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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 June 30, 2003
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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-2of 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 July 30, 2003
----- ----------------------------
Common Stock, $.0001 par value 2,782,751
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INDEX
LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets:
- June 30, 2003
- December 31, 2002
- June 30, 2002
Condensed Consolidated Statements of Operations:
- Three and six months ended June 30, 2003 and 2002
Condensed Consolidated Statements of Cash Flows:
- Six months ended June 30, 2003 and 2002
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 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
CERTIFICATIONS
i
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
LYNCH INTERACTIVE CORPORATION AND SUBSIDIAIRES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
June 30, December 31, June 30,
2003 2002 2002
------------ ------------- ------------
(Unaudited) (Note) (Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................... $ 25,526 $ 23,356 $ 24,291
Restricted Cash ......................................... -- -- 10,552
Receivables, less allowances of $258,
$316 and $928, respectively ........................... 8,553 8,916 8,982
Material and supplies ................................... 3,300 3,351 3,687
Prepaid expenses and other current assets ............... 1,290 1,451 2,443
--------- --------- ---------
TOTAL CURRENT ASSETS ...................................... 38,669 37,074 49,955
PROPERTY, PLANT AND EQUIPMENT:
Land .................................................... 833 807 840
Buildings and improvements .............................. 13,332 12,741 10,918
Machinery and equipment ................................. 203,807 195,015 183,979
--------- --------- ---------
217,972 208,563 195,737
Accumulated Depreciation ................................ (97,312) (88,201) (81,834)
--------- --------- ---------
120,660 120,362 113,903
GOODWILL, NET ............................................. 60,884 60,884 60,889
INVESTMENTS IN AND ADVANCES TO AFFILIATED ENTITIES ........ 10,100 9,343 15,375
OTHER ASSETS .............................................. 18,732 17,684 17,663
--------- --------- ---------
TOTAL ASSETS .............................................. $ 249,045 $ 245,347 $ 257,785
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks .................................. $ 11,623 $ 12,882 $ 12,776
Trade accounts payable .................................. 3,118 1,638 479
Accrued interest payable ................................ 372 384 1,809
Accrued liabilities ..................................... 14,831 16,682 17,158
Current maturities of long-term debt ..................... 18,619 18,272 21,151
--------- --------- ---------
TOTAL CURRENT LIABILITIES ................................. 48,563 49,858 53,373
LONG-TERM DEBT ......................................... 160,720 158,349 166,433
DEFERRED INCOME TAXES .................................. 6,659 6,621 7,790
OTHER LIABILITIES ...................................... 645 736 799
MINORITY INTERESTS ..................................... 7,414 7,151 6,814
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
COMMON STOCK, $0.0001 PAR VALUE-10,000,000
SHARES AUTHORIZED; 2,824,766 ISSUED; 2,782,751,
2,792,651 and 2,802,551 OUTSTANDING .................. -- -- --
ADDITIONAL PAID-IN CAPITAL .............................. 21,406 21,406 21,406
RETAINED EARNINGS ....................................... 4,448 1,879 1,625
ACCUMULATED OTHER COMPREHENSIVE INCOME .................. 599 534 467
TREASURY STOCK, 42,015, 32,115 and 22,215 shares, at cost (1,409) (1,187) (922)
--------- --------- ---------
TOTAL SHAREHOLDER'S EQUITY ................................ 25,044 22,632 22,576
--------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................ $ 249,045 $ 245,347 $ 257,785
========= ========= =========
Note: The balance sheet at December 31, 2002 has been derived from the audited
financial statements at that date, but does not include all of the information
and footnotes required by accounting principles generally accepted in the Untied
States for complete financial statements.
See accompanying notes.
-1-
LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except per share and share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------------------------------
2003 2002 2003 2002
----------------------------------------------------------
SALES AND REVENUES ................................... $ 21,343 $ 21,098 $ 42,646 $ 42,072
COSTS AND EXPENSES:
Operations, exclusive of depreciation and amortization 10,637 11,104 21,483 21,335
Depreciation and amortization ........................ 4,913 4,780 9,828 9,591
Selling and administrative ........................... 1,100 757 1,868 1,445
--------- --------- ---------- -----------
OPERATING PROFIT ..................................... 4,693 4,457 9,467 9,701
--------- --------- ---------- -----------
Other income (expense):
Investment income ................................. 98 235 656 1,232
Interest expense .................................. (2,999) (3,298) (6,025) (6,671)
Equity in earnings of affiliated companies ........ 425 224 685 428
Gain on sale of subsidiary stock .................. -- -- -- 4,965
--------- --------- ---------- ----------
(2,476) (2,839) (4,684) (46)
--------- --------- ---------- ----------
INCOME BEFORE INCOME TAXES, MINORITY INTERESTS AND
OPERATIONS OF MORGAN GROUP HOLDING CO. DISTRIBUTED TO
SHAREHOLDERS
2,217 1,618 4,783 9,655
Provision for income taxes ........................... (875) (651) (1,951) (3,783)
Minority Interests ................................... (186) (62) (263) (694)
--------- --------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS ................... 1,156 905 2,569 5,178
Loss from operations of Morgan Group Holding Co.
distributed to shareholders, net of income taxes of
$-, and minority interests of $868 ................... -- -- -- (1,888)
--------- -------- ---------- ----------
NET INCOME ........................................... $ 1,156 $ 905 $ 2,569 $ 3,290
========= ========= ========== ==========
Basic weighted average shares outstanding ............ 2,787,000 2,809,000 2,789,000 2,813,000
Diluted weighted average shares outstanding .......... 2,787,000 2,809,000 2,789,000 3,049,000
BASIC EARNINGS PER SHARE
INCOME FROM CONTINUING OPERATIONS ................... $ 0.41 $ 0.32 $ 0.92 $ 1.84
Loss from operations of Morgan Group Holding Co.
distributed to shareholders ........................ -- -- -- (0.67)
--------- --------- ---------- ----------
NET INCOME ........................................... $ 0.41 $ 0.32 $ 0.92 $ 1.17
========= ========= ========== ==========
DILUTED EARNINGS PER SHARE
INCOME FROM CONTINUING OPERATIONS .................... $ 0.41 $ 0.32 $ 0.92 $ 1.79
Loss from operations of Morgan Group Holding Co.
distributed to shareholders........................... -- -- -- (0.62)
--------- ---------- ---------- ----------
NET INCOME ........................................... $ 0.41 $ 0.32 $ 0.92 $ 1.17
========= ========== ========== ==========
See accompanying notes.
-2-
LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
Six Months Ended
June 30,
----------------------
2003 2002
----------------------
OPERATING ACTIVITIES
Net Income .......................................................... $ 2,569 $ 3,290
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization .................................... 9,828 9,591
Equity in earnings of affiliated companies ....................... (685) (428)
Minority interests ............................................... 263 694
Gain on sale of cellular partnership ............................. -- (4,965)
Gain on sale of available for sale securities .................... -- (24)
Non-cash items and changes in operating assets and liabilities
from operations of Morgan Group Holding Co.
distributed to shareholders .................................... -- 1,888
Changes in operating assets and liabilities:
Receivables ................................................. 363 1,055
Accounts payable and accrued liabilities .................... (476) 1,174
Other ....................................................... 212 (1,000)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES ........................... 12,074 11,275
-------- --------
INVESTING ACTIVITIES
Capital expenditures ................................................ (9,927) (7,794)
Investment in and advances to affiliated entities ................... (546) (1,912)
Proceeds from sale of available for sale securities ................. -- 398
Proceeds from sale of cellular partnership .......................... -- 5,570
Other ............................................................... (668) (75)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES ............................... (11,141) (3,813)
-------- --------
FINANCING ACTIVITIES
Issuance of long term debt .......................................... 8,748 1,965
Repayments of long term debt ........................................ (6,030) (7,605)
Net repayments on lines of credit ................................... (1,259) 2,440
Treasury stock transactions ......................................... (222) (691)
Investment in restricted cash ....................................... -- (2,983)
Other ............................................................... -- 39
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ................. 1,237 (6,835)
-------- --------
Net increase in cash and cash equivalents ........................... 2,170 627
Cash and cash equivalents at beginning of period .................... 23,356 23,664
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .......................... $ 25,526 $ 24,291
======== ========
See accompanying notes.
-3-
LYNCH INTERACTIVE CORPORATION & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A. Subsidiaries of the Registrant
As of June 30, 2003, the Subsidiaries of the Registrant are as follows:
Subsidiary Owned by Lynch
Brighton Communications Corporation ............ 100.0%
Lynch Telephone Corporation IV ............... 100.0%
Bretton Woods Telephone Company ............ 100.0%
World Surfer, Inc. ......................... 100.0%
Lynch Broadband Corporation .................. 100.0%
Lynch Telephone Corporation VI ............... 98.0%
JBN Telephone Company, Inc. ................ 98.0%
JBN Finance Corporation .................. 98.0%
CLR Video, L.L.C ......................... 98.0%
Giant Communications, Inc. ................. 100.0%
Lynch Telephone Corporation VII ............ 100.0%
USTC Kansas, Inc. ........................ 100.0%
Haviland Telephone Company, Inc. ........ 100.0%
Haviland Finance Corporation ........... 100.0%
DFT Communications Corporation ............... 100.0%
DFT Telephone Holding Company, L.L.C ...... 100.0%
Dunkirk & Fredonia Telephone Company ....... 100.0%
Cassadaga Telephone Company .............. 100.0%
Macom, Inc. ............................ 100.0%
Comantel, Inc. ........................... 100.0%
Erie Shore Communications, Inc. ........ 100.0%
D&F Cellular Telephone, Inc. ........... 100.0%
DFT Long Distance Corporation .............. 100.0%
DFT Local Service Corporation .............. 100.0%
DFT Security Services, Inc. ................ 100.0%
LMT Holding Corporation ...................... 100.0%
Lynch Michigan Telephone Holding Corporation 100.0%
Upper Peninsula Telephone Company ...... 100.0%
Alpha Enterprises Limited .............. 100.0%
Upper Peninsula Cellular North, Inc. . 100.0%
Upper Peninsula Cellular South, Inc. . 100.0%
Lynch Telephone Corporation IX ............... 100.0%
Central Scott Telephone Company ............ 100.0%
CST Communications Inc. ................ 100.0%
Global Television, Inc. ...................... 100.0%
Inter-Community Acquisition Corporation ...... 100.0%
Lynch Telephone Corporation X ................ 100.0%
Central Utah Telephone, Inc. .............. 100.0%
Central Telecom Services, LLC ............. 100.0%
Cache Valley Wireless, LC .............. 100.0%
-4-
Subsidiary Owned by Lynch
Lynch Entertainment, LLC ................. 100.0%
Lynch Entertainment Corporation II ....... 100.0%
Lynch Multimedia Corporation ............. 100.0%
Lynch Paging Corporation ................. 100.0%
Lynch PCS Communications Corporation ....... 100.0%
Lynch PCS Corporation A .................. 100.0%
Lynch PCS Corporation F .................. 100.0%
Lynch PCS Corporation G .................. 100.0%
Lynch PCS Corporation H .................. 100.0%
Lynch 3G Communications Corporation ........ 100.0%
Lynch Telephone Corporation ................ 83.1%
Western New Mexico Telephone Company, Inc. 83.1%
Interactive Networks Corporation ......... 83.1%
WNM Communications Corporation ........... 83.1%
WNM Interactive, L.L.C ................... 83.1%
Wescel Cellular, Inc. .................... 83.1%
Wescel Cellular of New Mexico, L.P. .... 42.4%
Wescel Cellular, Inc. II ................. 83.1%
Enchantment Cable Corporation ........ 83.1%
Lynch Telephone II, LLC .................... 100.0%
Inter-Community Telephone Company, LLC ... 100.0%
Valley Communications, Inc. .............. 100.0%
Lynch Telephone Corporation III ............ 81.0%
Cuba City Telephone Exchange Company ..... 81.0%
Belmont Telephone Company ................ 81.0%
-5-
B. Basis of Presentation
The Company consolidates the operating results of its telephone and cable
television subsidiaries (81-100% owned at June 30, 2003, December 31, 2002 and
June 30, 2002). 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 June 30, 2003,
December 31, 2002 and June 30, 2002), Capital Communications Company, Inc. (49%
owned at June 30, 2003, December 31, 2002 and June 30, 2002. Note: Interactive
owns a convertible preferred stock which, when converted, would increase its
ownership in Capital to 50%) and the cellular partnership operations in New
Mexico (17% to 21% owned at June 30, 2003, December 31, 2002 and June 30, 2002).
On January 24, 2002, Interactive spun off its interest in The Morgan Group, Inc.
("Morgan"), its only services subsidiary, via a tax-free dividend to its
shareholders of the stock of Morgan Group Holding Co., a corporation that was
formed to serve as a holding company for Interactive's controlling interest in
Morgan. Morgan Group Holding Co. is now a public company. Accordingly, the
amounts for Morgan are reflected on a one-line basis in the condensed
consolidated financial statements for the six months ended June 30, 2002, as
amounts "distributed to shareholders."
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Articles 10 and 11 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by accounting principles
generally accepted in the United States for complete financial statements. 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-month and six-month periods ended June 30, 2003
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2003. 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.
As noted, in Note H, in the first quarter of 2003, the Company issued stock
options to its President and Chief Operating Officer. The Company has elected to
account for these options under the provisions of FASB Statement No. 123
"Accounting and Disclosure of Stock-Based Compensation" and FASB Statement No.
148 "Accounting for Stock-Based Compensation - Transition and Disclosure, an
amendment of FASB Statement No. 123." Under the provisions of these two
statements, stock options are valued at fair value on the date of the grant and
such amount is amortized as an expense over the vesting period. During the
second quarter of 2003, the President left the Company, and all options were
forfeited. The $50,000 of expense that was recognized in the first quarter, was
reversed into net income.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
obligations." This standard provides accounting guidance for legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction or development and (or) normal operation of that
asset. According to the standard, the fair value of an asset retirement
obligation (ARO liability) should be recognized in the period in which (1)a
legal obligation to retire a long-lived asset exists and (2) the fair value of
the obligation based on retirement cost and settlement date is reasonably
estimable. Upon initial recognition of the ARO liability, the related asset
retirement cost should be capitalized by increasing the carrying amount of the
related long-lived asset. The Company adopted SFAS No. 143 on January 1, 2003.
Although the Company generally has had no legal obligation to remove assets,
depreciation rates of certain assets established by regulatory authorities for
the Company's telephone operations subject to SFAS No. 71 have historically
included a component for removal costs in excess of the related estimated
salvage value. SFAS No. 71 requires the Company to not remove this accumulated
liability for removal costs in excess of salvage value even though there is no
legal obligation to remove the assets. For the Company's operations not subject
to SFAS No. 71 the Company has not accrued a liability for anticipated removal
costs in the past and will continue to expense the costs of removal as incurred
since there is no legal obligation to remove such assets. Accordingly, the
adoption of SFAS No. 143 had no impact on the Company's financial statements.
-6-
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
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. FIN 46 is
effective immediately for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period beginning after June 15, 2003. Management of the
Company is still evaluating the impact that FIN 46 will have on the Company's
consolidated financial position, results of operations or cash flows.
Certain 2002 amounts have been reclassified to conform to the 2003 presentation.
C. Intangibles
The application of the non-amortization provisions of Statement No. 142,
Goodwill and Other Intangible Assets, has increased net income for both the
three months ended June 30, 2003 and 2002 by $0.7 million ($0.24 per basic and
diluted share) and approximately $1.3 million ($0.45 per basic and $0.44 per
diluted share) for the six months ended June 30, 2002 and approximately $1.3
million ($.045 per basic and diluted share) for the six months ended June 30,
2003.
The following tables display the details of goodwill and intangible assets as of
the dates shown.
June 30, December 31, June 30,
2003 2002 2002
---------------------------------
(Unaudited) (Unaudited)
---------------------------------
(000s)
Intangible assets subject to amortization:
Subscriber lists ........................... $ 7,702 $ 7,284 $ 7,594
Accumulated amortization ................... (2,665) (2,370) (1,774)
-------- -------- --------
$ 5,037 $ 4,914 $ 5,820
======== ======== ========
Amortization expense for three months ended .. $ 147 $ 405
Amortization expense for six months ended .... $ 295 $ 808
Intangible assets not subject for amortization
Goodwill ................................... $ 60,884 $ 60,884 $ 59,916
Cellular Licenses .......................... 1,650 1,650 1,650
Estimated aggregate amortization expense by year for Intangible assets subject
to amortization:
(000's)
-------
2003 $552
2004 $552
2005 $547
2006 $547
2007 $547
-7-
D. Acquisitions and Dispositions
In March 2002, the Company sold its 20.8% interest in the New Mexico cellular
partnership, RSA #1B, to Verizon Wireless for $5.6 million ($5 million pre-tax
gain) and repaid $2.6 million of outstanding indebtedness to Verizon.
E. Spin-off of Morgan
On January 24, 2002, Interactive spun off its interest in The Morgan Group,
Inc., its only services subsidiary, via a tax-free dividend to its shareholders
of the stock of Morgan Group Holding Co., a corporation that was formed to serve
as a holding company for Interactive's controlling interest in The Morgan Group,
Inc. Morgan Group Holding Co. is now a public company.
F. 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 six months ended June 30, 2003 and 2002 and
as of December 31, 2002 is as follows (000's):
Broadcasting Combined Information
June 30, December 31, June 30,
2003 2002 2002
(Unaudited) (Unaudited)
-------------------------------------
Current assets ................................. $ 5,404 $ 6,181 $ 5,145
Property, plant & equipment, intangibles & other 10,103 11,260 12,494
-------- -------- --------
Total assets ................................... $ 15,507 $ 17,441 $ 17,639
======== ======== ========
Current liabilities ............................ $ 3,127 $ 3,790 $ 4,140
Long term liabilities .......................... 17,020 18,069 18,856
Equity ......................................... (4,640) (4,418) (5,357)
-------- -------- --------
Total liabilities & equity ..................... $ 15,507 $ 17,441 $ 17,639
======== ======== ========
Three months ended
Revenues ....................................... $ 2,900 $ 2,958
Gross profit ................................... 782 954
Net (Loss) Profit .............................. (7) 73
Six Months Ended
Revenues ....................................... $ 5,738 $ 5,581
Gross profit ................................... 1,455 1,637
Net Loss ....................................... (212) (151)
At June 30, 2003, December 31, 2002, and June 30, 2002 the Company's investment
in Coronet Communications Company ("Coronet") was carried at a negative
$793,000, a negative $791,000, and a negative $930,000 respectively, due to the
Company's guarantee of $3.8 million of Coronet's third party debt. Long-term
debt of Coronet, at June 30, 2003, totaled $10.4 million due to a third party
lender which is due quarterly through December 31, 2005. The Company's
investment in Capital Communications Company was carried at $0 for all periods.
-8-
Telecommunications Combined Information
June 30, December 31, June 30,
---------------------------------
2003 2002 2002
(Unaudited) (Unaudited)
----------------------------------
(000`s)
Current assets ................................. $11,597 $13,996 $11,544
Property, plant & equipment, intangibles & other 27,343 28,320 28,124
------- ------- -------
Total assets ................................... $38,940 $42,316 $39,668
======= ======= =======
Current liabilities ............................ $ 5,372 $ 9,243 $ 8,836
Long term liabilities .......................... 11,061 11,869 13,517
Equity ......................................... 22,507 21,204 17,315
------- ------- -------
Total liabilities & equity ..................... $38,940 $42,316 $39,668
======= ======= =======
Three months ended
Revenues ....................................... $11,570 $11,104
Gross profit ................................... 4,152 3,277
Net income ..................................... 3,178 2,481
Six months ended
Revenues ....................................... $21,981 $20,937
Gross profit ................................... 7,580 5,836
Net income ..................................... 5,679 4,395
G. Indebtedness
The parent company maintains a short-term line of credit facility totaling $10.0
million. Borrowings under this facility were $8.3 million, $10.0 million and
$9.9 million at June 30, 2003, and December 31, 2002, and June 30, 2002
respectively. This facility will expire on August 31, 2003. Long-term debt
consists of (all interest rates are at June 30, 2003):
-9-
June 30, June 30,
2003 December 31, 2002
(Unaudited) 2002 (Unaudited)
---------------------------------------
(In thousands)
Rural Electrification Administration (REA) and Rural
Telephone Bank (RTB) notes payable through 2027 at
fixed interest rates ranging from 2% to 7.5%. (5%
weighted average, secured by assets of the telephone
companies of $152.8 million) ........................ $ 58,878 $ 58,119 $ 55,239
Bank Credit facilities utilized by certain telephone
and telephone holding companies through 2016, $28.9
million at fixed interest rates averaging 7.9% and
$53.8 million at variable interest rates averaging
4.1% .............................................. 82,681 80,166 84,060
Unsecured notes issued in connection with
acquisitions through 2006, at fixed interest rates
of 10.0% ........................................... 34,634 34,749 34,397
Convertible note due in December 2007 at a
fixed interest rate of 10% ........................ -- -- 10,000
Other ............................................... 3,146 3,587 3,888
--------- --------- ---------
179,339 176,621 187,584
Current maturities .................................. (18,619) (18,272) (21,151)
--------- --------- ---------
$ 160,720 $ 158,349 $ 166,433
========= ========= =========
H. Stock Options
The Company has a stock option plan which calls for 83,000 options to be issued,
a maximum option term of ten years and vesting at the discretion of the Option
Committee.
On February 10, 2003, the Company issued stock options to its newly hired
President and Chief Operating Officer, covering 55,000 shares. The exercise
prices were as follows: 20,000 at $26.06 (market price at date of grant), 20,000
at $36.06 and 15,000 at $46.06. These options vested at one year, three years
and four years from February 10, 2003 and expire on February 10, 2008. The
estimated fair value of these options at the date of grant was $650,000, using
the Black-Scholes Option Pricing model with the following assumptions: risk free
interest rate of 3%, dividend yield of 0% and volatility factor of the estimated
market price of the Company's common stock of .582 and an expected life of the
options of five years. $50,000 of expense was recognized in the first quarter of
2003 for these options - $30,000 net of tax. During the second quarter of 2003,
the President left the Company, and all options were forfeited and the $30,000
of expense, recognized in the first quarter, was reversed into income.
-10-
I. Comprehensive Income
Balances of accumulated other comprehensive income, net of tax, which consists
of unrealized gains (losses) on available for sale of securities, at June 30,
2003, December 31, 2002 and June 30, 2002 are as follows (in thousands):
Unrealized
Gain Tax Effect Net
Balance at December 31, 2002 ... $ 915 $ (381) $ 534
Current period unrealized losses 104 (39) 65
------ ------ ------
Balance at June 30, 2003 ..... $1,019 $ (420) $ 599
====== ====== ======
Balance at June 30, 2002 ..... $ 799 $ (332) $ 467
Comprehensive income, for the three month and six month periods ended June 30,
2003 and 2002 are as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------------------
2003 2002 2003 2002
-------------------------------------------
Net income for the period $ 1,156 $ 905 $ 2,569 $ 3,290
Reclassification adjustment-net of income
tax benefit of $--, $20 and -- and $146
respectively ............................... -- (32) -- (228)
Unrealized losses on available for sale
securities - net of income tax benefit
as of ($87),$307,($39) and $579
respectively................................ 131 (447) 65 (847)
------- ------- ------- -------
Comprehensive income ..................... $ 1,287 $ 426 $ 2,634 $ 2,215
======= ======= ======= =======
J. Earnings per share
The following table set forth the computation of basic and diluted earnings per
share for the periods indicated: During the six months ended June 30, 2003, the
Company purchased 9,900 shares of its common stock for treasury. During the
period there were stock options outstanding that have been excluded from the
earnings per share computation because their inclusion would have been
anti-dilutive.
-11-
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
------------------------------------------------
Basic earnings per share
Numerator:
Net Income ........................... $1,156,000 $ 905,000 $2,569,000 $3,290,000
Denominator:
Weighted average shares outstanding .. 2,787,000 2,809,000 2,789,000 2,813,000
---------- ---------- ---------- ----------
Earnings per share:
Net income ........................... $ 0.41 $ 0.32 $ 0.92 $ 1.17
========== ========== ========== ==========
Diluted earnings per share
Numerator:
Net Income ............................ $1,156,000 $ 905,000 $2,569,000 $3,290,000
Interest saved on assumed conversion
of convertible notes - net of tax...... -- -- -- 274,000
---------- ---------- ---------- ----------
Net Income ............................ $1,156,000 $ 905,000 $2,569,000 $3,564,000
---------- ---------- ---------- ----------
Denominator:
Weighted average shares outstanding .. 2,787,000 2,809,000 2,789,000 2,813,000
Shares issued on assumed conversion of
convertible note .................. -- -- -- 236,000
---------- ---------- ---------- ----------
Weighted average shares and share
Equivalents ....................... 2,787,000 2,809,000 2,789,000 3,049,000
---------- ---------- ---------- ----------
Earnings per share:
Net Income ........................... $ 0.41 $ 0.32 $ 0.92 $ 1.17
========== ========== ========== ==========
K. Segment Information
The Company is engaged in one business segment: multimedia. All operating units
are located domestically, and substantially all revenues are domestic. The
Company's operations include local telephone companies, a cable TV company,
investment in PCS entities and investment in two network-affiliated television
stations. The Company's primary operations are located in the states of Iowa,
Kansas, Michigan, New Hampshire, New Mexico, New York, North Dakota, Utah and
Wisconsin. 75% of the Company's telephone customers are residential. The
remaining customers are businesses.
EBITDA (before corporate allocation) for operating segments is equal to
operating profit before interest, taxes, depreciation, amortization and
allocated corporate expenses. EBITDA is presented because it is a widely
accepted financial indicator of value and ability to incur and service debt.
Management uses EBITDA to evaluate the operating performance of the Company's
operations. EBITDA is not a substitute for operating income or cash flows from
operating activities in accordance with accounting principles generally accepted
in the United States.
Operating profit is equal to revenues less operating expenses, including
unallocated general corporate expenses and excluding, interest and income taxes.
The Company allocates a portion of its general corporate expenses to its
operating segment, such allocation was $332,000 and $328,000 for the three
months ended June 30, 2003 and 2002, respectively; and $665,000 from $655,000
for the six months ended June 30, 2003 and 2002 respectively.
-12-
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
-----------------------------------------------
(000's)
Sales and revenues: ............................................... $ 21,343 $ 21,098 $ 42,646 $ 42,072
======== ======== ======== ========
EBITDA (before corporate allocation):
Operations ...................................................... $ 10,706 $ 9,993 $ 21,163 $ 20,737
Corporate expenses, gross ....................................... (1,100) (757) (1,868) (1,445)
-------- -------- -------- --------
Combined total ................................................. $ 9,606 $ 9,236 $ 19,295 $ 19,292
======== ======== ======== ========
Operating profit:
Operations ...................................................... $ 5,463 $ 4,890 $ 10,674 $ 10,499
Corporate expenses, net ......................................... (770) (433) (1,207) (798)
-------- -------- -------- --------
Combined total ................................................. $ 4,693 $ 4,457 $ 9,467 $ 9,701
======== ======== ======== ========
Operating profit .................................................. $ 4,693 $ 4,457 $ 9,467 $ 9,701
Other income (expense):
Investment income ............................................... 98 235 656 1,232
Interest expense ................................................ (2,999) (3,298) (6,025) (6,671)
Equity in earnings of affiliated companies ...................... 425 224 685 428
Gain on sale of subsidiary stock ................................ -- -- -- 4,965
-------- -------- -------- --------
Income before income taxes, minority interests and operations of
Morgan Group Holding Co. distributed to shareholders .............. $ 2,217 $ 1,618 $ 4,783 $ 9,655
======== ======== ======== ========
L. Litigation
Interactive and several other parties, including our Chief Executive Officer,
and Fortunet Communications, L.P., which was Sunshine PCS Corporation's
predecessor-in-interest, have been named as defendants in a lawsuit brought
under the so-called "qui tam" provisions of the federal False Claims Act in the
United States District Court for the District of Columbia. The complaint was
filed under seal with the court on February 14, 2001. At the initiative of one
of the defendants, the seal was lifted on January 11, 2002. Under the False
Claims Act, a private plaintiff, termed a "relator," may file a civil action on
the U.S. government's behalf against another party for violation of the statute.
In return, the relator receives a statutory bounty from the government's
litigation proceeds if he is successful.
The relator in this lawsuit is R.C. Taylor III, an individual who, to the best
of our knowledge, has no relationship to any of the entities and affiliates that
have been named parties in this litigation. Indeed at the time of his filings,
and to the best of our knowledge, Mr. Taylor was a lawyer at Gardner, Carton &
Douglas. Thereafter, we believe he was a lawyer with a Washington, D.C., law
firm. We do not know his current status. We issued a press release dealing with
this litigation on January 16, 2002.
The main allegation in the case is that the defendants participated in the
creation of "sham" bidding entities that allegedly defrauded the federal
Treasury by improperly participating in certain Federal Communications
Commission spectrum auctions restricted to small businesses, as well as
obtaining bidding credits in other spectrum auctions allocated to "small" and
"very small" businesses. The lawsuit seeks to recover an unspecified amount of
damages, which would be subject to mandatory trebling under the statute.
-13-
Interactive strongly believes that this lawsuit is completely without merit, and
intends to defend the suit vigorously. The U.S. Department of Justice has
notified the court that it has declined to intervene in the case. Nevertheless,
we cannot predict the ultimate outcome of the litigation, nor can we predict the
effect that the lawsuit or its outcome will have on our business or plan of
operation.
Interactive was formally served with the complaint on July 10, 2002. On
September 19, 2002, Interactive filed two motions with the United States
District Court for the District of Columbia: a motion to dismiss the lawsuit and
a motion to transfer the action to the Southern District of New York. On
November 25, 2002, the relator filed an opposition reply to our motion to
dismiss and on December 5, 2002, Interactive filed a reply in support of its
motion to dismiss.
In addition to the litigation described above, Interactive is a party to routine
litigation incidental to its business. Based on information currently available,
Interactive believes that none of this ordinary routine litigation, either
individually or in the aggregate, will have a material effect on its financial
condition and results of operations.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Sales and Revenues
Sales and Revenues for the three months ended June 30, 2003 increased by $0.2
million or 1.2%, to $21.3 million from the second quarter of 2002. Increases in
the current quarter are primarily the result of additional inter-state regulated
telephone revenues from the Company's telephone operations that are in the
process of significant capital upgrade programs. Notwithstanding the overall
increase in revenues for the period, lower intra-state revenues were recorded by
certain operations during the second quarter of 2003.
Revenues for the six months ended June 30, 2003 increased by $0.6 million or
1.4% from the six months ended June 30, 2002. Here again, high inter-state
revenues have offset lower intra-state revenues.
Operating Profit
Operating profit for the three months ended June 30, 2003 increased by $0.2
million to $4.7 million from the second quarter of 2002. Last years second
quarter included a $0.7 million allowance for doubtful accounts provided in
connection with the bankruptcies of MCI/Worldcom and Global Crossings. Absent
this allowance, operating profit decreased as a result of the above noted lower
intra-state revenues and higher depreciation associated with significant capital
spending programs, as compared to the previous year. The Company's security
operation in upstate New York recorded $250,000 less amortization expense during
the second quarter of 2003 as compared to the second quarter of 2002 as it
changed the amortization period of customer lists from three to ten years in the
fourth quarter of 2002. With regard to corporate expenses, the Company recorded
a $0.3 million bonus accrual in the second quarter of 2003 in accordance with
its shareholder approved executive compensation plan. No accrual was made in the
second quarter of 2002.
For the six month ended June 30, 2003, operating profit decreased by $0.2
million form the six months ended June 30, 2003 basically reflecting all of the
above factors.
Other Income (Expense)
For the three months ended June 30, 2003 investment income was down by $0.1
million from the same period in the prior year due to lower investment balances
and absence of certain realized gains on available for sale securities. For the
six months ended June 30, 2003, investment income was down by $0.6 million for
the same reasons.
-14-
Interest expense decreased by $0.3 million in the second quarter of 2003 from
the prior year due primarily to lower variable interest rates. In addition, in
November 2002, the Company repurchased a $10 million convertible note for which
we previously accrued and paid an interest rate of 6% per annum. These decreases
were offset by higher interest expense at certain telephone companies who drew
on debt facilitates to fund major capital expenditure program.
Interest expense decreased by $0.6 million for the six months ended June 30,
2003 as compared to the prior year for the same reasons as the above.
During the first quarter of 2002, the Company sold its minority interest in a
cellular telecommunications operation in New Mexico (RSA 1 (North)) for $5.6
million resulting in a pre-tax gain of $5.0 million.
Equity in earnings of affiliates for both the three-month and six-month periods
ending June 30, 2003 increased due to significant earnings at the Company's New
Mexico cellular operation (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 six months ended June 30, 2003 and 2002, represent
effective tax rates of 40.8% and 39.2%, respectively. The difference between
these effective rates and the federal statutory rate is principally due to state
income taxes, including the effect of earnings and losses attributable to
different state jurisdictions.
Minority Interests
Minority interests decreased earnings by $186,000 for the three months ended
June 30, 2003 as compared to $62,000 for the three months ended June 30, 2002.
The change was due to the absence of minority interest affects on the losses
incurred in 2003 on the company's security operation in upstate New York. For
the six months ended June 30, 2003 minority interest decreased earnings by
$263,000 as compared to $694,000 in the six months ended June 30, 2002 primarily
due to minority interest recorded on the gain from the sale of the cellular
property.
Income from Continuing Operations and Net Income
Income from continuing operations and net income for the three months ended June
30, 2003 of $1.2 million, or $0.41 per share (basic and diluted), compared to
income from continuing operations for the same period last year of $0.9 million,
or $0.32 per share (basic and diluted) absence of the allowance for bad debts
associated with MCI/WorldCom Global Crossing in 2002 was the primary cause of
the increase.
Income from continuing operations for the six months ended June 30, 2003 was
$2.6 million or $0.92 per share (basic and diluted) as reduced from the Income
from continuing operations for the six months ended June 30, 2002 of $5.2
million, or $1.84 per basic share ($1.79 per diluted share). The reduction is
primarily due to the $2.5 million or $0.89 per basic share gain from the sale of
the cellular property.
-15-
Net income for the six months ended June 30, 2003 was $2.6 million, or $0.92 per
share (basic and diluted), as compared to net income of $3.3 million, or $1.17
per share (basic and diluted), in the same period last year. The increase is due
to the Operating losses of Morgan of $1.9 million, or $0.67 per basic share, in
the first quarter of 2002, offset by the gain on the sale of the cellular
property.
FINANCIAL CONDITION
Liquidity/ Capital Resources
As of June 30, 2003, the Company had current assets of $38.7 million and current
liabilities of $48.6 million. Working capital deficiency was therefore $9.9
million as compared to $12.8 million at December 31, 2002. The addition of $8.7
million of long-term debt was the primary cause of the decrease.
For the six months ended June 30, 2003, capital expenditures were $9.9 million
versus $7.8 million for the same period last year. Full year capital
expenditures are estimated at $22 million versus $23.8 million in 2002.
At June 30, 2003, total debt was $191.0 million, which was $1.5 million higher
than the $189.5 million at the end of 2002. At June 30, 2003, there was
$123.6million of fixed interest rate debt averaging 7.0% and $67.3 million of
variable interest rate debt averaging 4.2%. Debt at year-end 2002 included
$124.7 million of fixed interest rate debt, at an average interest rate of 7.1%,
and $64.8 million of variable interest rate debt, at an average interest rate of
4.4%.
As of June 30, 2003, Interactive, the parent company, had $1.7 million available
under a $10 million short-term line of credit facility, which expires on August
31, 2003. Management currently expects that this line of credit facility will be
renewed but there is no assurance it will be.
Interactive and its predecessor have not paid any cash dividends on its common
stock since 1989. The Company intends to reexamine its dividend policy more
frequently in light of changing dynamics. While it is currently constrained by
capital needs, if it is able to recapitalize its balance sheet, resources may
become available to pay dividends. Future financings may limit or prohibit the
payment of dividends.
Interactive has a high degree of financial leverage. As of June 30, 2003, the
ratio of total debt to equity was 7.6 to 1. Certain subsidiaries also have high
debt to equity ratios. In addition, the debt at subsidiary companies contains
restrictions on the amount of readily available funds that can be transferred to
the parent company.
The Company has a need for resources primarily to fund future long-term growth
objectives. Interactive considers various alternative long-term financing
sources: debt, equity, or sale of an investment asset. While management expects
to obtain adequate financing to enable the Company to meet its obligations,
there is no assurance that such financing will be readily obtained at reasonable
costs.
The Company is obligated under long-term debt and lease agreements to make
certain cash payments over the term of the agreements. The following table
summarizes these contractual obligations for the period shown:
Payments Due by Period
(In thousands)
Less than
Total 1 year (b) 2 - 3 years 4 - 5 years After 5 years
------------------------------------------------------------
Long-term Debt (a) ............... $179,339 $ 18,619 $ 46,923 $ 40,645 $ 73,152
Operating Leases ................. 1,163 329 520 314 --
-------- -------- -------- -------- --------
Total Contractual Cash Obligations $180,502 $ 18,948 $ 47,443 $ 40,959 $ 73,152
======== ======== ======== ======== ========
(a) Does not include interest payments on debt
-16-
The Company has certain financing commitments from banks and other financial
institutions that provide liquidity. The following table summarizes the
expiration of these commitments for the periods shown:
Amount of Commitment Expiration
Per Period
(In thousands)
Total
Amounts Less than
Committed 1 year 1 - 3 years 4 - 5 years Over 5 years
------- ------- ----------- ----------- ------------
Other Commercial Commitments
Lines of Credit ............ $11,623 $11,623 -- -- --
Guarantees ................. 3,750 3,750 -- -- --
------- ------- ----------- ----------- ------------
Total Commercial Commitments $15,373 $15,373 -- -- --
======= ======= =========== =========== ============
At June 30, 2003, the Company's investment in Coronet Communications Company
("Coronet") was carried at a negative $793,000, due to the Company's guarantee
of $3.8 million of Coronet's third party debt. The Company's investment in
Capital Communications Company was carried at $0 for all periods. Based upon a
multiple of ten times broadcast cash flow, plus cash, less debt, Interactive
estimates its value in these stations at almost $12 million as compared to the
net book value of these investments of a negative $0.8 million. It is not
assured that the results of these stations will continue at the current level or
that they could be sold at ten times cash flow.
The Company has initiated an effort to monetize certain of its assets, including
selling a portion or all of certain investments and/or certain of its operating
entities. These may include minority interest in network affiliated television
stations and certain telephone operations where growth opportunities are not
readily apparent. There is no assurance that all or any part of this program can
be effectuated on acceptable terms. In March 2002, the Company sold its 20.8%
interest in the New Mexico cellular property, RSA 1 (North), to Verizon Wireless
for $5.6 million and repaid certain outstanding indebtedness to Verizon.
Critical Accounting Policies and Estimates
In the first quarter of 2003, the Company issued stock options to its President
and Chief Operating Officer. The Company has elected to account for these
options under the provisions of FASB Statement No. 123 "Accounting and
Disclosure of Stock-Based Compensation" and FASB Statement No. 148 "Accounting
for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB
Statement No. 123." Under the provisions of these two statements stock options
are valued at fair value on the date of the grant and such amount is amortized
as an expense over the vesting period.
General
Interactive's discussion and analysis of its financial condition and results of
operations are based upon its consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires
Interactive to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an ongoing basis, Interactive evaluates its
estimates, including those related to revenue recognition, carrying value of its
investments in the spectrum entities and long-lived assets, purchase price
allocations, and contingencies and litigation. Interactive bases its estimates
on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
-17-
Interactive believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements.
Revenue Recognition
The principal business of Interactive's telephone companies is to provide
telecommunications services. These services fall into four major categories:
local network, network access, long distance and other non-regulated
telecommunications services. Toll service to areas outside franchised telephone
service territory is furnished through switched and special access connections
with intrastate and interstate long distance networks.
Local service revenues are derived from providing local telephone exchange
services. Local service revenues are based on rates filed with various state
telephone regulatory bodies.
Revenues from long distance network services are derived from providing certain
long distance services to the Company's local exchange customers and are based
on rates filed with various state regulatory bodies.
Revenue from intra-state access is generally billed monthly in arrears based on
intra-state access rates filed with various state regulatory bodies. Interactive
recognizes revenue from intrastate access service based on an estimate of the
amounts billed to interexchange carriers in the subsequent month. Estimated
revenues are adjusted monthly as actual revenues become known.
Revenue from interstate access is derived from settlements with the National
Exchange Carrier Association ("NECA"). NECA was created by the FCC to administer
interstate access rates and revenue pooling on behalf of small local exchange
carriers who elect to participate in a pooling environment. Interstate
settlements are determined based on the various subsidiaries' cost of providing
interstate telecommunications service. Interactive recognizes interstate access
revenue based on an estimate of the current year cost of providing service.
Estimated revenue is adjusted to actual upon the completion of cost studies in
the subsequent period.
Other ancillary revenues derived from the provision of directory advertising and
billing and collection services are billed monthly based on rates under
contract.
Purchase Price Allocation
Interactive's business development strategy is to expand its existing operations
through internal growth and acquisition. From 1989 through 2002, the Company has
acquired fourteen telephone companies. Significant judgments and estimates are
required to allocate the purchase price of acquisitions to the fair value of
tangible assets acquired and identifiable intangible assets and liabilities
assumed. Any excess purchase price over the above fair values is allocated to
goodwill. Additional judgments and estimates are required to determine if
identified intangible assets have finite or indefinite lives and the period of
their lives.
Depreciation and Amortization
The calculation of depreciation and amortization expense is based on the
estimated economic useful lives of the underlying property, plant and equipment
and intangible assets. Although Interactive believes it is unlikely that any
significant changes to the useful lives of its tangible or intangible assets
will occur in the near term, rapid changes in technology, the discontinuance of
accounting under SFAS No. 71 by the Company's wireline subsidiaries, or changes
in market conditions could result in revisions to such estimates that could
materially affect the carrying value of these assets and the Company's future
consolidated operating results.
-18-
Annually, the Company tests goodwill for impairment using the two-step process
prescribed in SFAS No. 142. The first step is a screen for potential impairment,
while the second step measures the amount of impairment, if any. The Company
performed the first of its required annual impairment tests of goodwill and
other indefinite lived intangible assets.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The Company is exposed to market risk relating to changes in the general level
of U.S. interest rates. Changes in interest rates affect the amounts of interest
earned on the Company's cash and cash equivalents ($25.5 million at June 30,
2003 and $23.4 million at December 31, 2002).
The Company generally finances the debt portion of the acquisition of long-term
assets with fixed rate, long-term debt. The Company generally maintains the
majority of its debt as fixed rate in nature either by borrowing on a fixed
long-term basis or, on a limited basis, entering into interest rate swap
agreements. The Company does not use derivative financial instruments for
trading or speculative purposes. Management does not foresee any significant
changes in the strategies used to manage interest rate risk in the near future,
although the strategies may be reevaluated as market conditions dictate.
At June 30, 2003, approximately $67.3 million, or 35%, of the Company'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 2003 average interest rate under these
borrowings, it is estimated that the Company's 2003 three-month interest expense
would have changed by less than $0.1 million. In the event of an adverse change
in interest rates, management would likely take actions to further mitigate its
exposure. However, due to the uncertainty of the actions that would be taken and
their possible effects, the analysis assumes no such actions. Further, the
analysis does not consider the effects of the change in the level of overall
economic activity that could exist in such an environment.
Item 4. Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer, 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 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.
-19-
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, including without limitation, the Company's effort to monetize
certain assets, Liquidity and Capital Resources and Market Risk. It should be
recognized that such information are estimates or forecasts based upon various
assumptions, including the matters, risks, and cautionary statements referred to
therein, as well as meeting the Registrant's internal performance assumptions
regarding expected operating performance and the expected performance of the
economy and financial markets as it impacts Registrant's businesses. As a
result, such information is subject to uncertainties, risks and inaccuracies,
which could be material.
-20-
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Interactive and several other parties, including our Chief Executive Officer,
and Fortunet Communications, L.P., which was Sunshine PCS Corporation's
predecessor-in-interest, have been named as defendants in a lawsuit brought
under the so-called "qui tam" provisions of the federal False Claims Act in the
United States District Court for the District of Columbia. The complaint was
filed under seal with the court on February 14, 2001. At the initiative of one
of the defendants, the seal was lifted on January 11, 2002. Under the False
Claims Act, a private plaintiff, termed a "relator," may file a civil action on
the U.S. government's behalf against another party for violation of the statute.
In return, the relator receives a statutory bounty from the government's
litigation proceeds if he is successful.
The relator in this lawsuit is R.C. Taylor III, an individual who, to the best
of our knowledge, has no relationship to any of the entities and affiliates that
have been named parties in this litigation. Indeed at the time of his filings,
and to the best of our knowledge, Mr. Taylor was a lawyer at Gardner, Carton &
Douglas. Thereafter, we believe he was a lawyer with a Washington, D.C., law
firm. We do not know his current status. We issued a press release dealing with
this litigation on January 16, 2002.
The main allegation in the case is that the defendants participated in the
creation of "sham" bidding entities that allegedly defrauded the Federal
Treasury by improperly participating in certain Federal Communications
Commission spectrum auctions restricted to small businesses, as well as
obtaining bidding credits in other spectrum auctions allocated to "small" and
"very small" businesses. The lawsuit seeks to recover an unspecified amount of
damages, which would be subject to mandatory trebling under the statute.
Interactive strongly believes that this lawsuit is completely without merit, and
intends to defend the suit vigorously. The U.S. Department of Justice has
notified the court that it has declined to intervene in the case. Nevertheless,
we cannot predict the ultimate outcome of the litigation, nor can we predict the
effect that the lawsuit or its outcome will have on our business or plan of
operation.
Interactive was formally served with the complaint on July 10, 2002. On
September 19, 2002, Interactive filed two motions with the United States
District Court for the District of Columbia: a motion to dismiss the lawsuit and
a motion to transfer the action to the Southern District of New York. On
November 25, 2002, the relator filed an opposition reply to our motion to
dismiss and on December 5, 2002, Interactive filed a reply in support of its
motion to dismiss.
In addition to the litigation described above, Interactive is a party to routine
litigation incidental to its business. Based on information currently available,
Interactive believes that none of this ordinary routine litigation, either
individually or in the aggregate, will have a material effect on its financial
condition and results of operations.
-21-
Item 4. Submission of Matters to a Vote of Security Holders
--------------------------------------------------------------------
At the Annual Meeting of Stockholders of the Company held on May 8, 2003, the
following persons were elected as Directors of with the following votes:
Name Votes For Votes Withheld
---- --------- --------------
Paul J. Evanson ... 2,579,770 8,496
John C. Ferrara ... 2,579,760 8,506
Mario J. Gabelli .. 2,579,770 8,496
Marc J. Gabelli ... 2,579,750 8,516
Daniel R. Lee ..... 2,579,748 8,518
David C. Mitchell . 2,579,970 8,296
Salvatore Muoio ... 2,579,960 8,306
Frederic V. Salerno 2,579,424 8,842
Vincent S. Tese ... 2,579,718 8,548
Item 6. Exhibits and Reports on Form 8-K
(a) 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) Current Reports on Form 8-K filed on April 30, 2003, and on May
16, 2003, reporting earnings for the first quarter ended March
31, 2003.
-22-
SIGNATURE
Pursuant to the requirements of the Securities and 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)
By: /s/Robert E. Dolan
------------------------
Robert E. Dolan
Chief Financial Officer
August 13, 2003
-23-