SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
---------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2001
------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 1-15097
-------
LYNCH INTERACTIVE CORPORATION
-----------------------------
(Exact name of Registrant as specified in its charter)
Delaware 06-1458056
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
401 Theodore Fremd Avenue, Rye, New York 10580
---------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(914) 921-8821
--------------
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 November 1, 2001
----- -------------------------------
Common Stock, $.0001 par value 2,820,051
INDEX
LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
---------------------
Condensed Consolidated Balance Sheets
- September 30, 2001
- December 31, 2000
Condensed Consolidated Statements of Operations:
- Three and nine months ended September 30, 2001 and 2000
Condensed Consolidated Statements of Cash Flows:
- Nine months ended September 30, 2001 and 2000
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
---------------------------------------------------------
PART II. OTHER INFORMATION
SIGNATURE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
LYNCH INTERACTIVE CORPORATION AND SUBSIDIAIRES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
September 30, December 31,
2001 2000
------------ ------------
ASSETS (Unaudited) (Note)
CURRENT ASSETS:
Cash and cash equivalents ............................................ $ 30,991 $ 24,834
Marketable securities ................................................ 2,370 2,066
Receivables, less allowances of $186 and $155 ........................ 8,249 7,266
Other current assets ................................................. 6,328 5,315
Current assets to be distributed to shareholders ..................... 18,415 12,220
--------- ---------
TOTAL CURRENT ASSETS ..................................................... 66,353 51,701
PROPERTY, PLANT AND EQUIPMENT:
Land ................................................................. 772 490
Buildings and improvements ........................................... 9,412 8,559
Machinery and equipment .............................................. 176,856 151,481
--------- ---------
187,040 160,530
Accumulated Depreciation ............................................. (74,054) (64,961)
--------- ---------
112,986 95,569
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS
ACQUIRED, NET ......................................................... 66,214 52,222
INVESTMENTS IN AND ADVANCES TO AFFILIATED ENTITIES ....................... 14,016 13,284
INVESTMENT IN SPINNAKER INDUSTRIES INC ................................... 1,900 5,250
OTHER ASSETS ............................................................. 11,778 11,335
NON CURRENT ASSETS TO BE DISTRIBUTED TO SHAREHOLDERS ..................... 10,305 11,049
--------- ---------
TOTAL ASSETS ............................................................. $ 283,552 $ 240,410
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks ............................................... $ 8,647 $ 4,333
Trade accounts payable ............................................... 1,273 424
Accrued interest payable ............................................. 2,006 2,504
Accrued liabilities .................................................. 16,126 14,472
Current maturities of long-term debt ................................. 16,784 12,365
Current liabilities to be distributed to shareholders ................ 14,984 10,801
--------- ---------
TOTAL CURRENT LIABILITIES ................................................ 59,820 44,899
LONG-TERM DEBT ........................................................... 175,533 149,939
DEFERRED INCOME TAXES .................................................... 7,901 7,746
OTHER LIABILITIES ........................................................ 502 502
MINORITY INTERESTS ....................................................... 6,047 5,539
NON CURRENT LIABILITIES AND MINORITY INTERESTS TO BE
DISTRIBUTED TO SHAREHOLDERS ........................................... 7,997 8,386
SHAREHOLDERS' EQUITY
COMMON STOCK, $0.0001 PAR VALUE-10,000,000 SHARES
AUTHORIZED; 2,824,766 issued (at stated value)
2,821,851 and 2,821,666 outstanding .................................. -- --
ADDITIONAL PAID - IN CAPITAL .......................................... 21,406 21,404
RETAINED EARNINGS ..................................................... 3,875 652
ACCUMULATED OTHER COMPREHENSIVE INCOME ................................ 614 1,495
TREASURY STOCK, 2,915 AND 3,100 SHARES AT COST ........................ (143) (152)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY ............................................ 25,752 23,399
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .............................. $ 283,552 $ 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 accounting principles generally accepted in the United
States for complete financial statements.
See accompanying notes.
LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except share and per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
------- ------ ------ ------
(Restated) (Restated)
SALES AND REVENUES .............................. $ 23,934 $ 17,899 $ 58,594 $ 49,489
COSTS AND EXPENSES:
Operations ...................................... 14,922 12,303 40,217 34,878
Corporate expenses, net ......................... 627 894 2,133 2,523
----------- ----------- ----------- -----------
OPERATING PROFIT ................................ 8,365 4,702 16,244 12,088
Combined total Other income (expense):
Investment income ............................. 200 968 2,593 2,644
Interest expense .............................. (3,865) (3,495) (10,697) (10,504)
Equity in earnings of affiliated companies .... 213 195 582 1,464
Impairment of investment in
Spinnaker Industries, Inc. .................. (1,294) -- (1,294) --
Gain on redemption of East/West preferred stock -- -- -- 4,125
Total operating profit for reportable segments ----------- ----------- ----------- -----------
(4,746) (2,332) (8,816) (2,271)
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES AND MINORITY INTERESTS
3,619 2,370 7,428 9,817
Provision for income taxes ...................... (1,649) (1,202) (3,554) (4,693)
Minority Interests .............................. (185) (234) (508) (664)
----------- ----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS ............... 1,785 934 3,366 4,460
Income (loss) from operations of
The Morgan Group, Inc., which are being
distributed to shareholders (less income tax
(provision) benefit of $--, $(26), $265, and
$293 and minority interests of $69, $(31),
$31, and $236) .................................. (190) 44 (143) (288)
----------- ----------- ----------- -----------
NET INCOME ...................................... $ 1,595 $ 978 $ 3,223 $ 4,172
=========== =========== =========== ===========
Basic and diluted weighted average
shares outstanding ........................... 2,822,000 2,822,000 2,822,000 2,824,000
BASIC & DILUTED EARNINGS PER SHARE:
INCOME FROM CONTINUING OPERATIONS ............... $ 0.63 $ 0.33 $ 1.19 $ 1.58
Income (loss) from operations of
The Morgan Group, Inc. ........................ (0.06) 0.02 (0.05) (0.10)
----------- ----------- ----------- -----------
NET INCOME .................................. $ 0.57 $ 0.35 $ 1.14 $ 1.48
=========== =========== =========== ===========
See accompanying notes.
LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
Nine Months Ended
September 30,
2001 2000
------ ------
OPERATING ACTIVITIES (Restated)
Net income ..................................................................... $ 3,223 $ 4,172
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ............................................... 13,177 11,720
Net effect of purchases and sales of trading securities ..................... (304) (521)
Share of operations of affiliated companies ................................. (582) (1,464)
Gain on redemption of East/West preferred stock ............................. 0 (4,125)
Impairment on investment in Spinnaker Industries, Inc ....................... 1,294 --
Gain on sale of available for sale securities ............................... (296) (770)
Minority interests .......................................................... 508 664
Non-cash items and changes in operating asset and liabilities
from operations to be distributed to shareholders ......................... (1,057) 1,104
Changes in operating assets and liabilities:
Receivables ............................................................ 101 (354)
Accounts payable and accrued liabilities ............................... 823 (1,633)
Other .................................................................. (516) (512)
Other ....................................................................... 0 713
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES ...................................... 16,371 8,994
-------- --------
INVESTING ACTIVITIES
Capital expenditures ........................................................... (12,982) (11,546)
Investment in and advances to affiliated entities .............................. (185) (1,651)
Proceeds from redemption of East/West preferred stock .......................... 0 8,712
Acquisition of Central Utah Telephone Company
(total cost, less debt assumed and cash
equivalents acquired) ......................................................... (6,889) 0
Investing activities at operations to be
distributed to shareholders .................................................. (3,681) (116)
Proceeds from sale of available for sale securities ............................ 494 1,294
Other .......................................................................... (377) 1,291
-------- --------
NET CASH USED IN INVESTING ACTIVITIES .......................................... (23,620) (2,016)
-------- --------
FINANCING ACTIVITIES
Issuance of long term debt ..................................................... 27,148 1,200
Repayments of long term debt ................................................... (21,148) (3,812)
Net (repayments) borrowings under lines of credit .............................. 4,314 749
Treasury stock transactions .................................................... 11 (127)
Financing activities from operations to be
distributed to shareholders .................................................. 3,081 (700)
Other .......................................................................... 0 102
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ............................ 13,406 (2,588)
-------- --------
Net increase in cash and cash equivalents ...................................... 6,157 4,390
Cash and cash equivalents at beginning of period ............................... 24,834 27,507
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ..................................... $ 30,991 $ 31,897
======== ========
See accompanying notes.
NOTES TO CONDENSED CONDOLIDATED FINANCIAL STATEMENTS
A. Subsidiaries of the Registrant
As of September 30, 2001, the Subsidiaries of the Registrant are as follows:
Subsidiary Owned by Interactive
---------- --------------------
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%
Global Television, Inc. ...................... 100.0%
Inter-Community Acquisition Corporation ...... 100.0%
Home Transport Service, Inc. ................. 100.0%
Lynch Telephone Corporation X .................. 100.0%
Central Utah Telephone, Inc. ................. 100.0%
Skyline Telecom ........................ 100.0%
Bear Lake Communications, Inc. ......... 100.0%
Central Telecom Services, L.L.C .............. 100.0%
Lynch Entertainment, LLC ..................... 100.0%
Lynch Entertainment Corporation II ........... 100.0%
Subsidiary Owned by Lynch
---------- --------------
Lynch Multimedia Corporation .......................... 100.0%
CLR Video, LLC .................................... 60.0%
The Morgan Group, Inc. ................................ 80.8%(V)/68.5%(O)
Morgan Drive Away, Inc. ............................... 80.8%(V)/68.5%(O)
Transport Services Unlimited, Inc. ................ 80.8%(V)/68.5%(O)
Interstate Indemnity Company ........................ 80.8%(V)/68.5%(O)
Morgan Finance, Inc. ................................ 80.8%(V)/68.5%(O)
TDI, Inc. ........................................... 80.8%(V)/68.5%(O)
Home Transport Corporation ........................ 80.8%(V)/68.5%(O)
MDA Corporation ................................... 80.8%(V)/68.5%(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
B. Basis of Presentation
-- ---------------------
Lynch Interactive Corporation (the "Company" or "Interactive") consolidates the
operating results of its telephone and cable television subsidiaries (60-100%
owned at September 30, 2001 and December 31, 2000).
At December 31, 2000, the Company owned 70.2% of the voting power and 55.6% of
the common equity of The Morgan Group, Inc. ("Morgan"). On July 12, 2001, the
Company, through its wholly owned subsidiary Brighton Communications
Corporation, acquired 1.0 million shares of Morgan's Class B Common Stock from
Morgan at $2.00 per share. As a result of this transaction, the Company's
ownership in Morgan increased to 80.8% of the voting power and 68.8% of the
common equity. On August 17, 2001, the Board of Directors of the Company
authorized management to spin off its investment in Morgan (see Note C).
All material intercompany transactions and balances have been eliminated.
Investments in affiliates in which the Company does not have a majority voting
control are accounted for in accordance with the equity method. The Company
accounts for the following affiliated companies on the equity basis of
accounting: Coronet Communications Company (20% owned at September 30, 2001 and
December 31, 2000), Capital Communications Company, Inc. (49% owned at September
30, 2001 and December 31, 2000) and the cellular partnership operations in New
Mexico (17% to 21% owned at September 30, 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." During the third quarter of 2001, the Company
recorded an impairment charge relating to its investment in Spinnaker (see Note
H).
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 and nine-month period ended September 30, 2001
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2001.
In September 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill and intangible assets deemed to
have indefinite lives will no longer be amortized but will be subject to annual
impairment tests in accordance with the Statements. Other intangible assets will
continue to be amortized over their useful lives.
The Company has not yet completed its analysis on how the new rules relating to
amortization and impairment will affect its accounting for goodwill and other
intangible assets, for which implementation is required beginning January 1,
2002. Based on a preliminary analysis, application of the nonamortization
provisions of FAS 142 would have resulted in an increase in income from
continuing operations of $2.1 million, $0.68 per share, for the year ended
December 31, 2000 and $1.7 million, $0.56 per share, for the nine months ended
September 30, 2001. During 2002, the Company will perform the first of the
required impairment tests of goodwill and indefinite lived intangible assets and
has not yet determined what the effect of these tests will be on the earnings
and financial position of the Company. The Company adopted the accounting
requirements of SFAS 141 as of July 1, 2001.
In October 2001, the FASB issued Statement of Financial Accounting Standard No.
144, Accounting for Impairment or Disposal of Long-Lived Assets, effective for
fiscal years beginning after December 15, 2001. The FASB's new rules on asset
impairment supersede FASB Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and provide a
single accounting model for long-lived assets to be disposed of. Although
retaining many of the fundamental recognition and measurement provisions of FASB
Statement 121, the new rules significantly change the criteria that would have
to be met to classify an asset as held-for-sale. The new rules also will
supersede the provisions of APB Opinion 30 with regard to reporting the effects
of a disposal of a segment of a business and will require expected future
operating losses from discontinued operations to be displayed in discontinued
operations in the periods in which the losses are incurred (rather as of the
measurement date as presently required by APB 30). In addition, more
dispositions will qualify for discontinued operations treatment in the income
statement. The Company has not yet determined what the effect of FASB 144 will
be on the earnings and financial position of the Company.
Certain 2000 amounts have been restated and reclassified to conform to the 2001
presentation.
C. Spin-off of Morgan
-- ------------------
On August 17, 2001, the Board of Directors of Interactive authorized management
to distribute its holdings in Morgan to Interactive's shareholders. Interactive
expects to complete the spin off in the fourth quarter of 2001 or the first
quarter of 2002. As currently structured, common shares of Morgan that are
currently held by the company will be placed in a wholly owned subsidiary
("Morgan Holdings") and that subsidiary will be distributed to Interactive's
common shareholders in a tax free transaction. Morgan currently has on file with
the Securities and Exchange Commission a preliminary registration statement
registering warrants that will be issued to all of its current shareholders to
acquire newly issued shares of Class A and Class B Morgan common stock. The
warrants that are to be issued to Interactive will also be placed in Morgan
Holdings. Pursuant to the spin off, each Interactive shareholder would receive
one share of Morgan Holdings for each share of Interactive owned.
As a result, the Company's services segment, which consisted solely of the
operations of Morgan, is being reported as operations to be distributed to
shareholders in the accompanying condensed consolidated financial statements.
Accordingly, operating results of Morgan have been segregated from continuing
operations and reported as a separate line item on the Statement Of Operations.
Interactive has restated its prior year financial statements to present the
operating results of Interactive on a comparable basis. Morgan's net sales were
$24.8 million and $28.6 million, respectively, for the three-month periods
ending September 30, 2001 and 2000 and $71.0 million and $87.4 million for the
nine-month periods ended September 30, 2001 and 2000, respectively, and $108.0
million, $145.6 million and $150.5 million for the fiscal years ended December
31, 2000, 1999 and 1998, respectively.
The net assets of Morgan Holdings included in the accompanying condensed
consolidated balance sheets as of September 30, 2001 and December 31, 2000
consist of the following:
(In thousands) September 30, December 31,
2001 2000
(Unaudited)
---------- -----------
Cash and cash equivalents ................................... $ 4,016 $ 2,092
Accounts receivable, net .................................... 9,665 7,881
Deferred income taxes ....................................... 319 601
Prepaids and other .......................................... 4,415 1,646
------- -------
Current assets to be distributed to shareholders ............ $18,415 $12,220
======= =======
Property, plant and equipment, net .......................... $ 3,477 $ 3,688
Excess of cost over net fair value of net assets acquired net 6,376 6,727
Other Assets ................................................ 452 634
------- -------
Non-current assets to be distributed to shareholders ........ $10,305 $11,049
======= =======
Notes payable ............................................... $ 1,369 $ --
Accounts payable ............................................ 4,812 2,299
Accrued liabilities ......................................... 8,656 8,285
Current portion of long term debt ........................... 147 217
------- -------
Current liabilities to be distributed to shareholders ....... $14,984 $10,801
======= =======
Long term debt .............................................. $ 16 $ 71
Deferred income taxes ....................................... 282 282
Other liabilities ........................................... 4,821 5,122
Minority interest ........................................... 2,878 2,911
------- -------
Non-current liabilitie and minority interest
to be distributed to shareholders .......................... $ 7,997 $ 8,386
======= =======
D. Acquisitions
-- ------------
On June 22, 2001, Lynch Telephone Corporation X, a subsidiary of Interactive,
acquired Central Utah Telephone, Inc. and its subsidiaries, and Central Telcom
Services, LLC, a related entity, for approximately $15.6 million in cash and
notes. Though the purchase price allocation is not yet complete, the Company has
recorded approximately $14.9 million in goodwill, which is being amortized over
25 years.
The operating results of the acquired company are included in the Statements of
Operations from its acquisition date. The following unaudited pro forma
information shows the results of the Company's operations as though the
acquisition of Central Utah and related entities was made at the beginning of
2000. (In thousands of dollars, except per share data.)
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
---------------- -----------------
Sales and revenues ................. $23,934 $19,299 $61,975 $53,497
Income from Continuing Operations .. 1,785 750 2,777 3,927
Basic and diluted earnings per share 0.63 0.27 0.98 1.39
E. Investment in and Advances to Affiliates Entities
-- -------------------------------------------------
Net investment activity during 2001 for the Company occurred in the following
two separate affiliated entities involved in auctions for wireless spectrum:
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 nine months ended September 30, 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.
F. Spin-off of Sunshine PCS Corporation
-- ------------------------------------
A subsidiary of the Company 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 ("Sunshine"). On February 14, 2001, the Company
spun-off its common stock of Sunshine to the Company's shareholders. Prior to
the conversion, the Company 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 was $3.4 million at December 31, 2000 and September 30, 2001. In
addition, in exchange for a cash infusion of $250,000, the Company acquired (1)
10,000 shares of preferred stock in Sunshine with an aggregate 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, the Company's
obligation to make further loans was terminated.
G. Administrative Fee
-- ------------------
During the third quarter of 2001, the Company recorded an administration fee of
$2.8 million for services provided to a related entity in a Federal
Communications Commission conducted auction for spectrum to be used for the
provision of personal communications services. The auction was conducted in 1999
and the fee was based on the entity's realization of the licenses acquired. This
fee is included in "Sales and Revenues" in the Consolidated Statement of
Operations.
H. Investment In Spinnaker Industries, Inc.
-- ---------------------------------------
The Company owns 1.0 million shares of Spinnaker Industries, Inc. common stock.
On September 30, 2001, in trading on the American Stock Exchange, the closing
price of the common stock was $1.90 per share, which was below the Company's
basis in such shares of $3.19 per share. In the opinion of management, this
decline in value is other than temporary and in accordance with SFAS No. 115,
the Company recorded an impairment of its investment in Spinnaker by $1,294,000
to $1,900,000.
On November 13, 2001, Spinnaker announced that it has commenced voluntary
proceedings under Chapter 11 of the U.S. Bankruptcy Code for the purpose of
facilitating and accelerating its financial restructuring. Spinnaker also
announced that is has reached agreement, subject to Bankruptcy Court approval,
with its existing lenders to provide up to $30 million in debtor-in possession
financing, which Spinnaker believes will allow it to continue operating its
business in the ordinary and customary manner.
Interactive will continue to monitor its investment in Spinnaker and record
further impairments of such investment if and when appropriate.
I. Indebtedness
-- ------------
The Company maintains a short-term line of credit facility totaling $10.0
million, $4.5 million of which was available at September 30, 2001. This
facility will expire on August 31, 2002.
September 30,
The Company'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% (4.9%
weighted average at September 30, 2001), secured by assets of the telephone
companies of $121.0 million .................................................... $ 56,012 $ 52,188
Bank Credit facilities utilized by certain telephone and telephone holding
companies through 2013, $34.0 million at fixed interest rates averaging 7.9%
and $54.4 million at variable interest rates averaging 5.5% ................... 88,605 54,799
Unsecured notes issued in connection with acquisitions through 2006, at fixed
interest rates of 10.0% ........................................................ 34,611 27,259
Convertible subordinated note due in December 2004 at a fixed interest
rate of 6% ..................................................................... 10,000 25,000
Other .......................................................................... 3,089 3,058
--------- ---------
192,317 162,304
--------- ---------
Current Maturities ............................................................. (16,784) (12,365)
--------- ---------
$ 175,533 $ 149,939
========= =========
On December 12, 1999, the Company completed the private placement to Cascade
Investment LLC ("Cascade") of a $25 million 6% five-year note, convertible into
its common stock at $42.50 per share (adjusted for subsequent 2 to 1 stock
split) (the "Convertible Notes"). At that time, to assist the Company with the
private placement, the Chairman and CEO of the Company, agreed to grant Cascade
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 legal 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 and the
Company's Chairman was amended. As amended, Cascade had the right to sell up to
$15 million principal amount of Convertible Notes back to the Chairman at any
time prior to January 31, 2001 and the right to sell the remaining $10 million
of principal amount of Convertible Notes between November 15, 2002, and December
1, 2002. The option to sell is at 105% of the principal amount of Convertible
Notes 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 Convertible Notes sold by Cascade under this
option. During January 2001, Cascade exercised this option with respect to the
$15 million of the Convertible Notes and, pursuant to the agreement between the
Company and the Chairman, 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 Convertible Notes 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, which
at September 2001 was valued at $10.5 million. The Company can replace the
collateral at any time and the collateral fee would be eliminated 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 the 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 $15 million principal amount of Convertible Notes owned by Cascade. 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.
J. Restatement of Prior Period Earnings
-- ------------------------------------
On December 12, 1999, the Company completed the private placement to Cascade of
Convertible Notes (see Note I). At that time, to assist the Company with the
private placement, the Chairman and CEO of the Company, agreed to grant Cascade
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 financial statements. Accordingly, quarterly results of operations for
the three and nine months ended September 30, 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 three and
nine-month periods ended September 30, 2000 by $222,000, or $0.08 per share, and
$713,000, or $0.25 per share, respectively.
K. Comprehensive Income
-- --------------------
Balances of accumulated other comprehensive income, net of tax, which consists
of unrealized gains (losses) on available for sale of securities, at September
30, 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 (2,613) 1,099 (1,514)
Reclassification adjustment .... 1,095 (462) 633
------- ------- -------
Balance at September 30, 2001 $ 1,058 $ (444) $ 614
======= ======= =======
The comprehensive income (loss), for the three and nine month periods ending
September 30, 2001 and 2000 are as follows (in thousands):
Three Months Ended
March 31, September 30,
2001 2000
-----------------------
Net income for the period ............................... $ 1,595 $ 978
Unrealized gains (losses) on available
for sale securities - net of income tax ................ (449) (486)
benefits of $326 and $342, respectively
Reclassification adjustment-net of income tax
(provision) benefits of ($498) and $12, respectively .. 685 (18)
------- -------
Comprehensive income .................................... $ 1,831 474
======= =======
Nine Months Ended
March 31, September 30,
2001 2000
----------------------
Net income for the period ................................. $ 3,223 $ 4,172
Unrealized gains (losses) on available
for sale securities - net of income tax .................. (1,514) (2,249)
benefits of $1,099 and $1,614, respectively
Reclassification Adjustment - net of income tax (provision)
benefits of ($462) and $316, respectively ............... 633 (454)
------- -------
Comprehensive income ...................................... $ 2,342 $ 1,469
======= =======
L. Stock Split
-- -----------
A two-for-one stock split, was affected through a distribution to its
shareholders of one share of the Company'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.
M. Subsequent Event
-- ----------------
During the fourth quarter of 2001, as a result of litigation settlement, the
Company acquired the remaining 40% in CLR Video, L.L.C. that it did not own. CLR
Video, L.L.C. provides cable television service to approximately 2,400
subscribers in northeast Kansas.
N. Segment Information
-- -------------------
As a result of the decision to spin-off its investment in Morgan (see Note C),
the Company is principally engaged in one business segment: multimedia. All
businesses are located domestically, and substantially all revenues are
domestic. The Company's operations include local telephone companies, a cable TV
company, an investment in PCS entities and investments in two network-affiliated
television stations.
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 accounting principles generally accepted in the
United States.
Operating profit 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 segment. Such allocation was $301,000 and $292,000 for the three
months ended September 30, 2001 and 2000, respectively and $903,000 and $876,000
for the nine months ended September 30, 2001 and 2000, respectively.
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
-------- -------- -------- --------
Unaudited Unaudited
(In thousands) (In thousands)
Revenues ............................................... $ 23,934 $ 17,899 $ 58,594 $ 49,489
======== ======== ======== ========
EBITDA (before corporate allocation):
Operations ............................................. $ 13,950 $ 9,763 $ 31,620 $ 26,408
Corporate expenses, gross .............................. (624) (1,066) (2,199) (2,675)
-------- -------- -------- --------
Combined total ....................................... $ 13,326 $ 8,697 $ 29,421 23,733
======== ======== ======== ========
Operating profit:
Multimedia ............................................. $ 8,656 $ 5,366 $ 17,439 $ 13,654
Unallocated corporate expense .......................... (291) (664) (1,195) (1,566)
-------- -------- -------- --------
Combined Total ....................................... $ 8,365 $ 4,702 $ 16,244 $ 12,088
======== ======== ======== ========
Operating profit ....................................... $ 8,365 $ 4,702 $ 16,244 $ 12,088
Investment income ...................................... 200 968 2,593 2,644
Interest expense ....................................... (3,865) (3,495) (10,697) (10,504)
Equity in earnings of affiliated companies ............. 213 195 582 1,464
Write-down of investment in Spinnaker Industries, Inc. . (1,294) -- (1,294) --
Gain on redemption of East/West Preferred Stock ........ -- -- -- 4,125
-------- -------- -------- --------
Income from continuing operations before income taxes,
and minority interests ............................. $ 3,619 $ 2,370 $ 7,428 $ 9,817
======== ======== ======== ========
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
SALES AND REVENUES
Revenues for the three months ended September 30, 2001 increased by $6.0 million
or 34% to $23.9 million from the third quarter of 2000. Revenues grew primarily
due to the recognition, in the third quarter of 2001, of an administrative fee
of $2.8 million; the acquisition of Central Utah Telephone Company, Inc. and its
subsidiaries, and Central Telecom Services, L.L.C., a related entity, which
combined contributed $2.7 million in revenues to the third quarter; and, to a
lesser extent, the growth in both regulated telecommunications services and
provisions of non-traditional telephone services. During the third quarter of
2001, the Company recorded an administration fee of $2.8 million for services
provided to a related entity in a Federal Communications Commission auction for
spectrum to be used for the provision of personal communications services. The
auction was conducted in 1999 and the fee was based on the entity realization on
the licenses acquired. For the nine months ended September 30, 2001, revenues
increased by $9.1 million or 18.4% to $58.6 million. The factors cited above
that affected the third quarter comparisons also affected the nine-month
comparisons.
Operating profits for the three months ended September 30, 2001, increased by
$3.7 million primarily due to the receipt of the administration fee of $2.8
million noted above. The inclusion of Central Utah and related entities
contributed $1.0 million to the operating profit increase. Operating profits for
the nine months ended September 30, 2001, increased by $4.2 million, also
primarily due to the factors sited above.
In September 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards ("SFAS") No. 141, Business Combinations, and No.
142, Goodwill and Other Intangible Assets, effective for fiscal years beginning
after December 15, 2001. Under the new rules, goodwill and intangible assets
deemed to have indefinite lives will no longer be amortized but will be subject
to annual impairment tests in accordance with the Statements. Other intangible
assets will continue to be amortized over their useful lives. The Company has
not yet completed its analysis on how the new rules will affect its accounting
for goodwill and other intangible assets, for which, implementation is required
beginning in the first quarter of 2002. Based on a preliminary analysis,
application of the nonamortization provisions of SFAS No. 142 would have
resulted in an increase in income from continuing operations of $2.1 million,
$0.68 per share, for the year ended December 31, 2000 and $1.7 million, $0.57
per share, for the nine months ended September 30, 2001. During 2002, the
Company will perform the first of the required impairment tests of goodwill and
indefinite lived intangible assets and has not yet determined what the effect of
these tests will be on the earnings and financial position of the Company.
Investment income for the quarter ended September 30, 2001 was $0.2 million,
versus $1.0 million in the third quarter of 2001. In the third quarter of 2000,
the Company recorded $0.5 million in unrealized gains on "trading securities,"
due to its ownership of Class B shares of Tremont Advisers, Inc. (NASDAQ:TMAV).
For the nine months ended September 30, 2001 and 2000, investment income was
about the same at $2.6 million.
For the three months ended September 30, 2001, interest expense increased by
$0.4 million from the third quarter of 2000. The inclusion of Central Utah and
associated acquisition debt resulted in a $0.5 million increase. Other than
effects of Central Utah, interest expense reflected higher debt levels at lower
average interest rates on the variable debt, restructuring of the Company's
Convertible Note discussed below, and the absence of the amortization of the put
premium associated with the Company's Convertible Note for the duration of 2000.
For the nine months ended September 30, 2001, interest expense increased by $0.2
million. The factors cited affecting the third quarter comparison also affected
the nine-month comparison.
During the three months ended September 30, 2001, equity in earnings of
affiliates was about the same as the previous year. For the nine months ended
September 30, 2001, equity in earnings of affiliates was lower than it was
during the corresponding prior year period due to a net gain of $0.7 million in
2000 on the sale of cellular towers at two of the Registrant's cellular
telephone company investments.
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 price at the end of each accounting period and records
the change in unrealized gain (loss) in that period's comprehensive income. In
addition, under the provisions of this statement, if the quoted market indicated
by that valuation is below the Company's basis, management is required to
consider if the decline in value is other than temporary and, if so determined,
write down the investment to its publicly traded value by recording the loss in
the Statement of Operations. As of June 30, 2001, the basis of the Spinnaker
shares was $3.2 million, or $3.19 per share. At September 30, 2001, the quoted
market price of these shares was $1.90 per share, in trading on the American
Stock Exchange. 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. In the first quarter
of 2001, Spinnaker recorded a net loss of $41.0 million, including a $36.5
million of restructuring and asset impairment reserves related to the close of
its Spinnaker Coating facility in Westbrook, Maine. On October 15, 2001,
Spinnaker Industries announced that it would not be making that day's scheduled
interest payment with regard to its 10 3/4% Senior Notes and it was actively
engaged in discussion with a majority of the holders of those notes for the
purpose of negotiating a consensual restructuring of its indebtedness. The
Company believes that the decline on quoted value is other than temporary and,
accordingly, has recorded a loss of $1.3 million during the three months ended
September 30, 2001, to write down its investment in Spinnaker to $1.9 million at
September 30, 2001. Management will continue to monitor the market value of its
Spinnaker holdings and should the market value of the common shares fall below
the $1.9 million current basis, management will again consider if the decline in
value is other than temporary, and if so, an additional write-down would be
recorded in its reported financial results. The Company notes that at September
30, 2001, the market price of Spinnaker's Class A common shares, none of which
are owned by the Company, traded on the American Stock Exchange at $0.55 per
share. The only difference between Spinnaker common and Class A common shares is
that the common shares are entitled to 1/10 vote per share and the Class A
common shares are entitled to one vote per share.
On November 13, 2001, Spinnaker announced that it has commenced voluntary
proceedings under Chapter 11 of the U.S. Bankruptcy Code for the purpose of
facilitating and accelerating its financial restructuring. Spinnaker also
announced that is has reached agreement, subject to Bankruptcy Court approval,
with its existing lenders to provide up to $30 million in debtor-in possession
financing, which Spinnaker believes will allow it to continue operating its
business in the ordinary and customary manner.
As noted above, Interactive will continue to monitor its investment in Spinnaker
and record further impairments of such investment if and when appropriate.
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,
the Company 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 Company recorded a pre-tax gain of $4.1
million in the three months ended March 31, 2000.
The income tax provision includes federal, state and local taxes. The tax
provision for the nine months ended September 30, 2001 and 2000, represent
effective tax rates of 47.8%. The causes of the difference from the federal
statutory rate are principally the effect of state income taxes, including the
effect of earnings and losses attributable to different state jurisdictions, and
the amortization of non-deductible goodwill. Beginning on January 1, 2002, the
Company will no longer be amortizing goodwill in its results of operations. As a
result, the Company's effective tax rate will be lower in the future.
Minority interest decreased earnings by $0.2 million in each of the three months
ended September 30, 2001 and 2000. A similar variance occurred in the nine-month
periods.
Income from continuing operations for the three months ended September 30, 2001
was $1.8 million, or $0.63 per share (basic and diluted), as compared to net
income of $0.9 million, or $0.33 per share (basic and diluted), in the previous
years three-month period. The recording of the administrative fee noted above
and the results of Central Utah were offset by lower investment income, higher
interest expense and the impairment of the Spinnaker shares. Income from
continuing operations for the nine months ended September 30, 2001 of $3.4
million, or $1.19 per share (basic and diluted) as compared to income from
continuing operations of $4.5 million, or $1.58 per share (basic and diluted) in
the prior year. 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 September 30, 2001, the Company had current assets of $66.4 million and
current liabilities of $59.8 million. Working capital was therefore $6.5 million
as compared to $6.8 million at December 31, 2000. The debt restructurings
discussed below, the acquisition of Central Utah Telephone Company and related
entities and the additional investment in Morgan were the primary causes of the
change in working capital.
For the first nine months, capital expenditures were $13.0 million in 2001 and
$11.5 million in 2000.
At September 30, 2001, total debt was $201.0 million, which was $34.3 million
higher than the $166.6 million at the end of 2000. The acquisition of Central
Utah and the debt restructuring discussed below were financing causes of the
increase. At September 30, 2001, there was $137.9 million of fixed interest rate
debt averaging 7.00% and $63.1 million of variable interest rate debt averaging
5.6%. The Company is considering converting a significant portion the variable
interest rate debt to fixed interest rate debt in the near future. 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, the Company completed the private placement to Cascade
Convertible Notes. At that time, to assist the Company with the private
placement, the Chairman and CEO of the Company, agreed to grant Cascade 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 legal 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, which at September 2001 was
valued at $10.5 million. The Company can replace the collateral at any time and
the collateral fee would be eliminated from thereafter. As of October 31, 2001,
the Company has replaced $7.5 million ($5.5 million at September 30, 2001) of
the escrow collateral securing the above noted letter of credit by transferring
$7.5 million of Treasury Bills to an account and pledging that to issuer of the
letter of credit.
On January 16, 2001, the option to sell agreement between Cascade and the
Company's Chairman was amended. As amended, Cascade had the right to sell up to
$15 million principal amount of Convertible Notes back to the Chairman at any
time prior to January 31, 2001 and the right to sell the remaining $10 million
of principal amount of Convertible Notes between November 15, 2002, and December
1, 2002. The option to sell is at 105% of the principal amount of Convertible
Notes 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 Convertible Notes sold by Cascade under this
option. During January 2001, Cascade exercised this option with respect to the
$15 million of the Convertible Notes and, pursuant to the agreement between the
Company and the Chairman, 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 Convertible Notes 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. The loan is to be repaid in
equal monthly installments over twelve years beginning in April 2001, bearing
interest at either the 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 $15 million principal amount of Convertible Notes owned by Cascade. 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.
At September 30, 2001, the Company had $4.5 million available under a short-term
line of credit facility, which expires on August 31, 2002, the total facility is
$10.0 million.
Lynch Corporation, the Company's predecessor, has not paid any cash dividends on
its Common Stock since 1989. The Company has not paid any cash dividends since
its inception in 1999 and does not expect to pay cash dividends on its Common
Stock in the foreseeable future. The Company currently intends to retain its
earnings, if any, for use in its business. Future financings may limit or
prohibit the payment of dividends.
The Company has a high degree of financial leverage. As of September 30, 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 spin off of Morgan
is expected to reduce the Company's equity by approximately $6 million.
The Company has a need for resources primarily to fund future long-term growth
objectives. The Company considers various alternative long-term financing
sources: debt, equity, or sale of an investment asset. While management expects
to obtain adequate financing resources to enable the Company to meet its
obligations, there is no assurance that such can be readily obtained or at
reasonable costs.
On June 22, 2001, a subsidiary of the Company acquired Central Utah Telephone,
Inc. and its subsidiaries, a 7,000-access line telephone company located in
Utah. The Company has also acquired Central Telcom Services, LLC, a related
entity, which has certain PCS and MMDS interests and Internet, long distance and
telephone equipment businesses. The combined aggregate $15.6 million purchase
price was financed primarily through the issuance of additional debt.
The Company 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 growth opportunities are not
readily apparent. The Company'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 ($33.4
million at September 30, 2001 and $26.9 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. 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 September 30, 2001, $63.1 million, or 31.4%, 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 nine-month interest expense would have changed
approximately $0.3 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-downs of its investment in Spinnaker and
Morgan. 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 the Company 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 1. Legal Proceedings
In the ordinary course of business, we become involved in
various lawsuits and claims. While the outcome of these
matters is not currently determinable, we believe that the
outcome will not have a material adverse affect on our
results of operations or our financial position.
Item 2. Change in Securities and Use of Proceeds
----------------------------------------
(a) None.
(b) None.
(c) None.
Item 3. Defaults Upon Senior Securities
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None.
Item 5. Other Information
-----------------
None.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits - None.
(b) Reports on Form 8-K
- Current Report on Form 8-K filed
on August 28, 2001.
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Company 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
November 14, 2001