Company Name: First Aviation Services, Inc.
Public Availability Date: March 26, 2004Document Sections:
INQUIRY LETTER
INQUIRY LETTER
INQUIRY LETTER
STAFF REPLY LETTER [INQUIRY LETTER]
February 26, 2004 BY HAND Office of the Chief Counsel
Division of Corporation Finance
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549 Re: First Aviation Services, Inc. - Omission of Supporting Statement for
Shareholder Proposal by Wynnefield Capital, Inc. and certain of its affiliates
Ladies and Gentlemen: On behalf of our client, First Aviation Services, Inc., a Delaware corporation
(the "Company"), this letter is to inform you, pursuant to Rule 14a-8(j) under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), of the
Company's intention to omit from its proxy statement for its 2004 Annual Meeting
of Stockholders (the "Proxy Statement") the supporting statement (the
"Supporting Statement") to the stockholder proposal (the "Proposal") submitted
to the Company by Wynnefield Capital, Inc. and certain of its affiliates
(collectively, the "Proponent") for inclusion in the Proxy Statement under cover
of a letter dated January 14, 2004. A copy of the Proposal and the Supporting
Statement is attached hereto as Annex A. Five additional copies of this letter,
including the annexed Proposal and Supporting Statement, are enclosed herewith
in accordance with Rule 14a-8(j). A copy of this letter also is being furnished
to the Proponent simultaneously with this filing. The Company's Request
The Proponent proposes that the Company's stockholders "recommend that the board
of directors take steps to provide for cumulative voting for directors." The
Company understands that the staff of the Division of Corporation Finance (the
"Staff") of the Securities and Exchange Commission (the "Commission") has
generally not granted no-action relief in connection with exclusion of
shareholder proposals regarding the implementation of cumulative voting for
directors and accordingly does not seek to exclude the Proposal from the Proxy
Statement. However, on behalf of the Company, we respectfully request that the Staff concur
that it will not recommend any enforcement action if the Company omits the
Supporting Statement, in its entirety, from its Proxy Statement. In the event
the Staff disagrees with the Company's view that the Supporting Statement may be
excluded in its entirety, the Company is of the view that, for the reasons set
forth below, various portions of the Supporting Statement are false and
misleading and should be excluded or, alternatively, should be recast as
opinions or substantiated, as applicable. Reasons for Excluding the Supporting Statement
The Company believes the Supporting Statement may be excluded on the basis of
Rules 14a-8(i)(3) and 14a-9 under the Exchange Act because the Supporting
Statement (i) is false and misleading, (ii) impugns character and integrity
without factual basis, and (iii) sets forth numerous other statements and
assertions that lack factual support, as well as opinions asserted as statements
of fact. Rule 14a-8(i)(3) permits the omission from a proxy statement of a proposal or
supporting statement that is contrary to any of the Commission's proxy rules,
including Rule 14a-9. Rule 14a-9 prohibits the inclusion within proxy materials
of statements that are false or misleading and the omission from proxy materials
of material facts necessary to make statements made therein not false or
misleading. The Note to Rule 14a-8 provides certain examples of what, depending
upon the particular facts and circumstances, may be misleading within the
meaning of Rule 14a-9, including: "material which directly or indirectly impugns
character, integrity or personal reputation or directly or indirectly makes
charges concerning improper, illegal or immoral conduct or associations, without
factual foundation." The Staff has also indicated that, when a proposal and supporting statement
"have obvious deficiencies in terms of accuracy, clarity or relevance" and "will
require detailed and extensive editing in order to bring them into compliance
with the proxy rules," the Staff may find it appropriate for companies to
"exclude the entire proposal, supporting statement, or both, as materially false
or misleading." Division of Corporation Finance: Staff Legal Bulletin No. 14
(July 13, 2001) ("Staff Legal Bulletin No. 14").
Additionally, the Staff has cautioned that "shareholders should avoid making
unsupported assertions of fact ... [and] should provide factual support for
statements in the proposal and supporting statements and phrase statements as
their opinion where appropriate." Staff Legal Bulletin No. 14. Indeed, the Staff
has often required the deletion of unsubstantiated false and misleading
statements, and has required the revision of such statements to provide
additional factual support or to recast statements as opinions. See, e.g.,
General Electric Company (January 27, 2004) (requiring deletion of
unsubstantiated assertions); Phoenix Gold International, Inc. (December 15,
2003) (requiring the Proponent itself to delete, and provide factual support
for, certain unsubstantiated statements made in a cumulative voting proposal);
Honeywell International Inc. (February 5, 2003) (requiring that several
unsubstantiated false and misleading assertions made in a cumulative voting
proposal be recast as opinions of the proponent); Phoenix Gold International,
Inc. (November 18, 2002) (requiring that the Proponent itself recast as opinion
unsubstantiated assertions made in a cumulative voting proposal); J. Alexander's
Corporation (April 1, 2002) (noting that various statements in the proposal may
be omitted unless the proponent provided factual support for those statements).
The Company respectfully submits that, for the reasons set forth below, the
Supporting Statement is so replete with false and misleading statements that it
should be excluded in its entirety pursuant to Rule 14a-8(i)(3). In the event
the Staff disagrees with the Company's view that the Supporting Statement may be
excluded in its entirety, however, the Company is of the view that, for the
reasons set forth below, various portions of the Supporting Statement are false
and misleading and should be excluded, or, alternatively, should be recast as
opinions or substantiated, as applicable, pursuant to Rule 14a-8(i)(3).
Specific False and Misleading Statements:
The following are specific examples of statements and assertions in the
Supporting Statement that the Company believes are false and misleading within
the meaning of Rules 14a-8(i)(3) and 14a-9, which we shall restate for
convenience: 1. "Under the current board, the Company failed to realize its potential and
provide a positive return for long-term outside shareholders. Wynnefield
initially invested in the Company in 1997 at prices up to $10.25 per share.
Currently, the stock hovers near $4.50 per share. The Company's average annual
loss from continuing operations was $0.16 per share over the last three fiscal
years." This passage makes several unsupported and inaccurate factual assertions, as
well as statements of opinion that are presented as statements of fact.
First, the assertion that the Company has "failed to realize its potential" is
an opinion which is asserted as fact without explanation or factual support.
Moreover, this opinion is misleading because it is asserted without any
discussion of the depressed state of the industry in which the Company competes.
The aviation industry in general was greatly affected by the events of September
11, 2001, which contributed negatively to the revenues of most companies in the
industry. In particular, the state of the industry has contributed to several of
the Company's competitors, including AVTEAM, Inc. and Kellstrom Industries Inc.,
having filed for bankruptcy in 2001 and 2002, respectively, and having stock
values of zero. The lack of discussion of, or reference to, the financial
challenges the aviation industry has faced makes any discussion of potential or
performance of the Company misleading to stockholders. Second, this passage is also misleading to stockholders because, while the first
sentence generalizes that the return provided by the Company to its "long-term
outside shareholders" has not been "positive," the next two sentences of the
passage discuss only the return on the Proponent's investment, not the return on
the investment of other stockholders. Third, the factual assertions in the second and third sentences of this passage
are inaccurate and misleading as they suggest a much greater loss by the
Proponent in connection with its ownership of shares of the Company's common
stock than it has actually experienced. According to the Proponent's Statement
of Beneficial Ownership on Schedule 13D, last amended on June 6, 2003, and its
Statements of Changes of Beneficial Ownership of Securities on Form 4, the
average price at which the Proponent purchased its shares of the Company's
common stock is approximately $6.30 a share, which is significantly lower than
the $10.25 price referenced in this passage. Additionally, the referenced $4.50
per share "current" stock price does not take into account a special $1.00 per
share cash dividend which was paid to each of the Company's stockholders in
January 2003. Thus, by stating that the Proponent "initially invested ... at
prices up to $10.25 per share," and by not including the $1.00 per share
dividend as part of the Proponent's return on investment, the statement suggests
a loss on the Proponent's investment of up to $5.75 per share, instead of an
actual loss (based on the information in the Proponent's Schedule 13D and Forms
4) of only approximately $0.80 a share. These statements are therefore
materially misleading. Fourth, the statement that the "Company's average annual loss from continuing
operations was $0.16 per share over the last three fiscal years" is misleading
because it does not provide any discussion of the state of the aviation industry
over recent years as discussed above. Specifically, the Proponent's reference to
figures pertaining to continuing operations over a three year period is
misleading to shareholders without qualifying such reference with the effect on
operations of historical events and their industry-wide impact. Also, the
reference in this statement to "the last three fiscal years" is vague and
misleading as well, because the statement does not specify the specific fiscal
years for which these figures are being presented. The Company's last completed
fiscal year for which financial information is available is for the fiscal year
ended January 31, 2003, and the Proponent's failure to clarify the specific
fiscal years to which this statement is referring could be easily misinterpreted
by stockholders as including the fiscal year ended January 31, 2004.
Finally, it is misleading to give the impression, by discussing the Company's
performance in the supporting statement for a cumulative voting proposal, that
cumulative voting would have changed the Company's performance. Rather, such
performance has been affected by such things as the economic downturn in the
last few years and industry specific factors in the aviation industry. See
Winland Electronics, Inc. (May 24, 2002) (requiring deletion of false and
misleading statements suggesting cumulative voting would have changed company
performance). For all of the above reasons, the Company believes that, if the Staff disagrees
with the Company's view that the Supporting Statement may be excluded in its
entirety, the above-quoted passage should be deleted in its entirety. If,
notwithstanding the foregoing, this passage is permitted to be included in the
Supporting Statement, it should be corrected and recast as the Proponent's
opinion, or factual support should be provided, as required.
2. Heading: "Ignoring the Voice of Outside Shareholders"
"We think the Company's disappointing performance results from insularity of
management and the board, which we believe ignores the best interests of outside
shareholders." The heading and statement noted above in the Supporting Statement contain
various false and misleading assertions. First, the statement that the Company's performance is "disappointing" is an
unsupported assertion of opinion cast as fact. If such statement is not deleted,
it should be expressly identified as an opinion so as not to be misleading to
stockholders. Second, the claim that the "best interests of outside stockholders" are ignored,
following an aspersion as to the supposed "insularity of management and the
board", is factually misleading because it gives the false impression that the
board and management represent only the interests of stockholders connected to
or affiliated with management. In fact, a majority of the board consists of
independent directors. This sentence is therefore false and misleading.
Third, the heading, "Ignoring the Voice of Outside Shareholders," is misleading
as support for the Proponent's cumulative voting proposal. Cumulative voting is
a mechanism for focusing all stockholders' votesit does not ensure the
provision of a "voice" for outside stockholders. In addition, this heading and
the first statement quoted above are misleading in that they suggest that the
directors have not listened to, or been responsive to, outside shareholders. Not
only does the Proponent represent only its own economic interests, not those of
all outside stockholders, but, in fact, the board of the Company has given the
Proponent repeated access to management and to the independent directors to
present the Proponent's thoughts on the Company's business.
Fourth, by claiming in the heading and statement quoted above that the directors
have ignored the "voice" or "best interests" of outside-stockholders, the
Proponent suggests that the Company's officers and directors have breached, or
are willing to breach, their fiduciary duties to the Company's stockholders.
Such language is materially false and misleading and impugns the character and
integrity of board members without factual foundation. The Staff has permitted
corporations to delete proposals and supporting statements in their entirety
under such circumstances. See, e.g., The Swiss Helvetia Fund, Inc. (April 3,
2001) (entire shareholder proposal may be excluded because it contained
unsupported statements that implied that management had breached its fiduciary
duties). Furthermore, attempting to phrase these personal attacks on the
Company's management and directors as an opinion by inserting the words, "We
think," does not change the misleading nature of these statements. See Phoenix
Gold International, Inc. (November 18, 2002) (requiring certain inflammatory
statements by the Proponent itself to be deleted rather than allowing the
Proponent to recast them as opinions); P and F Industries, Inc. (March 19, 1991)
(statements regarding management, even if stated as opinions, can be false and
misleading). The Supporting Statement should be excluded in its entirety because
of the attacks on the character of the independent members of the board and of
management. If the Staff disagrees that the Supporting Statement should be excluded in its
entirety, the Company believes that the above heading and sentence should be
deleted for the reasons set forth above. 3. "By letter dated October 3, 2003, the outside directors declined our request
to commit to either achieve an adequate rate-of-return on assets within a
mutually agreed period or undertake sale or privatization of the Company."
This passage is false and misleading and should therefore be deleted in its
entirety if the Staff does not agree that the Supporting Statement should be
excluded in its entirety. First, this passage contains material inaccuracies, as it falsely represents
both the Proponent's "request" to the independent directors, as well as their
response to such request. The Proponent's request to the independent directors,
made at a meeting with the independent directors on September 23, 2003,
consisted of threats toward the directors that the board choose one of three
options: either sell the Company, privatize the Company, or face a "scorched
earth scenario" in which the Proponent would launch a public relations campaign
to paint the Company as a poor example of corporate governance. The independent
directors responded to the Proponent in a letter dated October 3, 2003. In the
letter, the independent directors did not reject committing to achieve an
"adequate" rate of return, or even discuss such an option, because, as the
independent directors understood the Proponent's position expressed at the
meeting, such an option was not one of the three options presented to the
independent directors at the meeting. Further, the independent directors did not
receive any constructive suggestions from the Proponent regarding improving the
Company's rate-of-return on assets, nor has the Proponent provided any factual
support for such a claim. It is therefore false and inaccurate to state that the
independent directors rejected such a request. Second, this passage is misleading, as it suggests as fact the Proponent's
opinion that the Company has failed to achieve an "adequate" rate-of-return on
assets, and makes this statement without providing either any description of
what the Proponent considers to be "adequate" or any factual support for this
assertion. The Staff has recently required the Proponent itself to revise
similar statements in a proposal submitted for inclusion in a corporation's
proxy statement. See Phoenix Gold International, Inc. (November 18, 2002)
(requiring the Proponent to recast as opinion statements in a cumulative voting
proposal that the corporation has not realized a "fair return" on shareholders'
investment). Third, it is blatantly false and misleading and impugns the character and
integrity of the independent directors to imply, as the Proponent does here,
that the independent directors are not committed to achieving at least an
"adequate" rate-of-return on assets. This implication is the same as suggesting
that the independent directors are not acting in the best interests of all
stockholders and that the independent directors have therefore breached their
fiduciary duties to stockholders. Such assertion therefore impugns the character
and integrity of board members without factual support. As noted above, the
Staff has permitted corporations to delete proposals and supporting statements
in their entirety if they impugn the character of management without factual
foundation. See, e.g., The Swiss Helvetia Fund, Inc. (April 3, 2001) (entire
shareholder proposal may be excluded because it contained unsupported statements
that implied that management had breached its fiduciary duties).
Finally, the Proponent's claim that the independent directors declined a request
to commit under certain circumstances to "undertake sale or privatization of the
Company" is materially misleading in and of itself. This statement is made under
the heading "Ignoring the Voice of Outside Shareholders," suggesting that the
decision to decline a request of the Proponent was an example of "ignoring"
options which would be in the best interests of outside shareholders. The Staff
should not permit a decision by the independent directors to not commit within a
specified time period to sell or privatize the Company pursuant to the threats
made by the Proponent to be twisted by the Proponent into a false and misleading
claim that the Company's independent directors do not consider all options for
the best interests of the stockholders, including a sale or privatization of the
Company. For all of the reasons set forth above, should the Staff not agree that the
Supporting Statement should be excluded in its entirety, the Company believes
that the above passage should be deleted in its entirety from the Supporting
Statement. If, notwithstanding the foregoing, this passage is permitted to be
included in the Supporting Statement, it should be corrected and recast as the
Proponent's opinion, or factual support should be provided, as required.
4. "Despite shareholder requests during earnings calls, the Company won't
breakout supply-chain/logistics operations in its financials, making meaningful
evaluation impractical. Management describes the sector as its best high-margin
growth opportunity. It represents the Company's only major new business
initiative in three years." This passage is false and misleading in two significant respects.
First, the Proponent generalizes that "shareholder requests" to breakout
supply-chain/logistics operations were made during earnings calls without
providing any factual support that any stockholder other than the Proponent, or
a stockholder making a request at the direction of the Proponent, made such a
request. The implication that stockholders other than the Proponent have made
such requests, and the suggestion that there are stockholders who are concerned
about this issue other than the Proponent, is false and misleading in the
absence of any factual support. Second, the Proponent provides no factual support for the claim that the failure
to "breakout supply-chain/logistics operations in its financials" makes
"meaningful evaluation of the Company's performance impractical", and the
passage provides neither an explanation of how the Proponent has arrived at this
conclusion or any criteria for making such a determination. In fact, this
assertion is, at best, a matter of opinion but the Proponent does not identify
it as such. This passage is thus false and misleading for this reason as well.
This passage should therefore be deleted if the Staff does not agree that the
Supporting Statement should be excluded in its entirety. Alternatively, the
Proponent should provide support for its assertions and identify them as
opinions if necessary. 5. "Management historically has not cooperated in appointment or nomination of a
Wynnefield representative to the board. They also opposed our director candidate
in a contested election at last year's annual meeting, denying board
representation to the Company's largest outside shareholder. Notably,
Wynnefield's candidate received two-thirds of votes cast by non-insider
shareholders." This passage is false and misleading in various respects.
First, the assertion that "[m]anagement historically has not cooperated in
appointment or nomination of a Wynnefield representative to the board" is false
and misleading because it misrepresents the corporate governance process.
Historically, candidates for the board of directors have been nominated by the
full board, a majority of which consists of independent directors, not
management. Additionally, directors are elected to the board by the Company's
stockholders (or, conceivably, by the other directors), not appointed by
management. These statements are similar to the misleading assertion in the
third paragraph of the Supporting Statement that the Company's "CEO and Chairman
... currently elect the entire board of directors," which likewise suggests that
management has a role in the selection of directors and that management alone
elected the directors currently serving on the board. The Staff has recently
required the Proponent itself to revise similar assertions. See Phoenix Gold
International, Inc. (December 15, 2003) (requiring the Proponent to revise
statements in a cumulative voting proposal which suggested management
involvement in the selection of members of the board). Second, the assertion that there was no cooperation in the "appointment or
nomination" of a representative of the Proponent to the board, in connection
with the heading, "Ignoring the Voice of Outside Shareholders," is false and
misleading, as it suggests that the board was unresponsive to, and was
"[i]gnoring," any such requests by the Proponent. In fact, the board, a majority
of which consists of independent directors, received a recommendation from the
Proponent that a representative of the Proponent be nominated as a candidate for
director, reviewed such representative's qualifications, deliberated, and
determined unanimously that the nominee was not a suitable candidate for
director. The suggestion that anyone was "[i]gnoring" or did not give due
consideration to the Proponent's recommendation, is false and misleading.
Finally, the candidate nominated by the Proponent at the Company's 2003 Annual
Meeting of Stockholders received only 10.8% of the vote of stockholders other
than the Proponent, the majority stockholder or any director or officer of the
Company. By not excluding the votes cast by the Proponent from those cast for
the Proponent's nominee, the statement that the Proponent's "candidate received
two-thirds of votes cast by non-insider shareholders" is materially misleading
to stockholders, as it suggests a much more significant number of votes cast in
support of the Proponent's candidate than actually were cast.
For all of the reasons set forth above, if the Staff does not agree that the
Supporting Statement should be excluded in its entirety, the above passage
should be deleted from the Supporting Statement. Alternatively, the Proponent
should provide support for its assertions and identify them as opinions if
necessary. 6. "First Equity also requires that FAVS keep a Westport, CT headquarters
despite sufficient room at a cost savings at the Memphis, TN operations
headquarters." This statement is factually inaccurate. The sublease, dated as of December 13,
1996, between First Equity and the Company for the Company's headquarter space
(the "Sublease") allows for the Company to cancel the sublease for any reason
upon six months prior notice, and no other contractual obligations exist between
the Company and First Equity separate from the Sublease which would require the
Company to remain in its current office space or in the Westport, CT geographic
area. This statement is therefore false and misleading and should be deleted from the
Supporting Statement if the Staff does not agree that the Supporting Statement
should be excluded in its entirety. 7. "What is cumulative voting? It gives outside shareholders the potential to
elect a director of their choosing." This passage is misleading. The claim that cumulative voting provides "outside
shareholders the potential to elect a director of their choosing" is false
because, while the adoption of cumulative voting could permit the Proponent,
who, according to the Proponent's Schedule 13D, last amended on June 6, 2003,
beneficially owns 29.8% of the Company's common stock, to elect a director of
its choosing with the aid of other stockholders, cumulative voting would not
provide to any other minority stockholder of the Company the ability to pool
enough votes to elect a director of such stockholder's choosing without the
support of the Proponent. For this reason, the statement that cumulative voting "gives outside
shareholders the potential to elect a director of their choosing" should be
deleted if the Staff does not agree that the Supporting Statement should be
excluded in its entirety. Irrelevance of the Supporting Statement to the Proposal:
In addition to the various factual inaccuracies and misleading statements in the
Supporting Statement as set forth above, many of the passages in the Supporting
Statement are irrelevant to the merits of the cumulative voting proposal, but
rather are devoted primarily to criticizing the Company's management or the
Company's performance. The Proponent does not attempt to relate many of the
statements in the Supporting Statement discussed abovewhich, among other
things, refer to the Company's stock price, the value of the Proponent's
investment and loss from continuing operationsto the subject of cumulative
voting. The Proponent also does not explain in the Supporting Statement how these
perceived problems will be addressed by cumulative voting. Indeed, in light of
the proxy contest run by the Proponent last year and the possibility of another
proxy contest this year, it appears that the proponent is seeking to use the
Supporting Statement to bolster its anticipated election contest, instead of as
support for the Proposal. The Staff has taken the position that statements that
fail to support a proposal, or are irrelevant to it, should be deleted. See,
e.g., First Energy Corp. (February 13, 2004) (requiring deletion of irrelevant
statements); Knight-Ridder, Inc. (December 28, 1995) (irrelevant statements
deemed misleading); Rockefeller Center Properties, Inc. (March 30, 1993)
(requiring removal of statements unrelated to cumulative voting proposal).
It should also be noted, as has been referenced above, that the Proponent has
submitted several cumulative voting proposals over the past four years for
inclusion in the proxy statements of Phoenix Gold International, Inc. See
Phoenix Gold International, Inc. (December 15, 2003); Phoenix Gold
International, Inc. (November 18, 2002); Phoenix Gold International, Inc.
(November 5, 2001), Phoenix Gold International, Inc. (November 21, 2000). In
each case, the Proponent was directed to delete various statements and
assertions regarding a variety of subjects as false and misleading, or revise
them to provide additional factual support, recast them as opinions or otherwise
conform them to the Staff's specifications. Despite the Proponent's consequent
demonstrated familiarity with Rule 14a-8 and the previous action required by the
Staff to be taken in regard with their prior proposals, the Supporting Statement
contains the various false and misleading statements described above.
Conclusion In light of the fact that the Supporting Statement is replete with false and
misleading statements, as described above, as well as containing obvious
deficiencies in terms of accuracy, clarity and relevance, and would require
detailed and extensive editing in order to bring it into compliance with the
proxy rules, the Company submits that the Supporting Statement may be excluded
from the Proxy Statement in its entirety. The Company believes this relief is
especially warranted where, as here, the Proponent is experienced in submitting
shareholder proposals under Rule 14a-8. Accordingly, we hereby respectfully request, on behalf of the Company, that the
Staff not recommend any enforcement action if the Supporting Statement is
excluded from the Proxy Statement. If the Staff is unable to concur with the
Company's position that the Company may exclude the entire proposal, we
respectfully submit that the specific statements discussed above should be
deleted from the Supporting Statement or, alternatively, recast as opinions or
substantiated, as applicable. If the Staff disagrees with the Company's conclusions regarding the Supporting
Statement, or should any additional information be desired in support of the
Company's position, we would appreciate an opportunity to confer with the Staff
prior to the issuance of its response. If you have any questions regarding this request, or need any additional
information, please feel free to call Howard B. Dicker at (212) 310-8858 or the
undersigned at (212) 310-8031. Very truly yours,
/s/ Craig R. Brown
Enclosures cc: Nelson Obus
Wynnefield Partners Small Cap Value, LP
Wynnefield Partners Small Cap Value, LP I
Wynnefield Small Cap Value Offshore Fund, Ltd.
(w/ encls. by fax and certified mail return receipt) [INQUIRY LETTER]
January 14, 2004 Mr. Robert G. Constantini
Secretary & Chief Financial Officer
First Aviation Services, Inc.
15 Riverside Avenue
Westport, Connecticut 06880 Subject: Shareholder Proposal for 2004 Annual Meeting of Shareholders of First
Aviation Services, Inc. Dear Mr. Constantini:
We are a group of shareholders of First Aviation Services, Inc. ("FAVS"),
consisting of Wynnefield Partners Small Cap Value, LP ("Partners"), Wynnefield
Partners Small Cap Value, LP I ("Partners I"), Wynnefield Small Cap Value
Offshore Fund, Ltd. ("Fund"), and Nelson Obus in his individual capacity
(together, the "Group"). Pursuant to Rule 14a-8 promulgated under the Securities
Exchange Act of 1934, the Group requests that you include the enclosed
shareholder proposal and accompanying statement in FAVS' proxy materials for its
2004 annual meeting of shareholders. A representative of the Group will attend
the meeting in order to bring the proposal before the meeting and to speak in
favor of the proposal. Partners currently owns 744,258 shares of the common stock of FAVS. Partners I
currently owns 910,834 shares of the common stock of FAVS. Fund currently owns
405,852 shares of the common stock of FAVS. Mr. Obus currently owns 100,000
shares of the common stock of FAVS. Each member of the Group intends to continue owning these shares through the
date of FAVS' 2004 annual meeting of shareholders. Each member of the Group has
continuously held more than 1% of FAVS' outstanding common stock for more than
one year. Enclosed are copies of the following documents, confirming this share
ownership for the required time period: 1. Amendment No. 7 to Schedule 13D filed with the Securities and Exchange
Commission on September 5, 2002; 2. Amendment No. 8 to Schedule 13D filed with the Securities and Exchange
Commission on May 20, 2003; and 3. Amendment No. 9 to Schedule 13D filed with the Securities and Exchange
Commission on June 6, 2003. We note that FAVS' proxy materials for the 2003 annual meeting of shareholders
filed with the SEC on May 13, 2003 (the "2003 Statement"), required that you
receive any proposal to be considered for inclusion in the Company's proxy
materials for the 2004 annual meeting of shareholders no later than January 19,
2004. The 2003 Statement also provided that "The Company's By-laws establish an
advance notice procedure with regard to certain matters, including stockholder
proposals." It appears that under Section I.12 of the Company's bylaws, any
business brought before a meeting "in accordance with Rule 14-8" is properly
noticed. We believe this correspondence and the enclosures comply with all requirements
under federal and state law and the bylaws of FAVS. Please let us know
immediately if you require any additional information, or information presented
in any other form, in order to enable us to comply with the directions set forth
above in a timely manner. Very truly yours,
WYNNEFIELD PARTNERS SMALL CAP VALUE, LP
By: Wynnefield Capital Management, L.L.C. Its: General Partner
By: /s/ Nelson Obus, Co-Managing Member
/s/ Nelson Obus, Individually
cc: Erich W. Merrill, Jr. WYNNEFIELD PARTNERS SMALL CAP VALUE, LP I
By: Wynnefield Capital Management, L.L.C. Its: General Partner
By: /s/ Nelson Obus, Co-Managing Member
WYNNEFIELD SMALL CAP VALUE OFFSHORE FUND, LTD.
By: Wynnefield Capital, Inc. Its: Manager
By: /s/ Nelson Obus, President
Proposal: The Company's stockholders recommend that the board of directors take steps to
provide for cumulative voting for directors. Supporting Statement:
Who's Proposing This? Wynnefield Capital, Inc., and affiliates, beneficial owners of 2,160,944 shares
(29.7 percent) of Company common stock. Why?
The Company's CEO and Chairman, who beneficially own 51 percent of Company
stock, currently elect the entire board of directors. Wynnefield and other
minority shareholders have no practical opportunity to elect a director of their
choosing. Under the current board, the Company failed to realize its potential and provide
a positive return for long-term outside shareholders. Wynnefield initially
invested in the Company in 1997 at prices up to $10.25 per share. Currently, the
stock hovers near $4.50 per share. The Company's average annual loss from
continuing operations was $0.16 per share over the last three fiscal years.
Ignoring the Voice of Outside Shareholders
We think the Company's disappointing performance results from insularity of
management and the board, which we believe ignores the best interests of outside
shareholders:
By letter dated October 3, 2003, the outside directors declined our request to
commit to either achieve an adequate rate-of-return on assets within a mutually
agreed period or undertake sale or privatization of the Company.
Despite shareholder requests during earnings calls, the Company won't breakout
supply-chain/logistics operations in its financials, making meaningful
evaluation impractical. Management describes this sector as its best high-margin
growth opportunity. It represents the Company's only major new business
initiative in three years.
Management historically has not cooperated in appointment or nomination of a
Wynnefield representative to the board. They also opposed our director candidate
in a contested election at last year's annual meeting, denying board
representation to the Company's largest outside shareholder. Notably,
Wynnefield's candidate received two-thirds of votes cast by non-insider
shareholders.
The board endorses a relationship with First Equity Group, Inc. (owned
entirely by the Company's CEO and Chairman), under which the Company paid over
$1 million in fees for advice on transactions during fiscal '01, '02, and '03
while completing only one small ($4.6 million) acquisition. First Equity also
requires that FAVS keep a Westport, CT headquarters despite sufficient room at a
cost savings at the Memphis, TN operations headquarters. We believe all outside shareholders would be better represented by a board with
at least one director elected by shareholders other than the Company's CEO and
Chairman. What is cumulative voting?
It gives outside shareholders the potential to elect a director of their
choosing. Cumulative voting allows each shareholder to cast a number of votes equal to the
number of shares held multiplied by the number of directors being elected. A
shareholder may direct all its votes to one nominee or split its votes among
several nominees. (For example, 1,000 shares times two directors provides 2,000
votes that can be cast for one nominee.) Will cumulative voting help?
Under cumulative voting, 33.4 percent of the Company's stock could elect a
nominee in years when two directors are up for election. [INQUIRY LETTER]
March 12, 2004 VIA FEDERAL EXPRESS Office of the Chief Counsel
Division of Corporation Finance
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549 Subject: Response to Objections by First Aviation Services, Inc., to Wynnefield
Shareholder Proposal for 2004 Annual Meeting Ladies and Gentlemen:
This letter is a response on behalf of our client, Wynnefield Capital, Inc., and
affiliates ("Wynnefield"), to Craig R. Brown's letter to the staff of the
Division of Corporation Finance of the Securities and Exchange Commission (the
"Commission"), dated February 26, 2004. The purpose of Mr. Brown's letter was to
advise the Commission that his client, First Aviation Services, Inc. (the
"Company"), intends to exclude from its proxy materials the entire supporting
statement (the "Supporting Statement") to a shareholder proposal (the
"Proposal") submitted by Wynnefield for consideration at the 2004 annual meeting
of the Company's shareholders. In his letter, Mr. Brown explained why he
believed the Company was entitled to exclude the Supporting Statement (without
opportunity for revision by Wynnefield) pursuant to Rule 14a-8(j) and requested
that the Commission recommend no action against the Company if it does so.
1. Overview. Mr. Brown argues that the Company should be permitted to omit the Supporting
Statement because the Company believes it contains false and misleading
statements. Wynnefield disagrees. As explained below with respect to each statement to which
Mr. Brown objects, the Supporting Statement provides fair and adequate
substantiation of factual assertions and identifies statements as opinion when
appropriate in compliance with guidance from the Division of Corporation Finance
staff (the "Staff"). See Division of Corporation Finance: Staff Legal Bulletin
No. 14 (July 13, 2001)("[S]hareholders should avoid making unsupported
assertions of fact. To this end, shareholders should provide factual support for
statements in the proposal and supporting statement or phrase statements as
their opinion where appropriate."). Most of the objections articulated in Mr. Brown's letter reflect the Company's
unsurprising preference for focusing on different or additional facts more
favorable to it. The existence of possible counter-arguments for Wynnefield's
supported assertions does not render Wynnefield's statements false and
misleading in violation of the proxy rules. Even if the Staff determines that some number of the eight objections raised by
the Company are valid, the Company overreaches by attempting to deny Wynnefield
an opportunity to revise its proposal in accordance with the Staff's usual
practice. The Staff has provided shareholders of all sizes and levels of
sophistication with opportunities to make simple revisions to individual
statements in supporting statements to shareholder proposals. See, e.g.,
Lubrizol Corp., February 10, 1999 (requiring eight revisions to proposal by
TIAA-CREF, one of the world's largest pension fund managers). In fact, the only
no-action letter cited by the Company in which the Staff permitted exclusion of
an entire supporting statement involved a proposal requesting only that the
directors of the relevant company "try not to violate their fiduciary duties to
stockholders." The Swiss Helvetia Fund, Inc. (April 3, 2001). The very subject
matter of that proposal impugned the character of management and was therefore
excludable, making revision to the supporting statement inapposite.
As the Staff is aware, shareholder proposals are one of very few means for a
shareholder to communicate effectively with other shareholders. Wynnefield views
its Proposal for cumulative voting as an important opportunity to explain how
the voting mechanism could help address issues that Wynnefield believes are
important to all shareholders of the Company. 2. Objections to Individual Statements.
Mr. Brown makes a series of objections to individual statements contained in the
proposal. We address these objections in the order in which Mr. Brown presented
them. Statement No. 1: "Under the current board, the Company failed to realize its
potential and provide a positive return for long-term outside shareholders.
Wynnefield initially invested in the Company in 1997 at prices up to $10.25 per
share. Currently, the stock hovers near $4.50 per share. The Company's average
annual loss from continuing operations was $0.16 per share over the last three
fiscal years." Mr. Brown refers to the phrase "failed to realize its potential" as an
unsupported assertion of fact. Wynnefield, however, has supported the assertion
of unrealized potential with the information regarding share prices shortly
following the Company's IPO (which reflected investors' assessment of the
Company's potential) in contrast to the current poor stock performance and
operating losses. Mr. Brown states that shareholders will be misled by the reference to losses
over the "last three fiscal years." The reference is, as Mr. Brown points out,
to fiscal years 2001, 2002, and 2003, the most recent fiscal years for which
data was available at the time the Proposal was required to be submitted. If the
Staff so requests, Wynnefield will specifically identify the fiscal years during
which the operating losses occurred. Mr. Brown argues that references to the Company's performance are false and
misleading because certain competitors of the Company have also struggled since
September 11, 2001. Mr. Brown omits from his discussion Aviall, Inc. ("Aviall"),
which Wynnefield believes is the Company's most comparable competitor because it
also includes general aviation as a core focus (unlike the companies cited by
Mr. Brown, which we understand focused primarily on the commercial aviation
industry). Aviall has adjusted to current industry conditions and is
thrivingits stock rebounded from a low of $4.64 in November of 2001 and now
trades at over $15.00 per share. Wynnefield chose not to discuss Aviall or other
competitors of the Company because it believes the stock prices and operating
losses cited are sufficient for the Company's shareholders to understand the
reference to unrealized potential. Mr. Brown also objects to Wynnefield's reference to purchase prices as high as
$10.25 and the statement that the Company has failed to provide a "positive
return for long-term outside shareholders." Wynnefield believes that the share
price information provided in the Supporting Statement, which covers a period
from shortly after the Company's IPO to present day, is representative and
adequate to support the modest proposition that long-term investors have not
received a positive return. Wynnefield's specific losses are not the point and
in any event are not as easily determined as Mr. Brown's proposed calculus would
imply. For example, Mr. Brown's calculus would not take into account the tax
consequences of the $1 per share dividend, which affect the amount of
Wynnefield's losses. Statement No. 2: "We think the Company's disappointing performance results from
insularity of management and the board, which we believe ignores the best
interests of outside shareholders." (Under heading: "Ignoring the Voice of
Outside Shareholders.") Mr. Brown first objects to Statement No. 2 by characterizing the phrase
"disappointing performance" as an unsupported assertion of opinion cast as fact.
Wynnefield believes information regarding stock performance and operating
results in Statement No. 1 above provides sufficient foundation for the claim of
"disappointing results." In addition, Statement No. 2 is qualified twice as a
statement of Wynnefield's opinion. In his second objection to Statement No. 2, Mr. Brown argues that it is
misleading to express an opinion that the board has failed to act in the best
interests of outside shareholders because a majority of the directors are
"independent" under applicable exchange definitions. Wynnefield intentionally
avoided questioning the "independence" of the directors. Wynnefield believes
that the Company has not created value for outside shareholders because the
board, regardless of whether its members are independent, has not successfully
addressed the issues that are important to outside shareholders. This belief is
clearly identified in the Supporting Statement as Wynnefield's opinion in
accordance with the Staff's guidance cited above. Mr. Brown's third objection to Statement No. 2 focuses on the heading "Ignoring
the Voice of Outside Shareholders." Contrary to Mr. Brown's letter, Wynnefield
does not claim that cumulative voting would "ensure" board representation to
anyone; "ensures" is the Company's word. The heading states only that the
current board has not adequately addressed issues that are important to outside
shareholders. The facts cited in the bullet points that follow Statement No. 2
in the Supporting Statement provide specific examples to support that assertion.
To the extent the heading implies that cumulative voting will aid outside
shareholders in obtaining board representation, we believe it accurately refers
to the voting mechanism's intended effect. See Black's Law Dictionary (6thed.
1990) at 380 (describing cumulative voting as "a method of voting that allows
substantial minority shareholders to obtain representation on the board of
directors"). Finally, Wynnefield believes the word "ignores" is appropriate in this context
even if the board or management has occasionally met with Wynnefield. The point
of the material under the heading "Ignoring the Voice of Outside Shareholders"
is to demonstrate how shareholders have expressed repeated requests in annual
meetings and other forums provided by management, without tangible results.
Statement No. 3: "By letter dated October 3, 2003, the outside directors
declined our request to commit to either achieve an adequate rate-of-return on
assets within a mutually agreed period or undertake sale or privatization of the
Company." Mr. Brown alleges that the request cited in Statement No. 3 was never
communicated to outside directors at the September 23, 2003 meeting between
Wynnefield and the outside directors and therefore could not have been rejected
in the independent directors' follow-up correspondence dated October 3, 2003.
Wynnefield disputes the characterization of its September 23, 2003 meeting with
the outside directors in Mr. Brown's letter and in the independent directors'
letter cited in Statement No. 3. The enclosed letter from Joseph Lhota, on behalf of himself and other
independent directors of the Company, expressly acknowledges that Wynnefield
made a request to the outside directors that they achieve an agreed upon rate of
return on assets or explore sale of the Company. Wynnefield will change the
reference in Statement No. 3 above to the enclosed November 3, 2003 letter if
the Staff requests in order to avoid any question over what was communicated in
person at the September 23 meeting. Mr. Brown also objects to Statement No. 3 by arguing that Wynnefield impugns the
character of the independent directors and misleads investors through use of the
term "adequate rate-of-return on assets" in describing its request. The term
"adequate" is used in the Supporting Statement because those are the terms used
by Wynnefield in making the offer that is being described. The specific rate to
be agreed upon was open to discussion but, as the enclosed correspondence
reflects, the independent directors refused to enter into those discussions.
Although Wynnefield obviously wishes the Company could provide a better return
on capital, Wynnefield does not imply that the Company's independent directors
are indifferent to the rate-of-return on assets achieved by the Company or that
failure to pursue Wynnefield's request constituted a breach of any specific
fiduciary duty. Wynnefield has simply stated (and cast as opinion) its belief
that the Company suffers because the board does not successfully address issues
that are important to creating value for shareholders unaffiliated with
management. The bases for this opinion are identified in Statement No. 3 and in
the other bullet points that follow in the Supporting Statement. These are not
the type of unfounded and inflammatory statements that the Staff has required to
be omitted. See Hewlett-Packard Company, (January 7, 2003)(requiring omission of
"egregious abuse [of corporate governance]"); P and F Industries, Inc., March
19, 1991 (certain statements alleging "abuse" by management can be false or
misleading even when cast as opinion); The Swiss Helvetia Fund, Inc. (April 3,
2001)(requiring omission of proposal expressly requesting that directors "try
not to violate their fiduciary duties to stockholders").
Statement No. 4: "Despite shareholder requests during earnings conference calls,
the Company won't breakout supply-chain/logistics operations in its financials,
making meaningful evaluation impractical. Management describes the sector as its
best high-margin growth opportunity. It represents the Company's only major new
business initiative in three years." Mr. Brown objects to Statement No. 4 as misleading because Wynnefield does not
provide any support that a shareholder other than Wynnefield made requests
during the conference calls. Wynnefield does not believe the statement is
misleading as currently written, even if it made the requests itself. But
Wynnefield will identify itself as having made the requests if the staff
requests. In response to Mr. Brown's second objection to Statement No. 4, it is difficult
to see how any shareholder will be misled by the self-evident statement that
failing to report separately on a particular line of business has the practical
effect of making evaluation of that sector more difficult.
Statement No. 5: "Management historically has not cooperated in appointment or
nomination of a Wynnefield representative to the board. They also opposed our
director candidate in a contested election at last year's annual meeting,
denying board representation to the Company's largest outside shareholder.
Notably, Wynnefield's candidate received two-thirds of votes cast by non-insider
shareholders." Mr. Brown objects that Statement No. 5 misrepresents the nomination process
because the board is responsible for nominations and considered Wynnefield's
recommendation that Nelson Obus be nominated for election at the 2004 annual
meeting. Statement No. 5 references management rather than the board or a
nominating committee because Wynnefield has historically sought to work through
management to secure their cooperation in securing a board nomination. Although
Wynnefield has recently tried to make a clear record of its desire for a board
seat by making a submission through the formal nominating process, Wynnefield is
realistic in realizing that under the current voting scheme it could never
obtain a board seat without cooperation of management, even with a nomination
through a committee of independent board members, as long as management owns
over 50 percent of the Company's voting stock. In this context, cooperation of
management is an absolute prerequisite to board representation, and Wynnefield
believes the Supporting Statement can and should reflect this fact.
The Company further objects that Statement No. 5 overstates the support
Wynnefield's nominee received at last year's annual meeting by including
Wynnefield's shares in the 2/3 vote count. Wynnefield believes that it is
appropriate to count its own shares in this context because Wynnefield is among
those shareholders that could, if cumulative voting was adopted, elect a
shareholder despite the opposition of management. Although Wynnefield adequately
identifies itself as one of the outside shareholders in Statement No. 5, it is
willing to further expressly identify itself as one of the non-insider
shareholders whose votes are represented in the 2/3 vote count if the Staff
requests. Wynnefield would also like to bring to the Staff's attention that it received
this support with only two business days to solicit proxies following
effectiveness of its definitive proxy materials. At the Company's June 20, 2003
investor conference call, two other shareholders asked pointed questions of
management regarding why the Company had not been more receptive to Wynnefield's
request for board representation on behalf of outside shareholders. Any
implication that may be drawn from the Supporting Statement that other outside
shareholders are dissatisfied with the responsiveness of the current board of
directors appears accurate to Wynnefield. Statement No. 6: "First Equity also requires that FAVS keep a Westport, CT
headquarters despite sufficient room at a cost savings at the Memphis, TN
operations headquarters." Mr. Brown does not dispute that the executive headquarters could be moved to the
Memphis facility at a cost savings. Instead, he argues that the statement is
factually inaccurate because the current lease for the facility is cancelable on
six-month's notice. Wynnefield states that First Equity "requires" the lease not through a formal
agreement but rather in First Equity's role as majority shareholder with shared
management. The Company is in the unique position of having its majority
shareholder, its executive management, and one of its principal landlords under
common control. The Supporting Statement should be able to reflect this
circumstance. Statement No. 7: "What is cumulative voting? It gives outside shareholders the
potential to elect a director of their choosing." Mr. Brown objects to Statement No. 7 as misleading because no group of
shareholders could pool enough votes to elect a director under cumulative voting
without the cooperation of Wynnefield. Wynnefield acknowledges that it would
need to be one of the shareholders that could "pool" votes to elect an
individual director, but it is unclear how that fact makes Statement No. 7
misleading. Nothing in the proposal suggests that other outside shareholders
will be able to elect a director under cumulative voting without the cooperation
of Wynnefield, just as Wynnefield will not be able to single-handedly elect a
director without the cooperation of other outside shareholders.
3. Relevance. Mr. Brown argues that the Supporting Statement is irrelevant because it
discusses matters such as operational results and stock performance. The only
no-action letter cited by Mr. Brown that specifically addressed discussions of
stock performance in a supporting statement to a cumulative voting proposal
involved a misleading comparison of a small company's performance to the Dow
Jones Industrial Average. See Winland Electronics (May 24, 2002). Wynnefield's
Supporting Statement does not contain any misleading comparisons.
In the only other no-action letter cited by Mr. Brown that addressed relevance
in the context of a cumulative voting proposal, the registrant was permitted to
delete statements discussing a compensation committee when the company had no
such committee and statements claiming that cumulative voting in Alaska State
elections could have prevented the Exxon-Valdez oil spill. See Rockefeller
Center Properties, Inc. (March 30, 1993). These irrelevant and confusing
statements are distinguishable from Wynnefield's Supporting Statement.
Wynnefield's Supporting Statement clearly articulates Wynnefield's belief that
disappointing performance is a result of management's and the board's insularity
from outside shareholders. This insularity is evidenced by (a) endorsement of
unproductive or inefficient arrangements with the Company's majority
shareholder, (b) failure to make a serious commitment to outside shareholders to
achieve an agreed upon rate-of-return or sell the Company or take it private,
and (c) failure to provide outside investors with the information they have
requested to track the Company's performance. Cumulative voting could help alleviate this insularity of management and the
board by providing shareholders other than First Equity with a chance to elect a
director to contribute to board decisions. A representative of outside
shareholders elected under cumulative voting could help evaluate the continued
benefit to all shareholders of the First Equity relationship, facilitate
discussion of a sale or going-private transaction to release value to all
shareholders, and urge that outside shareholders be provided the types of
information they need to evaluate the Company's progress. Wynnefield believes
opening the board to a new perspective through cumulative voting is the best
mechanism for addressing the insularity of management and the board.
* * * If the Commission requires any additional information or materials or disagrees
with our defenses of the Supporting Statement as set forth in this letter, we
would appreciate the opportunity to confer with the Commission concerning these
matters. Please direct any correspondence sent to Wynnefield regarding the Proposal to
Wynnefield Capital, Inc., Attention: Nelson Obus, 450 - 7thAvenue, Suite 509,
New York, New York 10123, and provide a copy to our office.
Very truly yours, /s/
Erich W. Merrill, Jr. cc: Mr. Craig R. Brown
Mr. Nelson Obus [STAFF REPLY LETTER]
March 26, 2004 Response of the Office of Chief Counsel Division of Corporation Finance
Re: First Aviation Services, Inc. Incoming Letter dated February 26, 2004
The proposal recommends that the board of directors take steps to provide for
cumulative voting for directors. We are unable to concur in your view that First Aviation may exclude the entire
proposal under rule 14a-8(i)(3). There appears to be some basis for your view,
however, that portions of the supporting statement may be materially false or
misleading under rule 14a-9. In our view, the proponent must:
recast the sentence that begins "Under the current board ..." and ends "...
long-term outside shareholders" as the proponents' opinion;
revise the sentence that begins "The Company's average ..." and ends "... last
three fiscal years" to specify the three fiscal years;
replace the words "shareholder requests" with the words "Wynnefield's
requests" in the sentence that begins "Despite shareholder requests ..." and
ends "... making meaningful evaluation impractical";
recast the phrase "... making meaningful evaluation impractical" in the
sentence that begins "Despite shareholder requests ..." and ends "... making
meaningful evaluation impractical" as the proponent's opinion; and
delete the sentence that begins "First Equity also requires ..." and ends "...
Memphis, TN operations headquarters." Accordingly, unless the proponent provides First Aviation with a proposal and
supporting statement revised in this manner, within seven calendar days after
receiving this letter, we will not recommend enforcement action to the
Commission if First Aviation omits only these portions of the supporting
statement from its proxy materials in reliance on rule 14a-8(i)(3).
Sincerely, /s/
Daniel Greenspan
Attorney-Advisor
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