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Supplemental Information BUSINESS SECTION BACKGROUND AND HISTORY OF LICT CORPORATION LICT Corporation ( LICT or the Company ) was incorporated in 1996 under the laws of the State of Delaware. (LICT was
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Supplemental Information BUSINESS SECTION BACKGROUND AND HISTORY OF LICT CORPORATION LICT Corporation ( LICT or the Company ) was incorporated in 1996 under the laws of the State of Delaware. (LICT was formerly known as Lynch Interactive Corporation, and its name was changed to LICT Corporation on March 14, 2007.) LICT's executive offices are located at 401 Theodore Fremd Avenue, Rye, New York Its telephone number is The Company's business development strategy is to expand its existing operations through internal growth and acquisitions. It may also, from time to time, consider the acquisition of other assets or businesses that are not related to its present businesses. The Company currently operates across a broad range of the telecommunications business segments, including: voice telephony, both as a Rural Local Exchange Carrier ( RLEC, an incumbent local telephone company serving a rural area) and a Competitive Local Exchange Carrier ( CLEC, a local telecommunications provider which competes with the incumbent telephone company); high speed Internet access through the provision of copperbased digital subscriber line ( DSL ), fiber optic facilities and cable modems; cable television services; and several related activities. As used herein, LICT includes its subsidiaries. On November 10, 2005 the Company concluded a one-for-one-hundred reverse stock split as part of a going dark transaction. The Company then voluntarily delisted from the American Stock Exchange and filed a Form 15 with the SEC deregistering its shares on December 23, Since that time, LICT has not been a reporting company under the Securities Exchange Act of 1934 (the Exchange Act ) and is thus not subject to the Sarbanes Oxley Act of 2002 ( Sarbanes Oxley ). The principal reason for the Company s going dark was the cost required to comply with section 404 of Sarbanes-Oxley. The Company is committed to having an effective system of accounting and financial reporting controls in place. It is also committed to consistently reviewing and, if necessary, improving those controls in order to generate reliable financial statements. However, the formal documentation and testing process required by section 404 of Sarbanes-Oxley would be likely, at some point, to impose substantial costs and a staffing strain on the Company and its subsidiaries. On November 19, 2007, we spun off to our shareholders, on a one-for-one basis, shares in a whollyowned subsidiary named CIBL, Inc. ( CIBL ). The principal assets owned by CIBL included a cable communications company, interests in two television broadcast stations, and interests in two cellular communications partnerships. The shares of CIBL were initially subject to transfer restrictions at the time of the spin-off. Subsequently, on December 5, 2008, the Financial Industry Regulatory Authority ( FINRA ) authorized public trading in CIBL shares, and the shares trade on the Pink Sheets under the symbol CIBY. In a transaction that closed on May 21, 2010, a subsidiary of the Company, Giant Communications, Inc. ( Giant ), acquired CIBL s cable operations, which serve approximately 1,700 customers in several rural northeastern Kansas communities. Giant operates as a CLEC in that area and is expanding its business plan, for which the CIBL cable system is expected to be a useful and complementary asset. On May 28, 2010, we spun off of our North Dakota properties, Inter-Community Telephone Company, L.L.C. ( ICTC ) and Valley Communications, Inc., to our shareholders. On March 31, 2010, the parent entity of these companies, Lynch Telephone II, L.L.C. ( Lynch II ), had been acquired by Sunshine PCS Corporation ( Sunshine ), a public shell company which went dark through a reverse split conducted in January In exchange for Lynch II, the Company received 320,000 shares of Sunshine stock, or 98.6% of its then outstanding shares. The spin-off of the North Dakota properties was accomplished by distributing approximately 315,700 of the Sunshine shares owned by LICT to LICT s shareholders, at the rate of thirteen (13) shares of Sunshine for each share of LICT held on the record date of May 24, 2010, plus cash in lieu of fractional Sunshine shares at the rate of $50/share. The Sunshine shares spun off are 13 not registered under the securities laws and thus are restricted from public trading at this time; however, approximately 4,500 previously-issued shares of Sunshine are registered and are listed for public trading on the Pink Sheets under the symbol SNSH. (At the time of the spin-off, Sunshine changed its corporate name to ICTC Group, Inc., although it continues to trade under the SNSH symbol.) This spin-off will benefit both the Company and the North Dakota properties in a number of ways, and will optimize the efficiency and future development of each of the entities involved. The Company s shares are quoted on the Pink Sheets under the symbol LICT. The Company has approximately 46 stockholders of record. LICT disseminates quarterly and audited annual financial statements as well as press releases to the financial community. TELECOMMUNICATIONS OPERATIONS Wireline Telecommunications Organization and Locations. LICT conducts its telecommunications operations through subsidiary companies. The telecommunications group has been expanded through the selective acquisition of RLECs and by offering additional services such as broadband Internet access service, security services, long distance, cable television service, Voice over Internet Protocol ( VoIP ) and CLEC services. Beginning in 1989, the Company has acquired fourteen telephone companies, excluding the recent North Dakota spin-off. These operations range in size from approximately 800 to over 7,500 access lines. The Company's telephone and other communications operations are located in California, Iowa, Kansas, Michigan, Nevada, New Hampshire, New Mexico, New York, Oregon, Utah and Wisconsin. Our service areas are largely residential and are not densely populated. As of December 31, 2010, total voice lines, including both access and CLEC (adjusted for the North Dakota spin-off), were 45,680, a 2.3% decrease from Total DSL broadband lines in service as of December 31, 2010 were 17,599, a 5.0% increase from Principal Products and Services. The principal business of LICT s telephone companies is to provide telecommunications services. These services fall into three major categories: Local network services. We provide telephone wireline access services to residential and non-residential customers in our service areas. We provide our local network customers a number of calling features including call forwarding, conference calling, caller identification, voic and call waiting. In addition, we provide broadband services, primarily by means of DSL technology, to both business and residential users for Internet access and data transport. In our RLEC franchised service territories, the DSL penetration levels of our subsidiaries are currently in the 50-60% range, and rank among the highest in the industry. We are continuing our efforts to increase our DSL customer base and to expand all of our broadband services. We also offer packages of telecommunications services. These packages permit customers to bundle their basic telephone line with their choice of enhanced services, or to customize a set of selected enhanced features that fit their specific needs. Network access services. We provide network access services to long distance and other carriers which involve the use of our facilities to originate and terminate interstate and intrastate telephone calls. Such services are generally offered on a month-to-month basis and the service is billed on a minutes-of-use basis. Access charges to long distance carriers and other customers are based on access rates filed with the Federal Communications Commission ( FCC ) for interstate services and with the respective state regulatory agencies for intrastate services. Non-Regulated Broadband Internet Access and Other Businesses. LICT also provides non-regulated telecommunications services, including DSL for Internet access and data transport, and long distance resale service in certain of its telephone service territories and adjacent areas. In addition, the Company 14 currently provides and intends to expand its provision of local telephone and other telecommunications services outside certain of its franchise areas by establishing CLEC operations in nearby areas. Currently, we have established CLECs in such varied locations as Jamestown, NY; Dubuque, IA; the Quad Cities area (Davenport/Bettendorf, IA and Moline/Rock Island, IL); Holton, KS; Silver City, NM; and Klamath Falls, OR. Also, in several areas, LICT subsidiaries provide security installation and monitoring services to homes and businesses, and cable television services ( CATV ), including cable modem service for high-speed Internet access. We now have a total of nearly 7,400 cable television subscribers, and are considering further acquisitions as we develop this aspect of LICT s overall business. The following table summarizes certain information regarding LICT's operations, excluding the North Dakota Operations: Years Ended December 31, Operations: Telephone access lines (a) 43,853 41,681 39,584 CLEC lines 4,985 5,088 6,096 Total voice lines 48,838 46,769 45,680 % Residential 73% 73% 73% % Business 27% 27% 27% DSL Lines 15,165 17,664 18,991 Cable Modem 1,855 2,493 3,552 Wireless 905 1,132 1,308 Total Broadband Connections 17,925 21,289 23,851 Cable television subscribers 4,473 5,732 7,343 Total Revenues Local service 13% 13% 13% Network access 59% 57% 53% Other businesses (b ) 28% 30% 34% Total telecommunications revenues 100% 100% 100% (a) An access line is a telecommunications circuit between the customer s establishment and the central switching office. (b) Other Businesses include Internet, alarm services, CLEC, CATV and other non-regulated revenues. Expansion and Development of New Products and Services. The Company continually seeks to roll out new services based on technological advances and expanding commercial initiatives. The Company s subsidiaries are also continually seeking to expand their service offerings beyond their regulated geographic territories, primarily by establishing and developing CLECs in adjoining areas where that is economically feasible. In some cases, our subsidiaries will build facilities, almost entirely fiber optic cable, directly to the customer premises to provide services. In other cases, they will lease facilities from the local telephone company (the serving RLEC or, in non-rural areas, the Incumbent Local Exchange Carrier or ILEC ), or other carriers to reach customers. In sum, as described in greater detail below, we expect future growth in telephone operations to be derived from a broad range of activities, including the acquisition of additional telephone and other communications companies; from providing service to new customers, primarily through CLEC operations; through providing additional and expanded services to existing customers; from upgrading existing customers to higher grades of service; and from new service offerings to all of our customers, whether served through our RLEC or CLEC operations. 15 LICT continually evaluates acquisition opportunities, focusing particularly on RLECs with a strong market position, good growth potential and predictable cash flow. In addition, the Company typically seeks companies with excellent local management already in place who will remain active with their company. At times, certain large telephone companies have offered certain of their rural telephone exchanges for sale, often on a statewide or larger area basis. LICT has in the past and may in the future consider acquiring such groups of exchanges. Telephone holding companies and others actively compete for the acquisition of such properties, and the acquisitions are subject to the consent or approval of regulatory agencies in most states. While management believes it will be successful in making additional acquisitions, any acquisition program is subject to various risks, including being able to find and complete acquisitions at an attractive price, and being able to integrate and operate successfully any acquisition which is made. All fifteen (in 2009, we split our Upper Peninsula Telephone Company ( UPTC ) into two separate operations, UPTC and Michigan Central Broadband Corporation) of LICT's current telephone companies now offer broadband Internet access service, either directly or through affiliated companies. At December 31, 2010, Internet access customers totaled 25,463 compared to 23,763 at December 31, LICT companies have substantially increased DSL customers, but this growth has been more than offset by a decrease in our traditional telephone service resulting from a number of factors, including competition from wireless and cable companies. Several of our subsidiaries are currently providing Voice over Internet Protocol ( VoIP ) and exploring options for expanding such service. Moreover, affiliates of nine of LICT s telephone companies now offer long distance and CLEC services. Specifically, an affiliate of Dunkirk & Fredonia Telephone Company ( DFT ) provides CLEC service on both a facilities-based and resale basis in Dunkirk and Jamestown, New York, certain areas of Buffalo, New York, and in other areas of two western New York counties. The facilities-based CLEC services, along with collocation and unbundled network element - loop (UNE-L) facilities, allow for increased margins over a wholly resale CLEC business model. In addition, DFT has been offering VoIP services through its own facilities since Giant Communications, Inc., an affiliate of one of the Company s Kansas telephone companies (J.B.N. Telephone Company), provides CLEC services in Holton and other areas of northeast Kansas, including the provision of VoIP services to end users. In addition, Giant serves 1,700 CATV customers, 900 of which also subscribe to cable modem services. CS Technologies, Inc. provides CLEC services, as well as VoIP and other data services, in the Quad Cities and Mount Joy, Iowa, primarily through its own facilities but also through UNE-L facilities. It also recently commenced the provision of CLEC services in Dubuque, IA on a UNE-L basis. Sales activity began in January 2010 and has already resulted in the provision of over 150 lines to more than 50 customers, both business and residential. Cal-Ore Communications Inc. ( Cal-Ore ), based in Dorris, CA, has recently acquired nearly 1,000 CLEC lines in Klamath Falls, OR through purchase from another CLEC. Using this acquired base, Cal- Ore is now moving to expand its CLEC business in terms of number of customers, geographic areas served and range of services provided. Central Telcom Services, LLC ( CTS ), based in Fairview, Utah, is successfully providing high capacity Ethernet circuits over its extensive fiber network to schools, hospitals, government, cell towers and private business facilities. WNM Communications Inc. has established a CLEC in Silver City, NM in 2010 and will evaluate moving into another locations in New Mexico in LICT currently is evaluating or implementing plans to provide additional or expanded CLEC services in all of the foregoing areas and others. Final plans to offer CLEC service in a number of areas now under consideration but have not yet been completed. There is no assurance that LICT can successfully develop these businesses or that these new or expanded businesses can be made profitable within a reasonable period of time. New businesses, and in particular any CLEC business, would be expected to operate at a loss initially and for a period of time. In addition, competition in the CLEC and other telecommunications businesses is substantial and is expected to increase in the future. On the CATV front, in addition to Giant s recent acquisition of a 1,700-subscriber system in Kansas noted above, in early 2009 CTS acquired five additional CATV systems in Nevada serving approximately 1,650 subscribers. CTS is in the process of rebuilding their systems to provide two-way service, and will consider the acquisition of additional cable systems in appropriate cases. At December 31, 2010, CTS was providing cable service in a total of 31 communities to some 5,299 CATV subscribers and 2,598 cable modem (broadband) subscribers. Another affiliate of DFT, DFT Security Systems, Inc. ( DFT Security, which is 63.6% owned by LICT), acquired American Alarm Company in December DFT Security provides alarm services in western New York, including the Buffalo area. At December 31, 2010, DFT Security served 2,304 customers. Regulatory Environment. Our subsidiaries that provide telecommunications services are subject to varying degrees of Federal and state regulation. Our operating telephone companies are regulated by the FCC with respect to interstate telecommunications services and by the state regulatory agencies with respect to intrastate telecommunications services. They are also subject to local government regulation, in some cases, such as regarding the use of local streets and rights of way. The FCC and the state commissions do not regulate all providers that come under their jurisdiction in the same way. Incumbent Local Exchange Carriers ( ILECs ) remain more highly regulated than CLECs who are also providing telecommunications services. While some regulation of ILECs has eased as competition has increased, that regulation remains more burdensome than the regulation of CLECs. The extent and nature of regulation, by the FCC and by state commissions, changes for various reasons, such as Congressional and judicial mandates, public policy decisions and other factors. Ongoing proceedings at the FCC and at the state level are addressing a number of critical telecommunications issues within their respective jurisdictions. A number of these proceedings have been active for many years while others commenced in Some of the issues being addressed include making broadband more widely available; interconnection between different types of networks; access and interconnection pricing; internet access and special access regulation; the interrelationship between traditional circuit switched telephone services and newer services that use Internet Protocol ( IP ) and other advanced technologies and standards; the treatment of Voice over IP ( VoIP ); the future of the various Federal and state universal service support funds and the mechanisms that support them; the structure of intercarrier compensation and the future direction and organization of the agency itself. National Broadband Plan. On March 16, 2010, after extensive public comment, the FCC released the National Broadband Plan ( NBP ) which it had authored in response to a Congressional mandate contained in the American Recovery and Reinvestment Act of 2009 (the ARRA ). The purpose of the 360-page NBP was not to make any immediate or actual changes in the FCC s existing regulations, but rather to lay out a plan for the FCC s regulatory approach over the coming decade. The basic thrust of the FCC s efforts, as set forth in the NBP, will be to expand the geographic availability and increase the bandwidth capacities provided to users. These efforts have overall goals, among others, of making a minimum download speed of 4 Mbps and upload speed of 1 Mbps available to every household and business in the nation, and making 100 Mbps service available to at least 100 million households in the next ten years. One of the measures that the FCC stated it intends to use to accomplish this is to gradually 17 shift Universal Service Fund ( USF ) support over a ten-year period into a new Connect America Fund ( CAF ) that will focus on the achievement of its broadband goals. The policy recommendations include guiding principles to foster competition in broadband, telep
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