SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
Amendment No. 1
---------------
(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, 1999
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 06-145056
-------- ---------
(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 NO X
Indicate the number of shares outstanding of each of the Registrant's classes of
Common Stock, as of the latest practical date.
CLASS OUTSTANDING AT OCTOBER 31, 1999
----- -------------------------------------
Common Stock, $.0001 par value 1,412,383
<PAGE>
INDEX
LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet:
- September 30, 1999
- December 31, 1998
Condensed Consolidated Statements of Operations:
- Three and nine months ended September 30, 1999 and 1998
Condensed Consolidated Statements of Cash Flows:
- Nine months ended September 30, 1999 and 1998
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
Item 5. Other
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
<PAGE>
Part 1 - FINANCIAL INFORMATION -
Item 1 - Financial Statements
<TABLE>
LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES
----------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEET
------------------------------------
(In thousands)
<CAPTION>
September 30 December 31
1999 1998
(Unaudited) (A)
--------- ---------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and Cash Equivalents ............................. $21,123 $27,988
Receivables,less Allowances of $330 and $320........... 19,647 18,853
Deferred income tax benefits .......................... 4,300 4,265
Other current assets .................................. 7,599 6,941
--------- ---------
TOTAL CURRENT ASSETS ................................. 52,669 58,047
PROPERTY, PLANT AND EQUIPMENT:
Land .................................................. 1,247 1,247
Buildings and Improvements ............................ 9,774 9,591
Machinery and Equipment ............................... 139,565 129,251
--------- ---------
150,586 140,089
Accumulated Depreciation .............................. (55,763) (48,906)
--------- ---------
94,823 91,183
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED, NET 64,816 47,740
OTHER ASSETS ............................................. 33,298 49,122
--------- ---------
TOTAL ASSETS ........................................ $ 245,606 $ 246,092
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks ................................ $16,105 $2,037
Notes payable to Lynch ................................ 0 15,150
Trade accounts payable ................................ 4,957 4,662
Accrued interest payable .............................. 759 889
Accrued liabilities ................................... 18,090 19,017
Customer advances ..................................... 2,130 1,996
Current maturities of long - term debt ................ 11,592 8,639
--------- ---------
TOTAL CURRENT LIABILITIES ........................... 53,633 52,390
LONG-TERM DEBT ........................................... 130,622 119,024
DEFERRED INCOME TAXES .................................... 14,391 19,850
OTHER LONG TERM LIABILITIES .............................. 5,958 4,987
MINORITY INTERESTS ....................................... 9,976 10,527
SHAREHOLDERS' EQUITY
COMMON STOCK, NO PAR VALUE-10,000,000 SHARES
AUTHORIZED; 1,412,383 shares issued (at stated value) 0 0
ADDITIONAL PAID - IN CAPITAL .......................... 23,004 29,073
RETAINED EARNINGS ..................................... 56 0
ACCUMULATED OTHER COMPREHENSIVE INCOME ................ 7,966 10,241
--------- ---------
TOTAL SHAREHOLDERS' EQUITY ........................... 31,026 39,314
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $245,606 $ 246,092
========= =========
(A) The Balance Sheet at December 31, 1998 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 from complete
financial statements.
See accompanying notes
</TABLE>
<PAGE>
<TABLE>
LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES
----------------------------------------------
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
-----------------------------------------------
(UNAUDITED)
(In thousands, except share amounts)
<CAPTION>
Three Months Nine Months
Ended September 30 Ended September 30
1999 1998 1999 1998
------- ------- ------ ------
SALES AND REVENUES ............................................
<S> <C> <C> <C> <C>
Multimedia .................................................. $ 15,513 $ 14,196 $ 42,855 $ 40,520
Services .................................................... 37,312 39,135 112,907 114,629
----------- ----------- ----------- -----------
$ 52,825 $ 53,331 $ 155,762 $ 155,149
Costs and expenses:
Multimedia ................................................ 10,610 9,958 29,779 28,410
Services .................................................. 34,627 35,856 104,123 105,217
Selling and administrative ................................ 3,019 2,748 9,467 9,069
----------- ----------- ----------- -----------
OPERATING PROFIT .............................................. 4,569 4,769 12,393 12,453
Other income (expense):
Investment Income ......................................... 682 757 1,716 2,357
Interest expense .......................................... (2,874) (2,545) (8,121) (7,984)
Share of operations of affiliated companies ............... 44 44 147 169
Reserve for impairment of investment in PCS license holders 0 0 (15,406) 0
Gain on sales of subsidiary stock ......................... 0 0 0 13
----------- ----------- ----------- -----------
(2,148) (1,744) (21,664) (5,445)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES
MINORITY INTERESTS AND EXTRAORDINARY ITEM .................... 2,421 3,025 (9,271) 7,008
(Provision) benefit for income taxes .......................... (1,166) (1,274) 2,600 (2,930)
Minority interests ............................................ (185) (315) (616) (688)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM ....................... $ 1,070 $ 1,436 ($ 7,287) $ 3,390
----------- ----------- ----------- -----------
LOSS FROM EARLY EXTINGUISHMENT OF
DEBT, NET OF TAX BENEFIT OF $105 ............................... 0 0 (160)
----------- ----------- ----------- -----------
NET INCOME (LOSS) ............................................. $ 1,070 $ 1,436 ($ 7,447) $ 3,390
=========== =========== =========== ===========
Weighted average shares outstanding ........................ 1,412,000 1,418,000 1,415,000 1,418,000
=========== =========== =========== ===========
BASIC EARNINGS PER SHARE
INCOME(LOSS BEFORE EXTRAORDINARY ITEM .......................... $ 0.76 $ 1.01 ($ 5.15) $ 2.39
EXTRAORDINARY ITEM ............................................ 0.00 0.00 (0.11) 0.00
----------- ----------- ----------- -----------
$ 0.76 $ 1.01 ($ 5.26) $ 2.39
NET INCOME (LOSS) ............................................. =========== =========== =========== ===========
See accompanying notes
</TABLE>
<PAGE>
<TABLE>
LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES
-------------------------------------------
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
-------------------------------------------
(UNAUDITED)
(In thousands)
Nine Months Ended
September 30
1999 1998
-------- -------
OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss) .............................................................. ($ 7,447) $ 3,390
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization ............................................... 11,231 10,571
Net effect of purchases of sales of trading securities ...................... (621) (260)
Deferred taxes .............................................................. (5,238) 306
Share of operations of affiliated companies ................................. (147) (169)
Minority interests .......................................................... 616 688
Reserve for impairment of investment in PCS license holders.................. 15,406 --
Changes in operating assets and liabilities net of acquisitions:
Receivables ............................................................... (324) (3,085)
Accounts payable and accrued liabilities .................................. (914) 4,721
Other ..................................................................... 578 2,170
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES ...................................... 13,140 18,332
-------- --------
INVESTING ACTIVITIES
Capital Expenditures ........................................................... (8,171) (7,135)
Acquisition of Central Scott Telephone Company - net of cash.................... (25,414) 0
Other .......................................................................... (1,507) (2,183)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES .......................................... (35,092) (9,318)
-------- --------
FINANCING ACTIVITIES
Issuance of long - term debt ................................................... 30,103 (19,147)
Advances from/to Lynch Corporation ............................................. (15,987) 2,852
Other .......................................................................... 971 (647)
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ........................... 15,087 (16,942)
-------- --------
Net decrease in cash and cash equivalents ..................................... (6,865) (7,928)
Cash and cash equivalents at beginning of period ............................... 27,988 27,058
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ..................................... 21,123 19,130
======== ========
See accompanying notes
</TABLE>
<PAGE>
A. SUBSIDIARIES OF THE REGISTRANT
As of September 30, 1999, the Subsidiaries of the Registrant are as follows:
<TABLE>
<CAPTION>
SUBSIDIARY OWNED BY INTERACTIVE
<S> <C>
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 Capital Corporation ...................................... 100.0%
Lynch Entertainment, LLC ....................................... 100.0%
Lynch Entertainment Corporation II ............................. 100.0%
Lynch Multimedia Corporation ................................... 100.0%
CLR Video, LLC ............................................... 60.0%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SUBSIDIARY OWNED BY INTERACTIVE
<S> <C>
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 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%
Acquisition Corporation
Valley Communications, Inc. ............................. 100.0%
Lynch Telephone Corporation III ........................... 81.0%
Cuba City Telephone Exchange Company .................... 81.0%
Belmont Telephone Company ............................... 81.0%
<FN>
Notes: (V)=Percentage voting control; (O)=Percentage of equity ownership
</FN>
</TABLE>
<PAGE>
A. ORGANIZATION
On August 12, 1999, the Board of Directors of Lynch Corporation ("Lynch")
approved in principle the spin off to its shareholders of its multimedia and
services businesses as an independent publicly-traded company (the "Spin-Off").
The multimedia and services businesses and the independently publicly-traded
company to which the assets and liabilities were contributed are hereinafter
referred to as Lynch Interactive Corporation (the "Company" or "Lynch
Interactive"). Prior to and contemporaneous with the Spin Off, certain legal and
regulatory actions were taken to perfect the existence of the above mentioned
affiliated multimedia and service companies as subsidiaries of Lynch Interactive
Corporation. The Spin Off occurred on September 1, 1999. In addition, at the
Spin Off, Lynch distributed 100 percent of the outstanding shares of common
stock of its wholly-owned subsidiary, Lynch Interactive, to holders of record of
Lynch's common stock as of the close of business on August 23, 1999. As part of
the Spin Off, Lynch Interactive received one million shares of common stock of
Spinnaker Industries, Inc. representing an approximately 13.6% ownership
interest (and an approximate 2.5% voting interest) and Lynch Interactive also
assumed certain short-term and long-term debt obligations of Lynch. Net assets
of approximately $23 million were contributed at the Spin Off. Prior to the Spin
Off, Lynch Interactive succeeded to the credit facilities established by Lynch.
In April 1999, Lynch received an Internal Revenue Service private letter ruling
that the distribution to its shareholders of the stock of Lynch Interactive
qualifies as tax-free for Lynch and its shareholders. In connection with
obtaining the rulings from the Internal Revenue Service ("IRS") as to the
tax-free nature of the Spin Off, Lynch made certain representations to the IRS,
which include, among other things, certain representations as to how Lynch and
Interactive intend to conduct their businesses in the future.
B. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 and
11 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles 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 nine month period
ended September 30,1999 are not necessarily indicative of the results that may
be expected for the year ending December 31, 1999.
The accompanying unaudited condensed consolidated financial statements include
the operations of the Company for the periods subsequent to September 1, 1999,
and the accompanying unaudited condensed combined financial statement the
operations of the multimedia and services businesses and other assets
contributed to Interactive for the periods through September 1, 1999 and are
based on historical amounts included in the consolidated financial statements of
Lynch except that the Company's financial statements reflect its investment in
common stock of Spinnaker in accordance with the provisions of SFAS No. 115
"Investment in Debt and Equity Securities." As a result, the Company's financial
statements reflect an increase in the market value of Spinnaker common stock of
approximately $10.2 million and $8.0 million (after-tax) at December 31, 1998
and September 30, 1999, respectively. However, the historical financial
information presented herein reflects periods during which the Company did not
operate as an independent public company and accordingly, certain assumptions
were made in preparing such financial information. Such information, therefore,
may not necessarily reflect the results of operations, financial condition or
cash flows of the Company in the future or what they would have been had the
Company been an independent public company during the reporting periods.
Investments in affiliates in which the Company does not have majority voting
control are accounted for in accordance with the equity method. All material
intercompany transactions and balances have been eliminated. The Company
consolidates the operating results of its telephone and cable television
subsidiaries (60-100% owned at September 30, 1999) and The Morgan Group, Inc.,
in which, at September 30, 1999, the Company owned 70.1% of the voting power and
55.4% of common equity. The Company accounts for the following affiliated
Companies on the equity basis of accounting: Coronet Communications Company (20%
owned at September 30, 1999), Capital Communications Company, Inc. (49% owned at
September 30, 1999) and Fortunet Communications, Inc. (49.9% owned at September
30, 1999). 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 Statement of Financial Accounting Standards (SFAS) No. 115
"Investments in Debt and Equity Securities."
<PAGE>
Lynch had historically provided substantial support services such as finance,
cash management, legal, and human resources to its various business units. Lynch
allocated the cost for these services among the business units supported,
including Interactive, based principally on informal estimates of time spent by
the corporate office on both Interactive and Lynch matters. In the opinion of
management, the method of allocating these costs is reasonable; however, the
costs of these services allocated to the Company are not necessarily indicative
of the costs that would have been incurred by the Company on a stand-alone
basis.
At the Spin Off, the employees of the corporate office of Lynch Corp. became
employees of the Registrant and the Registrant will provide corporate management
services to Lynch and charge a management fee for these services.
Lynch Interactive and Lynch have entered into certain agreements governing
various ongoing relationships, including the provision of support services and a
tax allocation agreement. The tax allocation agreement provides for the
allocation of tax attributes to each company as if it had actually filed with
the respective tax authority.
C. ACQUISITIONS
On July 16, 1999, Lynch Telephone Corporation IX, a subsidiary of the
Registrant, acquired by merger, all of the stock of Central Scott Telephone
Company for approximately $28.1 million in cash. As a result of this
transaction, the Registrant recorded approximately, $18.9 million in preliminary
goodwill, which is being amortized over 25 years.
The above acquisition was accounted for as a purchase, and accordingly, the
assets acquired and liabilities assumed were preliminarily recorded at their
estimated fair market values.
The operating results of the acquired company are included in the Consolidated
Statements of Operations from its acquisition date. The following unaudited
proforma information shows the results of the Registrant's operations as though
the acquisition of Central Scott was made at the beginning of 1998. (In
Thousands of Dollars, except per share data.)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales and Revenues ................. $ 53,289 $ 54,207 $ 158,603 $ 158,193
Operating Profit ................... 4,722 5,110 13,282 13,603
Income (Loss) from Continuing
Operations Before Income Taxes and
Minority Interest ................ 1,782 2,905 (10,102) 6,737
Income (Loss) Before Extraordinary
Item ............................. 689 1,413 (7,822) 3,212
Income (Loss) Before Extraordinary
Item Per Share ................... $ 0.49 $ 1.00 $ (5.53) $ 2.27
</TABLE>
D. INDEBTEDNESS
On a consolidated basis, at September 30, 1999, the Registrant maintains
short-term and long-term lines of credit facilities totaling $42.9 million, of
which $16.0 million was available. The Registrant (Parent Company) maintains two
short-term lines of credit facilities totaling $20.0 million, of which $6.8
million was available at September 30, 1999. The parent company facilities will
expire on August 31, 2000. The Morgan Group maintains lines and letters of
credit totaling $20.0 million, of which $9.2 million was available at September
30, 1999. These facilities, as well as facilities at other subsidiaries of the
Registrant, generally limit the credit available under the lines of credit to
certain variables, such as inventories and receivables, and are secured by the
operating assets of the subsidiary, and include various financial covenants. Due
to certain of these restrictive covenants and working capital requirements of
the subsidiaries, cash distributions from the subsidiaries are limited. At
September 30, 1999, $2.9 million of these total facilities expire within one
year.
In general, the credit facilities are secured by property, plant and equipment,
inventory, receivables and common stock of certain subsidiaries and contain
certain covenants restricting distributions to the Registrant.
Long-term debt consists of (all interest rates are at September 30, 1999):
Interest rates at December 31, 1998 were not significantly different except
where noted.
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
LONG TERM DEBT CONSISTS OF: 1999 1998
------------- -----------
<S> <C> <C>
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), secured by assets of the telephone companies of $109.3
million ........................................................................ $ 49,036 $ 45,264
Bank Credit facilities utilized by certain telephone and telephone holding
companies through 2009, $47.8 million at a fixed interest rate averaging 8.2%
($33.7 million averaging 8.9% at December 31, 1998) and $14.0 million at
variable interest rates averaging 7.3% ($16.9 million averaging 7.3% at December
31, 1998) ...................................................................... 61,781 50,623
Unsecured notes issued in connection with acquisitions through 2006, all at
fixed interest rates averaging 9.0% 28,114 28,003
Other .......................................................................... 3,283 3,773
--------- ---------
142,214 127,663
Current Maturities ............................................................. (11,592) (8,639)
--------- ---------
$ 130,622 $ 119,024
========= =========
</TABLE>
E. EARNINGS PER SHARE
In December 1997, the Registrant's predecessor corporation adopted Statement of
Financial Accounting Standards("SFAS") No. 128, Earnings Per Share which changed
the methodology of calculating earnings per share. Basic earnings per common
share amounts are based on the average number of common shares outstanding
during each period, excluding the dilutive effects of options, warrants, and
convertible securities. Diluted earnings per share reflect the effect, using the
treasury stock method. All earnings per share amounts have been presented in
accordance with, and where appropriate, restated to conform to the SFAS No. 128
requirements.
F. COMPREHENSIVE INCOME
Effective January 1, 1998, the Registrant's predecessor corporation adopted SFAS
No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components; however, the
adoption of SFAS No. 130 had no impact on the Company's net income. SFAS No. 130
requires unrealized gains or losses on the Registrant's available-for-sale
securities, which prior to adoption were reported separately in shareholders
equity to be included in other comprehensive income. The components of
comprehensive income, net of tax, for the three and nine months ended September
30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1999 1998 1999 1998
------ ------ ------- --------
<S> <C> <C> <C> <C>
Net income (loss) .................. $ 1,070 $ 1,436 $(7,447) $ 3,390
Unrealized gain (loss) on securities 198 150 (2,275) 750
------- ------- ------- -------
Comprehensive income (loss) ....... $ 1,268 $ 1,586 $(9,722) $ 4,140
======= ======= ======= =======
</TABLE>
<PAGE>
The components of accumulated other comprehensive income, net of related tax, at
September 30, 1999 and December 31, 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
------- --------
<S> <C> <C>
Unrealized gain (loss) on securities $ 7,966 $10,241
------- -------
Accumulated comprehensive income ... $ 7,966 $10,241
======= =======
</TABLE>
G. 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. Prior to the
Spin Off, Lynch allocated a portion of its general corporate expenses to its
operating segments. Such allocation to the Company was $158,000 for the three
months ended September 30, 1998, and $474,000 for the nine months ended
September 30, 1998. Subsequent to the Spin Off, the Registrant is providing
corporate management services to Lynch Corporation for a management fee.
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30
1999 1998 1999 1998
------------- ------------ ------------ -------------
Revenues:
<S> <C> <C> <C> <C>
Multimedia .............................................. $ 15,513 $ 14,196 $ 42,855 $ 40,520
Services ................................................ 37,312 39,135 112,907 114,629
--------- --------- --------- ---------
Combined Total .......................................... $ 52,825 $ 53,331 $ 155,762 $ 155,149
========= ========= ========= =========
EBITDA (before corporate allocation):
Multimedia .............................................. $ 8,482 $ 7,547 $ 28,396 $ 21,738
Services ................................................ 534 1,020 1,962 2,545
Corporate expenses, gross ............................... (520) (156) (1,690) (1,242)
========= ========= ========= =========
Combined total .......................................... $ 8,496 $ 8,411 $ 28,668 $ 23,041
========= ========= ========= =========
Operating profit:
Multimedia .............................................. $ 4,572 $ 4,052 $ 12,140 $ 11,580
Services ................................................ 208 699 969 1,591
Unallocated corporate expense ........................... (211) 18 (716) (718)
========= ========= ========= =========
Total operating profit for reportable segments .......... $ 4,569 $ 4,769 $ 12,393 $ 12,453
========= ========= ========= =========
Other profit or loss:
Investment income ....................................... $ 682 $ 757 $ 1,716 $ 2,357
Interest expense ........................................ (2,874) (2,545) (8,121) (7,984)
Equity in earnings of affiliated companies .............. 44 44 147 169
Reserve for impairment of investment in PCS license
holders ................................................. -- -- (15,406) --
Gain on sales of subsidiary and affiliate stock and other
operating assets ........................................ -- -- -- 13
========= ========= ========= =========
Income (loss) before income taxes, minority interests and
extraordinary item ...................................... $ 2,421 $ 3,025 $ (9,271) $ 7,008
========= ========= ========= =========
</TABLE>
H. Personal Communication Services
An Interactive subsidiary has loans to and a 49.9% limited partnership interest
in Fortunet Communications, L.P. ("Fortunet"). Fortunet's only assets consist of
three 15MHz personal communications licenses that were acquired in the C-Block
auction held by the Federal Communications Commission ("FCC"). In that auction,
Fortunet acquired 30MHz licenses in these markets, but on June 8, 1998, under
FCC restructuring options, it returned 15MHz of the original 30MHz acquired. On
April 15, 1999, the FCC completed the reauction of all the C-Block licenses that
were returned to it since the original C-Block auction, including the three
15MHz licenses that Fortunet returned. In that reauction, the successful bidders
paid a total $2.7 million for the three licenses as compared to $18.8 million
carrying amount of Lynch's investment in Fortunet. Accordingly, for the nine
months September 30, 1999, Lynch has recorded a write-down of $15.4 million in
its investment in Fortunet to reflect the amount bid for similar licenses in the
reauction, plus an additional $0.7 million of capitalized expenses and interest
to leave a net carrying value of $3.4 million.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SALES AND REVENUES
Revenues for the first nine months of 1999 increased by $0.6 million to $155.8
million from the first nine months of 1998. Within the operating segments:
multimedia, whose revenues increased 5.8%, contributed $2.3 million to the
increase and services revenues decreased $1.7 million. This decline in services
revenues was primarily in the manufactured housing operation and was partially
offset by higher revenues in the specialized outsourcing operation. Manufactured
housing shipments decreased eight percent in the quarter reflecting a weakening
demand in the retail sales of manufactured homes resulting in lower shipments by
some of the Company's major customers. These events have also in part resulted
in a decrease in the Company's market share measured as the percent of new homes
shipments. The Company's current anticipation is that this market weakness will
continue for the foreseeable future perhaps with the market improving in the
second half of Year 2000.
Multimedia revenues grew primarily due to the acquisition of Central Scott
Telephone Company and partially to growth in both telecommunications services as
well as the provision of non-traditional telephone services such as Internet.
For the three months ended September 30, 1999, revenues decreased by $0.5
million as the acquisition of Central Scott Telephone Company aided in the
multimedia's revenue increase of $1.2 million, which was offset by revenue
decrease at The Morgan Group due to the above-mentioned factors.
Operating profit for the first nine months of 1999 decreased by $0.1 million to
$12.4 million from the first nine months of 1998 due to increase in multimedia
offset by a decrease in services. Operating profit in the multimedia segment
increased by $0.6 million. Morgan's operating results decreased by $.6 million
due to a shift in revenue mix to lower margin business partially offset by cost
reductions of $1.1 million. Net corporate expense was $0.7 million in the first
nine months of 1999 and 1998.
Operating profit for the three months ended September 30, 1999 decrease by $0.2
million from the previous year due to lower operating profit at The Morgan
Group, which was not sufficient to offset the increased operating profit as a
result of the acquisition of Central Scott Telephone Company, net of the
goodwill amortization. Investment income for quarter ended September 30, 1999
was slightly lower than the three months ended September 30, 1998 due to lower
investment balances.
Investment income in the first nine months of 1999 of $1.7 million decreased by
$0.6 million from the first nine months of 1998 due to change in unrealized gain
(loss) of marketable securities, classified as trading.
Interest expense for the quarter increased by $0.3 million predominantly due to
the acquisition of Central Scott Telephone Company. Interest expense increased
by $0.1 million to $8.1 million in the first nine months of 1999 from $8.0
million in the first nine months of 1998, as reduced borrowings were offset by
the lower capitalized interest on the Company's investment in PCS licenses of
$1.2 million.
An Interactive subsidiary has loans to and a 49.9% limited partnership interest
in Fortunet Communications, L.P. ("Fortunet"). Fortunet's only assets consist of
three 15MHz personal communications licenses that were acquired in the C-Block
auction held by the Federal Communications Commission ("FCC"). In that auction,
Fortunet acquired 30MHz licenses in these markets, but on June 8, 1998, under
FCC restructuring options, it returned 15MHz of the original 30MHz acquired. On
April 15, 1999, the FCC completed the reauction of all the C-Block licenses that
were returned to it since the original C-Block auction, including the three
15MHz licenses that Fortunet returned. In that reauction, the successful bidders
paid a total $2.7 million for the three licenses as compared to $18.8 million
carrying amount of Lynch's investment in Fortunet. Accordingly, for the nine
months September 30, 1999, Lynch has recorded a write-down of $15.4 million in
its investment in Fortunet to reflect the amount bid for similar licenses in the
reauction, plus an additional $0.7 million of capitalized expenses and interest
to leave a net carrying value of $3.4 million.
Also of note, Lynch Interactive announced that as a result of the contract for
the acquisition of East/West Communications, Inc. (BULLETIN BOARD:EWCM) BY
OMNIPOINT CORPORATION (NYSE:OMPT), announced on Friday, October 22, 1999, Lynch
Interactive's redeemable preferred stock of East/West, which is currently on
Lynch Interactive's books for $4.5 million, will be redeemed at liquidation
value plus accrued dividends at the time of closing. Consummation of the
acquisition of East/West Communications, Inc. by Omnipoint Corporation is
subject to satisfaction of numerous conditions, including, without limitation,
receipt of requisite governmental approvals. This valuation amount is $8.5
million as of September 30, 1999.
<PAGE>
The income tax provision (benefit) includes federal, as well as state and local
taxes. The tax provision (benefit) for the three and nine months ended September
30, 1999 and 1998, represent effective tax rates of (43%) and 42%, respectively.
The differences from the federal statutory rate are principally due to the
effect of state income taxes and amortization of non-deductible goodwill. Of
note, no state tax benefit has been provided for the reserve for the impairment
of $15.4 million in the investment in PCS license holders.
Minority interest at $0.6 million was the same for both periods. Of note, the
reserve for impairment of PCS operations had no effect on minority interest.
Net loss for the nine months ended September 30, 1999 was ($7.4) million or
$(5.26) per share as compared to a net income of $3.4 million or $2.39 per share
in the previous nine month period. The reserve for the impairment of the
investment in PCS license holders ($10.2 million net of income tax benefit) was
the primary cause for the swing. Net income for the three months ended September
30, 1999 was $1.1 million, or $0.76 per share compared to net income of $1.4
million, or $1.01 per share for the same three month period in 1998.
In mid-July 1999, an Interactive subsidiary acquired Central Scott Telephone
Company ("Scott") for approximately $28.1 million in cash. Scott has
approximately 6,000 access lines in Scott County, Iowa. Interactive funded the
acquisition principally through borrowings. Scott had revenues of $4.4 million
in 1998. While Scott was profitable in 1998, Scott is not expected to contribute
to Interactive's earnings in 1999 due to interest expense on the financing debt.
FINANCIAL CONDITION
LIQUIDITY/CAPITAL RESOURCES
As of September 30, 1999, the Company had current assets of $52.7 million and
current liabilities of $53.6 million. Working capital was therefore a negative
$(0.9) million as compared to $5.6 million at December 31, 1998.
The first nine months capital expenditures were $8.2 million in 1999 and $7.1
million in 1998. Overall 1999 capital expenditures are expected to be
approximately $3.2 million above the 1998 level due to additional expenditures
for the Company's Kansas telephone operations.
At September 30, 1999, total debt was $158.3 million, which was $13.4 million
more than the $144.9 million at the end of 1998. At September 30, 1999, there
was $128.3 million of fixed interest rate debt averaging 7.0% and $30.1 million
of variable interest rate debt averaging 7.8%. Debt at year end 1998 included
$110.8 million of fixed interest rate debt, at an average interest rate of 7.1%
and $34.1 million of variable interest rate debt at an average interest rate of
7.6%. Additionally, the Company had $16.6 million in unused lines of credit at
December 31, 1998, of which $8.7 million was attributable to Morgan. At
September 30, 1999, there was $16.0 million in unused lines of credit of which
Morgan had $9.2 million available. As of September 30, 1999 and December 31,
1998, Interactive borrowed $13.2 million and $15.2 million under two short-term
line of credit facilities with maximum availability totaling $20.0 million.
These short-term lines of credit expire on August 31, 2000. Management
anticipates that these lines will be renewed when they expire.
On February 22, 1999, The Morgan Group, Inc. filed a Schedule 13E4, that invited
its shareholders to tender up to 100,000 shares of Class A common stock, to
Morgan at prices not less than $8.50 nor greater than $10.00 per share. The
tender offer expired March 19, 1999, whereby Morgan purchased 103,000 shares at
$9 per share. Lynch Interactive did not tender any shares in response to this
offer.
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 September 30, 1999,
the ratio of total debt to equity was 5.1 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 significant need for resources to fund future growth as well
as the ongoing operations of the parent company. Interactive is currently
considering various alternative long and short-term financing arrangements. One
alternative is the equity offering of Interactive stock which Interactive has a
commitment to make pursuant to the representations made to obtain its private
letter tax ruling. Other alternatives, either in addition to or in lieu of an
Interactive equity offering, include a sale of shares of Spinnaker stock or a
sale of a portion or all of certain investment in operating entities, either
directly or through an exchangeable debt instrument. As part of the
<PAGE>
representations made to the Internal Revenue Service in connection with the
private letter ruling, Interactive has a commitment to enter into a minimum $15
million equity stock offering within one year of the Spin Off. 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.
Lynch Interactive is conducting detailed negotiations regarding the private
placement of an approximately $25 million convertible immediate term, interest
bearing note, convertible into Lynch Interactive stock. The negotiations include
an option by the purchaser, to sell the note to the Chairman of Lynch
Interactive one year after issuance. There can be no assurance, whether because
of market or business conditions, reasons specific to the parties or otherwise,
that the contemplated terms of the note will not change or that the transaction
will be consummated.
Lynch Interactive is also actively pursuing acquisitions of rural telephone
companies. Specifically, it is holding detailed negotiations regarding the
potential acquisition of a rural telephone company, which also has cellular and
other telecommunications interests, in the general magnitude (though somewhat
smaller) of its recent acquisition of Central Scott Telephone Company.
YEAR 2000
The Company has initiated a comprehensive review of its computer systems to
identify the systems that could be affected by the "Year 2000" issue and is
developing and conducting an implementation plan to resolve the issue. The Year
2000 problem is the result of computer programs being written using two digits
(rather than four) to define the applicable year. Any of the Company's programs
or programs utilized by vendors to the Company that have time-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a major system failure or miscalculation. The Company's Year
2000 review is being performed primarily by internal staff, and in certain
operations is supplemented by outside consultants. The principal Information
Technology ("IT") systems that may be impacted by the Year 2000 for the
Company's telecommunications operations are central office switching, billing
and accounting. The principal IT systems for the Morgan Group are order entry
dispatch and accounting. The Year 2000 may also impact various non-IT systems,
including among other things security systems, HVAC, elevator systems, and
communications systems. In addition, each of the Company's businesses may be
impacted by the Year 2000 readiness of third party vendors/suppliers.
Due to the integral nature of switching equipment and billing software to their
operations, the telecommunications businesses are most effected by the Year 2000
issue. The majority of the telephone companies' switching and billing software
is Year 2000 compliant, with the remaining expected to be compliant in the
fourth quarter of 1999. The telecommunications businesses rely on switching
equipment and software provided by third party vendors. It is the Company's
understanding that the vendors have completed testing of the software and that
no additional action by the Company will be required after installation. The
telecommunications businesses periodically upgrade switching software in order
to remain current with respect to service features. The upgrades provided other
enhanced service features as well as included Year 2000 readiness and have been
capitalized. Other remediation costs, including internal costs have been charged
to expense as incurred. The total cost of Year 2000 remediation for the
telecommunications businesses is estimated to be approximately $1.1 million, of
which approximately $0.7 million has been spent to date. The telecommunications
businesses have for the most part, developed contingency plans in the event that
steps taken are not successful.
The Morgan Group, Inc. is in the process of remediating the Year 2000 issue,
primarily through the replacement of a significant portion of its operating
software. The implementation phase was completed in July 1999, with final
testing completed in September 1999. The total cost of Year 2000 remediation is
estimated to be approximately $0.4 million, of which approximately $0.3 million
has been spent to date. Costs specifically associated with modifying internal
use software are charged to expense as incurred. Morgan presently believes that
its Year 2000 compliance program will essentially be completed on a timely
basis, posing no significant internal operations problems. Management, at this
time, sees no need for a contingency plan for internal Year 2000 software
issues.
<PAGE>
The estimated costs and projected dates of completion for the Company's Year
2000 program are based on management's estimates and were developed using
numerous assumptions of future events, some of which are beyond the Company's
control. The Company presently believes that with modifications to existing
software and converting to new software, the Year 2000 issue will not pose
significant operational problems for the Company as a whole. The Company
believes it has substantially completed the modifications and conversions
required to be Year 2000 compliant and anticipates to be fully completed in
adequate time. In addition, the Company is in the process of developing
contingency procedures with regard to significant systems. However, if such
modifications and conversions and contingency procedures are not effective, or
if key third parties, suppliers or customers experience Year 2000 problems, the
Year 2000 issue may materially and adversely impact the Company's financial
condition, results of operations and cash flows.
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 equivalents and short-term investments
(approximately $21.0 million at September 30, 1999 and $28.0 million at December
31, 1998). 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 September 30, 1999, approximately $30.1 million, or 19% 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 1999 average interest rate under these
borrowings, it is estimated that the Company's 1999 nine month interest expense
would have changed by $0.2 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.
------------------------
Included in this Management Discussion and Analysis of Financial Condition and
Results of Operations and Item 5 below are certain forward looking financial and
other information, including without limitation matters relating to East/West,
possible financings, possible acquisitions, Year 2000 matters 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 risk factors 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.
<PAGE>
Item 3. Quantitative and Qualitative Disclosure About Market Risk
See "Market Risk" under Item 2 above.
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 - Financial Data Schedule
(b) Reports on Form 8-K
Report on Form 8-K filed August 26, 1999 (relating to Morgan)
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LYNCH INTERACTIVE CORPORATION
(Registrant)
BY: S/ROBERT E. DOLAN
Robert E. Dolan
Chief Financial Officer
November 15, 1999
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