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SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2004
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 1-15097
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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 or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
401 Theodore Fremd Avenue, Rye, New York 10580
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(Address of principal executive offices) (Zip Code)
(914) 921-8821
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Registrant's telephone number, including area code
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 Exchange 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 check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).Yes No X
--
Indicate the number of shares outstanding of each of the Registrant's classes of
Common Stock, as of the latest practical date.
Class Outstanding at October 29, 2004
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Common Stock, $.0001 par value 2,760,251
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INDEX
LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets:
- September 30, 2004
- December 31, 2003
- September 30, 2003
Condensed Consolidated Statements of Operations:
- Three and nine months ended September 30, 2004 and 2003
Consolidated Statements of Shareholders' Equity
Condensed Consolidated Statements of Cash Flows:
- Three and nine months ended September 30, 2004 and 2003
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
CERTIFICATIONS
i
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
September 30, December 31, September 30,
2004 2003 2003
----------------------------------------
(Unaudited) (Audited) (Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents ............................... $ 27,592 $ 26,556 $ 27,409
Receivables, less allowances of $270
$262 and $262, respectively ........................... 8,535 8,183 8,774
Material and supplies ................................... 3,010 2,597 3,160
Prepaid expenses and other current assets ............... 1,265 1,272 1,334
--------- --------- ---------
Total Current Assets ...................................... 40,402 38,608 40,677
Property, Plant and Equipment:
Land .................................................... 1,113 1,111 1,101
Buildings and improvements .............................. 17,606 17,549 13,308
Machinery and equipment ................................. 215,541 209,455 209,487
--------- --------- ---------
234,260 228,115 223,896
Less: Accumulated Depreciation .......................... (113,872) (102,556) (101,093)
--------- --------- ---------
120,388 125,559 122,803
Goodwill .................................................. 60,580 60,580 60,580
Other intangibles ......................................... 10,850 8,168 8,316
Investments in and advances to affiliated entities ........ 11,529 7,223 10,665
Other assets .............................................. 13,476 12,048 12,510
--------- --------- ---------
Total assets .............................................. $ 257,225 $ 252,186 $ 255,551
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable to banks .................................. $ 6,269 $ 3,456 $ 11,537
Trade accounts payable .................................. 3,601 5,336 3,331
Accrued interest payable ................................ 783 697 325
Accrued liabilities ..................................... 9,606 8,732 16,927
Current maturities of long-term debt ..................... 14,006 13,162 31,805
--------- --------- ---------
Total current liabilities ................................. 34,265 31,383 63,925
Long-term debt ............................................ 157,421 162,621 145,814
Deferred income taxes ..................................... 17,425 15,517 6,720
Other liabilities ......................................... 2,961 3,015 2,896
--------- --------- ---------
Total liabilities ....................................... 212,072 212,536 219,355
Minority Interests ........................................ 11,418 9,763 9,653
Commitments and Contingencies
Shareholders' equity
Common stock, $0.0001 par value-10,000,000
shares authorized; 2,824,766 issued; 2,763,851
2,779,951 and 2,782,151 outstanding .................. -- -- --
Additional paid-in capital .............................. 21,406 21,406 21,406
Retained earnings ....................................... 12,798 9,269 5,880
Accumulated other comprehensive income .................. 1,499 686 682
Treasury stock, 60,915, 44,815 and 42,615 shares, at cost (1,968) (1,474) (1,425)
--------- --------- ---------
Total shareholder's equity ................................ 33,735 29,887 26,543
--------- --------- ---------
Total liabilities and shareholders' equity ................ $ 257,225 $ 252,186 $ 255,551
========= ========= =========
See accompanying Notes to Condensed Consolidated Financial Statements.
-1-
LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------------------
2004 2003 2004 2003
-------------------------------------------
Revenues ............................................ $ 23,110 $ 22,082 $ 66,142 $ 64,293
Costs and expenses:
Cost of revenue ..................................... 7,409 7,501 22,073 21,807
General and administrative costs at operations ...... 3,648 3,413 10,507 10,155
Corporate office expenses ........................... 1,743 795 4,989 2,663
Depreciation and amortization ....................... 5,223 4,994 15,371 14,822
-------- --------
Total Expense ................................... 18,023 16,703 52,940 49,447
-------- --------
Operating profit .................................... 5,087 5,379 13,202 14,846
Combined total
Other income (expense):
Investment income ................................ 88 83 898 739
Interest expense ................................. (2,847) (2,995) (8,517) (9,020)
Equity in earnings of affiliated companies ....... 1,051 530 2,649 1,593
-------- --------
(1,708) (2,382) (4,970) (6,688)
-------- --------
Income before income taxes and minority interests ... 3,379 2,997 8,232 8,158
Provision for income taxes .......................... (1,203) (1,158) (3,125) (3,109)
Minority interests .................................. (634) (407) (1,578) (1,048)
-------- --------
Net income .......................................... $ 1,542 $ 1,432 $ 3,529 $ 4,001
======== ========
Basic and diluted weighted average shares outstanding 2,768 2,782 2,773 2,787
Basic and diluted earnings per share ................ $ 0.56 $ 0.51 $ 1.27 $ 1.44
See accompanying Notes to Condensed Consolidated Financial Statements.
-2-
LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(in thousands, except share data)
Accumulated
Shares of Other
Common Additional Compre-
Stock Common Paid-in Retained hensive Treasury
Out-standing Stock Capital Earnings Income Stock Total
------------ ---------- ------------- ------------ -------------- ------------ ----------
Balance as of December 31, 2003 2,779,951 $ 0 $ 21,406 $ 9,269 $ 686 $ (1,474) $ 29,887
Net income for the period ..... -- -- -- 3,529 -- -- 3,529
Unrealized gains on available
for
sale securities, net ........ -- -- -- -- 813 -- 813
----------
Comprehensive income .......... -- -- -- -- -- -- 4,342
----------
Purchase of treasury stock .... (16,100) -- -- -- -- (494) (494)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at September 30, 2004 . 2,763,851 $ 0 $ 21,406 $ 12,798 $ 1,499 $ (1,968) $ 33,735
========== ========== ========== ========== ========== ========== ==========
See accompanying Note to Condensed Consolidated Financial Statements.
-3-
LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
Nine Months Ended
September 30,
--------------------
2004 2003
--------------------
Operating activities:
Net Income ...................................................................... $ 3,529 $ 4,001
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ................................................ 15,371 14,822
Equity in earnings of affiliated companies ................................... (2,649) (1,593)
Minority interests ........................................................... 1,048
1,578
Changes in operating assets and liabilities:
Receivables ............................................................. (305) 142
Accounts payable and accrued liabilities ................................ 814 1,481
Other ........................................................................ 103 308
-------- --------
Net cash provided by operating activities ....................................... 18,441 20,209
-------- --------
Investing activities:
Capital expenditures ............................................................ (10,366) (14,701)
Acquisition of business ......................................................... (4,877) 0
Acquisition of subscriber lists ................................................. (217) (369)
Investment in and advances to affiliated entities ............................... (125) (170)
Distributions received from investments ......................................... 930 409
Other ........................................................................... (395) (495)
-------- --------
Net cash used in investing activities ........................................... (15,050) (15,326)
-------- --------
Financing activities:
Issuance of long term debt ...................................................... 5,599 10,233
Repayments of long term debt .................................................... (9,955) (9,235)
Net proceeds (repayments) on lines of credit .................................... 2,813 (1,345)
Purchase of treasury stock ...................................................... (494) (238)
Other ........................................................................... (318) (245)
-------- --------
Net cash used in financing activities ........................................... (2,355) (830)
-------- --------
Net increase in cash and cash equivalents ....................................... 1,036 4,053
Cash and cash equivalents at beginning of period ................................ 26,556 23,356
-------- --------
Cash and cash equivalents at end of period ...................................... $ 27,592 $ 27,409
======== ========
Cash paid for:
Interest expense .............................................................. $ 8,291 $ 8,993
======== ========
Income taxes .................................................................. $ 1,891 $ 1,632
======== ========
See accompanying Notes to Condensed Consolidated Financial Statements.
-4-
LYNCH INTERACTIVE CORPORATION & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A. Basis of Presentation
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Lynch Interactive Corporation ("Interactive" or the "Company") consolidates the
operating results of its telephone and cable television subsidiaries (81%-100%
owned at September 30, 2004, December 31, 2003 and September 30, 2003). In
addition, certain less than 50% owned investments in limited liability companies
which were accounted for in accordance with the equity method of accounting as
of December 31, 2003 have been consolidated at September 30, 2004. See Note B.
All material intercompany transactions and balances have been eliminated.
Investments in affiliates in which the Company does not have a majority voting
control are accounted for in accordance with the equity method. The Company
accounts for the following affiliated companies on the equity basis of
accounting: Coronet Communications Company (20% owned at September 30, 2004,
December 31, 2003 and September 30, 2003), Capital Communications Company, Inc.
(49% owned at September 30, 2004, December 31, 2003 and September 30, 2003; we
note, however, that Interactive owns a convertible preferred stock which, if
converted, would increase its ownership in Capital Communications to 50%) and
the cellular partnership operations in New Mexico (both 33% owned at September
30, 2004, December 31, 2003 and September 30, 2003).
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-Q and Articles 10 and 11 of Regulation S-X. Accordingly,
they are not audited and do not include all of the information and footnotes
required for complete financial statements. The consolidated financial
statements and footnotes included in this Form 10-Q should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's annual report on Form 10-K for the year ended December
31, 2003. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three and nine month periods ended September
30, 2004 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2004. The preparation of consolidated financial
statements in conformity with accounting principles generally accepted in the
United States requires management to make estimates and assumptions that affect
the amounts reported in the financial statements and accompanying notes. Actual
results could differ from those estimates. Certain prior year amounts in the
accompanying consolidated financial statements have been reclassified to conform
to current year presentation.
B. Recently Issued Accounting Pronouncements
- ----------------------------------------------
The Financial Accounting Standards Board ("FASB") issued Financial
Interpretation No. 46, "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51" (FIN 46) in January 2003 and revised it in
December 2003 (FIN 46R). FIN 46 requires certain variable interest entities to
be consolidated by the primary beneficiary of the entity if the equity investors
in the entity do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
The provisions of FIN 46R were applicable for the first interim or annual period
ending after March 15, 2004 for both new and existing variable interest
entities. Certain less than 50% owned investments in limited liability
companies, which were considered to be variable interest entities, needed to be
consolidated as a result of the implementation of FIN 46. The effect of
consolidating such operations resulted in increasing intangible assets and
decreasing investments in and advances to affiliated companies by approximately
$2 million and had no other significant effect on the Company's consolidated
financial statements.
-5-
C. Acquisitions and Dispositions
- ----------------------------------
In March 2004, the Company signed an agreement to acquire California-Oregon
Telecommunications Company ("Cal-Ore") located in Dorris, California. Cal-Ore's
subsidiary Cal-Ore Telephone Company is the incumbent service provider for a
rural area of about 850 square miles along the Northern California border with
Oregon with approximately 2,500 access lines. Cal-Ore's other businesses include
an Internet service provider, a CLEC that is planning to provide services in the
surrounding area and interests in certain cellular partnerships. The acquisition
price is $21.2 million, subject to certain closing adjustments. The acquisition
will close subject to meeting certain conditions, including approval by the
California Public Utilities Commission and other regulatory authorities.
Therefore, the Company's consolidated financial statements for the three and
nine months ended September 30, 2004 do not include the results of Cal-Ore.
In February 2004, Central Telecom Services, LLC, a 100% owned subsidiary of the
Company completed the acquisition of cable television assets at a cost of $0.4
million. The allocation of the purchase price to the assets acquired and
liabilities assumed was based on estimates of fair value, including $50,000
allocated to other intangibles for the subscriber list.
On April 30, 2004, the Company acquired a 37% interest in an entity (KMG) whose
principal asset consist of a $6.0 million subordinated note and a 17% equity
interest in Lynch Telephone Corporation, a 83% owned subsidiary of the Company.
The remaining 63% ownership of KMG is held by the members or management of
Western New Mexico Telephone Company, Inc. The Company issued a $4.5 million,
8.5% five-year amortizing subordinated note to acquire such interest. In
addition to the above mentioned assets, KMG also owns a lumber yard in Andrews,
Texas, and other investments.
On July 27, 2004, Interactive was the high bidder in the Federal Communications
Commission ("FCC") conducted auction for 24 GHz spectrum on two licenses in
Buffalo, NY and Davenport, IA (Block 31), for a total cost of $49,000. In
addition, Interactive acted as the administrative bidding agent for Napoleon
Communications, which was the high bidder in Phoenix, AZ, Las Vegas, NV, Reno,
NV and Albuquerque, NM (Block 39) in that auction. Napoleon qualified as a very
small business and received a bidding credit of 35%.
D. Investments in Affiliated Companies
- ----------------------------------------
Interactive has equity investments in both broadcasting and telecommunications
companies.
Summarized financial information for companies accounted for by the equity
method as of and for the three and nine months ended September 30, 2004 and 2003
and as of December 31, 2003 is as follows (in thousands):
Broadcasting Combined Information
September 30, December 31, September 30,
2004 2003 2003
---------------------------------
Current assets ................................. $ 6,917 $ 5,330 $ 5,382
Property, plant & equipment, intangibles & other 9,728 9,615 9,866
-------- -------- --------
Total assets ................................... $ 16,645 $ 14,945 $ 15,248
======== ======== ========
Current liabilities ............................ $ 3,619 $ 3,182 $ 3,227
Long term liabilities .......................... 16,967 16,483 16,844
Equity ......................................... (3,941) (4,720) (4,823)
-------- -------- --------
Total liabilities & equity ..................... $ 16,645 $ 14,945 $ 15,248
======== ======== ========
-6-
Broadcasting Combined Information
Continued September 30, December 31, September 30,
2004 2003 2003
---------------------------------------
Three months ended
Revenues....................................... $ 3,218 -- $ 2,584
Gross profit .................................. 1,021 -- 510
Net Profit (Loss).............................. 303 -- (183)
Nine months ended
Revenues ...................................... $ 9,912 -- $ 8,222
Gross profit .................................. 3,339 -- 1,965
Net Profit (Loss).............................. 985 -- (395)
Telecommunications Combined Information
September 30, December 31, September 30,
2004 2003 2003
----------------------------------------
Current assets ................................. $ 34,525 $ 30,340 $ 13,337
Property, plant & equipment, intangibles & other 26,402 27,114 27,643
-------- -------- --------
Total assets ................................... $ 60,927 $ 57,454 40,980
=======- ======== ========
Current liabilities ............................ $ 22,305 $ 23,073 $ 5,928
Long term liabilities .......................... 7,267 9,056 10,459
Equity ......................................... 31,355 25,325 24,593
-------- -------- --------
Total liabilities & equity ..................... $ 60,927 $ 57,454 $ 40,980
======== ======== ========
Three months ended
Revenues ....................................... $ 14,655 $ 12,110
Gross profit ................................... 7,207 4,215
Net income ..................................... 4,501 3,102
Nine months ended
Revenues ....................................... $ 41,404 $ 34,091
Gross profit ................................... 19,249 11,795
Net income ..................................... 12,154 8,781
At September 30, 2004, December 31, 2003, and September 30, 2003 the Company's
investment in Coronet Communications Company ("Coronet") was carried at a
negative $624,000, a negative $810,000, and a negative $798,000 respectively,
due to the Company's guarantee of $3.8 million of Coronet's third party debt.
Long-term debt of Coronet, at September 30, 2004, totaled $9.6 million due to a
third party lender, which is due in quarterly payments through December 31,
2005. The Company's investment in Capital Communications Company, Inc. was
carried at $0 for all periods.
In March 2004, a wholly owned subsidiary of Brighton Communications, a
subsidiary of the Company, invested $250,000 for a 7% interest in an entity
which provides wireline telecommunication transport services in New York State.
On April 30, 2004, the Company acquired a 37% interest in KMG whose principal
assets consist of a $6.0 million subordinated note and a 17% equity interest in
Lynch Telephone Corporation, which is an 83% owned subsidiary of the Company.
-7-
E. Indebtedness
- -----------------
Interactive maintains a short-term line of credit facility totaling $10.0
million, which was renewed during the third quarter of 2004. In accordance with
the terms of the renewal, the facility was reduced to $7.0 million on October
31, 2004, will be further reduced to $5.0 million on January 31, 2005 and will
remain at that level until it expires on August 31, 2005. Borrowings under this
facility were $2.3 million, zero and $7.9 million at September 30, 2004,
December 31, 2003 and September 30, 2003, respectively. Long-term debt consists
of (all interest rates are at September 30, 2004) (in thousands):
September 30, December 31, September 30,
2004 2003 2003
-----------------------------------------
Rural Electrification Administration ("REA") and Rural Telephone Bank (`RTB")
notes payable due from 2006 to 2027 at fixed interest rates ranging from 2% to
7.5%. (5% weighted average, secured by assets of the telephone
companies with a net book value of $150 million) .............................. $ 57,816 $ 59,917 $ 59,472
Bank Credit facilities utilized by certain telephone and telephone holding
companies due from 2005 to 2016, $9.9 million at fixed interest rates averaging
8.3 % and $62.6
million at variable interest rates averaging 4.6% ............................ 72,478 78,646 80,684
Unsecured notes issued in connection with acquisitions
through 2006, at fixed interest rates of 8.0% to 10.0% ........................ 38,483 34,389 34,515
Other ......................................................................... 2,650 2,831 2,948
--------- --------- ---------
171,427 175,783 177,619
Current maturities ............................................................ (14,006) (13,162) (31,805)
--------- --------- ---------
$ 157,421 $ 162,621 $ 145,814
========= ========= =========
On April 30, 2004 a subsidiary of the Company issued a $4.5 million, 8.5%
five-year amortizing subordinated note in connection with the acquisition of
KMG, which is classified as unsecured notes in the above table.
F. Comprehensive Income
- -------------------------
Other comprehensive income, net of tax, which consists of unrealized gains
(losses) on available for sale securities, for the three and nine month periods
ended September 30, 2004 and 2003 are as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------
2004 2003 2004 2003
----------------------------------------
Net income ..................... $ 1,542 $ 1,432 $ 3,529 $ 4,001
Unrealized gains ............... 70 143 1,236 247
Tax effect ..................... (24) (60) (423) (99)
------- ------- ------- -------
Net other comprehensive income 46 83 813 148
------- ------- ------- -------
Comprehensive income ........... $ 1,588 $ 1,515 $ 4,342 $ 4,149
======= ======= ======= =======
-8-
G. Treasury Stock Purchases
- -----------------------------
During the nine months ended September 30 2004, the Company purchased 16,100
shares of its common stock for treasury at an average investment of $30.68 per
share.
H. Amortization of Other Intangible Assets
- --------------------------------------------
Amortization expense on other intangible assets is estimated to be between $0.6
million and $0.7 million annually for the next five years.
I. Litigation
- ---------------
Interactive and several other parties, including Interactive's CEO, 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 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 FCC spectrum auctions restricted
to small businesses, as well as obtaining bidding credits in other spectrum
auctions allocated to "small" and "very small" businesses. While the complaint
seeks to recover an unspecified amount of damages, which would be subject to
mandatory trebling under the statute, a document filed by the relator with the
Court on February 24, 2004 discloses an initial computation of damages of not
less than $88 million resulting from bidding credits awarded to the defendants
in FCC auctions and $120 million of unjust enrichment through the sale or
assignment of licenses obtained by the defendants in FCC auctions, in each case
prior to trebling. As discussed below, the bidding credits the defendants
received were considerably less than the $88 million amount reported.
Interactive strongly believes that this lawsuit is completely without merit and
that relator's initial damage computation is without basis, 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 does not have any insurance to cover its cost of defending this
lawsuit, which costs will be material. Interactive does have a directors and
officers liability policy but the insurer has reserved its rights under the
policy and, as a result, any coverage to be provided to any director or officer
of Interactive in connection with a judgment rendered in this action is unclear
at this time.
Interactive was formally served with the complaint on July 10, 2002. On
September 19, 2002, the defendants 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; the defendants filed a reply in support of its
motion to dismiss. On September 30, 2003, the Court granted our motion to
transfer the action to the Southern District of New York. A scheduling
conference was held on February 10, 2004, at which time, the judge approved a
scheduling order and discovery commenced.
On June 7, 2004, the defendants filed a motion to relator to refer the issues in
this litigation to the FCC, which motion was opposed by the relator.
-9-
On July 28, 2004, the judge denied in part and granted in part the motion to
dismiss. Defendant bidding entities that did not win licenses were dismissed and
the "reverse" False Claims Act count was dismissed as redundant. Interactive and
its subsidiaries remain parties to the litigation. On September 14, 2004, the
judge issued a ruling denying the motion to refer the issues in this litigation
to the FCC, and discovery continues.
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.
As part of the Omnibus Budget Resolution of 1993, Congress authorized its FCC to
employ competitive bidding procedures to select among mutually exclusive
applicants for certain spectrum bidding. Initially the FCC had an initiative to
include, among others, qualified African Americans, Native Americans, Asian
Americans and women. As a result of this, the FCC conducted auctions beginning
in 1995 to allocate spectrum in a competitive manner. Interactive was a
participating investor and/or service provider to various entities in the
auction. In 2001, Interactive was named in a False Claim Act litigation with
regard to its auction activities. Below is a history of our C-Block activities,
the first auction Interactive was involved with as an investor and as a service
provider.
History of Lynch's "C" Block Activities
- ---------------------------------------
On December 18, 1995, Interactive (through its predecessor Lynch Corporation)
had investments in five entities that participated in the FCC Auction for
Broadband PCS "C" Block Spectrum (Auction 5). When the auction closed, on May 6,
1996, these five entities, on a combined basis, were the higher bidders for
thirty-one 30 MHz licenses at a gross cost of $288.2 million. These entities
were initially put together under the FCC's initiative to include, among others,
qualified women, African Americans, Native Americans and Asian Americans. As a
result of changes in these initiatives, these same individuals were qualified as
small businesses and remained eligible as bidders. These entities received $72
million of bidding credits, and accordingly the net cost was $216.2 million. The
federal government provided financing for 90% of the cost of these licenses, or
$194.6 million. Interactive's investments in these entities totaled $21 million.
Events during and subsequent to Auction 5, made financing these licenses through
the capital markets much more difficult than originally anticipated. On April
18, 1997, among other reasons, in order to obtain some economies of scale, such
as financing, the five entities merged into Fortunet Communications, Inc. The
FCC, in partial response to actions by Nextwave and others, promoted a plan of
refinancing of "C" block. In 1997, many of the license holders from Auction 5,
including Fortunet, petitioned the FCC for relief in order to afford these small
businesses the opportunity to more realistically restructure and build out their
systems. The President of Fortunet, Karen Johnson, participated in an FCC
sponsored forum on this issue on June 30, 1997. The response from the FCC, which
was announced on September 26, 1997 and modified on March 24, 1998, afforded
license holders four options. One of these options was the resumption of current
debt payments, which had been suspended earlier in 1997 for all such license
holders. Another option, amnesty, was to return all licenses and forgo any
amounts deposited in exchange for forgiveness of the FCC debt. Other options
include: disaggregation, splitting a 30 MHz license into two 15 MHz licenses and
forgoing 50% of the amount deposited, or prepayment, return of certain licenses
and utilize 70% of the amount deposited to acquire other licenses, 30% of the
deposits would be forfeited.
On June 8, 1998, Fortunet elected to apply its eligible credits relating to its
original down payment to the purchase of three licenses for 15 MHz of PCS
spectrum in Tallahassee, Panama City and Ocala, Florida. Consistent with an FCC
promulgated disaggregation alternative, Fortunet surrendered all the remaining
licenses and forfeited 30% of its original down payment in full satisfaction of
the government debt and the forgiveness of all accrued interest. Accordingly,
Fortunet retained 15 MHz of spectrum in the three Florida
-10-
markets covering a population of approximately 962,000 at a net auction cost of
$15.8 million. As a result of following this FCC process, disaggregation
resulted in a reduction of the bidding credits to $5.3 million. Fortunet also
lost $6.0 million of its down payment. A lawyer for many applications for FCC
licenses, Mr. Taylor, the relator in this case, is aware of the details of these
FCC initiated alternatives to the "C" Block, as was and should be his law firm.
As a result of this decision, during 1997, Interactive recorded a $7.0 million
write down of its investment in Fortunet.
On April 15, 1999, the FCC completed a reauction of all the C-Block licenses
that were surrendered, including the 15 MHz of spectrum that Fortunet returned
to the FCC on June 8, 1998 in respect of the Tallahassee, Panama City and Ocala,
Florida markets. In that reauction, the successful bidders paid a total of $2.7
million for those three 15 MHz licenses returned by Fortunet versus the $15.8
million paid by Fortunet. As a result of this auction, Interactive recorded a
further write down of its investment of $15.4 million, including capitalized
costs, to reflect the amount bid for the similar licenses in the reauction.
In February 2000, Fortunet merged with Sunshine PCS Corporation, which by way of
a spin-off from Lynch Interactive became a public company. It traded under the
symbol SUNPA.
On December 31, 2003, Sunshine, after undergoing appropriate corporate and
regulatory processes, sold its three 15 MHz licenses to Cingular Wireless for
$13.75 million. Interactive received $7.6 million as part of the sale
transaction versus its cash investment of $21 million initially invested in the
original five entities in 1992.
J. Potential MCI/WorldCom Recovery
- ------------------------------------
During 2002, the Company wrote off all receivables associated with MCI/WorldCom,
which had declared bankruptcy at that time. While it has not received settlement
from the bank of claims, it is currently estimated that Interactive could
receive $0.3 million. Such amounts have not been included in the attached
financial statements and income will only be recorded to the extent it is
received.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
------------------------------------------------------------------------
of Operations
-------------
Forward Looking Information
- ---------------------------
Included in this Management Discussion and Analysis of Financial Condition and
Results of Operations are certain forward looking financial and other
information, within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Act of 1934, as amended, including
without limitation, the Company's effort to monetize certain assets, adequacy of
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 Company's internal assumptions regarding expected operating
performance and the expected performance of the economy and financial markets as
they impact Registrant's businesses. As a result, such information is subject to
uncertainties, risks and inaccuracies, which could be material.
Overview
- --------
Interactive has grown primarily through the selective acquisition of rural local
exchange carriers ("RLECs") and by offering additional services such as Internet
service, alarm services, long distance service and competitive local exchange
carrier ("CLEC") service. From 1989 through the current reporting period,
Interactive 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.
-11-
The telecommunications industry in general and the RLECs that comprise
Interactive's business face a number of economic or industry-wide issues and
challenges.
o Regulatory- The Telecommunications Act of 1996 and other federal and
state legislation and regulations have a significant impact on the
industry and on rural carriers in particular. Interactive's telephone
companies are all RLECs serving very high cost areas with a
significant portion of their revenues being derived from federal or
state support mechanisms, which are referred to as Universal Service
Funds ("USF"). The revenues and margins of our RLEC subsidiaries are
largely dependent on the continuation of such support mechanisms.
o Competition- The effects of competition from CLECs, wireless service,
high speed cable, Voice Over Internet Protocol ("VoIP") and other
internet providers is an industry-wide issue that is felt to varying
degrees by our rural telephone companies.
o The economy- Unemployment, building starts, business bankruptcies and
the overall health of the economy have a significant effect on demand
for our services.
o Telecommunication bankruptcies- Interactive's telephone companies have
significant, normal course of business receivables from interexchange
carriers, such as MCI or Global Crossings who filed for bankruptcy
and, as a result, have been written-off. Additional bankruptcies could
have a significant effect on our financial condition.
o Market challenges- Our phone companies are required to comply with
industry-wide initiatives such as local number portability and the
requirements of the Communications Assistance for Law Enforcement Acto
("CALEA") that are expensive to implement and that in some cases have
limited demand in our markets.
Interactive generates cash and earns telecommunications revenues primarily from
local network access, intrastate and interstate access revenue and from state
and federal USF support mechanisms. Due to the nature of the Company's regulated
telephone operations, revenues and operating expenses are relatively stable
period to period.
o Local Revenues - The number of access lines is the primary driver of
local network access revenues. In addition, the ratio of business to
residential lines, as well as the number of features subscribed to by
customers are secondary drivers.
o Intrastate access revenues - Customer usage, primarily based on
minutes of use, and the number of access lines are the primary drivers
of intrastate access revenues since the Company's RLECs are on a
"bill-and-keep" basis.
o All fourteen of our RLECs participate in the National Exchange Carrier
Association ("NECA") access pools. Interstate access revenues depend
upon whether the RLEC has elected to be "cost-based" or has remained
an "average schedule" carrier. The revenues of our nine cost-based
carriers directly correlate to the rate-of-return on regulated net
investment earned by the NECA access pools plus the amount of
regulated operating expenses including taxes. The revenues of the
Company's five average schedule subsidiaries correlate to usage based
measurements such as access lines, interstate minutes-of-use, and the
number and mileage of different types of circuits. The average
schedule formulas are intended to be a proxy for cost-based recovery.
-12-
o USF subsidies are primarily driven by investments in specific types of
infrastructure, as well as certain operating expenses and taxes of the
Company. Interstate and intrastate USF subsidies are included in the
respective interstate and intrastate access revenue captions in the
breakdown of revenue and operating expenses which follows.
o Other business revenue: Interactive's companies also provide
non-regulated telecommunications related services, including Internet
access service, wireless 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 CLEC operations in selected nearby areas. In addition,
certain of Interactive's companies have expanded into cable and
security businesses in the areas in which they operate.
o Long Distance revenues are only retained by the Company if it is
providing the long distance service to the end user customer as the
toll provider. For unaffiliated IXCs who contract with Interactive for
billing services, the Company provides billing services and receives
an administrative handling fee.
o The following are material opportunities, challenges and risks that
Interactive's executives are currently focused on and what actions are
being taken to address the concerns:
o Universal Service Reform: There are two separate but associated
proceedings related to universal service currently underway at the
FCC. In June 2004, the FCC asked the Federal-State Joint Board on
Universal Service ("Joint Board") to review the rules relating to the
high-cost universal service support mechanisms for rural carriers and
to determine the appropriate rural mechanism to succeed the five-year
plan adopted in the Rural Task Force Order. In particular, the FCC
asked the Joint Board to make recommendations on a long-term universal
service plan that ensures that support is specific, predictable, and
sufficient to preserve and advance universal service. The FCC asked
the Joint Board to ensure that its recommendations are consistent with
the goal of ensuring that consumers in rural, insular, and high-cost
areas have access to telecommunications and information services at
rates that are affordable and reasonably comparable to rates charged
for similar services in urban areas. The FCC also asked the Joint
Board to consider how support can be effectively targeted to rural
telephone companies serving the highest cost areas, while protecting
against excessive fund growth. In conducting its review, the Joint
Board is supposed to take into account the significant distinctions
among rural carriers, and between rural and non-rural carriers and
consider all options for determining appropriate universal service
support.
o In June 2004, the FCC also issued a Notice of Proposed Rulemaking
seeking comment on whether the Joint Board's Recommended Decision
should be adopted, in whole or in part, including the process for
designation of eligible telecommunications carriers ("ETCs") and the
FCC's rules regarding high cost universal service support. In its
Recommended Decision, the Joint Board recommended that the Commission
adopt permissive federal guidelines for states to consider in ETC
designation proceedings and that the FCC limit the scope of high-cost
support to a single connection that provides a subscriber access to
the public telephone network. The Company participated with the RLEC
industry in comments to the FCC regarding the potential impact to
customers and RLECs in rural America. Total USF support payments are
material to the Company's financial results.
o Intercarrier Compensation and Access Charge Reform: The Company is
actively participating in the RLEC industry's efforts to determine how
intercarrier compensation and access charges should be modified
without sustaining revenue losses for RLECs.
o Loss of Access Revenues from VoIP and wireless usage: The Company is
experiencing revenue losses as usage transfers from landline service
provided by the Company's subsidiaries to either VoIP or
-13-
wireless services. The Company is trying to install more broadband
service to offset revenue losses from traditional voice services.
Three months ended September 30, 2004 compared to September 30, 2003
- --------------------------------------------------------------------
The following is a breakdown of revenues and operating costs and expenses for
the third quarter ended September 30, 2004 and 2003 (in thousands):
Third Quarter ended Sept. 30,
----------------------------- Increase
2004 2003 (Decrease)
--------------------------------------
(Unaudited)
Revenues:
Local access ...................... $ 2,963 $ 2,933 $ 30
Interstate access ................. 10,521 9,697 824
Intrastate access ................. 3,872 3,909 (37)
Other telephone ................... 651 640 11
Other business .................... 5,103 4,903 200
------- ------- -------
Total ........................... 23,110 22,082 1,028
------- ------- -------
Operating Cost and Expense:
Cost of revenue ................... 7,409 7,501 (92)
General and administrative costs at
operations ...................... 3,648 3,413 235
Corporate office expenses ......... 1,743 795 948
Depreciation and amortization ..... 5,223 4,994 229
------- ------- -------
Total ........................... 18,023 16,703 1,320
------- ------- -------
Operating profit ................ $ 5,087 $ 5,379 $ (292)
======= ======= =======
Total revenues for the three months ended September 30, 2004 increased by $1.0
million, or 4.7%, to $23.1 million compared to the third quarter of 2003. Local
access revenue increased by $30,000 in the third quarter of 2004 resulting from
the sale of additional features and rate increases, partially offset by a
decrease in access lines. Interstate access revenue increased $0.8 million in
the third quarter of 2004 primarily due to infrastructure development undertaken
in 2002 and 2003, which entitled the company to increased network access and USF
support primarily at the Haviland Telephone Company in Kansas. Such increase was
partially offset by the loss of a telecommunications transport contract in Utah.
Other business revenues increased $0.2 million due to the sale of
telecommunications equipment to an Iowa school district, revenues from a small
cable company in Utah that the Company acquired in February 2004, and partially
offset by lower revenues in the Company's security operation.
Total costs and expenses increased by $1.3 million to $18.0 million in the third
quarter of 2004. Costs of revenue decreased $0.1 million, or 1.2% due to cost
savings at the Company's unregulated subsidiaries, particularly the security
business, offset by costs related to the sale of equipment to the Iowa school
district and costs related to the small cable television operation in Central
Utah acquired in February 2004. General and administrative costs incurred at the
operations increased $0.2 million primarily due to increased staffing, increased
corporate advertising, and higher professional fees offset by a $0.1 million
decrease in consulting fees relating to the Kansas Commission audit incurred in
2003. Corporate office expenses increased $0.9 million resulting from $1.0
million of legal costs incurred defending the "qui tam" litigation in the third
quarter of 2004, $0.2 million of increased consulting costs resulting from
Sarbanes-Oxley implementation, offset by the absence in 2004 of a $0.2 million
management incentive accrual recorded in the third quarter of 2003. Depreciation
and amortization increased $0.2 million primarily due to a regulatory approved
change in depreciable lives, which resulted in increased depreciation expense at
our Michigan telephone company.
-14-
As a result of the above, operating profit for the three months ended September
30, 2004, decreased by $0.3 million to $5.1 million compared to the third
quarter of 2003.
EBITDA
- ------
EBITDA represents the Company's earnings before interest, taxes, depreciation
and amortization. EBITDA is not intended to represent cash flows from operating
activities and should not be considered as an alternative to net income or loss
(as determined in conformity with generally accepted accounting principles), as
an indicator of the Company's operating performance or to cash flows as a
measure of liquidity. EBITDA from operations is presented herein because the
Company's chief operating decision maker evaluates and measures each business
unit's performance based on its EBITDA results. The Company believes that EBITDA
from operations is the most accurate indicator of the Company's results, because
it focuses on revenue and operating cost items driven by operating managers'
performance, and excludes non-recurring items and items largely outside of
operating managers' control. In addition, Interactive utilizes EBITDA as one of
its metrics for valuing potential acquisitions. The following table reconciles
EBITDA to Operating profit and to Income before income taxes and minority
interests (in thousands).
Third Quarter ended Sept. 30,
----------------------------- Increase
2004 2003 (Decrease)
----------------------------------------
(Unaudited)
EBITDA from operations ......... $ 12,053 $ 11,168 $ 885
Corporate office expenses ...... (1,743) (795) (948)
-------- -------- --------
Total EBITDA ................. 10,310 10,373 (63)
Depreciation ................... 5,004 4,832 172
Amortization ................... 219 162 57
-------- -------- --------
Operating profit ............. 5,087 5,379 (292)
Investment income .............. 88 83 5
Interest expenses .............. (2,847) (2,995) 148
Equity in earnings of affiliates 1,051 530 521
-------- -------- --------
Income before income taxes and $ 3,379 $ 2,997 $ 382
minority interest
======== ======== ========
Other Income (Expense)
- ----------------------
For the three months ended September 30, 2004, investment income was relatively
unchanged compared to the 2003 period.
Interest expense decreased by $0.1 million in the third quarter of 2004 from the
same period in the prior year due primarily to lower outstanding borrowings
offset by higher interest rates.
Equity in earnings of affiliates for the three-month ending September 30, 2004
increased $0.5 million compared to the same period in the previous year due to
higher earnings at the Company's New Mexico cellular investments (RSA 3 and 5).
Income Tax Provision
- --------------------
The income tax provision includes federal, as well as state and local taxes. The
tax provision for the three months ended September 30, 2004 and 2003, represent
effective tax rates of 35.6% and 38.6%, respectively. The difference between
these effective rates and the federal statutory rate is principally due to state
income taxes, including the effect of earnings attributable to different state
jurisdictions.
-15-
Minority Interests
- ------------------
Minority interests decreased earnings by $0.6 million for the three months ended
September 30, 2004, as compared to $0.4 million for the three months ended
September 30, 2003. The change was due to higher earnings from the Company's New
Mexico cellular investments.
Net Income
- ----------
Net income for the three months ended September 30, 2004, was $1.5 million, or
$0.56 per share (basic and diluted), compared to a net income for the same
period last year of $1.4 million, or $0.51 per share (basic and diluted). The
Company has no dilutive instruments outstanding.
Nine months ended September 30, 2004 compared to September 30, 2003
The following is a breakdown of revenues and operating costs and expenses for
the nine months ended September 30, 2004 and 2003 (in thousands):
Nine Months ended September 30,
------------------------------- Increase
2004 2003 (Decrease)
-----------------------------------------
(Unaudited)
Revenues:
Local access ...................... $ 8,919 $ 8,851 $ 68
Interstate access ................. 29,134 27,672 1,462
Intrastate access ................. 11,684 11,486 198
Other telephone ................... 1,982 2,170 (188)
Other business .................... 14,423 14,114 309
------- ------- -------
Total ........................... 66,142 64,293 1,849
------- ------- -------
Operating Cost and Expense:
Cost of revenue ................... 22,073 21,807 266
General and administrative costs at
operations ...................... 10,507 10,155 352
Corporate office expenses ......... 4,989 2,663 2,326
Depreciation and amortization ..... 15,371 14,822 549
------- ------- -------
Total ........................... 52,940 49,447 3,493
------- ------- -------
Operating profit ................ $13,202 $14,846 $(1,644)
======= ======= =======
Total revenues for the nine months ended September 30, 2004 increased $1.8
million, or 2.9%, to $66.1 million compared to the same period in 2003. Local
access revenue increased by $68,000 in the nine months of 2004 resulting from
the sale of additional features and rate increases, partially offset by a 3.2%
decrease in access lines. Interstate access revenue increased $1.5 million in
the nine months ended September 30, 2004 primarily due to infrastructure
development undertaken in 2002 and 2003, which entitled the Company to increased
network access and USF support primarily at the Haviland Telephone Company in
Kansas. Such increase was partially offset by the loss of a telecommunications
transport contract in Utah and by a one-time NECA adjustment to our previously
reported rate base, which effects the amount of revenue that we were entitled to
in prior periods. The $0.2 million increase in intrastate network access revenue
was also due to the infrastructure development in Haviland. The $0.2 million
reduction in other telephone revenues reflects reduced billing and collection
revenue and lower directory revenues. Other business revenues increased $0.3
million due to the sale of telecommunications equipment to an Iowa school
district, revenues from a small cable company in Utah that the Company acquired
in February 2004, and partially offset by lower revenues in the Company's
security operation.
-16-
Total costs and expenses increased by $3.5 million to $52.9 million in the nine
months of 2004. Costs of revenue increased $0.3 million, or 1.2%, due to
additional operating costs related to the infrastructure development in
Haviland, costs related to the sale of equipment to the Iowa school district,
costs generated by the cable television operation acquired in February 2004 and
partially offset by cost savings in the Company's security operation. General
and administrative costs incurred at the operations increased $0.4 million
primarily due to increased staffing, increased corporate advertising, and higher
professional fees offset by a $0.1 million decrease in consulting fees relating
to the Kansas Commission audit incurred in 2003. Corporate office expenses
increased $2.3 million resulting from $2.1 million of legal costs incurred
defending the "qui tam" litigation in the first nine months of 2004, increased
audit and consulting costs resulting from Sarbanes-Oxley implementation, and
partially offset by the absence in 2004 of a $0.5 million management incentive
accrual recorded in the 2003 period. Depreciation and amortization increased
$0.5 million primarily as a result of a regulatory approved change in
depreciable lives, which resulted in increased depreciation expense at our
Michigan telephone company.
As a result of the above, operating profit for the nine months ended September
30, 2004, decreased by $1.6 million to $13.2 million compared to the same nine
month period in 2003.
EBITDA
- ------
The following table reconciles EBITDA to Operating profit and to Income before
income taxes and minority interests (in thousands).
Nine Months ended Sept. 30,
---------------------------- Increase
2004 2003 (Decrease)
-----------------------------------------
(Unaudited)
EBITDA from operations ......... $ 33,562 $ 32,331 $ 1,231
Corporate office expenses ...... (4,989) (2,663) (2,326)
-------- -------- --------
Total EBITDA ................. 28,573 29,668 (1,095)
Depreciation ................... 14,623 14,358 265
Amortization ................... 748 464 284
-------- -------- --------
Operating profit ............. 13,202 14,846 (1,644)
Investment income .............. 898 739 159
Interest expenses .............. (8,517) (9,020) 503
Equity in earnings of affiliates 2,649 1,593 1,056
-------- -------- --------
Income before income taxes and $ 8,232 $ 8,158 $ 74
minority interest
======== ======== ========
Other Income (Expense)
- ----------------------
For the nine months ended September 30, 2004, investment income increased by
$0.2 million due to a cash distribution from Sunshine PCS Corporation in the
first quarter of 2004.
Interest expense decreased by $0.5 million in the nine months of 2004 from the
same period in the prior year due primarily to lower outstanding borrowings
partially offset by higher interest rates.
Equity in earnings of affiliates for the nine-months ended September 30, 2004
increased $1.1 million compared to the same period in the previous year due to
higher earnings at the Company's New Mexico cellular investments (RSA 3 and 5).
-17-
Income Tax Provision
- --------------------
The income tax provision includes federal, as well as state and local taxes. The
tax provision for the nine months ended September 30, 2004 and 2003, represent
effective tax rates of 38.0% and 38.1%, respectively. The difference between
these effective rates and the federal statutory rate is principally due to state
income taxes, including the effect of earnings attributable to different state
jurisdictions.
Minority Interests
- ------------------
Minority interests decreased earnings by $1.6 million for the nine months ended
September 30, 2004, as compared to $1.0 million for the nine months ended
September 30, 2003. The change was due to higher earnings from the Company's New
Mexico cellular investments.
Net Income
- ----------
Net income for the nine months ended September 30, 2004, was $3.5 million, or
$1.27 per share (basic and diluted), compared to a net income for the same
period last year of $4.0 million, or $1.44 per share (basic and diluted). The
Company has no dilutive instruments outstanding.
Cash Requirements
- -----------------
The debt at each of Interactive's subsidiary companies contains restrictions on
the amount of funds that can be transferred to their respective parent
companies. The Interactive parent company ("Parent Company") needs cash
primarily to pay corporate expenses, federal income taxes and to invest in new
opportunities, including spectrum licenses. The Parent Company receives cash to
meet its obligations primarily through management fees charged to its
subsidiaries, a tax sharing agreement with its subsidiaries, a line of credit
facility, and has obtained additional liquidity by refinancing certain
subsidiary debt. In addition, the Parent Company considers various alternative
long-term financing sources: debt, equity, or sale of investments and other
assets. The Company is sensitive to liquidity issues as it is incurring
significant cost for litigation and Sarbanes Oxley compliance. The Parent
Company's line of credit facility, which was $10 million in 2004, was reduced to
$7.0 million on October 31, 2004 and will be further reduced to $5.0 million on
January 31, 2005. The Company is pursuing various financing alternatives
including obtaining an additional line of credit, refinancing substantially all
or individual pieces of its currently outstanding debt, and sale of certain
investments. 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.
The Company's RLECs and other businesses need cash to fund their current
operations, as well as future long-term growth initiatives. Each RLEC and other
business finances its cash needs with cash generated from operations, by
utilizing existing borrowing capacity or by entering into new long-term debt
agreements. New business acquisitions are generally financed with a combination
of new long-term debt, secured by the acquired assets, as well as cash from the
Parent. While management expects that both Parent and its operating subsidiaries
will be able 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, as of September 30, 2004 for the
periods shown, these contractual obligations and certain other financing
commitments from banks and other financial institutions that provide liquidity:
-18-
Payments Due by Period
(In thousands)
Less than
Total 1 year 2 - 3 years 4 - 5 years After 5 years
-------------------------------------------------------------
Long-term debt (a) ................... $171,427 $ 14,006 $ 53,095 $ 47,166 $ 57,160
Operating leases ..................... 1,595 411 725 146 313
Notes payable to banks ............... 6,269 6,269 -- -- --
Guarantees ........................... 3,750 -- 3,750 -- --
-------- -------- -------- -------- --------
Total contractual cash obligations and
commitments ........................ $183,041 $ 20,686 $ 57,570 $ 47,312 $ 57,473
======== ======== ======== ======== ========
(a) Does not include interest payments on debt.
A subsidiary of the Company has guaranteed $3.8 million of an equity investees'
total debt of $9.9 million. The guarantee is in effect for the duration of the
loan which expires on December 31, 2005 and would be payable if the equity
investee fails to make such payment in accordance with the terms of the loan.
At September 30, 2004, total debt (including notes payable to banks) was $177.7
million, a decrease of $1.5 million from December 31, 2003. At September 30,
2004, there was $107.3 million of fixed interest rate debt outstanding averaging
6.9% and $70.4 million of variable interest rate debt averaging 4.7%. The debt
at fixed interest rates includes $38.5 million of subordinated notes at interest
rates averaging 9.5% issued to sellers as part of acquisitions. On August 1,
2004, the Company converted $15.4 million of 7.5% fixed rate debt into a
variable rate instrument. The long-term debt facilities at certain subsidiaries
+are secured either by substantially all of such subsidiaries assets, or by the
common stock of such subsidiaries. At September 30, 2004 and December 31, 2003,
substantially all of the subsidiaries' net assets are restricted. In addition,
the debt facilities contain certain covenants restricting distribution to Lynch
Interactive. As of September 30, 2004, the Company is in compliance with all
debt covenants.
Interactive has a high degree of financial leverage. The ratio of total debt to
equity was 5.3 to 1 as of September 30, 2004 and 6.0 to 1 as of December 31,
2003. Certain subsidiaries also have high debt to equity ratios. Management
believes that it is currently more beneficial to hold excess cash at certain of
our subsidiaries rather than utilizing the cash to pay-down existing credit
facilities.
As of September 30, 2004, Interactive had current assets of $40.4 million and
current liabilities of $34.3 million resulting in a working capital surplus of
$6.1 million compared to a surplus of $7.2 million at December 31, 2003.
Sources and Uses of Cash
- ------------------------
Cash at September 30, 2004, was $27.6 million, an increase of $1.0 million
compared to December 31, 2003. During the nine months ended September 30, 2004,
net cash provided by operations of $18.5 million was primarily used to invest in
plant and equipment, acquire businesses and repay debt.
Capital expenditures which are predominantly spent at the RLECs and will be
included in their rate bases for rate setting purposes were $10.4 million in the
nine months ended September 30, 2004 compared to $14.7 million for the same
period in 2003. Capital expenditures in 2004 are expected to be approximately
$18.9 million, most of which will be added to the RLEC rate bases and is
primarily financed from internal sources.
The Company completed two acquisitions in the nine months ended September 30,
2004. In February 2004, a 100% owned subsidiary of the Company acquired cable
television assets at a cost of $0.4 million. On April 30, 2004, the Company
acquired a 37% interest in KMG by issuing a $4.5 million, 8.5% five-year
amortizing
-19-
subordinated note.
The Company has initiated an effort to monetize or spin-off certain of its
assets, including selling a portion or all of its investment in certain of its
operating entities and equity investments. These initiatives may include the
sale of certain telephone operations where growth opportunities are not readily
apparent. In addition, the Company is considering the distribution of certain
non-core assets to its shareholders. There is no assurance that all or any part
of these programs can be effectuated on acceptable terms.
Subsequent to the spin-off by Lynch Corporation, the Board of Directors of
Interactive authorized the purchase of up to 100,000 shares of common stock.
Through September 30, 2004, 61,100 shares had been purchased at an average cost
of $32.34.
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. The Company may consider paying dividends in the future
depending upon the needs of its businesses. Further financing may limit or
prohibit the payment of dividends.
Contingencies
- -------------
Interactive and several other parties, including Interactive's CEO, 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 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 (FCC) spectrum auctions restricted to small businesses, as well as
obtaining bidding credits in other spectrum auctions allocated to "small" and
"very small" businesses. While the complaint seeks to recover an unspecified
amount of damages, which would be subject to mandatory trebling under the
statute, a document filed by the relator with the Court on February 24, 2004
discloses an initial computation of damages of not less than $88 million
resulting from bidding credits awarded to the defendants in FCC auctions and
$120 million of unjust enrichment through the sale or assignment of licenses
obtained by the defendants in FCC auctions, in each case prior to trebling. As
discussed below, the bidding credits the defendants received were considerably
less than the $88 million amount reported.
Interactive strongly believes that this lawsuit is completely without merit and
that relator's initial damage computation is without basis, 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 does not have any insurance to cover its cost of defending this
lawsuit, which costs will be material. Interactive does have a directors and
officers liability policy but the insurer has reserved its rights under the
policy and, as a result, any coverage to be provided to any director or officer
of Interactive in connection with a judgment rendered in this action is unclear
at this time.
Interactive was formally served with the complaint on July 10, 2002. On
September 19, 2002, the defendants 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; the defendants filed a reply in support of its
motion to dismiss. On September 30, 2003, the Court granted our motion to
transfer the
-20-
action to the Southern District of New York. A scheduling conference was held on
February 10, 2004, at which time, the judge approved a scheduling order and
discovery commenced.
On June 7, 2004, the defendants filed a motion to refer the issues in this
litigation to the FCC, which motion has been opposed by the relator.
On July 28, 2004, the judge denied in part and granted in part the motion to
dismiss. Defendant bidding entities that did not win licenses were dismissed and
the "reverse" false claims act count was dismissed as redundant. Interactive and
its subsidiaries remain parties to the litigation. On September 14, 2004, the
judge issued a ruling denying the motion to refer the issues in this litigation
to the FCC, and discovery continues.
Critical Accounting Policies and Estimates
- ------------------------------------------
The preparation of consolidated financial statements requires Interactive's
management 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 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.
We believe that revenue from interstate access is based on critical accounting
estimates and judgment. Such revenue 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 as services are provided 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.
Interactive's current 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 and identifiable intangible assets acquired 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 and other intangible assets with indefinite
lives for impairment. The Company screens for potential impairment by
determining fair value for each reporting unit. We estimate the fair value of
each reporting unit based on a number of subjective factors, including: (a)
appropriate weighting of valuation approaches (income approach, market approach
and comparable public company approach), (b) estimates of our future cost
structure, (c) discount rates for our estimated cash flows, (d) selection of
peer group companies for the public company approach, (e) required level of
working capital, (f) assumed terminal value and (g) time horizon of cash flow
forecasts.
We consider the estimate of fair value to be a critical accounting estimate
because (a) a potential goodwill impairment could have a material impact on our
financial position and results of operations and (b) the estimate is based on a
number of highly subjective judgments and assumptions, the most critical of
which is that the regulatory environment will continue in its current form.
-21-
Interactive tests its investments and other long-term non-regulated assets
annually whenever events or changes in circumstances indicate that the carrying
value of such assets may not be recoverable. Significant judgment is required to
determine if an impairment has occurred and whether such impairment is "other
than temporary."
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
- -----------------------------------------
The Financial Accounting Standards Board (FASB" issued Financial Interpretation
No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB
No. 51" (FIN 46) in January 2003 and revised it in December 2003 (FIN 46R). FIN
46 requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. The provisions of FIN 46R
were applicable for the first interim or annual period ending after March 15,
2004 for both new and existing variable interest entities. Certain less than 50%
owned investments in limited liability companies, which were considered to be
variable interest entities, needed to be consolidated as a result of the
implementation of FIN 46. The effect of consolidating such operations resulted
in increasing intangible assets and decreasing investments in and advances to
affiliated companies by approximately $2 million and had no other significant
effect on the Company's consolidated financial statements.
Item 3. 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 $27.6 million at September 30, 2004 and $26.6 million at December
31, 2003). The majority of the Company's debt is fixed rate and the Company
generally finances the acquisition of long-term assets by borrowing on a fixed
long-term basis. The Company does not use derivative financial instruments for
trading or speculative purposes. Management does not currently 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. As of September 30, 2004, the fair value of debt was approximately
equal to its carrying value.
At September 30, 2004 and December 31, 2003, approximately $70.4 million and
$56.4 million, respectively, or 40% and 34% of Interactive's long-term 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 2004 average interest rate under these borrowings, it is
estimated that Interactive's interest expense for the nine months ended
September 30, 2004 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, no such actions are
assumed. As of September 30, 2004, if the Company were to convert a significant
portion of its variable interest rate debt into fixed interest rates, such
conversion would have increased interest expense for the nine months ended
September 30, 2004 by $1.2 million assuming that variable rates remain constant.
Further, such analysis does not consider the effects of the change in the level
of overall economic activity that could exist in such an environment.
-22-
Item 4. Controls and Procedures
-----------------------
Our Chief Executive Officer and Chief Financial Officer have evaluated the
effectiveness of the Company's disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the
"Act")) as of the end of the period covered by this report. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that the Company's disclosure controls and procedures as of the end of
the period covered by this report were designed and were functioning effectively
to provide reasonable assurance that the information required to be disclosed by
the Company in reports filed under the Act is recorded, processed, summarized
and reported within the time periods specified in the SEC's rules and forms. The
Company believes that a controls system, no matter how well designed and
operated, cannot provide absolute assurance that the objectives of the controls
system are met, and no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within a company have
been detected.
During the period covered by this report, there have been no changes in our
internal control over financial reporting that have materially affected, or is
reasonably likely to materially affect, our financial statements.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
Interactive and several other parties, including Interactive's CEO, 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 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 FCC spectrum auctions restricted
to small businesses, as well as obtaining bidding credits in other spectrum
auctions allocated to "small" and "very small" businesses. While the complaint
seeks to recover an unspecified amount of damages, which would be subject to
mandatory trebling under the statute, a document filed by the relator with the
Court on February 24, 2004 discloses an initial computation of damages of not
less than $88 million resulting from bidding credits awarded to the defendants
in FCC auctions and $120 million of unjust enrichment through the sale or
assignment of licenses obtained by the defendants in FCC auctions, in each case
prior to trebling. As discussed below, the bidding credits the defendants
received were considerably less than the $88 million amount reported.
Interactive strongly believes that this lawsuit is completely without merit and
that relator's initial damage computation is without basis, 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 does not have any insurance to cover its cost of defending this
lawsuit, which costs will be material. Interactive does have a directors and
officers liability policy but the insurer has reserved its rights under the
policy and, as a result, any coverage to be provided to any director or officer
of Interactive in connection with a judgment rendered in this action is unclear
at this time.
Interactive was formally served with the complaint on July 10, 2002. On
September 19, 2002, the defendants filed two motions with the United States
District Court for the District of Columbia: a motion to dismiss the
-23-
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; the defendants filed a reply in support of
its motion to dismiss. On September 30, 2003, the Court granted our motion to
transfer the action to the Southern District of New York. A scheduling
conference was held on February 10, 2004, at which time, the judge approved a
scheduling order and discovery commenced.
On June 7, 2004, the defendants filed a motion to relator to refer the issues in
this litigation to the FCC, which motion was opposed by the relator.
On July 28, 2004, the judge denied in part and granted in part the motion to
dismiss. Defendant bidding entities that did not win licenses were dismissed and
the "reverse" False Claims Act count was dismissed as redundant. Interactive and
its subsidiaries remain parties to the litigation. On September 14, 2004, the
judge issued a ruling denying the motion to refer the issues in this litigation
to the FCC, and discovery continues.
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.
As part of the Omnibus Budget Resolution of 1993, Congress authorized its FCC to
employ competitive bidding procedures to select among mutually exclusive
applicants for certain spectrum bidding. Initially the FCC had an initiative to
include, among others, qualified African Americans, Native Americans, Asian
Americans and women. As a result of this, the FCC conducted auctions beginning
in 1995 to allocate spectrum in a competitive manner. Interactive was a
participating investor and/or service provider to various entities in the
auction. In 2001, Interactive was named in a False Claim Act litigation with
regard to its auction activities. Below is a history of our C-Block activities,
the first auction Interactive was involved with as an investor and as a service
provider.
History of Lynch's "C" Block Activities
- ---------------------------------------
On December 18, 1995, Interactive (through its predecessor Lynch Corporation)
had investments in five entities that participated in the FCC Auction for
Broadband PCS "C" Block Spectrum (Auction 5). When the auction closed, on May 6,
1996, these five entities, on a combined basis, were the higher bidders for
thirty-one 30 MHz licenses at a gross cost of $288.2 million. These entities
were initially put together under the FCC's initiative to include, among others,
qualified women, African Americans, Native Americans and Asian Americans. As a
result of changes in these initiatives, these same individuals were qualified as
small businesses and remained eligible as bidders. These entities received $72
million of bidding credits, and accordingly the net cost was $216.2 million. The
federal government provided financing for 90% of the cost of these licenses, or
$194.6 million. Interactive's investments in these entities totaled $21 million.
Events during and subsequent to Auction 5, made financing these licenses through
the capital markets much more difficult than originally anticipated. On April
18, 1997, among other reasons, in order to obtain some economies of scale, such
as financing, the five entities merged into Fortunet Communications, Inc. The
FCC, in partial response to actions by Nextwave and others, promoted a plan of
refinancing of "C" block. In 1997, many of the license holders from Auction 5,
including Fortunet, petitioned the FCC for relief in order to afford these small
businesses the opportunity to more realistically restructure and build out their
systems. The President of Fortunet, Karen Johnson, participated in an FCC
sponsored forum on this issue on June 30, 1997. The response from the FCC, which
was announced on September 26, 1997 and modified on March 24, 1998, afforded
license holders four options. One of these options was the resumption of current
debt payments, which had been suspended earlier in 1997 for all such license
holders. Another option, amnesty, was to return all licenses and forgo any
amounts deposited in exchange for forgiveness of the FCC debt. Other options
-24-
include: disaggregation, splitting a 30 MHz license into two 15 MHz licenses and
forgoing 50% of the amount deposited, or prepayment, return of certain licenses
and utilize 70% of the amount deposited to acquire other licenses, 30% of the
deposits would be forfeited.
On June 8, 1998, Fortunet elected to apply its eligible credits relating to its
original down payment to the purchase of three licenses for 15 MHz of PCS
spectrum in Tallahassee, Panama City and Ocala, Florida. Consistent with an FCC
promulgated disaggregation alternative, Fortunet surrendered all the remaining
licenses and forfeited 30% of its original down payment in full satisfaction of
the government debt and the forgiveness of all accrued interest. Accordingly,
Fortunet retained 15 MHz of spectrum in the three Florida markets covering a
population of approximately 962,000 at a net auction cost of $15.8 million. As a
result of following this FCC process, disaggregation resulted in a reduction of
the bidding credits to $5.3 million. Fortunet also lost $6.0 million of its down
payment. A lawyer for many applications for FCC licenses, Mr. Taylor the relator
in this case, is aware of the details of these FCC initiated alternatives to the
"C" Block, as was and should be his law firm. As a result of this decision,
during 1997, Interactive recorded a $7.0 million write down of its investment in
Fortunet.
On April 15, 1999, the FCC completed a reauction of all the C-Block licenses
that were surrendered, including the 15 MHz of spectrum that Fortunet returned
to the FCC on June 8, 1998 in respect of the Tallahassee, Panama City and Ocala,
Florida markets. In that reauction, the successful bidders paid a total of $2.7
million for those three 15 MHz licenses returned by Fortunet versus the $15.8
million paid by Fortunet. As a result of this auction, Interactive recorded a
further write down of its investment of $15.4 million, including capitalized
costs, to reflect the amount bid for the similar licenses in the reauction.
In February 2000, Fortunet merged with Sunshine PCS Corporation, which by way of
a spin-off from Lynch Interactive became a public company. It traded under the
symbol SUNPA.
On December 31, 2003, Sunshine, after undergoing appropriate corporate and
regulatory processes, sold its three 15 MHz licenses to Cingular Wireless for
$13.75 million. Interactive received $7.6 million as part of the sale
transaction versus its cash investment of $21 million initially invested in the
original five entities in 1992.
Item 2. Unregistered Sale of Equity in Securities and Use of Proceeds
-------------------------------------------------------------
The following table sets forth the repurchases made by the Company of its
securities during the three months ended September 30, 2004:
Total Number of Maximum Number of
Total Shares Purchased Shares that May
Number of as Part of Publicly Yet Be Purchased
Shares Average Price Announced Plans Under the Plans or
Period Purchased Paid per Share or Programs Programs
- -----------------------------------------------------------------------------------
July 2004 .... 1,800 $ 33.96 1,800 45,000
August 2004 .. 4,600 31.61 4,600 40,400
September 2004 1,500 33.63 1,500 38,900
------ ------ ----- ------
Total ..... 7,900 $ 32.53 7,900 --
In September 1999, the Company's Board of Directors approved a stock repurchase
program providing for the purchase of up to 100,000 shares of the Company's
Common Stock in such manner, and at such times and prices as the Chief Executive
Officer or his designee determines.
-25-
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
Exhibit 31.1 - Chief Executive Officer Section 302 Certification.
Exhibit 31.2 - Chief Financial Officer Section 302 Certification.
Exhibit 32.1 - Chief Executive Officer Section 906 Certification.
Exhibit 32.2 - Chief Financial Officer Section 906 Certification.
(b) Reports on Form 8-K during the quarter reported on:
- Current Report on Form 8-K filed August 17, 2004, under Items 7 and 12
reporting the issuance of a press release regarding the Company's
second quarter operating results.
-26-
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LYNCH INTERACTIVE CORPORATION
(Registrant)
/s/ Robert E. Dolan
--------------------
Robert E. Dolan
Chief Financial Officer
November 15, 2004