct an additional investigation that must be completed within 45 days. The parties to a notified transaction may, with the consent of CFIUS and mutual agreement, withdraw and re-file a CFIUS notice, thereby commencing a new 30-day review period (and, if necessary, 45-day investigation). In certain situations, at the conclusion of an investigation, a report may be sent to the President, who then has 15 days to decide whether to block the transaction or to take other action.

CFIUS considers many factors in determining whether a proposed transaction threatens to impair national security, including domestic production needed for national defense requirements, the capability of domestic industries to meet national defense requirements, and the potential effects on U.S. international technological leadership in areas affecting national security.

CFIUS reviews also provide an opportunity for U.S. federal government agencies to ensure compliance with various regulations relating to national security, such as the requirement to obtain export licenses for exports of controlled technical data. The parties are required to submit information about classified and other defense-related contracts of the acquired company.

Parent and Lumos Networks believe that, with the proposed foreign ownership, control or influence and other mitigation measures, the Merger will not give rise to national security concerns that would cause the transaction to be blocked.

State

Lumos Networks also holds state telecommunications certificates and licenses that require approval before control of Lumos Networks can be transferred to Parent. In addition, some state laws require approval for licensees to enter into certain financing arrangements. Lumos Networks and Parent have made all of the initial required filings with the appropriate state public utility commissions.

 

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Timing of Regulatory Approvals

We currently anticipate that all regulatory approvals will be received by the third quarter of 2017, although the receipt of approvals and their timing cannot be assured or predicted at this time.

Litigation Related to the Merger

On April 4, 2017 and April 11, 2017, two putative class action lawsuits were filed in the United States District Court for the District of Delaware against Lumos Networks’ directors, EQT Partners Inc., Parent and Merger Sub. The plaintiffs in the actions allege that the preliminary proxy statement filed by Lumos Networks with the SEC on March 31, 2017 contained false and misleading statements and omitted material information in violation of Section 14(a) of the Exchange Act and SEC Rule 14a-9 promulgated thereunder, and further that the individual defendants, EQT Partners Inc., Parent and Merger Sub are liable for those alleged misstatements and omissions under Section 20(a) of the Exchange Act. The actions seek, among other things, to enjoin the Merger or, if the Merger has been consummated, to rescind the Merger or an award of damages, and an award of attorneys’ and experts’ fees and costs. Although it is not possible to predict the outcome of litigation matters with certainty, Lumos Networks believes that the claims raised in the actions are without merit and intends to defend against them vigorously.

THE MERGER AGREEMENT

The following summary describes certain material provisions of the Merger Agreement. This summary is not complete and is qualified in its entirety by reference to the Merger Agreement, which is attached to this proxy statement as Appendix A and incorporated into this proxy statement by reference. We encourage you to read the Merger Agreement carefully in its entirety because this summary may not contain all the information about the Merger Agreement that is important to you. The rights and obligations of the parties are governed by the express terms of the Merger Agreement and not by this summary or any other information contained in this proxy statement.

Explanatory Note Regarding the Merger Agreement and the Summary of the Merger Agreement

The Merger Agreement and the summary of terms included in this proxy statement have been prepared to provide you with information regarding the terms of the Merger Agreement. Factual disclosures about Lumos Networks contained in this proxy statement or in Lumos Networks’ public filings with the SEC, as described in the section entitled “Where You Can Find More Information” beginning on page 169, may supplement, update or modify the factual disclosures about the Company contained in the Merger Agreement and described in this summary. The representations, warranties and covenants contained in the Merger Agreement have been made solely for the purposes of the Merger Agreement and as of specific dates and solely for the benefit of the parties to the Merger Agreement, and:

 

    were negotiated with the principal purposes of establishing the circumstances in which a party to the Merger Agreement may have the right not to close the Merger if the representations and warranties of the other party prove to be untrue, due to a change in circumstance or otherwise, and allocating risk between the parties to the Merger Agreement;

 

    have been modified or qualified by certain confidential disclosures that were made among the parties to the Merger Agreement in connection with the negotiation of the Merger Agreement, which disclosures are not reflected in the Merger Agreement itself;

 

    may no longer be true as of a given date;

 

    may be subject to a contractual standard of materiality in a way that is different from those generally applicable to you or other stockholders and reports and documents filed with the SEC; and

 

    may be subject in some cases to other exceptions and qualifications, including exceptions that do not result in, and would not reasonably be expected to have, a company material adverse effect, as defined in the section titled “—Representations and Warranties” beginning on page 90 of this proxy statement.

Moreover, information concerning the subject matter of the representations and warranties, which do not purport to be accurate as of the date of this proxy statement, may have changed since the date of the Merger Agreement, and subsequent developments or new information qualifying a representation or warranty may have been included in this proxy statement. Accordingly, the representations, warranties, covenants and other provisions of the Merger Agreement or any description of such provisions should not be read alone, but instead should be read together with the information provided elsewhere in this proxy statement and in the documents incorporated by reference into this proxy statement. See the section titled “Where You Can Find More Information” beginning on page 169.

 

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Effects of the Merger; Directors and Officers; Certificate of Incorporation; Bylaws

The Merger Agreement provides that, subject to the terms and conditions of the Merger Agreement, and in accordance with the DGCL, at the effective time of the Merger, Merger Sub will be merged with and into Lumos Networks, with Lumos Networks continuing as a wholly owned subsidiary of Parent from and after the effective time of the Merger.

At the effective time of the Merger, the board of directors of the surviving corporation will consist of the directors of Merger Sub immediately prior to the effective time, until their successors have been duly elected or appointed and qualified in accordance with applicable law. From and after the effective time of the Merger, the officers of Lumos Networks at the effective time of the Merger will be the officers of the surviving corporation, until their respective successors have been duly elected or appointed and qualified in accordance with applicable law. At the effective time of the Merger, the certificate of incorporation of Lumos Networks as the surviving corporation will be amended, without any further action on the part of Lumos Networks or any other person, to be identical to the certificate of incorporation of Merger Sub in effect immediately prior to the effective time of the Merger, except that the name of the Company shall be the name of the surviving corporation, the provisions of the certificate of incorporation of Merger Sub relating to the incorporator of Merger Sub will be omitted and the provisions of the certificate of incorporation of Merger Sub with respect to limitation of liabilities of directors and indemnification and advancement of expenses of officers and directors of the Company will be revised to be no less favorable to current or former directors or officers of the Company and its subsidiaries, whom we collectively refer to the Company indemnified persons, than the provisions set forth in the current certificate of incorporation and bylaws of the Company described further below under “—Director’s and Officers’ Indemnification and Insurance” beginning on page 104. At the effective time of the Merger, the bylaws of the Company will be amended to be identical to the current bylaws of Merger Sub, except that the name of the surviving corporation will be changed to the name of the Company.

Closing and Effective Time of the Merger; Marketing Period

Unless another date is agreed by the parties, the closing of the Merger will take place at the offices of Troutman Sanders LLP, 1001 Haxall Point, Richmond, VA 23219, on the second business day following the satisfaction or waiver of all applicable conditions to closing (described below under “—Conditions to the Closing of the Merger” beginning on page 111) (other than those conditions to be satisfied at the closing, but subject to the fulfillment or waiver of those conditions). However, if the marketing period (as summarized below) has not ended at the time of the satisfaction or waiver of such closing conditions, the closing will occur on the earlier of (i) a date during the marketing period specified by Parent on no fewer than two business days’ notice to Lumos Networks and (ii) the second business day following the end of the marketing period, subject in each case to the satisfaction or waiver of all conditions to closing as of such date.

Concurrently with the closing, or on a different date as the parties may agree, Merger Sub or Lumos Networks will file a certificate of merger with the Secretary of State for the State of Delaware as provided under the DGCL. The Merger will become effective upon the filing of the certificate of Merger, or at such later time as is agreed by Parent and Lumos Networks and specified in the certificate of Merger.

The “marketing period” refers to the first period of 17 consecutive business days throughout which (a) Parent and its debt financing sources have certain financial information to the extent required by the debt commitment letter, which information we refer to as the “financing information,” and (b) the closing conditions to the obligations of each party and the closing conditions to the obligations of only Parent and Merger Sub (described below under “—Conditions to the Closing of the Merger” beginning on page 111) are satisfied (other than those conditions that by their terms are to be satisfied at the closing of the Merger, but subject to such conditions being satisfied assuming the closing would occur) and nothing shall have occurred and no condition shall exist that would cause any of those closing conditions to fail to be satisfied during such period. In addition, the following provisos apply in respect of the marketing period: (i) July 3, 2017 shall not constitute a business day for purposes of such 17 consecutive business day period; (ii) if such 17 consecutive business day period has not ended on or prior to August 18, 2017, then such period shall not start until September 5, 2017; (iii) if, after February 18, 2017 and prior to the completion of the marketing period, KPMG LLP has withdrawn its audit opinion with respect to any of the financial statements contained in Lumos Networks’ SEC documents or in the financing information, then the marketing period will not be deemed to commence unless and until a new unqualified audit opinion is issued with respect to such financial statements by KPMG LLP or another independent accounting firm reasonably acceptable to Parent; (iv) if the Company or any of its subsidiaries has publicly announced any intention to restate any

 

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historical financial statements included in the financing information or that any such restatement is under consideration, then the marketing period will not be deemed to commence unless and until, at the earliest, such restatement has been completed and the applicable financing information has been amended and delivered to Parent and its debt financing sources or the Company has announced that it has concluded that no restatement shall be required in accordance with generally accepted accounting principles, or GAAP; and (v) if Lumos Networks in good faith reasonably believes that the marketing period has commenced and that it has provided the financing information, Lumos Networks may deliver to Parent a written notice to that effect, in which case Lumos Networks will be deemed to have complied with clause (a) unless Parent in good faith reasonably believes that either the marketing period has not commenced or that Lumos Networks has not completed the delivery of the financing information, and, within three business days after the delivery of such notice by Lumos Networks, Parent delivers a written notice to Lumos Networks to that effect.

Merger Consideration

Common Stock

At the effective time of the Merger, each share of Lumos Networks Common Stock issued and outstanding immediately prior to such time (other than (i) shares held by Lumos Networks as treasury stock or shares, held by Parent (which shares shall be canceled and no Merger consideration shall be paid with respect thereto) or shares held by any subsidiary of the Company, which shares shall remain outstanding and no Merger consideration shall be paid with respect thereto and (ii) shares of Lumos Networks Common Stock held by stockholders who have not voted in favor of the Merger and who have properly exercised and not withdrawn appraisal rights under Delaware law with respect to such shares) will be converted automatically into the right to receive $18.00 per share in cash, which amount we refer to as the “Merger Consideration,” without interest and less any applicable withholding taxes. All shares of Lumos Networks Common Stock converted into the right to receive the Merger Consideration will automatically be cancelled at the effective time of the Merger, and each certificate formerly representing such shares of Lumos Networks Common Stock will thereafter represent only the right to receive the Merger Consideration.

Outstanding Equity Awards and Other Awards

The Merger Agreement provides for the following treatment with respect to equity awards relating to Lumos Networks Common Stock:

Stock Options

Immediately prior to the effective time of the Merger, each option to purchase Lumos Networks Common Stock (whether vested or unvested) that is outstanding immediately prior to the effective time of the Merger will automatically and without any required action on the part of the holder thereof, vest and be cancelled and entitle the option holder to receive an amount in cash equal to the product of (i) the total number of shares of Lumos Networks Common Stock subject to the option and (ii) the amount, if any, by which the Merger Consideration exceeds the applicable exercise price per share of Lumos Networks Common Stock underlying the option (less any applicable withholding taxes). If the exercise price of any option equals or exceeds the Merger Consideration, such option will be cancelled without the payment of any consideration to the holder. At or as soon as practicable after the effective time of the Merger, the surviving corporation will make the option payments, if any, due to each holder of such Lumos Networks options pursuant to the Company’s ordinary payroll practices.

Restricted Stock

Immediately prior to the effective time of the Merger, each share of Company restricted stock, that is outstanding and unvested immediately prior to the effective time of the Merger will automatically and without any action on the part of the holder thereof vest and entitle the holder of such share of Company restricted stock to receive the Merger Consideration, less any applicable withholding taxes and in accordance with the same terms and conditions applied to holders of Lumos Networks Common Stock generally. At or as soon as practicable after the effective time of the Merger, the surviving corporation will make the restricted stock payments, if any, due to each holder of such Lumos Networks restricted stock pursuant to the Company’s ordinary payroll practices.

 

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Employee Stock Purchase Plan

Each right to purchase Lumos Networks Common Stock under the Company Employee Stock Purchase Plan, which we refer to as a “Company Purchase Right,” that was outstanding as of February 18, 2017 and remains outstanding will automatically be exercised on the purchase date specified with respect to that Company Purchase Right under the Company Employee Stock Purchase Plan and related award agreement. If the purchase date is on or before the effective time of the Merger, the holder of that Company Purchase Right will receive shares of Lumos Networks Common Stock in accordance with the terms of the Company Employee Stock Purchase Plan and if the purchase date is after the effective time of the Merger, the holder of that Company Purchase Right will receive an amount in cash equal to the product of the Merger Consideration and the number of shares of Lumos Networks Common Stock that would have otherwise been delivered with respect to that Company Purchase Right.

Termination of the 2011 Company Equity and Cash Incentive Plan and the Company Employee Stock Purchase Plan

As of the effective time of the Merger, the 2011 Company Equity and Cash Incentive Plan and the Company Employee Stock Purchase Plan will be terminated and no further Company restricted shares, options or other rights with respect to shares of Lumos Networks Common Stock will be granted thereunder.

Dissenting Shares

Any shares of Lumos Networks Common Stock held by stockholders who have not voted in favor of the merger proposal or consented thereto in writing and who have properly demanded appraisal rights for such shares in accordance with, and who complies in all respects with, Section 262 of the DGCL will not be converted into the right to receive the Merger Consideration, and at the effective time all such dissenting shares shall be cancelled and the holders of such dissenting shares will only be entitled to the rights granted to them under Section 262 of the DGCL, unless and until any such stockholder fails to perfect or, effectively withdraws or otherwise loses such stockholder’s right to appraisal under the DGCL or other applicable law. If any holder of dissenting shares fails to perfect, effectively withdraws or otherwise loses such holder’s appraisal rights, then the dissenting shares will be deemed to have been converted, as of the effective time of the Merger, into, and will be exchangeable solely for, the right to receive the Merger Consideration, without interest and less any applicable withholding taxes.

Under the Merger Agreement, Lumos Networks must give Parent prompt notice of any demands for appraisal, any withdrawals of any such demands and any other instruments served pursuant to the DGCL relating to rights to be paid the fair value of dissenting shares and Parent has the right to direct all negotiations and proceedings with respect to such demands for appraisal. Prior to the effective time, Lumos Networks may not, except with the prior written consent of Parent, make any payment or commitment with respect to, or offer to settle or settle, any such demands, or waive any failure to perfect any right to appraisal or to timely take any other action to perfect appraisal rights in accordance with Section 262 of the DGCL.

Surrender and Payment

At or prior to the effective time of the Merger, Parent will appoint an agent reasonably acceptable to Lumos Networks, which institution we refer to as the “Exchange Agent,” to make payments of the Merger Consideration to stockholders. At or immediately following the effective time of the Merger, Parent will make available to the Exchange Agent cash sufficient to pay the aggregate Merger Consideration to stockholders (except with respect to dissenting shares and cancelled shares of Lumos Networks Common Stock) with the Exchange Agent, provided that Parent will not be required to make available any Merger Consideration to the extent the Company has made available amounts from its cash on hand.

 

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As soon as practicable (but no later than the third business day) after the effective time of the Merger, Parent will send, or will cause the Exchange Agent to send to each holder of shares of Lumos Networks Common Stock a letter of transmittal together with instructions (which shall specify that the delivery shall be effected, and risk of loss and title shall pass, only upon proper delivery of the certificates or transfer of the uncertificated shares to the Exchange Agent) for use in such exchange. Until so surrendered or transferred, as the case may be, each such share of Lumos Networks Common Stock represented by a certificate and each uncertificated share of Lumos Networks Common Stock shall represent after the effective time of the Merger for all purposes only the right to receive such Merger Consideration upon (i) surrender to the Exchange Agent of a certificate, together with a properly completed letter of transmittal, representing such share or (ii) in the case of a book-entry transfer of an uncertificated share, receipt of an “agent’s message” by the Exchange Agent (or such other evidence, if any, of transfer as the Exchange Agent may reasonably request) in respect of the share of Lumos Networks Common Stock represented by thereby. The amount of any Merger Consideration paid to the stockholders may be reduced by any applicable withholding taxes. No interest will be paid or accrued on any amount payable upon due surrender of the certificates.

If any portion of the Merger Consideration is to be paid to a person other than the person in whose name the surrendered certificate for shares or the transferred uncertificated shares is registered, then it will be a condition to such payment that (i) either such certificate is properly endorsed or is otherwise in proper form for transfer or such uncertificated shares shall be properly transferred and (ii) the person requesting such payment shall pay to the Exchange Agent any transfer or other taxes required as a result of such payment to a person other than the registered holder of such certificate or uncertificated shares or establish to the satisfaction of the Exchange Agent that such tax has been paid or is not payable.

If any cash deposited with the Exchange Agent remains undistributed to holders of Lumos Networks Common Stock nine months following the effective time of the Merger, such cash (including any interest or other income received in respect thereto) will be delivered to Parent, upon demand, and any holders of Lumos Networks Common Stock who have not complied with the exchange procedures in the Merger Agreement will thereafter look only to Parent for payment of the Merger Consideration, without any interest thereon. Any Merger Consideration that remains unclaimed by the holders of Lumos Networks Common Stock four years after the effective time of the Merger (or immediately prior to such earlier date or which any Merger Consideration would otherwise escheat to, or become property of, any governmental entity) will, to the extent permitted by applicable law, become the property of Parent free and clear of any claim or interest of any person previously entitled thereto.

If any stock certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming such stock certificate to be lost, stolen or destroyed (and if required by the surviving corporation or the Exchange Agent, the posting by such person of a bond, in such reasonable amount as the surviving corporation or the Exchange Agent may direct, as indemnity against any claim that may be made against it with respect to such stock certificate), the surviving corporation or the Exchange Agent will, in exchange for such lost, stolen or destroyed stock certificate, pay the Merger Consideration deliverable in respect thereof pursuant to the Merger Agreement.

Representations and Warranties

In the Merger Agreement, Lumos Networks has made customary representations and warranties to Parent and Merger Sub that are subject, in some cases, to specified exceptions and qualifications contained in the Merger Agreement. These representations and warranties relate to, among other things:

 

    the due organization, valid existence, good standing, corporate power, qualification to do business and similar corporate matters of Lumos Networks and each of its subsidiaries;

 

    the certificate of incorporation, bylaws or equivalent organizational or governing documents;

 

    the capitalization of Lumos Networks, including the number of shares of Lumos Networks Common Stock and preferred stock, options, warrants and other equity interests outstanding and the ownership of the capital stock of its subsidiaries;

 

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    the authority of Lumos Networks to enter into the Merger Agreement and, subject to the receipt of Lumos Networks stockholder approval, complete the Merger and the other transactions contemplated by the Merger Agreement, and the enforceability of the Merger Agreement against Lumos Networks;

 

    the determination of fairness, the approval and declaration of the advisability of, and the resolution to recommend that Lumos Networks stockholders vote in favor of the adoption of, the Merger Agreement by the Board;

 

    the absence of (1) any conflict with or violation of the organizational documents of Lumos Networks or any Lumos Networks subsidiary, (2) any violation of applicable laws, or (3) any required consent or approval required by, or any, breach, or violation under, any contract of Lumos Networks or its subsidiaries, in each case, as a result of the execution and delivery by Lumos Networks of the Merger Agreement and the completion by Lumos Networks of the Merger;

 

    the consents, filings and approvals required by governmental entities in connection with the transactions contemplated by the Merger Agreement;

 

    compliance with SEC filing requirements for Lumos Networks’ SEC filings since January 1, 2014, including the accuracy of information contained in such documents and compliance with GAAP and the rules and regulations of the SEC with respect to the consolidated financial statements contained therein;

 

    adequacy of disclosure controls and internal controls over financial reporting and compliance with the certification requirements of the Sarbanes-Oxley Act of 2002;

 

    the absence of certain undisclosed liabilities and undisclosed off balance sheet arrangements;

 

    the conduct by the Company and its subsidiaries of their business in the ordinary course consistent with past practice since January 1, 2016;

 

    the absence of certain changes and events since January 1, 2016;

 

    the absence of a company material adverse effect (as defined below) since January 1, 2016;

 

    the accuracy of information contained in this proxy statement, as it may be amended or supplemented from time to time;

 

    the absence of certain litigation matters;

 

    compliance with applicable laws and governmental orders;

 

    required governmental licenses, permits, certificates, approvals, clearances and authorizations necessary for the conduct of Lumos Networks’ business;

 

    employee benefit plans;

 

    labor matters;

 

    environmental matters;

 

    ownership of, or leasehold interests in, and the condition and use of, real property;

 

    tax matters;

 

    insurance;

 

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    material contracts (defined in the Merger Agreement as “Company Material Agreements”) and the enforceability thereof and the absence of violation or default thereunder, including contracts with Lumos Networks’ largest customers, suppliers and business partners;

 

    contracts related to the Company’s carrier end-user, transport and FTTC product lines;

 

    intellectual property matters;

 

    Financial Advisors’ fees related to the Merger;

 

    receipt by the Board of opinions of Wells Fargo Securities and UBS as to the fairness, as of the date of the Merger Agreement, from a financial point of view, of the Merger Consideration to be received by holders of shares of Lumos Networks Common Stock;

 

    the absence of prohibitions or restrictions on the Merger imposed by state anti-takeover statutes or regulations;

 

    the absence of any related person transactions; and

 

    the absence of any additional representations and warranties except for the representations and warranties expressly set forth in the Merger Agreement.

Parent’s and Merger Sub’s representations and warranties under the Merger Agreement relate to, among other things:

 

    Parent’s and Merger Sub’s due organization, valid existence, good standing, corporate power, qualification to do business and similar corporate matters;

 

    the authority of Parent and Merger Sub to enter into the Merger Agreement and complete the Merger and the other transactions contemplated by the Merger Agreement and the enforceability of the Merger Agreement against Parent and Merger Sub;

 

    the absence of (1) any conflict with or violation of the organizational documents of Parent or Merger Sub, (2) any violation of applicable laws or (3) any consent or approval required by, or any, breach, or violation under, any contract of Parent or Merger Sub, in each case, as a result of the execution and delivery by Parent and Merger Sub of the Merger Agreement and completion by Parent and Merger Sub of the Merger;

 

    the consents, filings and approvals required by governmental entities in connection with the transactions contemplated by the Merger Agreement;

 

    the absence of certain litigation matters;

 

    the sufficiency of the funds that Parent and Merger Sub have, or will have access to, in accordance with the debt commitment letter and equity commitment letter to fund the transactions contemplated in the Merger Agreement;

 

    the delivery of an executed debt commitment letter, equity commitment letter and termination equity commitment letter;

 

    the accuracy of information supplied to Lumos Networks by Parent or Merger Sub for use in this proxy statement, as it may be amended or supplemented from time to time;

 

    the absence of beneficial ownership of Lumos Networks Common Stock by Parent or Merger Sub;

 

    solvency of the surviving corporation at and immediately following the effective time;

 

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    Financial Advisors’ fees related to the Merger;

 

    the absence of any ownership interest by Parent or Merger Sub in any competitor of the Company in the same geographic areas in which the Company does business;

 

    the absence of any voting agreement with any Company stockholder or any agreement pursuant to which a third party (other than the counterparty to the equity commitment letter or any affiliate thereof) has agreed to provide equity capital to Parent or the Company to finance the Merger;

 

    the absence of any agreement with any Company employee pursuant to which the Company employee has agreed (i) to remain an employee after the effective time of the Merger (other than in accordance with existing employment agreements), (ii) contribute or roll-over any Lumos Networks Common Stock or other equity interest to the Company or any of its subsidiaries or Parent or its affiliates or (iii) receive any capital stock or other equity securities of the Company or any of its subsidiaries or Parent or its affiliates;

 

    the absence of any additional representations and warranties of the Company except for the representations and warranties of the Company expressly set forth in the Merger Agreement.

None of the representations and warranties in the Merger Agreement will survive the completion of the Merger.

Certain of the representations and warranties in the Merger Agreement made by Lumos Networks are qualified as to “materiality” or “company material adverse effect.” For purposes of the Merger Agreement, “company material adverse effect” means any change, effect, event, development, fact, condition, circumstance or occurrence that individually or in the aggregate (a) would or would reasonably be expected to prevent or materially impair or materially delay the consummation of the transactions contemplated by the Merger Agreement or (b) has had, or would reasonably be expected to have, a material adverse effect on the business, condition (financial or otherwise), assets, liabilities or results of operations of the Company and its subsidiaries, taken as a whole. The foregoing notwithstanding, with respect to the preceding clause (b), none of the following will constitute a company material adverse effect:

 

    changes after the date of the Merger Agreement in GAAP or in the regulatory accounting requirements applicable to any industry in which the Company and its subsidiaries operate, except to the extent that the Company and its subsidiaries, taken as a whole, are disproportionately affected thereby as compared with other participants in the industries in which the Company and its subsidiaries operate;

 

    changes in financial, capital, credit or securities markets or general economic or political conditions in the United States or any other country or region, except to the extent that the Company and its subsidiaries, taken as a whole, are disproportionately affected thereby as compared with other participants in the industries in which the Company and its subsidiaries operate;

 

    changes after the date of the Merger Agreement in applicable law or interpretations thereof or in conditions generally affecting the industry in which the Company and its subsidiaries operate, except to the extent that the Company and its subsidiaries, taken as a whole, are disproportionately affected thereby as compared with other participants in the industries in which the Company and its subsidiaries operate;

 

    acts of war, sabotage or terrorism or natural disasters, except to the extent that the Company and its subsidiaries, taken as a whole, are disproportionately affected thereby as compared with other participants in the geographic area impacted;

 

    the execution and delivery of the Merger Agreement or the announcement or consummation of the Merger and the other transactions contemplated by the Merger Agreement or the identity of or any facts or circumstances relating to Parent, including the impact thereof on the relationships, contractual or otherwise, of the Company and any of its Subsidiaries with employees, customers, suppliers or other third parties, provided that this exception will not apply to any portion of the representations and warranties in the Merger Agreement to the extent the purpose of such portion is to address the consequences of the transactions contemplated by the Merger Agreement;

 

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    any failure in and of itself by the Company and its subsidiaries to meet any internal or published budgets, projections, forecasts or predictions of financial performance for any period, provided that this exception will not prevent or otherwise affect a determination that any change, effects, events, developments, facts, conditions, circumstances or occurrences underlying such failure constitute or contribute to a company material adverse effect;

 

    any action taken (or not taken) at the written request of Parent or Merger Sub;

 

    a change in the price and/or trading volume of the Company’s securities on the NASDAQ or any other market in which such securities are quoted for purchase and sale, provided that this exception will not prevent or otherwise affect a determination that any change, effects, events, developments, facts, conditions, circumstances or occurrences underlying such change constitute or contribute to a company material adverse effect;

 

    any change in the Company’s credit rating, provided that this exception will not prevent or otherwise affect a determination that any change, effects, events, developments, facts, conditions, circumstances or occurrences underlying such change constitute or contribute to a company material adverse effect;

 

    any claim, action, suit, arbitration, governmental investigation, alternative dispute resolution action or any other judicial or administrative proceeding commenced or threatened against the Company, its directors or officers or any of its affiliates in connection with, arising from or relating to any litigation related to the Merger Agreement, the Merger or the other transactions contemplated by the Merger Agreement that is brought against the Company or any members of the Board commenced on or after the date of the Merger Agreement, including with respect to the Company’s sale process, including consideration of the transactions contemplated by the Merger Agreement and any transactions potentially competing with or alternative to such transactions or proposals from other third parties relating to any competing or alternative transactions or any disclosures in connection with any of the foregoing, provided that this exception will not apply to any portion of the representations and warranties in the Merger Agreement to the extent the purpose of such portion is to address the consequences of the transactions contemplated by the Merger Agreement; or

 

    any action taken by the Company or any of its subsidiaries that is required under the Merger Agreement (other than pursuant to interim operating covenants of the Merger Agreement), including any actions the Company is required to take under this Agreement to obtain any approval or authorization under applicable antitrust, competition, telecommunication or public utility laws for the consummation of the Merger.

Conduct of Business Pending the Merger

Lumos Networks has agreed to certain covenants in the Merger Agreement restricting the conduct of its business between the date of the Merger Agreement and the earlier of the effective time of the Merger or termination of the Merger Agreement. In general, Lumos Networks has agreed that, except (1) as contemplated under the Merger Agreement, (2) as set forth in Lumos Networks’ disclosure schedule, (3) as required by applicable law, or (4) with the prior written consent of Parent (not to be unreasonably withheld, conditioned or delayed), from the date of the Merger Agreement until the earlier of the effective time of the Merger or termination of the Merger Agreement, (a) Lumos Networks will and will cause each of its subsidiaries to, except as contemplated by the Company’s 2017 annual operating budget, conduct their business in all material respects in the ordinary course consistent with past practice, use commercially reasonable efforts to preserve intact their present business organizations in all material respects in the ordinary course of business consistent with past practice, use commercially reasonable efforts to maintain satisfactory relations with and keep available the services of their current officers and other key employees in all material respects in the ordinary course of business consistent with past practice, and use commercially reasonable efforts to preserve existing relationships with material customers, lenders, suppliers, distributors and others having material business relationships with the Company and its subsidiaries, in all material respects in the ordinary course of business consistent with past practice, and (b) Lumos Networks will not, and will not permit its subsidiaries to:

 

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    amend the organizational documents of the Company or any of its subsidiaries or amend the terms of any outstanding security of the Company or any subsidiary of the Company;

 

    split, combine, subdivide or reclassify any shares of capital stock of the Company or any subsidiary of the Company, other than any such transaction by a wholly owned subsidiary of the Company that remains a wholly owned subsidiary of the Company after consummation of such transaction;

 

    authorize, declare, set aside or pay any dividend or other distribution payable in cash, stock, other ownership interests or other securities, property or otherwise, with respect to the Lumos Networks Common Stock or any other equity interest of the Company of any of its subsidiaries;

 

    redeem, purchase or otherwise acquire, or offer to redeem, purchase or otherwise acquire, any equity interests of the Company, except repurchases or acquisitions of Lumos Networks Common Stock issued under the 2011 Company Equity and Cash Incentive Plan pursuant to agreements already in effect on the date of the Merger Agreement;

 

    issue any equity interests, except for:

 

    Lumos Networks Common Stock issued under the Warrant or under the 2011 Company Equity and Cash Incentive Plan pursuant to agreements already in effect on the date of the Merger Agreement, and

 

    Lumos Networks Common Stock issued under the Company Employee Stock Purchase Plan with respect to any Purchase Date (as defined in the Company Employee Stock Purchase Plan) that is on or before the effective time of the Merger;

 

    acquire (whether pursuant to merger, stock or asset purchase or otherwise) in one transaction or any series of related transactions any business enterprise or any material assets of any person or any equity interests in any person or any business;

 

    transfer, lease, license, sell, mortgage, pledge, dispose of, abandon, fail to maintain or encumber any of its material assets, rights or properties other than (i) sales or non-exclusive licenses in the ordinary course of business consistent with past practice for an amount not exceeding $2,000,000 in the aggregate and (ii) dispositions of equipment and property no longer used in, or material to, the operation of the business;

 

    incur, assume, issue, modify, renew, syndicate, guarantee, prepay, refinance or otherwise become liable for any long-term or short-term indebtedness, or enter into any swap, cap, floor, collar, futures contract, forward contract, option or any other derivative financial instrument, or hedging or off balance sheet financing arrangements, or assume, guarantee, endorse or otherwise become liable or responsible (whether directly, contingently or otherwise) for the indebtedness of any other person, except for:

 

    transactions among the Company and its wholly owned subsidiaries or among the Company’s wholly owned subsidiaries,

 

    the incurrence of obligations as lessee that have been recorded as capital leases under GAAP in the ordinary course of business consistent with past practice and

 

    the incurrence of indebtedness that does not exceed $1,000,000 in aggregate principal amount outstanding at any time, so long as such indebtedness is prepayable without premium, penalty or other cost,

 

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    make any material loan, advance or capital contribution to, or investment in, any other person, other than (i) loans, advances or capital contributions to, or investments in, wholly owned subsidiaries of the Company, (ii) advances to employees of the Company or its subsidiaries for expenses incurred in the ordinary course of business consistent with past practice, (iii) extensions of credit to customers incurred in the ordinary course of business consistent with past practice, or (iv) loans, advances or capital contributions in the aggregate of less than $1,000,000;

 

    except as required by the terms of any benefit plans or compensation plans or arrangements, which collectively we refer to as Company employee plans, existing on the date of the Merger Agreement, and except as required by applicable law or as contemplated under the Merger Agreement, (i) make any change in, or accelerate the vesting of, the compensation or benefits payable or to become payable or provided to, or grant any severance or termination pay to, any of the employees, directors or independent contractors of the Company or its subsidiaries, (ii) establish, adopt, enter into, terminate or amend any Company employee plan or make any loans to any employee, director or independent contractor of the Company or any of its subsidiaries, (iii) hire or terminate the employment of any employee who has an annual base salary in excess of $200,000, (iv) increase the funding obligation or contribution rate of certain Company employee plans or (v) grant any cash bonus or any cash incentive compensation outside the ordinary course of business consistent with past practice, provided, that the Company or any subsidiary of the Company may, in the ordinary course of business consistent with past practice:

 

    enter into at-will offer letters with new employees whose annual base salary is $200,000 or less and whose employment is terminable on no more than 60 days’ notice without penalty or expense,

 

    promote employees,

 

    change the compensation or benefits to employees whose annual base salary is $200,000 or less, or

 

    pay severance to employees under any Company employee plan in effect on the date of the Merger Agreement;

 

    incur any capital expenditures or any obligations or liabilities in respect thereof, other than certain capital expenditures contemplated by the Company’s 2017 annual operating budget;

 

    enter into, or amend or modify in any material respect or terminate any material agreement or otherwise waive, release or assign any material rights, claims, benefits or obligations of the other counterparty under any such agreement other than in the ordinary course of business consistent with past practice;

 

    mortgage, encumber or otherwise create any liens with respect to any material property or material assets, other than certain permitted liens;

 

    enter into any new line of business that would be material to the Company and its subsidiaries, taken as a whole, outside the businesses being conducted by the Company and its subsidiaries on the date of the Merger Agreement and any reasonable extensions thereof, other than in the ordinary course of business consistent with past practice;

 

    compromise, settle, pay or discharge any litigation, investigations or arbitrations (including any settlement or consent to settlement of any material tax claim), other than (i) to the extent disclosed in and reserved against in the Company’s financial statements, (ii) with any telecommunications vendor in the ordinary course of business consistent with past practice or (iii) requiring payment of less than $1,000,000;

 

    change any of the accounting methods used by it materially affecting its assets, liabilities or business, except for changes required by GAAP or certain securities rules;

 

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    make, change or rescind any material tax election, change an annual tax accounting period, adopt or change any accounting method in respect of taxes, file any amended material tax returns, enter into any tax allocation agreement, tax sharing agreement or closing agreement with respect to any material taxes, or take any affirmative action to surrender any right to claim a refund of material taxes; or

 

    authorize or enter into any agreement or arrangement to do any of the foregoing.

The Merger Agreement also provides that Parent shall not, and shall cause its subsidiaries not to, from the date of the Merger Agreement to the effective time of the Merger, take any action or fail to take any action that is intended to, or would reasonably be expected to, individually or in the aggregate, prevent, materially delay or materially impede the ability of Parent and Merger Sub to consummate the Merger or the other transactions contemplated by the Merger Agreement, including the financing thereof.

Access to Information

The Merger Agreement provides that, until the effective time of the Merger and subject to applicable law and the confidentiality agreement, dated June 17, 2016, between Parent and the EQT Fund, which we refer to as the “Confidentiality Agreement,” the Company shall:

 

    give Parent, its counsel, Financial Advisors, auditors and other authorized representatives, upon reasonable notice, reasonable access during normal business hours to the offices, properties, books and records of the Company and its subsidiaries;

 

    furnish to Parent, its counsel, Financial Advisors, auditors and other authorized representatives such financial and operating data and other information as such Persons may reasonably request;

 

    furnish to Parent monthly financial, operating and Board reports generally prepared by the Company on a regular basis promptly after such reports are delivered to the other recipients thereof; and

 

    instruct its employees, counsel, Financial Advisors, auditors and other authorized representatives to cooperate reasonably with Parent in its investigation of the Company and its subsidiaries.

The Merger Agreement requires Parent to conduct any investigation in a manner as not to interfere unreasonably with the conduct of the business of the Company and its subsidiaries. Additionally, without the Company’s prior written consent, Parent and its representatives are prohibited from performing any invasive or destructive environmental sampling at any owned or leased real property of the Company and its subsidiaries. The Merger Agreement also requires Parent and the Company to hold, and cause their respective representatives to hold, all information received from the other party as confidential in accordance with the terms of the Confidentiality Agreement.

No Solicitation of Other Offers; Change of Recommendation

Subject to certain exceptions, until the earlier to occur of the effective time of the Merger and the termination of the Merger Agreement in accordance with its terms, the Company will generally not be permitted to solicit or discuss alternative proposals with third parties, as described below. For purposes of the Merger Agreement:

 

    “acceptable confidentiality agreement” means a confidentiality agreement (i) in effect on the date of the Merger Agreement or (ii) that contains provisions that are no less favorable in the aggregate to the Company than those contained in the Confidentiality Agreement and which does not prohibit the Company from complying with its obligations under the Merger Agreement; provided that such confidentiality agreement does not need to restrict a third party from making directly to the Company or the Board, or consummating the transactions contemplated by, an acquisition proposal;

 

   

“acquisition proposal” means, other than the transactions contemplated by the Merger Agreement, any offer, proposal or inquiry relating to (i) any acquisition or purchase, direct or indirect, of more than 20% of the consolidated assets, revenues or income of the Company and its subsidiaries, taken as a whole, or more than

 

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20% of any class of equity or voting securities of the Company or any of its subsidiaries whose assets, revenue or income, individually or in the aggregate, constitute more than 20% of the consolidated assets, revenues or income of the Company, (ii) any tender offer (including a self-tender offer) or exchange offer that, if consummated, would result in a third party beneficially owning more than 20% of any class of equity or voting securities of the Company or any of its subsidiaries whose assets, revenue or income, individually or in the aggregate, constitute more than 20% of the consolidated assets, revenues or income of the Company or (iii) a merger, consolidation, share exchange, business combination, sale of substantially all the assets, reorganization, recapitalization, liquidation, dissolution or other similar transaction involving the Company or any of its subsidiaries whose assets, revenue or income, individually or in the aggregate, constitute more than 20% of the consolidated assets, revenue or income of the Company; and

 

    “superior proposal” means any bona fide written acquisition proposal (except the references therein to “20%” shall be replaced by “50%”) that was not solicited or received by the Company in violation of the Merger Agreement, that is reasonably likely to be consummated and that the Board of the Company determines in good faith, after consultation with its financial advisors and outside counsel, considering such factors as the Board considers appropriate (which shall in any event include financial, legal, regulatory and fiduciary aspects of such proposal) and the person making such proposal or providing financing for such proposal to be more favorable from a financial point of view to the Company’s stockholders than the transactions contemplated by the Merger Agreement (including any offer by Parent to modify the terms of the Merger Agreement).

Until the earlier to occur of the effective time of the Merger and the termination of the Merger Agreement in accordance with its terms, the Company and its subsidiaries shall, and the Company shall instruct and use reasonable best efforts to cause its and its subsidiaries’ respective representatives to, immediately cease and cause to be terminated any discussions or negotiations with any persons that may be ongoing with respect to an acquisition proposal from any third party (except to notify that person as to the existence of the non-solicitation provisions of the Merger Agreement), and to not:

 

    solicit, initiate, or take any action to knowingly facilitate or encourage the submission of any acquisition proposal or any inquiry, offer or proposal that could reasonably be expected to lead to any acquisition proposal;

 

    enter into or participate in any discussions or negotiations with, furnish any information relating to the Company or any of its subsidiaries or afford access to the business, properties, assets, books or records of the Company or any of its subsidiaries to, or otherwise knowingly cooperate in any way with, any third party that is seeking to make, or has made, or could reasonably be expected to make any acquisition proposal; or

 

    enter into any letter of intent or other agreement with respect to any acquisition proposal (except for an acceptable confidentiality agreement) with any third party.

The Merger Agreement specifically allows the Company to waive in connection with entering into the Merger Agreement any provision in any agreement to which the Company or any subsidiary of the Company is a party that prohibits the counterparty from confidentially requesting the Company to amend or waive the standstill provision in such agreement (i.e., a “don’t ask to waive” provision) to the extent the Board determines that the failure to take such action would be reasonably likely to be inconsistent with its fiduciary duties under applicable law. The Merger Agreement requires the Company, promptly after the date of the Merger Agreement, to request any third party that previously executed a confidentiality agreement in connection with its consideration of an acquisition proposal to promptly return or destroy all confidential information furnished to such third party and to terminate access to data rooms furnished to any such third party.

If at any time prior to obtaining the Company stockholder approval, (i) the Company receives a bona fide acquisition proposal that the Board reasonably believes, in good faith, after consultation with outside legal counsel and Financial Advisors, constitutes or would reasonably be expected to lead to a superior proposal and (ii) the Board determines in good faith, after consultation with outside legal counsel, that the failure to take such action would be reasonably likely to be inconsistent with its fiduciary duties under applicable law, then the Company may (A) engage in negotiations or discussions with such third party and (B) furnish to such third party non-public information relating to the Company or any of its subsidiaries pursuant to an acceptable confidentiality agreement.

 

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The Company must notify Parent promptly (and in any event within 48 hours) after receipt of any acquisition proposal or any inquiry, offer or proposal that could reasonably be expected to lead to any acquisition proposal or any request for information relating to the Company or any of its subsidiaries or for access to the business, properties, assets, books or records of the Company or any of its subsidiaries by any third party that may be considering making, or has made or could be reasonably expected to make, an acquisition proposal. The Company must keep Parent reasonably informed, on a prompt basis (and in any event within 48 hours), of any material developments regarding, or any material change to the terms and status of, any such acquisition proposal.

Except as expressly permitted by the Merger Agreement and described below, the Board will not:

 

    withdraw or withhold, or modify or qualify in a manner adverse to Parent, the Board recommendation or publicly announce that it has proposed or resolved to take such action;

 

    fail to include the Board recommendation in the Company’s proxy statement;

 

    in the event any tender or exchange offer is commenced that would constitute an acquisition proposal, fail to publish, send or provide to the Company stockholders, pursuant to Rule 14e-2(a) under the Exchange Act, and within ten business days after such tender or exchange offer is first commenced, or subsequently amended in any material respect, a statement recommending that the Company stockholders reject such tender or exchange offer and publicly affirming the Board recommendation; or

 

    recommend, adopt, approve or enter into, or publicly propose or resolve to recommend, adopt, approve or enter into, any acquisition proposal or any letter of intent, agreement in principle or definitive agreement.

We refer to each of the actions or events in the bullets above as an “adverse recommendation change.”

Prior to obtaining the Company stockholder approval, the Board may:

 

    effect an adverse recommendation change in respect of an acquisition proposal, or enter into an agreement providing for a transaction that constitutes a superior proposal, if:

 

    the Company shall have received an acquisition proposal that the Board determines, in good faith, after consultation with its outside legal counsel and Financial Advisors, constitutes a superior proposal,

 

    the Board determines in good faith, after consultation with outside legal counsel, that the failure to take action with respect to such superior proposal would be reasonably likely to be inconsistent with its fiduciary duties under applicable law,

 

    the Company has provided four business days prior written notice to Parent that it intends to take such action,

 

    if Parent shall have delivered to the Company a written offer capable of being accepted by the Company to alter the terms or conditions of the Merger Agreement during such four business day period, the Board shall have determined in good faith (after consultation with its outside legal counsel and Financial Advisors), after considering the terms of such offer by Parent, that the superior proposal giving rise to the notice by the Company continues to be a superior proposal,

 

    in the case of the Board entering into an agreement providing for a transaction that constitutes a superior proposal, the Company terminates the Merger Agreement; and

 

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    if any superior proposal is revised, then the Company shall deliver to Parent a new notice and again comply with the above requirements with respect to such revised superior proposal on each occasion on which a revised superior proposal is submitted, provided, that in connection with each new notice, each reference to a four business day period in the bullets above shall be deemed to be a reference to a three business day period.

 

    in response to any event, fact, circumstance, development or occurrence that is material to the Company and its subsidiaries, taken as a whole, that was not known to, or reasonably foreseeable by, the Board as of the date of the Merger Agreement, which event, fact, circumstance, development or occurrence becomes known to the Board prior to obtaining the Company stockholder approval and does not involve or relate to an acquisition proposal, effect an adverse recommendation change if:

 

    the Board determines in good faith, after consultation with outside legal counsel, that the failure to effect such adverse recommendation change would be reasonably likely to be inconsistent with its fiduciary duties under applicable law,

 

    the Company provided four business days prior written notice to Parent that it intends to take such action, and

 

    if Parent shall have delivered to the Company a written offer capable of being accepted by the Company to alter the terms or conditions of the Merger Agreement during such four business day period, the Board shall have determined in good faith (after consultation with its outside legal counsel and Financial Advisors), after considering the terms of such offer by Parent, that the failure to effect such adverse recommendation change would be reasonably likely to be inconsistent with its fiduciary duties under applicable law.

The Merger Agreement does not prohibit the Company or the Board from (i) complying with its disclosure obligations under U.S. federal or state law or other applicable laws, including taking and disclosing to its stockholders a position contemplated by Rule 14d-9 or Rule 14e-2(a) under the Exchange Act, or from making any legally required disclosure to stockholders with regard to the transactions contemplated by the Merger Agreement or an acquisition proposal (provided, that neither the Company nor the Board may recommend any acquisition proposal or make an adverse recommendation change unless permitted by the Merger Agreement), (ii) making any “stop, look and listen” communication to the stockholders of the Company pursuant to Rule 14d-9(f) under the Exchange Act, or (iii) contacting and engaging in discussions with any person or group and their respective representatives who has made an acquisition proposal that was not solicited in breach of the Merger Agreement solely for the purpose of clarifying such acquisition proposal and the terms thereof.

Company Stockholder Approval

The Company is required to mail this proxy statement as promptly as reasonably possible after the date the SEC staff advises that the SEC has no further comments to this proxy statement or that the Company may commence mailing this proxy statement.

The Company is required to take all lawful action to call, give notice of, convene and hold a stockholders’ meeting on a date as soon as reasonably practicable following the date of the Merger Agreement for the purpose of obtaining the Company stockholder approval and, in accordance with Section 14A of the Exchange Act and the applicable SEC rules issued thereunder, seeking advisory approval of a proposal to the stockholders of the Company for a non-binding advisory vote to approve certain compensation that may become payable to the Company’s named executive officers in connection with the completion of the Merger. The Company is required to take all lawful action to solicit the approval of the Merger Agreement by its stockholders. The Company is not entitled to change the record date for the stockholders’ meeting without the prior written consent of Parent or as required by applicable law. Except to the extent the Company has effected an adverse recommendation change in accordance with the terms of the Merger Agreement:

 

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    the Board is required to recommend the adoption and approval of the Merger Agreement by the Company’s stockholders and is required to include that recommendation in this proxy statement, and

 

    neither the Board nor any committee of the Board may withdraw, modify or qualify (or publicly propose to withdraw or modify or qualify) in any manner adverse to Parent the Board’s recommendation, or take any other action or make any other public statement in connection with the stockholders’ meeting inconsistent with such recommendation.

If at any time prior to the effective time of the Merger any information relating to the Company or Parent, or any of their respective affiliates, directors or officers, should be discovered by the Company or Parent which should be set forth in an amendment or supplement to this proxy statement, so that this proxy statement would not include any misstatement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they are made, not misleading, the party that discovers such information is required to promptly notify the other parties to the Merger Agreement and an appropriate amendment or supplement describing such information will be promptly filed with the SEC and, to the extent required by applicable law, disseminated to the Company stockholders.

Without limiting the Company’s right to enter into a superior proposal and terminate the Merger Agreement pursuant to the terms of the Merger Agreement, (i) the obligation of the Company to call, give notice of, convene and hold the stockholders’ meeting and to hold a vote on the adoption of the Merger Agreement will not be affected by the commencement, disclosure, announcement or submission to the Company of any acquisition proposal (whether or not a superior proposal), or by an adverse recommendation change by the Board, and (ii) in any case in which the Company makes an adverse recommendation change, the Company remains obligated to submit the Merger Agreement to a vote of its stockholders, although the Company would not be obligated to recommend to its stockholders the adoption of the Merger Agreement at any meeting to the extent that the Board has made an adverse recommendation change.

The Merger Agreement requires Parent to vote all shares of Lumos Networks Common Stock beneficially owned by it or any of its subsidiaries in favor of adoption of the Merger Agreement at the stockholders meeting.

Required Governmental Approvals and Other Consents

The Company, Parent and Merger Sub have each agreed, subject to the terms of the Merger Agreement, to cooperate with one another and use their reasonable best efforts to:

 

    take, or cause to be taken, all appropriate action, and do, or cause to be done, all things necessary, proper or advisable under any applicable law or otherwise to consummate and make effective the Merger as promptly as reasonably practicable;

 

    obtain from any governmental authorities any consents, licenses, permits, waivers, clearances, approvals, authorizations or orders required to be obtained or made by Parent, Merger Sub or the Company or any subsidiary of the Company, or avoid any legal proceeding by any governmental authority, in connection with the authorization, execution and delivery of the Merger Agreement and the consummation of the transactions contemplated by the Merger Agreement;

 

    as promptly as is reasonably practicable but in any event within ten business days after the date of the Merger Agreement (or within 30 calendar days after the date of the Merger Agreement with respect to certain identified required governmental approvals) make or cause to be made the applications or filings required to be made by Parent, Merger Sub, the Company and the subsidiaries of the Company under or with respect to the required governmental approvals or any other applicable laws in connection with the authorization, execution and delivery of the Merger Agreement and the consummation of the transactions contemplated by the Merger Agreement, including the Merger and the payment of any fees due in connection with such applications or filings;

 

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    comply at the earliest reasonably practicable date with any request under or with respect to the required governmental approvals and any such other applicable laws for additional information, documents or other materials received by Parent or the Company from the FTC, the DOJ, the FCC, CFIUS, Team Telecom or any other governmental authority in connection with such applications or filings or the Merger;

 

    defend any legal proceedings challenging the Merger Agreement or the consummation of the Merger; and

 

    coordinate and cooperate with, and give due consideration to all reasonable additions, deletions or changes suggested by the other party in connection with, making any filing under or with respect to the required governmental approvals or any such other applicable laws and any filings, conferences or other submissions related to resolving any investigation or other inquiry by any governmental authority.

Each of the Company and Parent is required to use its reasonable best efforts to, and cause their respective subsidiaries to, furnish to the other party all information necessary (including, but not limited to, information about or from their respective direct or indirect owners) for any such application or other filing to be made in connection with the Merger. Each of the Company and Parent must promptly inform the other of any material communication with, and any proposed understanding, undertaking or agreement with, any governmental authority regarding any such application or filing. If a party intends to independently participate in any meeting with any governmental authority in respect of any such filings, investigation or other inquiry, then that party is required to give the other party reasonable prior notice of such meeting and invite representatives of the other party to participate in the meeting unless prohibited by the governmental authority. The Merger Agreement requires the Company and Parent to cooperate with each other with respect to all matters relating to any governmental authority relating to any regulatory, governmental, CFIUS or Team Telecom Agencies matters. The Merger Agreement provides that the Company and Parent shall both, to the extent practicable, have the opportunity to participate in all meetings with, review communications to, and receive copies of communications from, any governmental authority in connection with obtaining any necessary regulatory, governmental, CFIUS or Team Telecom Agencies clearances.

The Merger Agreement requires Parent to take any and all actions and to make any and all undertakings necessary to avoid or eliminate each and every impediment under any applicable law that may be asserted by any governmental authority (including, without limitation, those in connection with the required governmental approvals) with respect to the Merger so as to enable the consummation of the Merger to occur as soon as reasonably possible (and in any event, no later than November 18, 2017, which we refer to as the “end date”). However, nothing in the Merger Agreement requires Parent to:

 

    take or agree to take any action with respect to (A) any of its affiliates (other than the Company or its subsidiaries) or any direct or indirect portfolio companies of investment funds advised or managed by one or more affiliates of Parent or any investment funds advised or managed by one or more affiliates of Parent, including selling, divesting, conveying, holding separate, or otherwise limiting its freedom of action with respect to any assets, rights, products, licenses, businesses, operations, or interest therein, of any such affiliates or any direct or indirect portfolio companies of investment funds advised or managed by one or more affiliates of Parent or any investment funds advised or managed by one or more affiliates of Parent or (B) the selling, divesting, conveying or holding separate with respect to any assets, rights, products, licenses, businesses, operations, or interest therein, of Parent, the Company or any of its subsidiaries in more than a de minimis respect, or

 

    be required to accept or agree to any burdensome condition, which for purposes of the Merger Agreement is defined to mean any actions or undertakings necessary to obtain the approval of CFIUS, the Team Telecom Agencies or any other governmental authority that, pursuant to a mitigation agreement or otherwise, would impose requirements on the Company and its subsidiaries (or their assets and businesses) that individually or in the aggregate, would reasonably be expected to have an adverse effect in any material respect on the financial condition or results of operations of the Company and its subsidiaries, taken as a whole, provided that any such actions or undertakings that are substantially similar to the terms of mitigation agreements previously entered into by Parent’s affiliates with CFIUS and the Team Telecom Agencies with respect to their acquisition of Tampnet would not be a burdensome condition.

 

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The Company and Parent are required to give any notices to third parties, and use, and cause their respective subsidiaries to use, reasonable efforts to obtain any consents under any Company material agreements necessary, proper or advisable to consummate the Merger. The Company and Parent will coordinate and cooperate in determining whether any actions, notices, consents, approvals or waivers are required to be given or obtained, or should be given or obtained, from parties to any Company material agreements.

Until the earlier of the effective time of the Merger or the termination of the Merger Agreement in accordance with its terms, Parent and the Company are required to promptly notify each other in writing of any pending or threatened legal proceedings challenging or seeking material damages in connection with the Merger or seeking to restrain or prohibit the consummation of the Merger or otherwise limit in any material respect the right of Parent to own or operate all or any portion of the businesses or assets of the Company or any of its subsidiaries.

If any legal proceeding is instituted by a governmental authority challenging the Merger as violative of applicable law, the Merger Agreement requires each of the Company and Parent to cooperate and use their reasonable best efforts to contest and resist, except insofar as the Company and Parent may otherwise agree, any such legal proceeding, including any legal proceeding that seeks a temporary restraining order or preliminary injunction that would prohibit, prevent or restrict consummation of the Merger.

The Merger Agreement states that nothing in the Merger Agreement gives Parent or Merger Sub the right to control or direct the operations of the Company prior to the consummation of the Merger and that prior to the effective time of the Merger, the Company will exercise, consistent with the terms and conditions of the Merger Agreement, complete unilateral control and supervision over its business operations.

Continuing Employees

The Merger Agreement requires that, during the one-year period following the effective time of the Merger, Parent and its affiliates provide each continuing employee for so long as the employee is employed during that one-year period:

 

    an annual base salary or wage level and cash bonus opportunity at least equal to the annual base salary or wage level and cash bonus opportunity to which the continuing employees were entitled immediately prior to the effective time of the Merger,

 

    severance benefits that are no less favorable than those severance benefits provided under the Company benefit or compensation plans or arrangements immediately prior to the date of the Merger Agreement, and

 

    benefits, perquisites and other terms and conditions of employment that are substantially similar in the aggregate to the benefits, perquisites and other terms and conditions of employment that such continuing employees were entitled to immediately prior to the effective time of the Merger under the Company benefit or compensation plans or arrangements.

The Merger Agreement further requires Parent or its affiliates to pay annual bonuses for the Company’s fiscal year that includes the effective time of the Merger in accordance with the Company’s 2017 TIP.

The Merger Agreement also provides that, after the effective time of the Merger, Parent will use commercially reasonable efforts to:

 

    ensure that no waiting periods, exclusions or limitations with respect to any pre-existing conditions, evidence of insurability or good health or actively-at-work exclusions are applicable to any continuing employees or their dependents or beneficiaries under any welfare benefit plans in which such employees or their dependents or beneficiaries may be eligible to participate; and

 

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    provide or cause to be provided that any costs or expenses incurred previously by continuing employees (and their dependents or beneficiaries) during any plan year in which such continuing employees (and their dependents or beneficiaries) commence participation under any other welfare plans shall be taken into account for purposes of satisfying applicable deducible, co-payment, coinsurance, maximum out-of- pocket provisions and like adjustments or limitations on coverage under any such other welfare benefit plans for which participation commences during any plan year.

The Merger Agreement further requires that all continuing employees receive credit for all service with the Company, its subsidiaries and their predecessors, prior to the closing of the Merger for all purposes, including, eligibility to participate, vesting credit, eligibility to commence benefits, benefit accrual (but not for purposes of benefit accruals or benefit levels (i) under any defined benefit pension plan or retiree welfare plan or (ii) which would result in any duplication of benefits for the same periods of service), early retirement subsidies and severance.

Directors’ and Officers’ Indemnification and Insurance

The Merger Agreement provides that, after the effective time of the Merger, the surviving corporation will, and Parent will cause the surviving corporation to, indemnify and hold harmless, and will advance expenses as incurred to, each current and former director and officer of Lumos Networks and its subsidiaries, which we refer to as “indemnitees,” against any costs or expenses, judgments, fines, losses, claims, damages, liabilities or awards incurred in connection with any proceeding or investigation, whether civil, criminal, administrative or investigative, arising out of, relating to or in connection with matters existing or occurring at or prior to the effective time of the Merger, including the fact that such indemnitee is or was a director or officer of Lumos Networks or any of its subsidiaries or any acts or omissions occurring or alleged to occur prior to the effective time of the Merger, to the same extent any such indemnitee would have been entitled to under Delaware law and under the organizational documents of Lumos Networks or any of its subsidiaries in effect on of the date of the Merger Agreement. Any indemnitee receiving an advancement of expenses will be required to provide, as a condition to such advancement, an undertaking to repay such advances if it is ultimately determined that such indemnitee is not entitled to indemnification.

The Merger Agreement also requires that, for a period of six years after the effective time of the Merger:

 

    the surviving corporation will assume, and Parent will cause the surviving corporation to assume, the obligations of Lumos Networks and its subsidiaries with respect to rights to indemnification, exculpation and advancement of expenses for acts or omissions occurring at or prior to the effective time of the Merger existing in favor of indemnitees as provided in the organizational documents of Lumos Networks or any of its subsidiaries or in any indemnification contract between an indemnitee and Lumos Networks or any of its subsidiaries, in each case, as in effect on the date of the Merger Agreement; and

 

    the surviving corporation will maintain, and Parent will cause the surviving corporation to maintain, provisions of the surviving corporation’s organizational documents with respect to limitation of liabilities of directors and indemnification and advancement of expenses of officers and directors of the Company that are no less favorable to the indemnitees than were set forth in the organizational documents of Lumos Networks as in effect on the date of the Merger Agreement. During that period, the surviving corporation will not amend, repeal or otherwise modify any such provisions in any manner that would adversely affect the rights of any indemnitee. If any actual or threatened claim is made during that period, all indemnification rights related to that claim will continue until the disposition or resolution of such the action, suit, proceeding or investigation in accordance with the surviving corporation’s organizational documents.

The Merger Agreement provides that, prior to the effective time of the Merger, Lumos Networks will or, will cause the surviving corporation as of the effective time of the Merger to, obtain and pay for a six-year non-cancellable extension of the directors’ and officers’ liability coverage of Lumos Networks’ existing directors’ and officers’ insurance policies and existing fiduciary liability insurance policies, which we refer to as “D&O insurance,” with respect to any claim related to any period of time at or prior to the effective time of the Merger. The extension of the D&O insurance, or “tail,” is required to be obtained from an insurance carrier with the same or better credit rating as Lumos Networks’ current

 

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insurance carrier with respect to D&O insurance and is required to have terms, conditions, retentions and limits of liability that are no less favorable in the aggregate than the coverage provided under Lumos Networks’ existing D&O insurance policies. If Lumos Networks and the surviving corporation do not obtain such D&O insurance on or prior to the effective time of the Merger, the surviving corporation will, and Parent will cause the surviving corporation to, continue to maintain in effect, for a period of at least six years from and after the effective time of the Merger, the D&O insurance in place as of the date of the Merger Agreement with Lumos Networks’ current insurance carrier or with an insurance carrier with the same or better credit rating and with terms, conditions, retentions and limits of liability that are no less favorable in the aggregate than the coverage provided under Lumos Networks’ existing policies as of the date of the Merger Agreement. Alternatively, the surviving corporation will purchase from Lumos Networks’ current insurance carrier or from an insurance carrier with the same or better credit rating comparable D&O insurance for such six-year period with terms, conditions, retentions and limits of liability that are no less favorable in the aggregate than as provided in Lumos Networks’ existing policies as of the date of the Merger Agreement, but under no circumstance will Lumos Networks pay, or will Parent or the surviving corporation be required to pay, a one-time premium in connection with the “tail” policy in excess of 300% of the amount per year that Lumos Networks paid in its last full fiscal year or annual premiums in excess of 300% of the amount per year that Lumos Networks paid in its last full fiscal year. If the aggregate premiums of the D&O insurance required to be maintained exceed these limits, then Lumos Networks or the surviving corporation will only be required to obtain a D&O insurance policy with the greatest coverage available for a cost not exceeding such limits.

The Merger Agreement provides that if Parent, the surviving corporation or any of its successors or assigns consolidates with or merges into any other person and shall not be the continuing or surviving corporation or entity of such consolidation or merger, or transfers or conveys all or substantially all of its properties and assets to any person, then, and in each such case, to the extent necessary, proper provision shall be made so that the successors and assigns of Parent or the surviving corporation, as the case may be, shall assume the Merger Agreement obligations described above with respect to indemnification, exculpation, advance or expenses and D&O insurance.

Parent Financing

The Merger Agreement provides that Parent shall use its reasonable best efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable to arrange and obtain the equity financing and the debt financing on the terms and conditions described in or contemplated by the equity commitment letter and the debt commitment letters (taking into account related “market flex” provisions contained in the debt commitment letters) (or such other terms and conditions acceptable to Parent so long as such terms and conditions satisfy the requirement set forth below with respect to substitute financing) and to consummate the equity financing and debt financing, which we collectively refer to as the financing, on the closing date and shall not permit any amendment or modification to be made to, or any waiver of any provision or remedy, under the equity commitment letter and the debt commitment letters, which we collectively refer to as the financing commitments, without the prior written consent of the Company if such amendments, modifications or waivers would:

 

    reduce the aggregate amount of the financing (including by increasing the fees payable thereunder or the original issue discount applicable to the financing) below the amount, which we refer to as the “required financing amount,” required for Parent to consummate the Merger and the other transactions contemplated by the Merger Agreement, including (i) the payment of the Merger Consideration for all of the shares of Lumos Networks Common Stock on a fully-diluted basis, (ii) making all payments in respect of the Company stock options, Company restricted stock and Company Purchase Rights, (iii) the repayment or refinancing of all indebtedness of the Company required to be repaid under the Merger Agreement and (iv) the payment of all related fees and expenses of Parent, Merger Sub and their respective representatives pursuant to the Merger Agreement;

 

    impose new or additional conditions, or expand, amend or modify any of the conditions to the receipt of the financing that would prevent or materially delay the consummation of the transactions contemplated by the Merger Agreement;

 

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    materially delay or impair the availability of the financing at the closing or materially impede the satisfaction of the conditions to obtaining the financing; or

 

    adversely impact the ability of Parent or Merger Sub to enforce its rights against the other parties.

We refer to any amendments, modifications or waivers that would have any of results or impacts described in the bullets above as a restricted financing commitment amendment. The Merger Agreement allows Parent to amend the financing commitments without the consent of the Company to add lenders, lead arrangers, bookrunners, syndication agents or similar entities who had not executed the financing commitments as of the date of the Merger Agreement so long as any such amendment is not a restricted financing commitment amendment.

The Merger Agreement requires Parent to use its reasonable best efforts to:

 

    maintain in effect the financing commitments;

 

    satisfy on a timely basis (taking into account the marketing period) all conditions to obtaining the financing that are within its control or subject to its influence;

 

    enter into definitive agreements with respect to the financing commitments on the terms and conditions contained in the financing commitments (taking into account related “market flex” provisions contained in the debt commitment letters) (or such other terms and conditions acceptable to Parent so long as such terms and conditions satisfy the requirement set forth below with respect to substitute financing);

 

    fully pay (including from the proceeds of the financing) any and all commitment fees or other fees required to be paid under the financing commitments on or prior to the closing date;

 

    enforce its rights under the financing commitments; and

 

    in the event that all conditions in the financing commitments have been satisfied, consummate the financing on or before the closing date.

The Merger Agreement requires Parent to provide a copy of any amendment, supplement or modification of the financing commitments to the Company.

The Merger Agreement provides that if funds in the amounts set forth in the financing commitments, or any portion thereof, become unavailable on the terms and conditions set forth therein (taking into account related “market flex” provisions contained in the debt commitment letters), then Parent will, as promptly as practicable following the occurrence of such event:

 

    notify the Company in writing thereof;

 

    use reasonable best efforts to obtain substitute financing (on terms and conditions that are no less favorable (taking into account related “market flex” provisions contained in the debt commitment letters) to Parent and Merger Sub, than the terms and conditions as set forth in the financing commitments (taking into account any “market flex” provisions with respect to the debt commitment letters) in an amount, when added to the portion of the financing commitments that is still available, that is no less than the required financing amount; and

 

    deliver to the Company copies of the new commitment letter and fee letter with respect to any such substitute financing (in a redacted form removing fee information, economic terms of the “market flex” provisions and other economic provisions that are customarily redacted in connection with Merger Agreements of this type, but which redacted information does not relate to the aggregate amount of commitments under the financing, the availability of the financing or the conditionality of, or contain any conditions precedent to, the funding of the substitute financing) and related definitive financing documents with respect to such substitute financing.

 

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The Merger Agreement provides that Parent and Merger Sub shall give the Company prompt notice:

 

    of any material breach or material default (or any event or circumstance that, with or without notice, lapse of time or both, could reasonably be expected to give rise to any material breach or material default) by any party to any financing commitment or definitive document related to the financing;

 

    of the receipt of any written notice or other written communication from any debt financing sources with respect to any actual or threatened material breach, material default, withdrawal, early termination or repudiation by any debt financing sources of any provisions of the financing commitments or any definitive document related to the financing that would, in any such case, reasonably be expected to adversely affect the timely availability (taking into account the timing of the marketing period) or the amount of the financing commitments;

 

    of any amendment or modification of, or waiver under, the financing commitments or any related fee letters;

 

    of any material dispute or disagreement between or among any parties to the financing commitments (other than customary negotiations in the ordinary course between or among any parties to the financing commitments with respect to the definitive documentation for the financing); and

 

    if for any reason Parent or Merger Sub believes in good faith that there is a reasonable possibility that it will not be able to timely obtain (taking into account the timing of the marketing period) all or any portion of the financing.

The Merger Agreement provides that, despite the notice obligation of Parent described above, Parent is not required to disclose any information that is subject to attorney-client or similar privilege if Parent shall have used its reasonable best efforts to disclose such information in a way that would not waive such privilege. Parent shall keep the Company informed on a reasonably current basis in reasonable detail of the status of its efforts to arrange the financing or any substitute financing. The Merger Agreement does not obligate Parent to pay any fees or agree to pay any interest rate amounts, in either case, in excess of those contemplated by the financing commitments (taking into account any “market flex” provisions with respect to the debt commitment letters) or to consummate the debt financing prior to the completion of the marketing period.

The Merger Agreement requires the Company to, and to use its reasonable best efforts to cause its subsidiaries and its and their respective officers, directors and employees to, and to use its reasonable best efforts to direct its and their respective accountants, legal counsel and other representatives to, at Parent’s sole expense, provide Parent with all cooperation as may be reasonably requested by Parent in connection with the arrangement of the debt financing contemplated by the financing commitments, including the following:

 

    assisting Parent in preparation for, and participating with Parent in, the marketing efforts for the debt financing, including, without limitation, participation in (and causing senior members of management and representatives of the Company and its subsidiaries to participate in) a reasonable number of meetings (including customary one-on-one meetings), presentations, conference calls, due diligence sessions (including accounting due diligence sessions) and other sessions with the debt financing sources, prospective lenders and investors and rating agencies in connection with the financing and providing assistance to Parent in obtaining ratings as contemplated by the debt financing;

 

    assisting with the preparation of materials for rating agency presentations and bank information memoranda (including (x) the delivery of an additional bank information memorandum that does not include material non-public information with respect to the Company and its subsidiaries or any of its or their respective securities and (y) execution and delivery of one or more customary authorization and representation letters contemplated by the debt commitment letters or otherwise that are customary for such financing), lender presentations and similar documents required in connection with the marketing and syndication of the financing; provided, that any such bank information memoranda shall contain disclosure and financial statements with respect to the Company or the surviving corporation reflecting the surviving corporation and/or its subsidiaries as the obligor(s); provided, further, that the Company shall not be required to prepare any projections;

 

 

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    as promptly as reasonably practicable (A) furnishing Parent and Merger Sub and the financing sources with the historical and pro forma financial information required to be furnished to the debt financing sources pursuant to the debt commitment letters or any substantially similar requirements of any substitute financing and such other financial and other pertinent information regarding the Company as may be reasonably requested by Parent or the financing sources to assist in the preparation of any syndication, offering or other similar marketing materials and/or documents related to the debt financing or that are necessary for the satisfaction of the obligations and conditions set forth in the financing commitments, (B) assisting Parent in the preparation of pro forma financial information and pro forma financial statements by Parent to be included in any syndication, offering or other similar marketing materials and/or documents relating to the debt financing; provided, that the Company shall not be required (x) to provide any financial information related to Parent or any of its subsidiaries or any adjustments that are not directly related to the acquisition of the Company by Parent or (y) to disclose any information that is subject to attorney client or similar privilege if the Company shall have used its reasonable best efforts to disclose such information in a way that would not waive such privilege or (z) to produce or prepare any projections and (C) informing Parent if the Company or its subsidiaries shall have actual knowledge of any facts that would likely require the restatement of any financial statements included in the historical and pro forma financial information required to be furnished to the debt financing sources pursuant to the debt commitment letters (or any substitute financing) for such financial statements to comply with GAAP;

 

    using reasonable best efforts to obtain any legal opinions reasonably requested by Parent;

 

    assisting Parent in the preparation, negotiation, execution and delivery of one or more credit or other agreements in connection with the debt financing (including providing information necessary for the completion of any schedules thereto), provided, that neither the Company nor any of its subsidiaries shall be required to enter into any such agreement prior to the effective time of the Merger (other than the representation and authorization letters referred to in the second bullet above unless the effectiveness thereof shall be conditioned upon, or become operative upon, the occurrence of the effective time of the Merger;

 

    assisting Parent in the preparation, negotiation, execution and delivery of other documents and instruments relating to guarantees, the pledge of collateral and other matters ancillary to the debt financing as may be reasonably requested by Parent in connection with the debt financing (including providing information necessary for the completion of any schedules thereto) and otherwise reasonably facilitating the pledge of collateral (including lien searches, lien releases and instruments of termination or discharge that are reasonably requested by Parent in order to release all liens over the property and assets of the Company and taking reasonable actions for the purposes of establishing collateral arrangements) and providing of guarantees contemplated by the debt commitment letters (provided, that the Company and its subsidiaries shall not be required to enter into any such document or instrument prior to the effective time of the Merger (other than the representation and authorization letters referred to in the second bullet above) unless the effectiveness thereof shall be conditioned upon, or become operative upon, the occurrence of the effective time of the Merger);

 

    at least four business days prior to the closing date, providing Parent with all documentation and information regarding the Company and its subsidiaries that the debt financing sources reasonably determine is required by regulatory authorities under applicable “know your customer” and anti-money laundering rules and regulations, including the USA Patriot Act of 2001 (Title III of Pub. L. 107-56 (signed into law October 26, 2001)) to the extent reasonably requested in writing by Parent at least nine business days prior to the closing date;

 

    obtaining customary executed payoff letters, lien terminations and instruments of discharge, and give any other necessary notices within the required time periods (excluding any such notices of prepayment and/or redemption which are irrevocable or which are otherwise not conditioned on the closing), to allow for the payoff, discharge and termination in full at the closing of all indebtedness required by the debt commitments letters to be terminated;

 

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    cooperating with the debt financing sources’ requests for due diligence;

 

    taking and/or facilitating all corporate resolutions and other organizational actions, subject to the occurrence of the closing, reasonably requested by Parent that are necessary or customary to permit the consummation of the debt financing; and

 

    executing and delivering customary closing documents as may be reasonably requested by Parent, including a certificate of the chief financial officer or person performing similar functions of the Company with respect to solvency matters in the form attached to the debt commitment letters (or as attached to, or required by, any substitute financing).

The Merger Agreement provides that nothing in the Merger Agreement will require any cooperation by the Company to the extent that it would:

 

    require the Company or any of its subsidiaries or representatives, as applicable, to agree to pay any commitment or other fees or reimburse any expenses prior to the effective time of the Merger, or incur any liability that is not subject to reimbursement or indemnity from Parent;

 

    unreasonably interfere with the ongoing business or operations of the Company and its subsidiaries;

 

    require the Company or any of its subsidiaries to take any action that will conflict with or violate any applicable law;

 

    require the Company or any of its subsidiaries to enter into any financing or purchase agreement, promissory note, pledge or security agreement, mortgage or any other similar instrument, document or agreement for the financing prior to the effective time of the Merger (other than the representation and authorization letters contemplated by the debt commitment letters or otherwise that would be customary for the financing) unless the effectiveness thereof shall be conditioned upon, or become operative upon, the occurrence of the effective time of the Merger Agreement;

 

    require (x) the Board to adopt resolutions approving the agreements, documents and instruments pursuant to which the financing commitments are obtained or (y) the boards of directors (or other similarly governing bodies) of the subsidiaries of the Company to adopt resolutions approving the agreements, documents and instruments pursuant to which the financing commitments are obtained (except to the extent such subsidiary resolutions are contingent upon the closing or become effective after giving effect to the effective time of the Merger); or

 

    result in any officer or director of the Company or any of its subsidiaries incurring any personal liability with respect to any matters relating to the financing.

The Merger Agreement requires Parent to promptly, upon request by the Company, advance or reimburse the Company or cause the Company to be advanced or reimbursed for all reasonable and documented out-of-pocket costs and expenses (including those of its accountants, consultants, outside legal counsel, agents and other representatives) incurred or to be incurred by the Company or any of its subsidiaries in connection with the actions and cooperation in connection with the financing. The Merger Agreement also requires Parent to indemnify, defend and hold harmless the Company, its subsidiaries and its representatives from and against any and all liabilities, losses, damages, claims, costs, expenses, interest, awards, judgments and penalties suffered or incurred by them in connection with the arrangement of the financing and any information utilized in connection therewith (other than historical information relating to the Company or its subsidiaries or other information furnished in writing by the Company or its subsidiaries), except to the extent suffered or incurred as a result of the bad faith, gross negligence, or willful misconduct by the Company or its subsidiaries

 

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or, in each case, their respective affiliates and representatives. The Merger Agreement provides that all material non-public information regarding the Company and its subsidiaries provided to Parent, Merger Sub and their representatives and affiliates pursuant to the provisions described in this paragraph will be kept confidential in accordance with the confidentiality agreement between the parties.

Under the Merger Agreement, the Company consents to the use of the logos of the Company and its subsidiaries by (i) Parent, Merger Sub, the EQT Fund, the equity financing sources and other persons related to Parent, Merger Sub, the EQT Fund and the equity financing sources, as well as by (ii) the debt financing sources and other persons related to the debt financing sources in connection with the debt financing, except that any of these persons who use the logos are required to ensure that such logos are used solely in a manner that is not intended, or that is not reasonably likely, to harm or disparage the Company or the Company’s reputation or goodwill.

The Merger Agreement provides that if the Company has remaining sufficient cash and access to undrawn available lines of credit to insure the Company remains as going concern, the Company will cooperate with Parent to make available cash on hand of the Company and its subsidiaries to be used for the funding of the Merger and the other transactions contemplated by the Merger Agreement as of the Effective Time.

Transaction Litigation

The Merger Agreement requires the Company to, as promptly as reasonably pra