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 March 31, 2001
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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 the number of shares outstanding of each of the Registrant's classes of
Common Stock, as of the latest practical date.
Class Outstanding at May 1, 2001
----- --------------------------
Common Stock, $.0001 par value 2,821,666
INDEX
LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Balance Sheets
- March 31, 2001
- December 31, 2000
Condensed Statements of Operations:
- Three months ended March 31, 2001 and 2000
Condensed Statements of Cash Flows:
- Three months ended March 31, 2001 and 2000
Notes to Condensed 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
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
LYNCH INTERACTIVE CORPORATION AND SUBSIDIAIRES
CONDENSED BALANCE SHEETS
(In thousands, except share amounts)
March 31, December 31,
2001 2000
----------- -------------
ASSETS (Unaudited) (Note)
CURRENT ASSETS:
Cash and cash equivalents ......................................... $ 35,695 $ 26,926
Marketable securities ............................................. 2,492 2,066
Receivables, less allowances of $324 and $403 ..................... 14,517 15,147
Other current assets .............................................. 7,456 7,562
--------- ---------
TOTAL CURRENT ASSETS .................................................. 60,160 51,701
PROPERTY, PLANT AND EQUIPMENT:
Land .............................................................. 1,364 1,363
Buildings and improvements ........................................ 10,846 10,745
Machinery and equipment ........................................... 156,219 153,915
--------- ---------
168,429 166,023
Accumulated Depreciation .......................................... (69,800) (66,766)
--------- ---------
98,629 99,257
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS
ACQUIRED, NET ...................................................... 58,243 58,949
INVESTMENTS IN AND ADVANCES TO AFFILIATED ENTITIES .................... 13,486 13,284
INVESTMENT IN SPINNAKER INDUSTRIES INC ................................ 3,250 5,250
OTHER ASSETS .......................................................... 12,555 11,969
--------- ---------
TOTAL ASSETS .......................................................... $ 246,323 $ 240,410
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks ............................................ $ 3,771 $ 4,333
Trade accounts payable ............................................ 3,982 2,797
Accrued interest payable .......................................... 1,728 2,504
Accrued liabilities ............................................... 19,995 21,143
Customer advances ................................................. 1,314 1,540
Current maturities of long-term debt .............................. 16,369 12,582
--------- ---------
TOTAL CURRENT LIABILITIES ............................................. 47,159 44,899
LONG-TERM DEBT ........................................................ 156,169 150,010
DEFERRED INCOME TAXES ................................................. 6,850 7,746
OTHER LIABILITIES ..................................................... 5,017 5,624
MINORITY INTERESTS .................................................... 8,660 8,732
SHAREHOLDERS' EQUITY
COMMON STOCK, $0.0001 PAR VALUE-10,000,000 SHARES
AUTHORIZED; 2,824,766 issued (at stated value) 2,821,666 Outstanding
ADDITIONAL PAID - IN CAPITAL ....................................... 21,404 21,404
RETAINED EARNINGS .................................................. 961 652
ACCUMULATED OTHER COMPREHENSIVE INCOME ............................. 255 1,495
TREASURY STOCK, 3,100 SHARES AT COST ............................... (152) (152)
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TOTAL SHAREHOLDERS' EQUITY .......................................... 22,468 23,399
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ........................... $ 246,323 $ 240,410
========= =========
Note: The balance sheet at December 31, 2000 has been derived from the audited
financial statements at that date, but does not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements.
See accompanying notes.
LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except per share amounts)
Three Months Ended
March 31,
--------------------------
2001 2000
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SALES AND REVENUES (Restated)
Multimedia .......................................... $ 17,209 $ 15,571
Services ............................................ 20,688 28,386
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$ 37,897 $ 43,957
COSTS AND EXPENSES:
Multimedia .......................................... 12,748 11,192
Services ............................................ 19,106 26,632
Selling and administrative .......................... 2,869 3,295
----------- -----------
OPERATING PROFIT .................................... 3,174 2,838
Combined total
Other income (expense):
Investment income ................................. 1,254 504
Interest expense .................................. (3,517) (3,641)
Equity in earnings of affiliated companies ........ 165 299
Gain on redemption of East/West preferred stock ... -- 4,125
Total operating profit for reportable segments
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(2,098) 1,287
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INCOME BEFORE INCOME TAXES AND MINORITY INTERESTS ... 1,076 4,125
Provision for income taxes .......................... (839) (1,947)
Minority Interests .................................. 72 103
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NET INCOME .......................................... $ 309 $ 2,281
=========== ===========
Basic and diluted weighted average shares outstanding 2,822,000 2,824,000
BASIC & DILUTED EARNINGS PER SHARE
NET INCOME .......................................... $ 0.11 $ 0.81
See accompanying notes.
LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
Three Months Ended
March 31,
2001 2000
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OPERATING ACTIVITIES (Restated)
Net Income ......................................................... $ 309 $ 2,281
Adjustments to reconcile net income to net cash provided by, used in
operating activities:
Depreciation and amortization ................................... 4,323 4,108
Net effect of purchases and sales of trading securities ......... (426) 163
Share of operations of affiliated companies ..................... (165) (299)
Gain on redemption of East/West preferred stock ................. -- (4,125)
Minority interests .............................................. (72) (103)
Changes in operating assets and liabilities:
Receivables ................................................ 630 (90)
Accounts payable and accrued liabilities ................... (1,603) (2,791)
Other ...................................................... 106 (473)
Other ........................................................... -- 271
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NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES ................ 3,102 (1,058)
-------- --------
INVESTING ACTIVITIES
Capital expenditures ............................................... (3,052) (3,664)
Investment in and advances to affiliated entities .................. (58) (15,118)
Proceeds from redemption of East/West preferred stock .............. -- 8,712
Other .............................................................. (607) 194
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NET CASH USED IN INVESTING ACTIVITIES .............................. (3,717) (9,876)
-------- --------
FINANCING ACTIVITIES
Issuance of long term debt ......................................... 27,098 1,175
Repayments of long term debt ....................................... (17,152) (2,089)
Net repayments, borrowings, lines of credit ........................ (562) 661
Treasury stock transactions ........................................ -- (20)
Other .............................................................. -- 175
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NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ................ 9,384 (98)
-------- --------
Net increase (decrease) in cash and cash equivalents ............... 8,769 (11,032)
Cash and cash equivalents at beginning of period ................... 26,926 31,354
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CASH AND CASH EQUIVALENTS AT END OF PERIOD ......................... $ 35,695 $ 20,322
======== ========
See accompanying notes.
NOTES TO CONDENSED FINANCIAL STATEMENTS
A. Subsidiaries of the Registrant
As of March 31, 2001, the Subsidiaries of the Registrant are as follows:
Subsidiary Owned by Lynch
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Brighton Communications Corporation ................................................... 100.0%
Lynch Telephone Corporation IV ...................................................... 100.0%
Bretton Woods Telephone Company ................................................... 100.0%
World Surfer, Inc. ................................................................ 100.0%
Lynch Kansas Telephone Corporation .................................................. 100.0%
Lynch Telephone Corporation VI ...................................................... 98.0%
JBN Telephone Company, Inc. ....................................................... 98.0%
JBN Finance Corporation ......................................................... 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%
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%
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%
Lynch Telephone Corporation X ....................................................... 100.0%
Global Television, Inc. ............................................................. 100.0%
Inter-Community Acquisition Corporation ............................................. 100.0%
Home Transport Service, Inc. ........................................................ 100.0%
Lynch Entertainment, LLC ............................................................ 100.0%
Lynch Entertainment Corporation II .................................................. 100.0%
Lynch Multimedia Corporation ........................................................ 100.0%
CLR Video, LLC .................................................................... 60.0%
Subsidiary Owned by Lynch
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The Morgan Group, Inc. ................................................................ 70.0%(V)/55.4%(O)
Morgan Drive Away, Inc. ............................................................... 70.0%(V)/55.4%(O)
Transport Services Unlimited, Inc. ................................................ 70.0%(V)/55.4%(O)
Interstate Indemnity Company ........................................................ 70.0%(V)/55.4%(O)
Morgan Finance, Inc. ................................................................ 70.0%(V)/55.4%(O)
TDI, Inc. ........................................................................... 70.0%(V)/55.4%(O)
Home Transport Corporation ........................................................ 70.0%(V)/55.4%(O)
MDA Corporation ................................................................... 70.0%(V)/55.4%(O)
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 Paging 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%
Wescel Cellular, Inc. ............................................................. 83.1%
Wescel Cellular of New Mexico, L.P. ............................................. 42.4%
Wescel Cellular, Inc. II .......................................................... 83.1%
Northwest New Mexico Cellular, Inc. ............................................. 40.6%
Northwest New Mexico Cellular of New Mexico, L.P. ............................... 20.7%
Enchantment Cable Corporation ................................................. 83.1%
Lynch Telephone II, LLC ............................................................... 100.0%
Inter-Community Telephone Company, LLC ............................................. 100.0%
Inter-Community Telephone Company II, 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%
Notes: (V)=Percentage voting control; (O)=Percentage of equity ownership
A. Basis of Presentation
The Company consolidates the operating results of its telephone and cable
television subsidiaries (60-100% owned at March 31, 2001 and December 31, 2000)
and The Morgan Group, Inc. ("Morgan"), in which, at March 31, 2001 and December
31, 2000, the Company owned 70.2% of the voting power and 55.6% of common
equity. 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 March 31, 2001 and
December 31, 2000), Capital Communications Company, Inc. (49% owned at March 31,
2001 and December 31, 2000) and the cellular partnership operations in New
Mexico (17% to 21% owned at March 31, 2001 and December 31, 2000).
The shares of Spinnaker Industries, Inc., in which the company owns 2.5% of the
voting power and 13.6% of the common equity, are accounted for in accordance
with Statements of Financial Accounting Standards (SFAS) No. 115 "Investment in
Debt and Equity Securities."
The accompanying unaudited condensed 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 the management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three-month period ended March 31, 2001 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2001.
Certain 2000 amounts have been restated to conform to the 2001 presentation.
B. Acquisitions
On October 15, 2000, the Registrant signed an agreement to acquire Central Utah
Telephone, Inc. and subsidiaries, a 4,100-access line telephone company located
in Utah. In April 2001, Central Utah acquired certain telephone exchanges from
Qwest Communications International Inc. involving approximately 3,300 access
lines. The Registrant has also agreed to acquire Central Telcom Services, LLC, a
related entity, which has certain PCS and MMDS interests and Internet, long
distance and telephone equipment businesses. The aggregate purchase prices,
including debt assumed, is roughly comparable to the Registrant's most recent
telephone acquisitions and is expected to be financed primarily through the
issuance of additional debt with the remaining coming from resources currently
available. The closing of the transactions, which are expected in the second
quarter of 2001, are subject to certain conditions including approvals by
certain regulatory authorities.
C. Investment in and Advances to Affiliates Entities
During the first quarter of 2001, a subsidiary of the Registrant's net
investment activity in two separate affiliated entities involved in auctions for
wireless spectrum is as follows:
In the Guard Band auction, PTPMS II Communications, L.L.C. acquired three
licenses at a net cost of $6.3 million; Interactive has loans to PTPMS II of
$6.1 million, $5.0 million, of which was funded in the first quarter of 2001,
and owns 49.9% of PTPMS II equity.
In the C&F Block PCS reauction, which ended on January 26, 2001, Theta
Communications, LLC acquired one license at a net cost of $4.0 million. The
license has not yet been awarded and as required under Federal Communications
Commission rules, Theta has 20% of the cost of the license on deposit. During
the first quarter of 2001, $5.0 million of loans from Interactive to Theta were
returned. Lynch Interactive owns 10% of Theta and has committed to fund a
portion of the remaining license cost. An affiliate of Interactive also has
invested in Theta.
D. Spin-off of Sunshine PCS Corporation
A subsidiary of the Registrant had previously owned a 49.9% limited partnership
interest in Fortunet Communications, L.P. ("Fortunet").
Fortunet was licensed for 15 MHz of spectrum in three Florida markets covering a
population ("POP") of approximately 785,000 (Based on 1999 census data). In
February 2001, Fortunet converted from a partnership to a corporation with
Interactive receiving 49.9% of common stock. It also changed its name to
Sunshine PCS Corporation. On February 14, 2001, Lynch Interactive spun-off its
common stock of Sunshine to its shareholders. Prior to the conversion,
Interactive contributed a portion of the debt owed to it by Fortunet as a
contribution to capital and restructured the terms of the remaining debt. The
face value of the restructured debt is $16.1 million and the carrying value is
$3.4 million at December 31, 2000. In addition, in exchange for a cash infusion
of $250,000, Lynch Interactive acquired (1) 10,000 shares of preferred stock in
Sunshine with a liquidation preference of $10.0 million and (2) warrants to
purchase 4,300,000 shares of Sunshine Class A common stock at $0.75 per share.
At the time, Interactive's obligation to make further loans was terminated.
E. Indebtedness
The parent company of the Registrant maintains a short-term line of credit
facility totaling $10.0 million, all of which was available at March 31, 2001.
The parent company facility will expire on August 31, 2001.
Morgan's Credit Facility matured on January 28, 2001, at which time Morgan had
no outstanding debt and $6.6 million outstanding letters of credit. Morgan was
in default of the financial covenants, resulting in the bank failing to renew
the Credit Facility. As a result of the Credit Facility not being renewed,
Morgan has a payment default and the financial institution has the right to
demand cash to meet outstanding obligations under the letter of credit. The bank
has discretion as to whether to make any loans or issue additional letters of
credit for Morgan.
Morgan is actively seeking an alternative financial institution to replace the
existing credit facility and currently has received several commitment letters.
Each of the commitment letters is conditioned upon satisfactory completion of
due diligence procedures as well as Morgan meeting various financial covenants
and requirements prior to closing. In connection with the replacement of the
credit facility, the Board of Directors of Interactive has approved the
acquisition of 1.0 million shares of Morgan's Class B common stock at $2.00 per
share. The investment by Interactive would increase Interactive's ownership in
Morgan from 55.6% to 68.5%. The Board of Directors of Morgan approved the
issuance of additional Class 'B' stock, but the sale is subject to final
negotiations with the potential lenders, appropriate documentation and approval
of Morgan shareholders. The Morgan Board of Directors has also authorized its
management to further develop plans to provide an opportunity for other
shareholders to acquire additional equity investment in Morgan.
March 31,
Lynch Interactive's long-term debt consists of: 2001 December 31,
Unaudited 2000
(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% (4.8%
weighted average at March 31, 2001), secured by assets of the telephone
companies of $114.7 million .................................................... $ 51,552 $ 52,188
Bank Credit facilities utilized by certain telephone and telephone holding
companies through 2013, $34.2 million at fixed interest rates averaging 7.9%
and $46.3 million at variable interest rates averaging 7.5% ................... 80,490 54,799
Unsecured notes issued in connection with acquisitions through 2006, at fixed
interest rates of 10.0% ........................................................ 27,161 27,259
Convertible subordinated note due in December 2004 at a fixed interest rate
of 6% 10,000 25,000
Other .......................................................................... 3,335 3,346
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172,538 162,592
Current Maturities ............................................................. (16,369) (12,582)
--------- ---------
156,169 $ 150,010
========= =========
On December 12, 1999, Interactive completed the private placement of a $25
million 6% five-year note, convertible into Interactive common stock at $42.50
per share (adjusted for subsequent 2 to 1 stock split). At that time, to assist
the Company with the private placement to Cascade Investment LLC ("Cascade"),
the Chairman and CEO of Interactive, agreed to give the acquirer of the note, a
one-time option to sell the note to him at 105% of the principal amount thereof.
The exercise period was from November 15, 2000 to December 1, 2000. This option
to sell is secured by a bank letter of credit, which is secured by the
Chairman's escrow of securities. The Company agreed to reimburse the Chairman
for the cost of the letter of credit plus his counsel fees in connection with
the option to sell agreement and obtaining the letter of credit.
On January 16, 2001, the option to sell agreement between Cascade Investments
and the Company's Chairman was amended. As amended, Cascade had the right to
sell up to $15 million of the notes back to the Chairman at any time prior to
January 31, 2001 and the right to sell the remaining $10 million of the note
between November 15 and December 1, 2002. The option to sell is at 105% of
principal amount sold plus accrued and unpaid interest. As a condition to
modifying and extending the option to sell, the Company entered into an
agreement in December 2000, with its Chairman whereby it will pay for and
acquire, on the same terms and conditions, any portion of the note sold by
Cascade under this option. During January 2001, Cascade exercised this option
with regard to the $15 million of the notes and on February 14, 2001, the
Company transferred $15.9 million to Cascade, including the 5% premium plus
accrued and unpaid interest in exchange for $15.0 million of the note held by
Cascade.
The option to sell the remaining $10 million is secured by a collateralized
letter of credit in which the collateral is provided by an affiliate of the
Chairman. The Company has agreed to pay all legal fees, letter of credit fees
and a 10% per annum collateral fee on the amount of collateral provided, $10.5
million. The Company can replace the collateral at any time and the collateral
fee would be eliminated from thereafter.
In January 2001, a subsidiary of the Company borrowed $27.0 million secured by
the stock of Western New Mexico Telephone Company. The loan is to be repaid in
equal monthly installments over twelve years beginning in April 2001, bearing
interest at either bank's prime rate or LIBOR plus 2.5%, or at the Company's
option, it can be fixed for its term. $15.9 million of the proceeds were used to
acquire the Convertible Note of the Company owned by Cascade Investment L.L.C.
The stock of Western New Mexico Telephone Company had previously been used to
secure the acquisition facility, the balance of which was $7.9 million prior to
repayment in December 2000.
F. Default on Morgan Line of Credit
As noted above, at March 31, 2001, The Morgan Group, Inc. was in default under
its Credit Facility. At that time, Morgan had no borrowings under this
agreement, but the Lender had issued $6.6 million of lines of credit securing
certain insurance claims. As of the date of these financial statements, the
default has not yet been cured.
Interactive owns 55.6% of the equity of Morgan and 70.2% of the vote. For the
year ended December 31, 2000, Morgan represented 61.6% of Interactive's
consolidated revenues and had an operating loss of $2.0 million, as compared to
Interactive's consolidated operating profits of $13.3 million. At December 31,
2000, Morgan represented 9.7% of Interactive's total assets and Interactive has
a net $4.0 million investment in Morgan. Morgan is actively seeking alternative
financial institutions to replace its existing credit facility and currently has
received several commitment letters. Each of the commitment letters is
conditioned upon satisfactory completion of due diligence procedures as well as
Morgan meeting various financial covenants and requirements prior to closing. In
connection with the replacement of the credit facility, the Board of Directors
of Interactive has approved the acquisition of 1.0 million shares of Morgan's
Class B common stock at $2.00 per share. The investment by Interactive would
increase Interactive's ownership in Morgan from 55.6% to 68.5%. The Board of
Directors of Morgan approved the issuance of the additional Class 'B' stock, but
the sale is subject to final negotiations with the potential lenders,
appropriate documentation and approval of Morgan shareholders. The Morgan Board
of Directors has also authorized its management to further develop plans to
provide an opportunity for other shareholders to acquire additional equity
investment in Morgan.
Both Morgan and Interactive management believe that an alternative credit
facility can be ultimately obtained and the investment by Interactive will be
made. Should facility not be obtained, Interactive's investment in Morgan of
$3.7 million at March 31, 2001 may become impaired.
Interactive is currently considering whether it should retain its investment in
Morgan and exploring ways on how to appropriately divest itself of its
investment if that decision is made.
G. Restatement of Prior Period Earnings
On December 12, 1999, Interactive completed the private placement of a $25
million 6% five-year unsecured convertible subordinated note, convertible into
Interactive common stock at $42.50 per share, (adjusted for the subsequent 2 for
1 stock split). At that time, to assist the Company with the private placement
to Cascade Investment, LLC ("Cascade"), the Chairman and CEO of the Company,
agreed to give the acquirer of the note, a one-time option to sell the note to
him at 105% of the principal amount thereof. The exercise period was from
November 15, 2000 to December 1, 2000. Under accounting principles generally
accepted in the United States relating to significant shareholders, the Company
was required to reflect this transaction in its annual report. Accordingly,
quarterly results of operations for the three months ended March 31, 2000, have
been restated to reflect the recording of $1.25 million (pre-tax) in interest
expense associated with the 5% premium. Therefore, the net income was reduced
for the quarter ending March 31, 2000 by $271,000 or $0.09 per share.
H. Comprehensive Income
Balances of accumulated other comprehensive income, net of tax, which consists
of unrealized gains (losses) on available for sale of securities, at March 31,
2001 and December 31, 2000 are as follows (in thousands):
Unrealized
Gain(Loss) Tax Effect Net
---------- ---------- ---
Balance at December 31, 2000 ... $ 2,576 $(1,081) $ 1,495
Current period unrealized losses (2,138) 898 (1,240)
------- ------- -------
Balance at March 31, 2001 ...... $ 438 $ (183) $ 255
======= ======= =======
The comprehensive income (loss), for the three-month periods ending March 31,
2001 and 2000 are as follows (in thousands):
Three Months Ended
March 31,
2001 2000
-------------------
Net income for the period ....................... $ 309 $ 2,281
Unrealized gains (losses) on available for sale
securities - net of income tax ................. (1,240) (1,205)
benefit of $898 and $876, respectively ------- -------
Comprehensive income ........................ $ (931) $ 1,076
======= =======
I. Stock Split
A two-for-one stock split, was affected through a distribution to its
shareholders of one share of Registrant's Common Stock for each share of Common
Stock owned. The record date was August 28, 2000, and the distribution date was
September 11, 2000.
Share and per share data in the accompanying financial statements and notes have
been adjusted to reflect this change.
J. Earnings per share
For the three ended March 31, 2001 and 2000, the following table sets forth the
computation of pro forma basic and diluted earnings (loss) per share.
Three Months Ended
March 31,
2001 2000
----------------------
Basic earnings per share
Numerators:
Net Income .................................... $ 309,000 $2,281,000
Denominator:
Weighted average shares outstanding ........... 2,822,000 2,824,000
Earnings per share:
Net income .................................... $ 0.11 $ 0.81
Diluted earnings per share
Numerators:
Net Income ..................................... $ 309,000 $2,281,000
Interest saved on assumed conversion of
convertible notes - net of tax ............. -- --
---------- ----------
Net Income ..................................... $ 309,000 $2,281,000
---------- ----------
Denominators:
Weighted average shares outstanding ........... 2,822,000 2,824,000
Shares issued on conversion of convertible note -- --
---------- ----------
Weighted average share and share equivalents .. 2,822,000 2,824,000
---------- ----------
Earnings per share:
Net income .................................... $ 0.11 $ 0.81
========== ==========
K. Segment Information
The Company is principally engaged in two business segments: multimedia and
services. All businesses are located domestically, and substantially all
revenues are domestic. The multimedia segment includes local telephone
companies, a cable TV company, an investment in PCS entities and investments in
two network-affiliated television stations. The services segment includes
transportation and related services.
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.
EBITDA is not a substitute for operating income or cash flows from operating
activities in accordance with generally accepted accounting principles.
Operating profit (loss) is equal to revenues less operating expenses, excluding
unallocated general corporate expenses, interest and income taxes. The
Registrant allocates a portion of its general corporate expenses to its
operating segments. Such allocation was $326,000 and $317,000 for the three
months ended March 31, 2001 and 2000, respectively.
Three Months Ended
March 31,
2001 2000
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Unaudited
Revenues: (In thousands)
Multimedia ....................................... $ 17,209 $ 15,571
Services ......................................... 20,688 28,386
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Combined Total ................................... $ 37,897 $ 43,957
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EBITDA (before corporate allocation):
Multimedia ....................................... $ 8,602 $ 8,160
Services ......................................... (223) (580)
Corporate expenses, gross ........................ (882) (634)
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Combined total ................................... $ 7,497 $ 6,946
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Operating profit:
Multimedia ....................................... $ 4,169 $ 4,025
Services ......................................... (475) (898)
Unallocated corporate expense .................... (520) (289)
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Combined Total ................................... $ 3,174 $ 2,838
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Operating profit ................................. $ 3,174 $ 2,838
Investment income ................................ 1,254 504
Interest expense ................................. (3,517) (3,641)
Equity in earnings of affiliated companies ....... 165 299
Gain on redemption of East/West Preferred Stock .. -- 4,125
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Income before income taxes, and minority interests $ 1,076 $ 4,125
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Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
SALES AND REVENUES
Revenues for the three months ended March 31, 2001 decreased by $6.1 million to
$37.9 million from the first quarter of 2000. Within the operating segments,
multimedia revenues increased by $1.6 million or 11%, which were offset by a
$7.7 million decrease at The Morgan Group Inc. ("Morgan") - Interactive's
service subsidiary. The decrease at Morgan was primarily related to a decline in
revenues from its manufactured housing division of $6.8 million, or 37.6% in the
quarter. Shipments for the manufactured housing industry as a whole were down
42% in January and February of 2001 according to the Manufactured Housing
Institute. (March shipment data was not available). The industry continues to
operate in a two-year slump created by consumer credit issues and excess
inventory. Multimedia revenues grew in both regulated telecommunications
services and the provision of non-traditional telephone services such as
Internet.
Shipments of manufactured homes tend to decline in the winter months in areas
where poor weather conditions inhibit transport. This usually reduces operating
revenues in the first and fourth quarters of the year. Morgan's operating
revenues, therefore, tend to be stronger in the second and third quarters.
Operating profit for the three months ended March 31, 2001 increased by $0.3
million to $3.2 million from the first quarter of 2000. Within the operating
segments, multimedia's operating profit increased $0.2 million, Morgan's
operating loss decreased from $0.9 million to $0.5 million and corporate
expenses increased by $0.2 million. The improvement, on lower volume, reflects
Morgan's cost-reduction efforts over the past 12 months. As a result, Morgan's
operating results improved in the first quarter despite the revenue decline.
Operating profit in the multimedia segment increased $0.3 million as increased
revenues were offset by the additional start-up costs in developing new
communications services.
Investment income for the quarter ended March 31, 2001 increased by $0.8 million
primarily due to higher realized on and unrealized gains on "trading
securities."
Interest expense decreased from the prior year period by $0.1 million as
increased level of borrowings were offset by the absence of amortization of a
put premium associated with the Company's convertible note issued on December
12, 1999. This premium was fully amortized at the end of 2000.
The Company owns 1,000,000 shares of Spinnaker Industries, Inc. common stock. As
described in the Notes to the accompanying financial statements, the Company
accounts for this investment under the provision of Statement of Financial
Accounting Standards No. 115 "Investment and Debt and Equity Securities." Under
the provision of this standard, the Company records this investment at its
publicly traded market value at the end of each accounting period and records
the change in unrealized gain (loss) in that period's comprehensive income. The
basis of these shares is $3.2 million, or $3.17 per share. At March 31, 2001,
the market price of these shares was $3.25 per share, in trading on the American
Stock Exchange. Subsequent to March 31, 2001, Spinnaker's Class A common shares,
also in trading on the American Stock Exchange, began trading below the $3.25
market price per share, to a low of $0.70 per share on May 1, 2001. The only
difference between Spinnaker common and Class A shares is that the common shares
are entitled to 1/10 vote per share and the Class A shares are entitled to one
vote per share. In addition, during the year ended December 31, 2000, Spinnaker
recorded a loss from continuing operations before discontinued operations and
extraordinary gain of $17.7 million. Losses of $5.2 million and $2.8 million
were recorded for the years ended December 31, 1999 and 1998, respectively. The
Company's Management will continue to monitor the market value of its Spinnaker
holdings and should the market value of the common shares fall below the $3.2
million basis, management is required to consider if the decline in value is
other than temporary, and if so, a write-down would be recorded in its reported
financial results.
On February 25, 2000, Omnipoint acquired through a merger, all of the
outstanding shares of East/West Communications, Inc. At the time of the merger,
Interactive held redeemable preferred stock of East/West Communications, Inc.
with a liquidation value of $8.7 million, including payment in kind of dividends
to date. In accordance with its terms, the preferred stock was redeemed at its
liquidation value and as a result, the Registrant recorded a pre-tax gain of
$4.1 million in the three months ended March 31, 2000.
The income tax provision includes federal, as well as state and local taxes. The
tax provision for the three months ended March 31, 2001 and 2000, represent
effective tax rates of 78% and 47.2%, respectively. The causes of the difference
from the federal statutory rate are principally the effect of state income
taxes, including the effect of earnings and losses attributable to different
state jurisdictions, and the amortization of non-deductible goodwill. In
addition, during the three months ended March 31, 2001, no tax benefit has been
recorded for losses of Morgan of $0.5 million.
Minority interest increased earnings by $0.1 million for both the three months
ended March 31, 2001 and 2000.
Net income for the three months ended March 31, 2001 was $0.3 million or $0.11
per share (basic and diluted) as compared to net income of $2.3 million, or
$0.81 per share (basic and diluted), in the previous years three-month period.
The most significant item affecting the swing in earnings was the gain on the
redemption of East/West preferred stock ($2.5 million, net of income tax
provision) in 2000.
FINANCIAL CONDITION
Liquidity/ Capital Resources
As of March 31, 2001, the Company had current assets of $60.2 million and
current liabilities of $47.1 million. Working capital was therefore $13.1
million as compared to $6.8 million at December 31, 2000. The debt restructuring
discussed below was the primary cause of the increased working capital.
For the first three months, capital expenditures were $3.0 million in 2001 and
$3.7 million in 2000.
At March 31, 2001, total debt was $176.3 million, which was $9.4 million higher
than the $166.9 million at the end of 2000. At March 31, 2001, there was $126.3
million of fixed interest rate debt averaging 6.88% and $50.0 million of
variable interest rate debt averaging 7.5%. Debt at year-end 2000 included
$142.9 million of fixed interest rate debt, at an average interest rate of 6.79%
and $23.9 million of variable interest rate debt at an average interest rate of
8.49%.
On December 12, 1999, Interactive completed the private placement of a $25
million 6% five-year note, convertible into Interactive common stock at $42.50
per share (adjusted for subsequent 2 to 1 stock split). At that time, to assist
the Company with the private placement to Cascade Investment LLC ("Cascade"),
the Chairman and CEO of Interactive, agreed to give the acquirer of the note, a
one-time option to sell the note to him at 105% of the principal amount thereof.
The exercise period was from November 15, 2000 to December 1, 2000. This option
to sell is secured by a bank letter of credit, which is secured by the
Chairman's escrow of securities. The Company agreed to reimburse the Chairman
for the cost of the letter of credit plus his counsel fees in connection with
the option to sell agreement and obtaining the letter of credit.
The option to sell the remaining $10 million is secured by a collateralized
letter of credit in which the collateral is provided by an affiliate of the
Chairman. The Company has agreed to pay all legal fees, letter of credit fees
and a 10% per annum collateral fee on the amount of collateral provided, $10.5
million. The Company can replace the collateral at any time and the collateral
fee would be eliminated from thereafter.
On January 16, 2001, the above option to sell agreement was amended. As amended,
Cascade had the right to sell up to $15 million of the notes back to the
Chairman at any time prior to January 31, 2001 and the right to sell the
remaining $10 million of the note between November 15 and December 1, 2002. The
option to sell is at 105% of principal amount sold plus accrued and unpaid
interest. As a condition to modifying and extending the option to sell, the
Company entered into an agreement in December 2000, with its Chairman whereby it
will pay for and acquire, on the same terms and conditions, any portion of the
note sold by Cascade under this option. During January 2001, Cascade exercised
this option with regard to the $15 million of the notes and on February 14,
2001, the Company transferred $15.9 million to Cascade, including the 5% premium
plus accrued and unpaid interest in exchange for $15.0 million of the note held
by Cascade.
In January 2001, a subsidiary of the Company borrowed $27.0 million secured by
the stock of Western New Mexico Telephone Company. $15.9 million of the proceeds
were used to acquire the Convertible Note of the Company owned by Cascade
Investment L.L.C. The stock of Western New Mexico Telephone Company had
previously been used to secure the acquisition facility, the balance of which
was $7.9 million prior to repayment in December 2000.
As of March 31, 2001, Interactive, the parent company, had $10.0 million
available under a short-term line of credit facility, which expires on August
31, 2001.
Interactive owns 55.6% of the equity of Morgan and 70.2% of the vote. For the
year ended December 31, 2000, Morgan represented 61.6% of Interactive's
consolidated revenues and had an operating loss of $2.0 million, as compared to
Interactive's consolidated operating profits of $13.3 million. At December 31,
2000, Morgan represented 9.7% of Interactive's total assets and Interactive has
a net $4.0 million investment in Morgan. Morgan is actively seeking alternative
financial institutions to replace its existing credit facility and currently has
received several commitment letters. Each of the commitment letters is
conditioned upon satisfactory completion of due diligence procedures as well as
Morgan meeting various financial covenants and requirements prior to closing. In
connection with the replacement of the credit facility, the Board of Directors
of Interactive has approved the acquisition of 1.0 million Class 'B' common
shares of Morgan at $2.00 per share. The investment by Interactive would
increase Interactive's ownership in Morgan from 55.6% to 68.5%. The Board of
Directors of Morgan approved the issuance of additional Class 'B' stock, but the
sale will be subject to final negotiations with the potential lenders,
appropriate documentation and approval of Morgan shareholders. The Morgan Board
of Directors has also authorized its management to further develop plans to
provide an opportunity for other shareholders to acquire additional equity
investment in Morgan.
Both Morgan and Interactive management believe that an alternative credit
facility can be ultimately obtained and the investment by Interactive will be
made. Should facility not be obtained, Interactive's investment in Morgan of
$3.7 million at March 31, 2001 may become impaired.
Interactive is currently considering whether it should retain its investment in
Morgan and exploring ways to appropriately divest itself of its investment.
Lynch has not paid any cash dividends on its Common Stock since 1989.
Interactive does not expect to pay cash dividends on its Common Stock in the
foreseeable future. Interactive currently intends to retain its earnings, if
any, for use in its business. Future financings may limit or prohibit the
payment of dividends.
Interactive has a high degree of financial leverage. As of March 31, 2001, the
ratio of total debt to equity was 7.8 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 respective parent of the subsidiaries.
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 resources to enable the Company to meet its
obligations, there is no assurance that such can be readily obtained or at
reasonable costs.
On October 15, 2000, the Registrant signed an agreement to acquire Central Utah
Telephone, Inc. and subsidiaries, a 4,100-access line telephone company located
in Utah. In April 2001, Central Utah acquired certain telephone exchanges from
Qwest Communications International Inc. involving approximately 3,300 access
lines. The Registrant has also agreed to acquire Central Telcom Services, LLC, a
related entity, which has certain PCS and MMDS interests and Internet, long
distant and telephone equipment businesses. The aggregate purchase prices,
including debt assumed, is roughly comparable to the Registrant's most recent
telephone acquisitions and is expected to be financed primarily through the
issuance of additional debt and the remaining coming from resources currently
available. The closing of the transactions, which are expected by the second
quarter of 2001, are subject to certain conditions including approvals by
certain regulatory authorities.
The Registrant has initiated an effort to monetize certain of its assets,
including selling a portion or all of certain investments in certain of its
operating entities. These may include minority interest in network affiliated
television stations and certain telephone operations where competitive local
exchange carrier opportunities are not readily apparent. The Registrant's
approximately 13.6% ownership interest in Spinnaker Industries, Inc. (AMEX:SKK)
may also be sold in order to fund future growth initiatives. There is no
assurance that all or any part of this program can be effectuated on acceptable
terms.
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, cash equivalents and marketable securities ($38.2
million at March 31, 2001 and $29.0 million at December 31, 2000).
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 March 31, 2001, approximately $50.0 million, or 28.4% 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 2001 average interest rate under these
borrowings, it is estimated that the Company's 2001 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.
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 potential write-down of its investment in Spinnaker and
Morgan, the ability of Morgan to obtain a replacement credit facility,
Interactive's potential divesture of its investment in Morgan, Interactive's
additional investment in Morgan, possible acquisitions including Central Utah
Telephone, Central Telecom Services, Registrant's effort to monetize certain
assets, and Market Risk. It should be recognized that such information are
projections, estimates or forecasts based on various assumptions, including
without limitation, meeting its assumptions regarding expected operating
performance and other matters specifically set forth, as well as the expected
performance of the economy as it impacts the Registrant's businesses, government
and regulatory actions and approvals, and tax consequences and cautionary
statements set forth in documents filed by Registrant and The Morgan Group with
the Securities and Exchange Commission. As a result, such information is subject
to uncertainties, risks and inaccuracies, which could be material.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
---------------------------------
None
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
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Robert E. Dolan
Chief Financial Officer
May 15, 2001