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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002 Commission file number 1-106
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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LYNCH INTERACTIVE CORPORATION
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(Exact name of Registrant as specified in its charter)
Delaware 06-1458056
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State of other jurisdiction (I.R.S. Employer
incorporation or organization Identification No.)
401 Theodore Fremd Avenue, Rye, NY 10580
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (914) 921-8821
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange
------------------- on which registered
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Common Stock, $.0001 American Stock Exchange
Securities registered pursuant to section 12(g) of the Act: None
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
Indicate by mark if disclosure of delinquent filers pursuant to Item 405 of
Regulations S-K is not contained herein, and will not be contained, to the best
of the Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K, or any amendment to
this Form 10-K. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) Yes No X
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of June 30, 2002 (based upon the closing price of the Registrant's
Common Stock on the American Stock Exchange of $30.50 per share) was $65
million. (In determining this figure, the Registrant has assumed that all of the
Registrant's directors and officers are affiliates. This assumption shall not be
deemed conclusive for any other purpose.)
The number of outstanding shares of the Registrant's Common Stock was 2,790,651
as of March 24, 2003.
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DOCUMENTS INCORPORATED BY REFERENCE:
Part III: Certain portions of Registrant's Proxy Statement for the 2003 Annual
Meeting of Shareholders.
FORWARD LOOKING INFORMATION
This Form 10-K contains certain forward looking information, including without
limitation Item 1-I.A "Regulatory Environment" and possible changes thereto and
"Competition," Item 1.-I.B "Cable Television," Item 1-I.C "Personal
Communications and other Wireless Services'," including without limitation the
risks described, "Impairment of Assets," and "Risk Management, Safety and
Insurance," Item 7. "Management's Discussion and Analysis of Financial Condition
and Results of Operations," including without limitation Liquidity and Capital
Resources, and Market Risk. It should be recognized that such information are
estimates or forecasts based upon various assumptions, including the matters,
risks, and cautionary statements referred to therein, as well as meeting the
Registrant's internal performance assumptions regarding expected operating
performance and the expected performance of the economy and financial markets as
it impacts Registrant's businesses. As a result, such information is subject to
uncertainties, risks and inaccuracies, which could be material.
PART I
ITEM 1. BUSINESS
Lynch Interactive Corporation ("Interactive" or the "Company") was incorporated
in 1996 under the laws of the State of Delaware. On September 1, 1999,
Interactive was spun off by Lynch Corporation to its shareholders (the "Spin
Off") and became a public company. Prior to the Spin Off, Interactive had no
significant assets, liabilities or operations. As a successor to certain
businesses of Lynch Corporation, Interactive became a diversified holding
company with subsidiaries primarily engaged in multimedia and transportation
services. Interactive's executive offices are located at 401 Theodore Fremd
Avenue, Rye, New York 10580-1430. Its telephone number is 914-921-8821.
Interactive's business development strategy is to expand its existing operations
through internal growth and acquisitions. It may also, from time to time,
consider the acquisition of other assets or businesses that are not related to
its present businesses. In January 2002, Interactive spun off its interest in
The Morgan Group, Inc., its only services subsidiary, via a tax-free dividend to
its shareholders of the stock of Morgan Group Holding Co., a corporation that
was formed initially to serve as a holding company for Interactive's controlling
interest in The Morgan Group, Inc., among other business purposes. In October
2002, the Morgan Group, Inc. filed for bankruptcy. As a result, the Company now
operates in one business segment, multimedia, which consists of
telecommunications, cable television and broadcasting. As used herein,
Interactive includes subsidiaries.
I. MULTIMEDIA
A. Telecommunications
Operations. Interactive conducts its telecommunications operations through
subsidiary companies. The telecommunications group has been expanded through the
selective acquisition of local exchange telephone companies serving rural areas
and by offering additional services such as Internet service, alarm services,
long distance service and competitive local exchange carrier service. From 1989
through 2002, Interactive has acquired fourteen telephone companies, four of
which have indirect minority ownership of 2% to 19%, whose operations range in
size from approximately 800 to over 10,000 access lines. The Company's telephone
operations are located in Iowa, Kansas, Michigan, New Hampshire, New Mexico, New
York, North Dakota, Utah and Wisconsin. As of December 31, 2002, total access
lines were 53,619, 100% of which are served by digital switches.
The principal business of Interactive's telephone companies is to provide
telecommunications services. These services fall into four major categories:
local network, network access, long distance and other non-regulated
telecommunications services. Toll service to areas outside franchised telephone
service territory is furnished through switched and special access connections
with intrastate and interstate long distance networks.
Interactive holds franchises, licenses and permits adequate for the conduct of
its business in the geographic areas that it serves.
We expect future growth in telephone operations to be derived from the
acquisition of additional telephone companies, from providing service to new
customers or additional services to existing customers, from upgrading existing
customers to higher grades of service, and from new service offerings.
The following table summarizes certain information regarding Interactive's
multimedia operations:
Years Ended December 31,
2000 2001 2002
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Telecommunications Operations
Access lines (a) ............................................................................. 46,312 53,804 53,619
% Residential .............................................................................. 75% 75% 74%
% Business ................................................................................. 25% 25% 26%
Internet Subscribers ......................................................................... 18,340 20,885 21,329
Security Customers ........................................................................... 680 5,597 6,500
Cable Subscribers ............................................................................ 4,515 2,959 2,879
Total Multimedia Revenues
Telecommunications Operations
Local Service ............................................................................... 15% 14% 15%
Network Access & Long Distance .............................................................. 61% 60% 59%
Non-Regulated & Other (b) ................................................................... 21% 24% 25%
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Total Telecommunications Operations ......................................................... 97% 98% 99%
Cable Television Operations ................................................................. 3% 2% 1%
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Total Multimedia Revenues ................................................................. 100% 100% 100%
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(a) An "access line" is a telecommunications circuit between the customer's
establishment and the central switching office.
(b) Non-regulated and other revenues include Internet, alarm, PCS, CLEC and
other non-regulated revenues.
Telephone Acquisitions. Interactive pursues an active program of acquiring
operating telephone companies. From January 1, 1989 through December 31, 2002,
Interactive acquired fourteen telephone companies serving a total of
approximately 45,600 access lines, at the time of these acquisitions, for an
aggregate consideration totaling approximately $153.6 million. Such acquisitions
are summarized in the following table:
Number of Number of
Year of Access Lines Access Lines Ownership
Company Acquisition Yr. of Acq. 12/31/02 Percentage
- ------- ----------- ----------- -------- ----------
Western New Mexico Telephone Co. 1989 4,200 6,966 83.1
Inter-Community Telephone Co. (a) 1991 2,550 2,616 100.0
Cuba City Telephone Co. & Belmont
Telephone Co. .................... 1991 2,200 2,744 81.0
Bretton Woods Telephone Co. ...... 1993 250 836 100.0
JBN Telephone Co. (b) ............ 1993 2,300 2,710 98.0
Haviland Telephone Co. ........... 1994 3,800 3,856 100.0
Dunkirk & Fredonia Telephone Co. &
Cassadaga Telephone Co. .......... 1996 11,100 13,099 100.0
Upper Peninsula Telephone Co. .... 1997 6,200 7,271 100.0
Central Scott Telephone Co. ...... 1999 6,000 6,264 100.0
Central Utah Telephone Co./Skyline
Telephone Company/Bear Lake
Telephone Company ............... 2001 7,000 7,257 100.0
(a) Includes 1,350 access lines acquired in 1996.
(b) Includes 354 access lines acquired in 1996.
Interactive continually evaluates acquisition opportunities targeting domestic
rural telephone companies with a strong market position, good growth potential
and predictable cash flow. In addition, Interactive generally seeks companies
with excellent local management already in place who will remain active with
their company. Recently, certain large telephone companies have offered certain
of their rural telephone exchanges for sale, often on a statewide or larger area
basis. Interactive has and in the future may, bid on such groups of exchanges.
Telephone holding companies and others actively compete for the acquisition of
telephone companies and such acquisitions are subject to the consent or approval
of regulatory agencies in most states. While management believes it will be
successful in making additional acquisitions, any acquisition program is subject
to various risks, including being able to find and complete acquisitions at an
attractive price and being able to integrate and operate successfully any
acquisition made.
Related Services and Investments. Interactive also provides non-regulated
telephone related services, including internet access service and long distance
resale service, in certain of its telephone service (and adjacent) areas.
Interactive also provides and intends to provide more local telephone and other
telecommunications service outside certain of its franchise areas by
establishing competitive local exchange carrier (CLEC) operations in certain
nearby areas. Affiliates of nine of Interactive's telephone companies now offer
Internet access service. At December 31, 2002, Internet access customers totaled
21,329 compared to 20,885 at December 31, 2001. Affiliates of four of
Interactive's telephone companies now offer long distance service, and
affiliates of two of Interactive's telephone companies now offers CLEC services.
An affiliate of Dunkirk & Fredonia Telephone Company ("DFT") provides CLEC
service on a resale basis in neighboring Dunkirk, New York, certain areas of the
Buffalo, New York, market and two other western New York counties. Some of DFT's
CLEC services are now being provided via an "unbundled network elements
platform", which allows for increased margins over a resale CLEC business model.
In addition, facilities-based services are continuing to be evaluated for DFT's
CLEC business. Giant Communications also provides CLEC services to selected
areas in Northeast Kansas.
DFT Security Systems, Inc. (which is 63.6% owned by Interactive), another
affiliate of DFT, acquired American Alarm Company in December 2001. DFT Security
Systems provides alarm services to western New York, including the Buffalo area,
and now serves 6,500 alarm customers.
Affiliates of Inter-Community Telephone Company in North Dakota, and Western New
Mexico Telephone Company in New Mexico have filed with the state regulatory
commissions to provide CLEC services in those states. Final plans to offer CLEC
service in areas adjacent to Interactive's telephone operations in those states
have not been completed. There is no assurance that Interactive can successfully
develop these businesses or that these new or expanded businesses can be made
profitable within a reasonable period of time. Such businesses, in particular
any CLEC business, would be expected to operate at losses initially and for a
period of time.
Regulatory Environment. Operating telephone companies are regulated by state
regulatory agencies with respect to intrastate telecommunications services and
the Federal Communications Commission ("FCC") with respect to interstate
telecommunications services.
For the interstate services, Interactive's telephone subsidiaries participate in
the National Exchange Carrier Association ("NECA") common line and traffic
sensitive tariffs and access revenue pools. Where applicable, Interactive's
subsidiaries also participate in similar pooling arrangements approved by state
regulatory authorities for intrastate services. Such interstate and intrastate
arrangements are intended to compensate local exchange carriers ("LECs"), such
as Interactive's operating telephone companies, for the costs, including a fair
rate-of-return, of facilities furnished in originating and terminating
interstate and intrastate long distance services.
In addition to access pool participation, certain of Interactive's subsidiaries
are compensated for their intrastate costs through billing and keeping
intrastate access charge revenues (without participating in an access pool).
Intrastate access charge revenues are based on intrastate access rates filed
with the state regulatory agency.
In recent years, various aspects of federal and state telephone regulation have
been subject to re-examination and on-going modification. In February 1996, the
Telecommunications Act of 1996 (the "1996 Act"), which is the most substantial
revision of communications law since the 1930's, became law. The 1996 Act is
intended generally to allow telephone, cable, broadcast and other
telecommunications providers to compete in each other's businesses, while
loosening regulation of those businesses. Among other things, the 1996 Act (i)
allows major long distance telephone companies and cable television companies to
provide local exchange telephone service; (ii) allows new local telephone
service providers to connect into existing local telephone exchange networks and
purchase services at wholesale rates for resale; (iii) provides for a commitment
to universal service for high-cost, rural areas and authorizes state regulatory
commissions to consider their status on certain competition issues; (iv) allows
the Regional Bell Operating Companies to offer long distance telephone service
and enter the alarm services and electronic publishing businesses; (v) removes
rate regulation over non-basic cable service; and (vi) increases the number of
television stations that can be owned by one party. The 1996 Act had dual goals
of fostering local and intrastate competition while ensuring universal service
to rural America.
The FCC has completed numerous regulatory proceedings required to implement the
1996 Act. For certain issues, the FCC bifurcated the proceedings between
price-cap and rate-of-return companies or in the case of the Universal Service
Fund ("USF") between rural and non-rural companies. In several cases, the
regulations for the price-cap (or non-rural) local exchange carriers have been
or are being determined first, followed by separate proceedings for
rate-of-return (or rural) companies. All of Interactive's telephone subsidiaries
are rural, rate-of-return companies for interstate regulatory purposes. The
rate-of-return designation is an election made by the carrier with the FCC. The
price cap approach differs from traditional rate-of-return regulation by
focusing primarily on the prices of communications services rather than the
telephone companies' costs.
USF is intended, among other things, to provide special support funds to high
cost rural LECs so that they can provide affordable services to their customers,
notwithstanding their high cost due to low population density. The FCC adopted
permanent USF procedures for non-rural carriers effective January 1, 2000. The
new Federal universal service support mechanism for non-rural carriers utilizes
the FCC's synthesis cost proxy model with a hold-harmless provision. The
hold-harmless provision originally ensured that the non-rural carrier receives
at least as much USF as they had been receiving under the previous system. The
hold-harmless support is being gradually phased out for non-rural carriers.
During 2001, the FCC completed three major regulatory proceedings related to
rural LECs to provide a more stable, predictable source of interstate and USF
revenues. In May 2001, the FCC adopted an order related to USF for rural
carriers based on the Rural Task Force (RTF) recommendation. Such order mandates
the continued use of actual embedded costs as the basis for USF support for
rural carriers through June 2006. In such order, the FCC emphasized that it
would provide predictability, certainty and stability to rural LECs for five
years, so as to allow rural carriers to continue to provide supported
telecommunications services at affordable rates to American consumers. In May
2001, the FCC adopted the Separations Freeze Order in which the FCC stressed how
freezing separations factors would bring stability and regulatory certainty to
the separations process to avoid sudden cost shifts in a time of rapid market
and technology changes. Finally, in October 2001, the FCC adopted the
Multi-Association Group (MAG) Order, in which the FCC declared that some of the
primary benefits are to provide certainty and stability for rate-of-return
carriers and to encourage investment in rural America. The MAG Order reaffirmed
that the 11.25% interstate rate-of-return was appropriate for rate-of-return
carriers. In addition, the MAG Order increased the Subscriber Line Charges
billed to end user customers effective January 2002 and created a new universal
service support mechanism called the Interstate Common Line Support fund
effective July 2002.
In November 2002 the FCC requested that the Federal-State Joint Board on
Universal Service (Joint Board) review certain of the FCC rules relating to the
high-cost universal service support mechanisms to ensure that the dual goals of
preserving universal service and fostering competition continue to be fulfilled.
The Joint Board initiated this review in February 2003. Interactive cannot
predict the effects of the review of the FCC rules in this proceeding which
could take over a year or more to complete.
In addition, the FCC has an open docket regarding potential changes to
intercarrier compensation. Some parties are advocating that the FCC eliminate
the interstate access charges that local exchange carriers bill to interexchange
companies and implement a policy where each local exchange carrier bills their
own end user customers the costs to originate and terminate calls. Any changes
made to intercarrier compensation for the interstate jurisdiction may also need
to be adopted for the intrastate jurisdiction. Interactive cannot predict the
potential changes that may be made to intercarrier compensation or the impact
the changes might have on the operations of the company.
Interactive's local exchange carrier telephone operations do not have
significant wireline competition at the present time. Because of the rural
nature of their operations and related low population density, they are
primarily high cost operations, which receive substantial Federal and state
subsidies. However, the regulatory environment for LEC operations has begun to
change. A principal purpose of the 1996 Act was to encourage competition in
local telephone services. Although the 1996 Act reaffirmed the Federal policy of
maintaining universal telephony service at fair and reasonable rates, the 1996
Act and related proceedings also promote competition and USF portability.
Similar regulatory changes have also been initiated in many of the states in
which Interactive operates.
Competition. All of Interactive's current telephone companies are monopoly
wireline providers in their respective area for local telephone exchange
service, except to a very limited extent in Iowa, but there can be no assurance
that this will continue. As a result of the 1996 Act, FCC and state regulatory
authority initiatives and judicial decisions, competition has been introduced
into certain areas of the toll network wherein certain providers are attempting
to bypass local exchange facilities to connect directly with high-volume toll
customers. For example, in the last few years, the States of New Mexico, New
York, Michigan, Wisconsin and Kansas passed or amended telecommunications bills
intended to introduce more competition among providers of local services and
reduce regulation. Regulatory authorities in certain states, including New York,
have taken steps to promote competition in local telephone exchange service, by
requiring certain companies to offer wholesale rates to resellers. A substantial
impact is yet to be seen on Interactive's telephone companies. Interactive's
subsidiaries do not expect bypass to pose a significant near-term competitive
threat due to a limited number of high-volume customers they serve. In addition,
cellular radio or similar radio-based wireless services, including personal
communication services, and cable television and internet based services could
provide an alternative local telephone exchange service as well as possible
competition from electric companies.
Interactive's telephone companies, in the aggregate, own approximately 10,000
miles of cable and 1,000 miles of fiber optic cable. Substantially all of the
telephone companies' properties are encumbered under mortgages and security
interests. See Item 2. Properties
B. Cable Television/Broadcasting
Cable Television
It is part of Interactive's strategy to own cable television systems,
particularly in markets where Interactive is the telephone operator and adjacent
areas.
CLR Video, L.L.C. - CLR Video, L.L.C., a 98% owned subsidiary of Interactive, is
a provider of cable television in northeast Kansas with approximately 2,695
subscribers.
Broadcasting
Station WHBF-TV - Lynch Entertainment, L.L.C. ("Lynch Entertainment I"), a
wholly-owned subsidiary of Interactive, and Lombardo Communications, Inc.,
wholly-owned by Philip J. Lombardo, are the general partners of Coronet
Communications Company ("Coronet"). Lynch Entertainment I has a 20% interest in
Coronet and Lombardo Communications, Inc. has an 80% interest. In addition, on
the sale of the stations, Interactive is entitled to an additional fee of 5% of
the Capital Proceeds (as defined). Coronet owns a CBS-affiliated television
station WHBF-TV serving Rock Island and Moline, Illinois and Davenport and
Bettendorf, Iowa.
Station WOI-TV - Lynch Entertainment Corporation II ("LEC-II"), a wholly-owned
subsidiary of Interactive, owns 49% of the outstanding common shares of Capital
Communications Corporation ("Capital") and convertible preferred stock, which
when converted, would bring LEC-II's common share ownership to 50%. On March 1,
1994, Capital acquired the assets of WOI-TV for $12.7 million. WOI-TV is an ABC
affiliate and serves the Ames/Des Moines, Iowa market. Lombardo Communications,
Inc. II, controlled by Philip J. Lombardo, has the remaining share interest in
Capital.
Based upon a multiple of ten times broadcast cash flow, plus cash, less debt,
Interactive estimates its value in these stations at almost $12 million as
compared to the net book value of these investments of a negative $0.8 million.
It is not assured that the results of these stations will continue at the
current level or that they could be sold at ten times cash flow.
Operations. Revenues of a local television station depend to some extent upon
its relationship with an affiliated television network. In general, the
affiliation contracts of WHBF-TV and WOI-TV with CBS and ABC, respectively,
provide that the network will offer to the affiliated station the programs it
generates, and the affiliated station will transmit a number of hours of network
programming each month. The programs transmitted by the affiliated station
generally include advertising originated by the network, for which the network
is compensated by its advertisers.
The affiliation contract generally provides that the network will pay to the
affiliated station an amount which is determined by negotiation, based upon the
market size and rating of the affiliated station. Typically, the affiliated
station also makes available a certain number of hours each month for network
transmission without compensation to the local station, and the network makes
available to the affiliated station certain programs, which will be broadcast
without advertising, usually public information programs. Some network programs
also include "slots" of time in which the local station is permitted to sell
spot advertising for its own account. The affiliate is permitted to sell
advertising spots preceding, following, and sometimes during network programs.
A network affiliation is important to a local station because network programs,
in general, have higher viewer ratings than non-network programs and help to
establish a solid audience base and acceptance within the market for the local
station. Because network programming often enhances a station's audience
ratings, a network-affiliated station is often able to charge higher prices for
its own advertising time. In addition to revenues derived from broadcasting
network programs, local television stations derive revenues from the sale of
advertising time for spot advertisements, which vary from 10 seconds to 120
seconds in length, and from the sale of program sponsorship to national and
local advertisers. Advertising contracts are generally short in duration and may
be canceled upon two-weeks notice. WHBF-TV and WOI-TV are represented by a
national firm for the sale of spot advertising to national customers, but have
local sales personnel covering the service area in which each is located.
National representatives are compensated by a commission based on net
advertising revenues from national customers.
Competition. WHBF-TV and WOI-TV compete for revenues with local television and
radio stations, cable television, and other advertising media, such as
newspapers, magazines, billboards and direct mail. Generally, television
stations such as WHBF-TV and WOI-TV do not compete with stations in other
markets.
Other sources of competition include community antenna television ("CATV")
systems, which carry television broadcast signals by wire or cable to
subscribers who pay a fee for this service. CATV systems retransmit programming
originated by broadcasters, as well as providing additional programming that is
not originated on, or transmitted from, conventional broadcasting stations.
Direct broadcast are satellites providing local to local video services to a
growing percentage of the population in the United States. In addition, some
alternative media operators, such as multipoint distribution service owners,
provide for a fee and on a subscription basis, programming that is not a part of
regular television service. Additional program services are provided by
low-power television stations as well.
Federal Regulation. Television broadcasting is subject to the jurisdiction of
the FCC under the Communications Act of 1934, as amended (the "Communications
Act"). The Communications Act, and/or the FCC's rules, among other things, (i)
prohibit the assignment of a broadcast license or the transfer of control of a
corporation holding a license without the prior approval of the FCC; (ii)
prohibit the common ownership of a television station and a daily newspaper in
the same market; (iii) prohibit ownership of a CATV system and television
station in the same market; (iv) restrict the total number of broadcast licenses
which can be held by a single entity or individual or entity with attributable
interests in the stations and prohibits such individuals and entities from
operating or having attributable interests in most types of stations in the same
service area (loosened in the 1996 Act); and (v) limit foreign ownership of FCC
licenses under certain circumstances. See Regulatory Environment under A. above
for a description of certain provisions of the 1996 Act including in particular
those, which would remove the regulations over non-basic cable service in three
years and permit telephone service providers to provide cable service. In
calculating media ownership interests, The Company's interests may be aggregated
under certain circumstances with certain other interests of Mr. Mario J.
Gabelli, Vice Chairman and Chief Executive Officer of the Company, and certain
of his affiliates.
Television licenses are issued for terms of eight years and are renewable for
terms of eight years. The current licenses for WHBF-TV and WOI-TV expire on
December 1, 2005 and February 1, 2006, respectively.
C. Personal Communications and Other Wireless Services.
Sunshine PCS Corporation. In February 2001, Interactive spun off its 49.9%
interest in Sunshine PCS Corporation ("Sunshine") to its shareholders. Sunshine
succeeded by merger to the assets and liabilities of Fortunet Communications,
L.P. Sunshine holds 15 MHz PCS licenses in Tallahassee, Panama City and Ocala,
Florida. Interactive currently holds the following interests in Sunshine: 10,000
shares of 7% preferred stock of Sunshine (dividends payable in kind through
February 2006, and in cash thereafter) with a liquidation value of $10.0
million, 12,500 shares of series A-1 preferred stock of Sunshine with no
dividend and a liquidation value of $12.5 million, 2,000 shares of series A-2
convertible preferred stock of Sunshine with no dividend and a liquidation value
of $2.0 million (which represent approximately 13.7% of the common equity on a
fully diluted basis), and warrants expiring February, 2006 to purchase 4,300,000
shares of Class A Common Stock of Sunshine at $0.75 per share (which represent
approximately 29.5% of the common equity on a fully diluted basis). In addition,
Interactive owns 294,218 shares of Sunshine's Class A Common Stock. The
Company's total book basis in its Sunshine investment is $3.4 million, its tax
basis is approximately $14.0 million and from inception Interactive has invested
over $21.0 million in Sunshine and its predessors. Taking into account the
series A-2 convertible preferred stock, the warrants and the shares held
directly, Interactive beneficially owns 57.2% of the outstanding Class A Common
Stock of Sunshine and 45.2% of the total outstanding shares of Sunshine. In
September 2001, Sunshine met the FCC requirement that it provide service
coverage to at least one-quarter of the population in its licensed areas.
However, Sunshine does not presently have the funds necessary to fully build out
the system necessary to provide commercial operations; moreover, obtaining
financing from third parties is extremely difficult to obtain, because of the
general downturn in the wireless industry and Sunshine's lack of operating
history. Sunshine has disclosed that it would consider selling its licenses or
entering into a joint venture with a company that provides service to a nearby
area and then developing our licenses together. However, Sunshine has not yet
adopted a business plan and there can be no assurance of Sunshine's ability to
achieve any of its several business strategic options because of financial
considerations. Moreover, because Sunshine has incurred losses since its
inception and has not yet determined how to finance its operations, the latest
report of its independent auditors contains an explanatory paragraph, which
expresses substantial doubt as to Sunshine's ability to continue as a going
concern. As of December 31, 2002, it has $0.4 million in cash and for the year
ended December 31, 2002, cash flow used in operations was $0.6 million though
steps are being taken to reduce that number in 2003.
Las Cruces, NM PCS License. Another subsidiary of Interactive, Lynch PCS
Corporation G ("LPCSG") holds a 10 MHz PCS license for the Basic Trading Area
(BTA) covering Las Cruces, New Mexico. Las Cruces is the principal city in the
BTA, which covers a population of approximately 197,166 (as of the 1990 census).
In April 2002, LPCSG completed a build-out of the licensed area sufficient to
meet the FCC requirement that it provide service coverage to at least
one-quarter of the population in this BTA.
Logan, UT PCS License. As part of the acquisition of Central Utah Telephone
Company by Interactive in June 2001, Interactive acquired Central Telecom
Services, LLC, a related entity that now owns 7.5 MHz of a 10 MHz PCS license in
the Logan, Utah, BTA, which has a population of approximately 102,702. Similar
to LPCSG, Central Telecom Services has completed a build-out sufficient to meet
the FCC requirement that service coverage be available to at least one-quarter
of the population in this BTA. In respect of the traditions of many staff
members and former owners, Interactive donated 20% of the net profits from any
sale of the Logan license to the Church of Jesus Christ of Latter Day Saints.
Iowa PCS Licenses. Central Scott has a 10 MHz PCS License for its wireline
territory covering a population of 11,470. Central Scott is also an
approximately 14% minority owner of an entity that has a 10 MHz PCS license for
portions of Clinton and Jackson Counties in Iowa, with a total population at
December 31, 2002 of 68,470, of which Interactive's proportionate share is
9,781.
RSA Cellular Interests. At December 31, 2002, Interactive owned minority
interests in certain entities that provide wireless cellular telephone service
in two Rural Service Areas ("RSAs") in New Mexico and two RSA's in North Dakota,
covering areas with a total population of approximately 157,415. Equity in
earnings from these two operations was $0.9 million for the year ended December
31, 2002 on a combined basis and the combined book basis is $2.4 million at
December 31, 2002. Interactive is proportional share of these operations
combined revenues, EBITDA and operating profits were $2.0 million, $1.2 million
and $0.9 million respectively, for the year ended December 31, 2002. The
difference between EBITDA and operating profit is depreciation of plant and
equipment. EBITDA is presented because it is a widely accepted financial
indicator of value and ability to incur and service debt. The Company utilizes
the EBITDA metric for valuing potential acquisitions. EBITDA is not a substitute
for operating profit in accordance with generally accepted accounting
principles. The entities have no debt and Interactive is proportional share of
their cash equivalents is $0.8 million
In March 2002, Interactive sold its interest in New Mexico RSA 1 (North) for
$5.5 million to Verizon Wireless, and in connection therewith prepaid certain
outstanding indebtedness to Verizon. As a result of such sale, Interactive
reported a pre-tax gain of $5.0 million in the first quarter of 2002.
Other Interests in Wireless Licenses. LPCSG also has an agreement with
Bal/Rivgam LLC (in which an affiliate of the Vice Chairman has a 49.9% equity
interest), which won licenses in the FCC's Wireless Communications Services
("WCS") Auction in 1997, to receive a fee equal to 5% of the realized net
profits of Bal/Rivgam (after an assumed cost of capital), in return for
providing bidding and certain other services to Bal/Rivgam. Bal/Rivgam holds 5
WCS licenses covering a population of approximately 42 million with an aggregate
cost of $0.7 million and certain Local Multipoint Distribution Services ("LMDS")
licenses. Betapage Communications, L.L.C., in which Interactive has a 49.9%
equity interest, was a winning bidder in the FCC auction for 929 MHz paging
licenses, which was conducted in 2000. Betapage won 24 paging licenses covering
a population of 76.7 million at a cost of approximately $77,000. Interactive
also has the right to receive a fee equal to 20% of the realized net profits of
Betapage (after an assumed cost of capital).
Another subsidiary of Interactive is a 49.9% owner of PTPMS Communications,
L.L.C. ("PTPMS"), which was a winning bidder in the FCC auction of licenses for
fixed point-to-point microwave services, which was conducted in 2000. PTPMS won
22 licenses covering a population of 27.6 million for an aggregate cost of $1.5
million. Interactive's subsidiary has loaned PTPMS approximately $1.4 million.
Interactive's subsidiary also has the right to receive a fee equal to 20% of the
realized net profits of PTPMS (after an assumed cost of capital).
Another subsidiary of Interactive is a 49.9% owner of PTPMS Communications II,
L.L.C ("PTPMS II"), which was a winning bidder in the FCC auction of licenses
for 700 MHz Guard Band spectrum for wireless data transmission and wireless
Internet services, which was conducted in 2000. PTPMS II won three licenses
covering a population of 6.4 million in BTAs including the cities of Buffalo,
NY, Des Moines-Quad-Cities, IA and El Paso, TX, at an aggregate cost of
approximately $6.3 million. Interactive has loaned PTPMS II approximately $6.1
million, $5.0 million of which was loaned in 2001. Interactive's subsidiary has
the right to receive a fee equal to 20% of the realized net profits of PTPMS II
(after an assumed cost of capital). In a FCC auction conducted during 2002 for
similar spectrum, which ended on September 18, 2002 , the Lower 700 MHz Band
Auction, the price per MHz of population was materially lower than the price
paid by PTPMS II in 2000. Accordingly, during 2002, Interactive provided a
reserve for impairment for its investment in PTPMS II of $5.5 million, resulting
in a net book value, at December 31, 2002, of $0.7 million and the tax basis was
$6.2 million.
Another subsidiary of Interactive, Lynch 3G Communications Corporation,
participated in the Lower 700 MHz auction conducted in August 2002. Lynch 3G won
eight 12 MHz licenses in the following areas: Reno, NV; Santa Barbara, CA; Des
Moines, IA; Quad Cities area of Davenport and Bettendorf, IA and Rock Island and
Moline, IL; Las Cruces, NM; Elmira, NY; and two RSAs in the western part of New
Mexico. The total population covered by these licenses is approximately 1.7
million. Lynch 3G paid $1.1 million for these licenses.
Interactive expects to continue to participate in the spectrum auctions being
conducted by the FCC.
In addition to the build out requirements for PCS licenses, FCC rules impose
build-out requirements for WCS, LMDS, paging licenses, point-to-point microwave
services and the licenses granted in 700 MHz (guard band) and Lower 700 MHz
spectrum. There are also substantial restrictions on the transfer of control of
licensed spectrum.
There are many risks relating to PCS and other FCC wireless licenses including
without limitation, the high cost of PCS and certain other licenses, the fact
that it involves start-up businesses, raising the substantial funds required to
pay for the licenses and the build out, determining the best way to develop the
licenses and which technology to utilize, the small size and limited resources
of companies compared to other potential competitors, existing and changing
regulatory requirements, additional auctions of wireless telecommunications
spectrum and actually building out and operating new businesses profitably in a
highly competitive environment (including already established cellular telephone
operators and other new PCS licensees). There can be no assurance that any
licenses granted to Sunshine, or other entities in which subsidiaries of
Interactive have interests, can be successfully sold or financed or developed,
thereby allowing Interactive's subsidiaries to recover their debt and equity
investments.
III. OTHER INFORMATION
While Interactive holds licenses of various types, Interactive does not believe
they are critical to its overall operations, except for (1) the
television-broadcasting licenses of WHBF-TV and WOI-TV; (2) Interactive's
telephone subsidiaries' franchise certificates to provide local-exchange
telephone service within their service areas; (3) Western New Mexico Telephone
Company's FCC licenses to operate point-to-point microwave systems; (4) licenses
held by partnerships and corporations in which Western New Mexico Telephone
Company and Inter-Community Telephone Company own minority interests to operate
cellular telephone systems covering areas in New Mexico and North Dakota, (5)
CLR Video's franchises to provide cable television service within its service
areas and (6) personal communications services and other wireless communication
licenses held by companies in which Interactive's subsidiaries have investments,
including the PCS licenses for Las Cruces, New Mexico, Logan, Utah, and portions
of Iowa as described above in more detail.
The capital expenditures, earnings and competitive position of Interactive have
not been materially affected by compliance with current federal, state, and
local laws and regulations relating to the protection of the environment;
however, Interactive cannot predict the effect of future laws and regulations.
No portion of the business of Interactive is regarded as seasonal.
Interactive does not believe that its multimedia business is dependent on any
single customer of local telephone service. Most local exchange carriers,
including Interactive's, received a significant amount of revenues in the form
of access fees from long distance companies.
Interactive had a total of 359 employees at December 31, 2002, compared to 328
employees at December 31, 2001.
IV. EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction G (3) of Form 10-K, the following list of
executive officers of the Registrant is included in Part 1 of this Annual Report
on Form 10-K in lieu of being included in the Proxy Statement for the 2003
Annual Meeting of Shareholders. Such list sets forth the names and ages of all
executive officers of the Registrant indicating all positions and offices with
the Registrant held by each such person and each such person's principal
occupations or employment during the past five years.
Name Officers and Positions Held Age
Mario J. Gabelli ............ Vice Chairman since December 2002 and Chief Executive 60
Officer since September 1999. From September 1999 to
December 2002, Mr. Gabelli served as our Chairman. He is
also the Vice Chairman (and from 1986 to August 2001
Chairman and Chief Executive Officer) of Lynch Corporation;
Chairman, Chief Executive Officer, Chief Investment Officer
and a director of Gabelli Asset Management Inc. and its
predecessors (since November 1976) (and in connection with
those responsibilities, he serves as director or trustee
and/or an officer of registered investment companies
managed by subsidiaries of Gabelli Asset Management); and
Chairman and Chief Executive Officer of Gabelli Group
Capital Partners, Inc., a private company
Frederic V. Salerno ............Chairman since December 2002. Mr. Salerno became a 60
director of Interactive in August 2002. Prior to joining
Interactive, Mr. Salerno was the Vice Chairman and Chief
Financial Officer of Verizon Communications. Mr. Salerno,
a trustee of the New York Inner-City Scholarship Fund and
former Chairman of the Archdiocese of New York's
Partnership for Quality Education Campaign, joined New York
Telephone in 1965. He was named Vice President in 1983 when
he managed the divestiture of the firm from the Bell
System; and became President and Chief Executive Officer of
NY Telephone in 1987
Joseph C. Farina ...............President and Chief Operating Officer since February 2003. 54
Prior to joining Interactive, Mr. Farina was the Chief
Operating Officer of Genuity Inc. from June 2000 to January
2003. Before that, Mr. Farina was the President and Chief
Executive Officer of Bell Atlantic Data Solutions Group
from 1998 to 2000
Robert E. Dolan ................Chief Financial Officer and Controller (since September 51
1999); Chief Financial Officer (1992-2000) and Controller
(1990-2000) of Lynch Corporation
John Fikre .....................Vice President--Corporate Development, General Counsel and 38
Secretary (since August 2001); Associate, Willkie Farr &
Gallagher (since August 1994)
The executive officers of the Registrant are elected annually by the Board of
Directors at its meeting in May and hold office until the organizational meeting
in the next subsequent year and until their respective successors are chosen and
qualified.
ITEM 2. PROPERTIES
Interactive leases approximately 3,400 square feet of office space from an
affiliate of its Vice Chairman for its executive offices in Rye, New York. The
lease expires at the end of 2007.
Western New Mexico Telephone Company owns a total of 16.9 acres at fourteen
sites located in southwestern New Mexico. Its principal operating facilities are
located in Silver City, where Western owns one building comprising a total of
6,480 square feet housing its administrative offices and certain storage
facilities and another building comprising 216 square feet, which houses core
network equipment. In Cliff, Western owns five buildings with a total of 14,055
square feet in which are located additional offices and storage facilities as
well as a vehicle shop, a wood shop, and central office switching equipment.
Smaller facilities, used mainly for storage and for housing central office
switching equipment, with a total of 8,384 square feet, are located in
Lordsburg, Reserve, Magdalena and five other localities. In addition, Western
leases 1.28 acres on which it has constructed four microwave towers and a 120
square-foot equipment building. Western has the use of 38 other sites under
permits or easements at which it has installed various equipment either in small
company-owned buildings (totaling 2,403 square feet) or under protective cover.
Western also owns 3,317 miles of copper cable and 421 miles of fiber optic cable
running through rights-of-way within its 15,000 square mile service area. All
Western's properties described herein are encumbered under mortgages held by the
Rural Utilities Service ("RUS") and the National Bank for Co-Operatives
("Co-Bank").
Inter-Community Telephone Company owns 12 acres of land at 10 sites. Its main
office at Nome, ND, contains 4,326 square feet of office and storage space. In
addition, it has 4,400 square feet of garage space and 5,035 square feet
utilized for its switching facilities. Inter-Community has 2,028 miles of copper
cable and 226 miles of fiber optic cable. All of Inter-Community's properties
described herein are encumbered under mortgages held by Co-Bank.
Cuba City Telephone Company is located in a 3,800 square foot brick building on
0.4 of an acre of land. The building serves as the central office, commercial
office, and garage for vehicle and material storage. The company also owns a
cement block storage building of 1,490 square feet on 0.1 of an acre. In
Madison, Wisconsin, Cuba City leases 900 square feet for administrative
headquarters and financial functions. Belmont Telephone Company is located in a
cement block building of 800 square feet on .5 acre of land in Belmont,
Wisconsin. The building houses the central office equipment for Belmont. The
companies own a combined total of 346 miles of copper cable and 34 miles of
fiber optic cable. All of Cuba City and Belmont's property described herein are
encumbered under first mortgages held by the RUS and Rural Telephone Bank,
respectively, and second mortgages held by Co-Bank. All of Inter-Community's
properties described herein are encumbered under mortgages held by Co-Bank.
J.B.N. Telephone Company owns a total of approximately 2.25 acres at fifteen
sites located in northeast Kansas. Its administrative and commercial office
consisting of 7,000 square feet is located in Holton, Kansas and a 3,000 square
feet garage warehouse facility is located in Wetmore, Kansas. In addition,
J.B.N. owns thirteen smaller facilities housing central office switching
equipment and over 1,186 miles of copper cable and 186 miles of fiber optic
cable. All properties described herein are encumbered under mortgages held by
the RUS.
CLR Video has its headquarters in Holton, Kansas, leased from J.B.N. Telephone
Company. It also owns one small parcel of land and leases 22 small sites, which
it uses for its cable receiving and transmission equipment. All properties
described herein are encumbered under a mortgage to Co-Bank. Also, see under
Item 1.I.B. Cable Television.
Haviland Telephone Company owns a total of approximately 3.9 acres at 20 sites
located in south central Kansas. Its administrative and commercial office
consisting of 4,450 square feet is located in Haviland, Kansas. In addition,
Haviland owns 19 smaller facilities housing garage, warehouse, and central
office switching equipment and over 1,213 miles of copper cable and 198 miles of
fiber optic cable. All properties described herein are encumbered under a
mortgage held by the RUS.
Dunkirk & Fredonia Telephone Company (including its subsidiaries) owns a total
of approximately 16.4 acres at six locations in western New York. Its host
central office switching equipment, administrative and commercial offices
consisting of 18,297 square feet is located in Fredonia, New York. In addition,
Dunkirk & Fredonia owns five other properties, including a service garage, a
paging tower site, a small central office housing switching equipment, sales and
service center in Jamestown, New York, and one rental property in Ashville, New
York. Dunkirk & Fredonia also owns 345 miles of copper telephone cable and 65
miles of fiber optic cable. All properties described herein are encumbered under
a mortgage held by RUS.
Upper Peninsula Telephone Company owns a total of approximately 25 acres at 19
sites located principally in the Upper Peninsula of Michigan. Its host central
office switching equipment, administrative and commercial offices consisting of
11,200 square feet is located in Carney, Michigan. In addition, Upper Peninsula
owns 25 other smaller facilities housing garage, warehouse and central office
switching equipment and over 2,272 miles of copper cable and 152 miles of fiber
optic cable. All properties described herein are encumbered under mortgages held
by the RUS and Co-Bank.
Central Scott Telephone Company owns 3.5 acres of land at 6 sites. Its main
office in Eldridge, Iowa contains 3,104 square feet of office and 341 square
feet of storage space. In addition, it has 3,360 square feet of garage space and
2,183 square feet utilized for its switching facilities. Central Scott has 357
miles of copper cable and 25 miles of fiber optic cable. All of Central Scott's
properties described herein are encumbered under mortgages held the First
National Bank of Omaha.
Central Utah Telephone, Inc., and its subsidiaries own a total of 9.49 acres at
sixteen sites and have an additional 1.54 acres at fifteen sites, which are
under leases, permits or easements. These sites are located in the central,
northeastern and mid-western areas of Utah. Central Utah Telephone's principal
operating facilities are located in Fairview, Utah, where it owns a new
commercial office bldg. containing 14,400 square feet, a plant office and
central office building containing 5,200 square feet. In addition it has 720
square feet of office space, 2,455 square feet of warehouse space, 5,245 square
feet of vehicle maintenance facilities, 4,252 square feet of protective cover
and 3 rental homes. Central Utah Telephone owns smaller facilities used mainly
for housing central office switching equipment with a total of 9,405 square feet
in 25 various locations. In addition, Central Utah Telephone owns 867 miles of
copper cable and 157 miles of fiber optic cable running through rights-of-way
within its 6,867 square mile service area. All of Central Utah Telephone's
properties described herein are encumbered under mortgages held by the RUS and
CoBank.
It is Registrant's opinion that the facilities referred to above are in good
operating condition and suitable and adequate for present uses.
ITEM 3. LEGAL PROCEEDINGS
Interactive and several other parties, including our Chief Executive Officer,
and Fortunet Communications, L.P., which was Sunshine PCS Corporation's
predecessor-in-interest, have been named as defendants in a lawsuit brought
under the so-called "qui tam" provisions of the federal False Claims Act in the
United States District Court for the District of Columbia. The complaint was
filed under seal with the court on February 14, 2001. At the initiative of one
of the defendants, the seal was lifted on January 11, 2002. Under the False
Claims Act, a private plaintiff, termed a "relator," may file a civil action on
the U.S. government's behalf against another party for violation of the statute.
In return, the relator receives a statutory bounty from the government's
litigation proceeds if he is successful.
The relator in this lawsuit is R.C. Taylor III, an individual who, to the best
of our knowledge, has no relationship to any of the entities and affiliates that
have been named parties in this litigation. Indeed at the time of his filings,
and to the best of our knowledge, Mr. Taylor was a lawyer at Gardner, Carton &
Douglas. Thereafter, we believe he was a lawyer with a Washington, D.C., law
firm. We do not know his current status. We issued a press release dealing with
this litigation on January 16, 2002.
The main allegation in the case is that the defendants participated in the
creation of "sham" bidding entities that allegedly defrauded the federal
Treasury by improperly participating in certain Federal Communications
Commission spectrum auctions restricted to small businesses, as well as
obtaining bidding credits in other spectrum auctions allocated to "small" and
"very small" businesses. The lawsuit seeks to recover an unspecified amount of
damages, which would be subject to mandatory trebling under the statute.
Interactive strongly believes that this lawsuit is completely without merit, and
intends to defend the suit vigorously. The U.S. Department of Justice has
notified the court that it has declined to intervene in the case. Nevertheless,
we cannot predict the ultimate outcome of the litigation, nor can we predict the
effect that the lawsuit or its outcome will have on our business or plan of
operation.
Interactive was formally served with the complaint on July 10, 2002. On
September 19, 2002, Interactive filed two motions with the United States
District Court for the District of Columbia: a motion to dismiss the lawsuit and
a motion to transfer the action to the Southern District of New York. On
November 25, 2002, the relator filed an opposition reply to our motion to
dismiss and on December 5, 2002, Interactive filed a reply in support of its
motion to dismiss.
In addition to the litigation described above, Interactive is a party to routine
litigation incidental to its business. Based on information currently available,
Interactive believes that none of this ordinary routine litigation, either
individually or in the aggregate, will have a material effect on its financial
condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Common Stock of Lynch Interactive Corporation is traded on the American
Stock Exchange under the symbol "LIC." The market price high and lows in
consolidated trading of the Common Stock for the last two years are as follows:
2002
Three Months Ended
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
High $70.50 $54.50 $31.58 $28.50
Low $39.00 $24.50 $24.50 $22.80
2001
Three Months Ended
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
High $48.75 $63.99 $79.00 $69.99
Low $34.50 $40.00 $48.03 $43.00
At March 20, 2003, Interactive had 848 shareholders of record and the closing
price of our Common Stock was $23.05.
Neither Interactive nor Lynch Corporation, the company from which Interactive
was spun off, has paid any cash dividends on its common stock since 1989.
Interactive does not expect to pay cash dividends on its common stock in the
foreseeable future. Interactive currently intends to retain its earnings, if
any, for use in its business. Current and future financings may limit or
prohibit the payment of dividends.
ITEM 6. SELECTED FINANCIAL DATA
LYNCH INTERACTIVE CORPORATION
SELECTED FINANCIAL DATA
(In Thousands, Except Per Share Data)
Years Ended December 31, (a)(b)
--------------------------------------------------------------
1998 1999 2000 2001 2002
--------------------------------------------------------------
Revenues ............................................. $ 54,622 $ 59,011 $ 66,983 $ 79,352 $ 86,304
Operating profit(k) .................................. 14,650 12,299 15,331 19,985 19,233
Net financing activities (d) ......................... (7,973) (8,789) (10,308) (11,074) (11,266)
Equity in earnings of affiliates ..................... 317 1,057 1,669 932 1,262
Impairment of investment in Spinnaker Industries, Inc. -- -- -- (3,194) --
Reserve for impairment of investment in spectrum
license holders (e) ................................ -- (15,406) -- -- (5,479)
Gain on sale of subsidiary stock and other
assets ............................................. 2,709 -- 4,187 -- 4,965
-------- -------- -------- -------- --------
Income (loss) before income taxes, minority
interests, extraordinary item and
operations of Morgan ............................... 9,703 (10,839) 10,879 6,649 8,715
(Provision) benefit for income taxes ................. (4,453) 2,478 (4,971) (3,454) (3,924)
Minority interests ................................... (763) (686) (877) (661) (1,030)
-------- -------- -------- -------- --------
Income (loss) from continuing operations before
Extraordinary item and operations of Morgan ...... 4,487 (9,047) 5,031 2,534 3,761
Extraordinary item (f) .............................. -- (160) -- -- --
Income (Loss) from operations of Morgan
distributed to shareholders (i) .................... 442 (9) (2,666) (1,386) (1,888)
======== ======== ======== ======== ========
Net income (loss) .................................. $ 4,929 $ (9,216) $ 2,365 $ 1,148 $ 1,873
======== ======== ======== ======== ========
Basic and diluted earnings
Per common share (g)
Income (loss) from continuing operations before
Extraordinary item and operations of Morgan ..... $ 1.58 $ (3.21) $ 1.78 $ 0.90 $ 1.34
Extraordinary item .................................... -- $ (0.06) -- -- --
Income (loss) from operations of Morgan
distributed to shareholders (j) ................. $ 0.16 $ (0.00) $ (0.94) $ (0.49) $ (0.67)
Net income (loss) ................................. $ 1.74 $ (3.27) $ 0.84 $ 0.41 $ 0.67
December 31, (a)
--------- ----------- --------- --------- ---------
1998 1999 2000 2001 2002
--------- ----------- --------- --------- ---------
Cash, securities and short-term investments ......... $ 26,498 $ 29,094 $ 26,900 $ 31,233 $ 23,356
Total assets (l).................................... $ 212,705 $ 221,705 $ 217,742 $ 256,350 $ 245,347
Long-term debt ...................................... $ 126,183 $ 164,736 $ 162,304 $ 193,202 $ 176,621
Shareholders' equity (h) ............................ $ 32,285 $ 20,211 $ 19,391 $ 24,517 $ 22,632
(a) On September 1, 1999, Interactive was spun off to the Lynch Corporation
("Lynch") shareholders (the "Spin Off") and became a public company. Prior
to the Spin Off, Interactive had no significant assets, liabilities or
operations. As a successor to certain businesses of Lynch, December 31,
2000, 2001 and 2002, for the three years ended 2002, and for the period
from September 1, 1999 to December 31, 1999, the above financial data
represented the consolidated accounts of Interactive. Prior to September 1,
1999, the financial data has been prepared using the historical basis of
assets and liabilities and historical results of operations of the
multimedia and services businesses and other assets and liabilities, which
were contributed to Interactive, on a combined basis. Accordingly, the
results for the year ended December 31, 1999, represent a combination of
consolidated and combined financial information for the respective periods.
As the historical financial information prior to September 1, 1999 herein
reflects periods during which the Company did not operate as an independent
public company, certain assumptions were made in preparing such financial
information. Such information, therefore, may not necessarily reflect the
results of operations, financial condition or cash flows of the Company in
the future or what they would have been had the Company been an independent
public company during the reporting periods. In the above presentation,
Lynch's only service business, Morgan, is being treated as a discontinued
operation.
(b) Includes results of Upper Peninsula Telephone Company from March 18, 1997,
Central Scott Telephone Company from July 16, 1999, and Central Utah
Telephone Company from June 23, 2001, their respective dates of
acquisition.
(c) Operating profit is sales and revenues less operating expenses, which
excludes investment income, interest expense, equity in earnings of
affiliated companies, impairment of investment in Spinnaker Industries
Inc., reserve for impairment in spectrum license holders in 1999 and 2000,
gains on sales of subsidiary stock and other assets, minority interests,
income taxes, extraordinary items and operations of Morgan.
(d) Consists of investment income and interest expense.
(e) See Note 4 "Wireless Communications Services" in the Company's consolidated
financial statements.
(f) Loss from Early Extinguishment of Debt, Net of Tax Benefit of $105
(g) Based on weighted average number of common shares outstanding.
(h) Adjusted to reflect a 2 for 1 stock split which occurred on September 11,
2000.
(i) Net of income tax and minority interest.
(j) No cash dividends have been declared over the period.
(k) Goodwill amortization was $1.9 million, $2.2 million, $2.5 million, $2.8
million and $0.0 million for the five years ended December 31, 2002
respectively. On January 1, 2002, the Company adopted the provisions SFAS
142 and stopped amortizing goodwill. (See note l in the accompanying
financial statements.)
(l) Amounts do not include assets associated with The Morgan Group, Inc.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion should be read together with the Consolidated Financial
Statements of Interactive and the notes thereto included elsewhere in this
Annual Report.
RESULTS OF OPERATIONS
Overview
In January 2002, Interactive spun off its investment in The Morgan Group, Inc.
("Morgan"), its only services subsidiary, via a tax-free dividend to its
shareholders of the stock of Morgan Group Holding Co., a corporation that was
initially formed to serve as a holding company for Interactive's controlling
interest in Morgan. Morgan Group Holding Co. is now a public company.
Accordingly, the amounts for Morgan are reflected on a one-line basis in the
consolidated financial statements as of December 31, 2001, and for the year then
ended as "to be distributed to shareholders." Similarly, the prior years'
financial statements have been restated to be comparable with the current year's
presentations.
The narratives below reflect these changes in reporting and restatements of
prior periods.
Year 2002 compared to 2001
Revenues
Revenues for the year ended December 31, 2002, increased by $7.0 million to
$86.3 million from the year ended December 31, 2001. During the year ended
December 31, 2001, Interactive recorded a $2.8 million contingent administrative
fee for services it had previously performed in an auction for wireless
spectrum. Excluding this fee, revenues increased by $9.7 million or 13%,
attributable due to acquisitions and higher regulated telephone service
revenues, and the provision of non-traditional telephone services such as:
Internet, long distance service and local exchange carrier service. The
acquisition of American Alarm Company (63.6% owned by Interactive), which
occurred on November 30, 2001, contributed $3.1 million to 2002 revenues as
compared to $0.3 million in 2001. On June 22, 2001, the Company acquired Central
Utah Telephone Company. Prior to our acquisition, Central Utah recorded $3.7
million of revenues in 2001, such amount excludes the effect of certain access
lines that Central Utah acquired on April 6, 2001. Certain regulatory
initiatives in some of the states, in which our companies operate, will reduce
revenues at certain telecommunication operations in the near future. In
addition, significant capital expenditures at certain operations will result in
increased regulated revenues in the future.
Operating Profit
Operating profit for the year ended December 31, 2002, decreased by $0.8 million
to $19.2 million from the year ended December 31, 2001. The absence, in 2002, of
the $2.8 million in administration fee income, that was recorded in 2001, was a
significant item effecting the variance. In addition, in accordance with
Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible
Assets, effective January 1, 2002, the Company no longer amortized goodwill and
other intangible assets, deemed to have indefinite lives. There was $2.8 million
of such amortization expense recorded during 2001. Also, during year ended
December 31, 2002, the Company recorded $0.9 million in allowance for doubtful
accounts associated with the bankruptcies of MCI/Worldcom and Global Crossing.
The bankruptcy filings may adversely impact the interstate revenues pools
administered by the National Exchange Carrier Association ("NECA") of which all
of the Company's telephone operating subsidiaries participate. If the Company's
access settlements from NECA are reduced, the Company's operating results in
2003 could be materially affected. As noted above, in November 2001, the Company
acquired American Alarm. At that time, $4.0 million of the acquisition price was
allocated to customer contracts, which for nine months of 2002 were amortized
over 3 years. During the fourth quarter of 2002, based on Company specific
experience, the amortization period was changed to 10 years. During 2002, the
Company recorded $1.2 million of amortization expense associated with these
contracts and annual amortization is expected to be $0.3 million in 2003.
Overall, the inclusion of American Alarm reduced operating profit by $0.7
million in 2002.
EBITDA
EBITDA (Earnings before interest, taxes depreciation and amortization) for the
year ended December 31, 2002, increased by $0.3 million to $38.6 million from
the year ended December 31, 2001. EBITDA is presented because it is a widely
accepted financial indicator of value and ability to incur and service debt. The
Company utilizes the EBITDA metric for valuing potential acquisitions. EBITDA is
not a substitute for operating profit, in accordance with generally accepted
accounting principles. The difference between EBITDA and operating profit is
depreciation and amortization of $17.4 million and $18.5 million for the years
ended December 31, 2002 and 2001, respectively. The absence, in 2002, of the
$2.8 million in administration fee income, that was recorded in 2001, was a
significant item effecting the variance. Also, during year ended December 31,
2002, the Company recorded $0.9 million in allowance for doubtful accounts
associated with the bankruptcies of MCI/Worldcom and Global Crossing. Subject to
the bankruptcy results, a percentage of this allowance may be recovered in 2003
and beyond. On June 22, 2001, the Company acquired Central Utah Telephone
Company. Prior to our acquisition, Central Utah recorded $1.8 million of EBITDA
in 2001, such amount excludes the effect of certain access lines that Central
Utah acquired on April 6, 2001. As noted above, in November 2001, the Company
acquired American Alarm which contributed $0.5 million to 2002.
Other Income (Expense)
The Company has made loans to and has investments in PTPMS Communications II,
LLC, totaling $6.2 million. PTPMS II acquired wireless spectrum in an auction
conducted by the Federal Communications Commission in 2000 called the 700 MHz
Guard Band Auction. In a FCC auction conducted during 2002 for similar spectrum,
which ended on September 18, 2002 , the Lower 700 MHz Band Auction, the price
per MHz of population was materially lower than the price paid by PTPMS II in
2000. Accordingly, during 2002, Interactive provided for the impairment for its
investment in PTPMS II of $5.5 million ($3.6 net of income tax effects),
resulting in a net book value, at December 31, 2002, of $0.7 million.
During 2002, the Company sold its interest in a cellular partnership in New
Mexico RSA # 1 (North) for $5.5 million resulting in a pre-tax gain of $5.0
million ($2.5 million net of income tax and minority interests effect).
As discussed below, during 2001, the Company provided for the impairment of $3.2
million representing its entire investment in 1,000,000 Common Shares of
Spinnaker Industries Inc. On November 13, 2001, Spinnaker announced that it had
commenced voluntary proceedings under Chapter 11 of the U.S. Bankruptcy Code for
the purpose of facilitating and accelerating its financial restructuring. In
late March 2002, all assets of Spinnaker were sold and equity holders received
no value.
For the year December 31, 2002 investment income was down by $1.1 million from
the previous year due to lower levels of treasury rates, in which the Company
invests the predominant amount of its liquid assets. In addition, 2001's
investment income included approximately $1.0 million of gains in connection
with the Company's investment in Tremont Advisers, Inc. All of the Company's
interest in Tremont was sold in October 2001 when Tremont was acquired by
Oppenheimer Funds, Inc. at a price of $19.00 per share. Offsetting these 2001
gains, there was higher dividend income in 2002 from the Company's ownership of
bank stocks.
Interest expense decreased from 2001 to 2002 by $0.9 million due primarily to
reduced interest rates, lower levels of borrowings and the absence, in 2002, of
a collateral fee $0.6 million associated with a Put on the Company's convertible
debt outstanding. Offsetting these decreases, interest expense increased during
2002 from 2001 due to the full year effect of debt incurred for the acquisitions
of Central Utah and American Alarm. In November 2002, the Company reacquired its
Convertible Note issued to Cascade Investments LLC, there was $0.7 million of
interest expense and other costs associated with this note in 2002.
Income Tax Provision
The income tax provision includes federal as well as state and local taxes. The
tax provision for the years ended December 31, 2002 and 2001, represent
effective tax rates of 45.0% and 51.9%, respectively. The causes of the
difference from the federal statutory rate are principally the effect of state
income taxes, including the effect of earnings and losses attributable to
different state jurisdictions, and the amortization of non-deductible goodwill
in 2001.
Minority Interests
Minority interests decreased earnings by $1.0 million for the year December 31,
2002 and $0.7 million for the year ended December 31, 2001. The Change was
principally due to minority interest associated with the gain from the sale of
New Mexico RSA 1 (North) offset by net losses at American Alarm for which there
is a 36.4% minority ownership.
Income From Continuing Operations
The Company recorded income from continuing operations for the year ended
December 31, 2002 of $3.8 million, $1.34 per share (basic and diluted), as
compared to income from continuing operations for the same period last year of
$2.5 million, or $0.90 per share (basic and diluted). The following were the
significant causes of the variance: (1) the absence of the administrative fee in
2002 reduced net income by $1.7 million, (2) the absence of the reserve for
impairment in Spinnaker increased net income by $2.1 million, (3) the gain in
2002 on the sale of New Mexico RSA # 1 (North) increased net income by $2.5
million, (4) the provision for impairment of spectrum license holders reduced
net income in 2002 by $3.6 million and (5) the amortization of goodwill prior to
the adoption by the Company of the non-amortization provision SFAS 142 which
decreased 2001 net income by $2.4 million.
Year 2001 compared to 2000
Revenues
2001 total revenues were $79.3 million, an increase of $12.3 million, or 18.4%,
from the $67.0 million recorded in 2000. Revenues grew primarily due to the
recognition, in the third quarter of 2001, of an administrative fee of $2.8
million; the acquisition of Central Utah Telephone Company, Inc. and its
subsidiaries, and Central Telecom Services, L.L.C., a related entity which were
acquired on June 23, 2001, which combined contributed $4.8 million in revenues
and, to a lesser extent, the growth in both regulated telecommunications
services and provisions of non-traditional telephone services such as: Internet,
long distance service and competitive local exchange carrier and the acquisition
of American Alarm on November 30, 2001. During the third quarter of 2001, the
Company recorded an administration fee of $2.8 million for services provided to
a related entity in a Federal Communication Commission auction for spectrum to
be used for the provision of personal communications services. The auction was
conducted in 1999 and the fee was based on the entity's gain on the sale of
licenses acquired.
Operating Profit
Operating profit for 2001 increased to $20.0 million from $15.3 million reported
for 2000, an increase of $4.7 million. This increase in operating profits is
principally attributable to the inclusion the results of operations of Central
Utah from the date of acquisition and the $2.8 million administrative fee.
EBITDA
Earnings before interest, taxes, depreciation and amortization ("EBITDA")
increased to $38.3 million in 2001 from $31.0 million in 2000, an increase of
$7.3 million, or 23.3%. EBITDA is presented because it is widely accepted
financial indicator of value and ability to incur and service debt. EBITDA is
not a substitute for operating income in accordance with generally accepted
accounting principles. The Company utilies the EBITDA metric for valuing
potential acquisitions . The difference between EBITDA and Operating Profit is
depreciation and amortization of $18.3 million and $15.8 million for the years
ended December 31, 2002 and 2001. Of the $7.3 million increase in EBITDA, $2.6
million of the increase was due to the acquisition of Central Utah Telephone
Company. In addition, during 2001, the Company recorded $2.8 million of
administrative fee income. The remaining increase was primarily due to the
increase in regulated operations and reduced losses by the Company's CLEC
operations.
Other Income (Expense)
Investment income was approximately $2.9 million in 2001 compared to investment
income of $3.3 million in 2000. The lower level of investable securities was the
primary cause of the decrease in investment income.
Interest expense increased by $0.4 million to $13.9 million in 2001 compared to
$13.5 million in 2000. The increase is due primarily to the acquisition of
Central Utah on June 23, 2001 ($0.9 million) offset by higher debt levels at
lower average interest rates on the variable debt, the restructuring of the
Company's Convertible Note discussed below, and the absence of the amortization
of the put premium associated with the Company's Convertible Note for the
duration of 2000.
During 2001, the Company recorded approximately $0.9 million of equity in
earnings of affiliated entities compared to $1.7 million in 2000. The decrease
of $0.8 million was primarily due to a net gain of $0.7 million in 2000 on the
sale of cellular towers at two of the Registrant's cellular telephone company
investments.
On February 25, 2000, Omnipoint acquired through a merger, all of the
outstanding shares of East/West Communications, Inc. At the time of the merger,
Interactive held a redeemable preferred stock of East/West Communications, Inc.
with a liquidation value of $8.7 million, including payment in kind of dividends
to date. In accordance with its terms, the preferred stock was redeemed at its
liquidation value and as a result, Registrant recorded a pre-tax gain of $4.2
million in the year ended December 31, 2000.
The Company owned 1,000,000 shares of Spinnaker Industries, Inc. common stock.
As described in the Notes to the accompanying financial statements, the Company
accounts for this investment under the provision of Statement of Financial
Accounting Standards No. 115 "Investment and Debt and Equity Securities." Under
the provision of this standard, the Company records this investment at its
publicly traded market price at the end of each accounting period and records
the change in unrealized gains (loss) in that period's comprehensive income. In
addition, under the provisions of this statement, if the quoted market indicated
by that valuation is below the Company's basis, management is required to
consider if the decline in value is other than temporary and, if so determined,
write down the investment to its publicly traded value by recording the loss in
the Statement of Operations. As of December 31, 2000, the basis of the Spinnaker
shares was $3.2 million, or $3.19 per share. At December 31, 2001, the quoted
market price of these shares was $0 per share. During the year ended December
31, 2000, Spinnaker recorded a loss from continuing operations of $17.7 million.
Losses of $5.2 million and $2.8 million were recorded for the years ended
December 31, 1999 and 1998, respectively. In the nine months ended September 30,
2001, Spinnaker recorded a net loss of $53.9 million, including $41.2 million of
restructuring and asset impairment reserves related to the close of its
Spinnaker Coating facility in Westbrook, Maine. On October 15, 2001, Spinnaker
Industries announced that it would not be making that day's scheduled interest
payment with regard to its 10 3/4% Senior Notes and it was actively engaged in
discussion with a majority of the holders of those notes for the purpose of
negotiating a consensual restructuring of its indebtedness. On November 13,
2001, Spinnaker announced that it has commenced voluntary proceedings under
Chapter 11 of the U.S. Bankruptcy Code for the purpose of facilitating and
accelerating its financial restructuring. Spinnaker also announced that it had
reached agreement, subject to Bankruptcy Court approval, with its existing
lenders to provide up to $30 million in debtor-in possession financing, which
Spinnaker believes will allow it to continue operating its business in the
ordinary and customary manner. There has been no quoted price since the stock at
December 31, 2002. The Company believes that the decline in quoted value is
other than temporary and, accordingly, has recorded a loss of $3.2 million
during 2001 to write down its investment in Spinnaker to $0 at December 31,
2001. In late March 2002, all assets of Spinnaker were sold and equity holders
received no value.
Tax Provision
The 2001 tax provision of $3.5 million includes federal, state and local taxes
and represents an effective rate of 51.9% versus 45.7% effective tax rate of
$5.0 million in 2000. The causes of the difference from the federal statutory
rate are principally the effect of state income taxes, including the effect of
earnings and losses attributable to different state jurisdictions, and the
amortization of non-deductible goodwill. Beginning on January 1, 2002, the
Company will no longer be amortizing goodwill in its results of operations. As a
result, the Company's effective tax rate will be lower in the future.
Minority Interest
Minority interest was a reduction to earnings of $0.7 million in 2001 and $0.9
million in 2000. The reduction in net earnings in 2001 at telephone operations
in which there is a minority ownership was the cause of the variance between
years.
Income from Continuing Operations
Income from continuing operations was $2.5 million ($0.90 per diluted share) in
2001 compared to income from continuing operations of $5.0 million ($1.78 per
diluted share) in 2000, net income for the year ended December 31, 2001 was $1.1
million, or $0.41 per diluted share, as compared to a net income of $2.4
million, or $0.84 per diluted share for the year ended December 31, 2000. In
2001, the recording of the administrative fee noted above and the results of
Central Utah were offset by lower investment income, higher interest expense and
the impairment of the Spinnaker shares. The most significant item affecting the
swing in earnings was the gain on the redemption of the East/West preferred
stock ($2.5 million, net of income tax provision) in 2000.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2002, Lynch Interactive Corporation had current assets of
$37.1 million and current liabilities of $49.9 million. Working capital was a
deficit $12.8 million as compared to a deficit $8.9 million at December 31,
2001. This increase in the deficit was principally the result of the
reclassification from long-term to current of $6.4 million of long-term debt
which is due in December, 2003. During 2003, the Company expects to extend the
maturity of certain debt instruments and refinance other debt instruments
thereby issuing additional long-term debt, and reducing the negative working
capital though there is no assurance that the Company can accomplish this.
Cash at December 31, 2002, was $23.3 million about the same as the previous
year. During the year ended December 31, 2002, the net cash provided by
operations of $25.5 million was used to invest in plant and equipment and repay
debt. The Company used $7.6 million of restricted cash at December 31, 2001, as
part of the repurchase of $10.5 million of convertible debt. In addition, during
the year ended December 31, 2002, the Company generated $3.0 million of cash
proceeds for the sale of a minority interest in a cellular operation and issued
$7.1 million in long-term debt.
Capital expenditures were $23.8 million in 2002 and $20.5 million in 2001.
Anticipated capital expenditures in 2003 are approximately $20 million. External
financing is currently in place for approximately $7 million of these
expenditures. The remainder will be financed from internal sources. $20 million
in capital expenditures are expected to be made in 2004.
Subsequent to December 31, 2002, the Company issued $3.3 million of long-term
debt through the refinancing of Lynch Telephone Corporation III.
On November 29, 2002, Interactive repurchased from Cascade Investment, LLC, the
remaining outstanding $10 million in principal amount of its convertible notes
pursuant to a previously negotiated put arrangement. The repurchase price was at
105% of the principal amount was funded by the balance in the restricted cash
account.
On March 26, 2003, the Company issued a press release and filed a Current Report
on Form 8-K disclosing a planned offering of certain securities to its
shareholders which is expected to be completed in 2003.
At December 31, 2002, total debt (including notes payable to banks) was $189.5
million, a decrease of $14.0 million from December 31, 2001. At December 31,
2002, there was $124.7 million of fixed interest rate debt outstanding averaging
7.1% and $64.8 million of variable interest rate debt averaging 4.4%. Of the
debt at fixed interest rates, there is $34.5 million of subordinated notes at a
10% interest rate issued to sellers as part of the acquisition.
Interactive has a short-term line of credit facility, which expires August 31,
2003, with maximum availability totaling $10.0 million all of which was
outstanding at December 31, 2002. The Company is pursuing various financing
alternatives including renewal of the line of credit, refinancing substantially
all or individual pieces of its currently outstanding debt, and sale of certain
investments. The Company expects that this line of credit facility will be
renewed in August 2003. While it is management's belief that the Company will
have adequate resources to fund operations over the next twelve months, there
can be no assurance that the Company will obtain financing on terms acceptable
to management.
In general, the long-term debt facilities at subsidiaries are secured by
substantially all of the Company's property, plant and equipment, receivables
and common stock of certain subsidiaries and contain certain covenants
restricting distribution to Lynch Interactive. At December 31, 2001 and 2002,
substantially all of the subsidiaries' net assets are restricted.
A subsidiary of the Company has guaranteed $3.8 million of an equity investees'
total debt of $10.1 million.
Subsequent to the spin-off by Lynch Corporation, the Board of Directors of Lynch
Interactive Corporation authorized the purchase of up to 100,000 shares of
common stock. Through December 31, 2002, 32,115 shares had been purchased at an
average cost of $36.95 per share. Subsequent to year-end, an additional 2,000
shares have been acquired at an average cost of $25.60 per share.
Lynch Corporation, the Company's predecessor, has not paid any cash dividends on
its common stock since 1989. The Company has not paid any cash dividends since
its inception in 1999 and does not expect to pay cash dividends on its common
stock in the foreseeable future. Interactive currently intends to retain its
earnings, if any, for use in its business. Further financing may limit or
prohibit the payment of dividends.
Interactive has a high degree of financial leverage. As of December 31, 2002,
the ratio of total debt to equity was 8.4 to 1. Certain subsidiaries also have
high debt to equity ratios. In addition, the debt at subsidiary companies
contains restrictions on the amount of funds that can be transferred to the
respective parent of the subsidiaries.
The Company has a need for resources primarily to fund future long-term growth
initiatives. The Company considers various alternative long-term financing
sources: debt, equity, or sale of an investment asset. While management expects
to obtain adequate financing resources to enable the Company to meet its
obligations, there is no assurance that such can be readily obtained or at
reasonable costs. The Company is obligated under long-term debt provisions and
lease agreements to make certain cash payments over the term of the agreements.
The following table summarizes these contractual obligations for the periods
shown:
Payments Due by Period
(In thousands)
Less than
Total 1 year 1 - 3 years 4 - 5 years After 5 years
------------------------------------------------------------------------
Long-term Debt (a) ............... $176,621 $ 18,272 $ 39,181 $ 48,285 $ 70,883
Operating Leases ................. 1,337 352 566 419 --
-------- -------- -------- -------- --------
Total Contractual Cash Obligations $177,958 $ 18,624 $ 39,747 $ 48,704 $ 70,883
======== ======== ======== ======== ========
(a) Does not include interest payments on debt
The company has certain financing commitments from banks and other financial
institutions that provide liquidity. The following table summarizes the
expiration of these commitments for the periods shown:
Amount of Commitment Expiration
Per Period
(In thousands)
Total
Amounts Less than
Other Commercial Commitments Committed 1 year 1 - 3 years 4 - 5 years Over 5 years
--------------- --------------- ---------------- --------------- -------------
Lines of Credit .............. $12,882 $12,882 -- -- --
Standby Letter of Credit (Notes
payable to Banks)...... ..... -- -- -- -- --
Guarantees ................... 3,750 -- -- -- $ 3,750
Standby Repurchase Obligations -- -- -- -- --
Other Commercial Commitments . -- -- -- -- --
------- ------- ------- ------- -------
Total Commercial Commitments . $16,632 $12,882 -- -- $ 3,750
======= ======= ======= ======= =======
A subsidiary of the Company has guaranteed $3.8 million of an equity investees'
total debt of $10.1 million.
The Company has initiated an effort to monetize certain of its assets, including
selling a portion or all of certain in vestment in certain of its operating
entities. These may include minority interest in network affiliated television
stations and certain telephone operations where growth opportunities are not
readily apparent. There is no assurance that all or any part of this program can
be effectuated on acceptable terms. In March 2002, the Company sold its 20.8%
interest in the New Mexico cellular property, RSA #1 (North) to Verizon Wireless
for $5.5 million and repaid certain outstanding indebtedness to Verizon. (See
Note 5 in the accompanying financial statements)
Critical Accounting Policies and Estimates
General
Interactive's discussion and analysis of its financial condition and results of
operations are based upon its consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires
Interactive to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an ongoing basis, Interactive evaluates its
estimates, including those related to revenue recognition, carrying value of its
investments in the spectrum entities and long-lived assets, purchase price
allocations, and contingencies and litigation. Interactive bases its estimates
on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Interactive believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements.
Revenue Recognition
The principal business of Interactive's telephone companies is to provide
telecommunications services. These services fall into four major categories:
local network, network access, long distance and other non-regulated
telecommunications services. Toll service to areas outside franchised telephone
service territory is furnished through switched and special access connections
with intrastate and interstate long distance networks.
Local service revenues are derived from providing local telephone exchange
services. Local service revenues are based on rates filed with various state
telephone regulatory bodies.
Revenues from long distance network services are derived from providing certain
long distance services to the Company's local exchange customers and are based
on rates filed with various state regulatory bodies.
Revenue from intrastate access is generally billed monthly in arrears based on
intrastate access rates filed with various state regulatory bodies. Interactive
recognizes revenue from intrastate access service based on an estimate of the
amounts billed to interexchange carriers in the subsequent month. Estimated
revenues are adjusted monthly as actual revenues become known.
Revenue from interstate access is derived from settlements with the National
Exchange Carrier Association ("NECA"). NECA was created by the FCC to administer
interstate access rates and revenue pooling on behalf of small local exchange
carriers who elect to participate in a pooling environment. Interstate
settlements are determined based on the various subsidiaries' cost of providing
interstate telecommunications service. Interactive recognizes interstate access
revenue based on an estimate of the current year cost of providing service.
Estimated revenue is adjusted to actual upon the completion of cost studies in
the subsequent period.
Other ancillary revenues derived from the provision of directory advertising and
billing and collection services are billed monthly based on rates under
contract.
Purchase Price Allocation/Test for Impairment of Goodwill and Other
Indefinite-lived Intangible Assets
Interactive's business development strategy is to expand its existing operations
through internal growth and acquisition. From 1989 through 2001, the Company has
acquired twelve telephone companies. Significant judgments and estimates are
required to allocate the purchase price of acquisitions to the fair value of
tangible assets acquired and identifiable intangible assets and liabilities
assumed. Any excess purchase price over the above fair values is allocated to
goodwill. Additional judgments and estimates are required to determine if
identified intangible assets have finite or indefinite lives.
Annually, the Company tests goodwill for impairment using the two-step process
prescribed in SFAS No. 142. The first step is a screen for potential impairment,
while the second step measures the amount of impairment, if any. The Company
performed its transitional impairment tests of goodwill and other indefinite
lived intangible assets as of January 1, 2002 and the first of its required
annual tests as of October 1, 2002 and determined that there were no impairments
at that time.
Depreciation and Amortization
The calculation of depreciation and amortization expense is based on the
estimated economic useful lives of the underlying property, plant and equipment
and intangible assets. Although Interactive believes it is unlikely that any
significant changes to the useful lives of its tangible or intangible assets
will occur in the near term, rapid changes in technology, the discontinuance of
accounting under SFAS No. 71 by the Company's wireline subsidiaries, or changes
in market conditions could result in revisions to such estimates that could
materially affect the carrying value of these assets and the Company's future
consolidated operating results.
Recently Issued Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
obligations. This standard provides accounting guidance for legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction or development and (or) normal operation of that
asset. According to the standard, the fair value of an asset retirement
obligation (ARO liability) should be recognized in the period in which (1)a
legal obligation to retire a long-lived asset exists and (2) the fair value of
the obligation based on retirement cost and settlement date is reasonably
estimable. Upon initial recognition of the ARO liability, the related asset
retirement cost should be capitalized by increasing the carrying amount of the
related long-lived asset. SFAS No. 143 is effective for fiscal years beginning
after June 15, 2002. Under FCC mandated accounting practices, the Company is
prohibited from complying with the provisions of SFAS 143 at this time.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to market risks relating to changes in the general level
of U.S. interest rates. Changes in interest rates affect the amount of interest
earned on the Company's cash equivalents and short-term investments
(approximately $23.4 million at December 31, 2002 and $31.2 million at December
31, 2001). The Company generally finances the debt portion of the acquisition of
long-term assets with fixed rate, long-term debt. The Company generally
maintains the majority of its debt as fixed rate in nature by borrowing on a
fixed long-term basis. The Company does not use derivative financial instruments
for trading or speculative purposes. Management does not foresee any significant
changes in the strategies used to manage interest rate risk in the near future,
although the strategies may be reevaluated as market conditions dictate.
At December 31, 2002, approximately $64.8 million, or 34% of Interactive's
long-debt and notes payable bears interest at variable rates. Accordingly, the
Company's earnings and cash flows are affected by changes in interest rates.
Assuming the current level of borrowings for variable rate debt and assuming a
one percentage point change in the 2002 average interest rate under these
borrowings, it is estimated that Interactive's 2002 interest expense would have
changed by approximately $0.5 million. In the event of an adverse change in
interest rates, management would likely take actions to further mitigate its
exposure. However, due to the uncertainty of the actions that would be taken and
their possible effects, the analysis assumes no such actions. In addition, if
the Company were to convert a significant portion of its assets variable
interest rate debt into fixed interest, at current time such could increase
interest expense by $1.5 million levels. Further, the analysis does not consider
the effects of the change in the level of overall economic activity that could
exist in such an environment.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 15(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 is included under the caption
"Executive Officers of the Registrant" in Item 1 hereof and included under the
captions "Election of Directors" and "Section 16(a) Reporting" in Registrant's
Proxy Statement for its Annual Meeting of Shareholders for 2003, which
information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is included under the captions
"Compensation of Directors," "Executive Compensation," "Executive Compensation
and Benefits Committee Report on Executive Compensation" and "Performance Graph"
in Registrant's Proxy Statement for its Annual Meeting of Shareholders for 2003,
which information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is included under the caption "Security
Ownership of Certain Beneficial Owners and Management," in the Registrant's
Proxy Statement for its Annual Meeting of Shareholders for 2003, which
information is included herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is included under the caption
"Executive Compensation", and "Transactions with Certain Affiliated Persons" in
the Registrant's Proxy Statement for its Annual Meeting of Shareholders for
2003, which information is included herein by reference.
ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Our chief executive officer and chief financial officer have evaluated the
effectiveness of the Registrant's disclosure controls and procedures (as
defined in Rules 13a-14(c) and 15d-14(c) of the Securities Exchange Act of
1934 (the "Act")) as of a date within 90 days of the filing date of this
annual report (Evaluation Date). They have concluded that, as of the
Evaluation Date, the Registrant's disclosure controls and procedures were
adequate and effective to ensure that information required to be disclosed
by the Registrant in the reports that if files or submits under the Act is
recorded, processed, summarized and reported, within the time periods
specified in the rules and forms of the Securities and Exchange Commission.
(b) Changes in internal controls.
There were no significant changes in the Registrant's internal controls or
in other factors that could significantly affect these controls subsequent
to the Evaluation Date, nor were there any significant deficiencies or
material weaknesses in these controls requiring corrective actions.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The following documents are filed as part of this Form 10-K Annual
Report: Financial Statements:
Reports of Independent Auditors and the following Financial Statements
of the Company are included herein:
Consolidated Balance Sheets - December 31, 2001 and 2002 Consolidated
Statements of Operations - Years ended December 31, 2000, 2001 and
2002 Consolidated Statements of Shareholders' Equity - Years ended
December 31, 2000, 2001 and 2002 Consolidated Statements of Cash Flows
- Years ended December 31, 2000, 2001 and 2002 Notes to Consolidated
Financial Statements
(a)(2) Financial Statement Schedules:
Schedule I - Condensed Financial Information of Registrant
Schedule II - Valuation and Qualifying Accounts
(a)(3) Exhibits: See the Exhibit Index on pages 51 through 53
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions, or are inapplicable, and therefore have been omitted.
See Page 2 above re Forward Looking Information.
(b) Reports on Form 8-K:
Current Report on Form 8-K filed on November 29, 2002.
(c) Exhibits: The following Exhibits listed in the Exhibit Index are filed with
this Form 10-K Annual Report:
3.2 Amended By-laws of Registrant
23 Consents of Siepert & Co., L.L.P. for use of:
- Report of Siepert & Co., L.L.P. on the financial statements
of Cuba City Telephone Exchange Company for the year ended
December 31, 2002 and 2001
- Report of Siepert & Co., L.L.P. on the financial statements
of Belmont Telephone Company for the year ended December 31,
2002 and 2001
- Report of Siepert & Co., L.L.P. on the financial statements
of Upper Peninsula Telephone Company for the year ended
December 31, 2002 and 2001
- Report of Siepert & Co., L.L.P. on the financial statements
of Lynch Michigan Telephone Holding Company for the year
ended December 31, 2001 and 2000
24 Powers of Attorney
99.1 Report of Independent Auditors
- Report of Siepert & Co., L.L.P. on the financial statements
of Cuba City Telephone Exchange Company for the year ended
December 31, 2002 and 2001
- Report of Siepert & Co., L.L.P. on the financial statements
of Belmont Telephone Company for the year ended December 31,
2002 and 2001
- Report of Siepert & Co., L.L.P. on the financial statements
of Upper Peninsula Telephone Company for the year ended
December 31, 2002 and 2001
- Report of Siepert & Co., L.L.P. on the financial statements
of Lynch Michigan Telephone Holding Company for the year
ended December 31, 2001 and 2000
99.2 Chief Executive Officer Section 906 Certification
99.3 Chief Financial Officer Section 906 Certification
(d) Financial Statement Schedules: Financial Statement Schedules are listed in
response to Item 15(a)(2)
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Lynch Interactive Corporation
We have audited the accompanying consolidated balance sheets of Lynch
Interactive Corporation (the "Company") and subsidiaries as of December 31, 2001
and 2002, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 2002. Our audits also included the financial statement schedules listed in
the index at Item 15(a). These financial statements and schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedules based on our audits. We did
not audit the following: the financial statements of Cuba City Telephone
Exchange Company and Belmont Telephone Company, indirect wholly-owned
subsidiaries of Lynch Interactive Corporation, which statements reflect total
assets of $4,347,000 and $4,372,000 as of December 31, 2001 and 2002,
respectively, and total revenues of $2,076,000, $2,139,000 and $2,117,000 for
each of the three years in the period ended December 31, 2002; the financial
statements of Upper Peninsula Telephone Company, an indirect wholly-owned
subsidiary of Lynch Interactive Corporation, which statements reflect total
assets of $26,720,000 as of December 31, 2002 and total revenues of $10,986,000
for the year then ended; and the financial statements of Lynch Michigan
Telephone Holding Corporation, an indirect wholly-owned subsidiary of Lynch
Interactive Corporation, which statements reflect total assets of $33,147,000 as
of December 31, 2001 and total revenues of $11,246,000 for the year then ended.
Those financial statements were audited by other auditors whose reports have
been furnished to us, and our opinion, insofar as it relates to the amounts
included in the consolidated financial statements and financial statement
schedules for Cuba City Telephone Exchange Company and Belmont Telephone Company
in 2000, 2001 and 2002, Upper Peninsula Telephone Company in 2002 and Lynch
Michigan Telephone Holding Corporation in 2001, is based solely on the reports
of the other auditors.
We conducted our audits in accordance with a