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, 2000
------------------
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
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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 October 31, 2000
----- -------------------------------
Common Stock, $.0001 par value 2,821,766
<PAGE>
INDEX
LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Balance Sheets
- September 30, 2000
- December 31, 1999
Condensed Statements of Operations:
- Three and nine months ended September 30, 2000 and 1999
Condensed Statements of Cash Flows:
- Nine months ended September 30, 2000 and 1999
Notes to Condensed Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk
PART II. OTHER INFORMATION
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
Part 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements
<PAGE>
<TABLE>
LYNCH INTERACTIVE CORPORATION AND SUBSIDIAIRES
CONDENSED BALANCE SHEETS
(In thousands)
<CAPTION> September 30, December 31,
2000 1999
------------ ------------
(Unaudited) (Note)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents ............................................ $ 33,535 $ 31,354
Marketable securities ................................................ 2,108 1,587
Receivables, less allowances of $293 and $415 ........................ 17,894 16,875
Deferred income taxes ................................................ 3,404 3,404
Other current assets ................................................. 7,556 7,573
--------- ---------
TOTAL CURRENT ASSETS ..................................................... 64,497 60,793
PROPERTY, PLANT AND EQUIPMENT:
Land ................................................................. 1,348 1,347
Buildings and improvements ........................................... 10,612 10,522
Machinery and equipment .............................................. 152,338 142,558
--------- ---------
164,298 154,427
Accumulated Depreciation ............................................. (67,121) (58,497)
--------- ---------
97,177 95,930
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ............................. 59,522 62,845
ACQUIRED, NET
INVESTMENTS IN AND ADVANCES TO AFFILIATED ENTITIES ....................... 6,579 9,479
INVESTMENT IN SPINNAKER INDUSTRIES INC ................................... 9,000 11,875
OTHER ASSETS ............................................................. 12,458 13,047
--------- ---------
TOTAL ASSETS ............................................................. $ 249,233 $ 253,969
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks ............................................... $ 4,020 $ 3,271
Trade accounts payable ............................................... 4,052 4,465
Accrued interest payable ............................................. 829 805
Accrued liabilities .................................................. 20,014 21,751
Customer advances .................................................... 1,779 1,974
Current maturities of long-term debt ................................. 15,427 16,445
--------- ---------
TOTAL CURRENT LIABILITIES ................................................ 46,121 48,711
LONG-TERM DEBT ........................................................... 147,054 149,256
DEFERRED INCOME TAXES .................................................... 11,997 13,220
OTHER LIABILITIES ........................................................ 5,179 5,817
MINORITY INTERESTS ....................................................... 10,482 10,054
SHAREHOLDERS' EQUITY
COMMON STOCK, $0.0001 PAR VALUE-10,000,000 SHARES
AUTHORIZED; 2,824,766 issued (at stated value) ........................ 0 0
ADDITIONAL PAID - IN CAPITAL ......................................... 21,404 21,404
RETAINED EARNINGS (ACCUMULATED DEFICIT) .............................. 3,172 (1,713)
ACCUMULATED OTHER COMPREHENSIVE INCOME ............................... 3,971 7,240
TREASURY STOCK, 3,000 AND 400 SHARES AT COST ......................... (147) (20)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY ............................................ 28,400 $ 26,911
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .............................. $ 249,233 $ 253,969
========= =========
<FN>
Note: The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date, but does not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements.
</FN>
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except per share amounts)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- --------------------------
2000 1999 2000 1999
------------ ------------- ------------ ------------
SALES AND REVENUES
<S> <C> <C> <C> <C>
Multimedia ...................................... $ 17,899 $ 15,513 $ 49,489 $ 42,855
Services ........................................ 28,164 37,312 85,992 112,907
----------- ----------- ----------- -----------
$ 46,063 $ 52,825 $ 135,481 $ 155,762
Costs and expenses:
Multimedia ...................................... 12,302 10,610 34,877 29,779
Services ........................................ 25,009 34,627 78,990 104,123
Selling and administrative ...................... 3,872 3,019 10,133 9,467
----------- ----------- ----------- -----------
OPERATING PROFIT ................................ 4,880 4,569 11,481 12,393
Other income (expense):
Investment income ............................. 1,014 682 2,751 1,716
Interest expense .............................. (3,281) (2,874) (9,740) (8,121)
Equity in earnings of affiliated companies .... 195 44 1,464 147
Gain on redemption of East/West preferred stock 0 0 4,125 0
Reserve for impairment of investment in
PCS license holders ......................... 0 0 0 (15,406)
----------- ----------- ----------- -----------
(2,072) (2,148) (1,400) (21,664)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES, MINORITY
INTERESTS AND EXTRAORDINARY ITEM ............... 2,808 2,421 10,081 (9,271)
(Provision) benefit for income taxes ............ (1,343) (1,166) (4,768) 2,600
Minority Interests .............................. (265) (185) (428) (616)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM ......... $ 1,200 $ 1,070 $ 4,885 ($ 7,287)
----------- ----------- ----------- -----------
LOSS FROM EARLY EXTINGUISHMENT OF DEBT,
NET OF INCOME TAX BENEFIT OF $105 ............... 0 0 0 (160)
----------- ----------- ----------- -----------
NET INCOME (LOSS) ............................... $ 1,200 $ 1,070 $ 4,885 ($ 7,447)
=========== =========== =========== ===========
Basic weighted average shares ................... 2,823,000 2,824,000 2,824,000 2,830,000
Diluted weighted average shares ................. 3,411,000 2,824,000 3,412,000 2,830,000
BASIC EARNINGS PER SHARE
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM ......... $ 0.43 $ 0.38 $ 1.73 ($ 2.57)
EXTRAORDINARY ITEM .............................. 0 0 0 (0.06)
----------- ----------- ----------- -----------
NET INCOME (LOSS) ............................... $ 0.43 $ 0.38 $ 1.73 ($ 2.63)
=========== =========== =========== ===========
DILUTED EARNINGS PER SHARE
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM ......... $ 0.42 $ 0.38 $ 1.65 ($ 2.57)
EXTRAORDINARY ITEM .............................. 0 0 0 (0.06)
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS) ............................... $ 0.42 $ 0.38 $ 1.65 ($ 2.63)
=========== =========== =========== ===========
See accompanying notes
</TABLE>
<PAGE>
<TABLE>
LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
<CAPTION>
Nine Months Ended
September 30,
2000 1999
--------- ---------
OPERATING ACTIVITIES
<S> <C> <C>
Net Income (loss) ................................................... $ 4,885 ($ 7,447)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization .................................... 12,537 11,231
Net effect of purchases and sales of trading securities .......... (521) (621)
Deferred income taxes ............................................ 0 (5,238)
Share of operations of affiliated companies ...................... (1,464) (147)
Gain on redemption of East/West preferred stock .................. (4,125) 0
Gain on sale of available-for-sale securities .................... (770) 0
Minority interests ............................................... 428 616
Reserve for impairment of PCS licenses ........................... 0 15,406
Changes in operating assets and liabilities:
Receivables ................................................. (1,019) (324)
Accounts payable and accrued liabilities .................... (3,177) (914)
Other ....................................................... 11 578
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES ........................... 6,785 13,140
-------- --------
INVESTING ACTIVITIES
Capital Expenditures ................................................ (11,664) (8,171)
Investment in and advances to wireless telecommunications affiliates (1,651) 0
Proceeds from redemption of East/West preferred stock ............... 8,712 0
Acquisition of Central Scott Telephone Company - net of cash acquired 0 (25,414)
Proceeds from sale of available-for-sale securities ................. 1,294 0
Other ............................................................... 1,293 (1,507)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES ............................... (2,016) (35,092)
-------- --------
FINANCING ACTIVITIES
(Repayments) issuance of long term debt ............................. (3,220) 14,551
Net borrowings, lines of credit ..................................... 749 15,552
Treasury stock transactions ......................................... (127) 0
Advances to Lynch Corporation ....................................... 0 (15,987)
Other ............................................................... 10 971
-------- --------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES ................ (2,588) 15,087
-------- --------
Net increase (decrease) in cash and cash equivalents ................ 2,181 (6,865)
Cash and cash equivalents at beginning of period .................... 31,354 27,988
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .......................... $ 33,535 $ 21,123
======== ========
See accompanying notes.
</TABLE>
<PAGE>
NOTES TO CONDENSED FINANCIAL STATEMENTS
A. Subsidiaries of the Registrant
As of September 30, 2000, the Subsidiaries of the Registrant are as follows:
<TABLE>
<CAPTION>
Subsidiary Owned by Lynch
---------- --------------
<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%
Lynch Telephone Corporation X ................ 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 Lynch
---------- --------------
<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 Paging Corporation ............................ 100.0%
Lynch Telecommunications 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%
<FN>
Notes: (V)=Percentage voting control; (O)=Percentage of equity ownership
</FN>
</TABLE>
<PAGE>
B. 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," "Lynch Interactive"
or "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. The Spin-Off occurred on September 1, 1999. At the Spin-Off, Lynch
distributed 100 percent of the outstanding shares of common stock of its
wholly-owned subsidiary, 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,
Interactive received one million shares of common stock of Spinnaker Industries,
Inc. representing an approximate 13.6% equity 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 contributed by
Lynch, were estimated to be approximately $23 million at the date of the
Spin-Off. Such amount was subsequently decreased in the fourth quarter by $1.6
million to reflect a revision in the allocation of certain liabilities. Prior to
the spin-off, 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.
C. Basis of Presentation
As of September 30, 2000 and December 31, 1999, and for the three and nine
months ended September 30, 2000, the accompanying financial statements represent
the consolidated accounts of Interactive. For the three and nine months ended
September 30, 1999, the financial statements have been prepared using the
historical basis of assets and liabilities and historical results of operations
of the multimedia and services businesses and other assets and liabilities,
which were contributed to Interactive. However, for the three and nine months
periods ended September 30, 1999, financial information reflects a period 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 a 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 December 31, 1999 and September 30, 2000) and The
Morgan Group, Inc. ("Morgan"), in which, at December 31, 1999 and September 30,
2000, the Company owned 70.0% 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 December 31, 1999
and September 30, 2000), Capital Communications Company, Inc. (49% owned at
December 31, 1999 and September 30, 2000), Fortunet Communications, L.L.P.
(49.9% owned at December 31, 1999 and September 30, 2000), and the cellular
partnership operations in New Mexico (17% to 21% owned at December and September
30, 2000).
<PAGE>
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."
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 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 Interactive on a stand-alone basis.
At the Spin Off, the employees of the corporate office of Lynch Corporation
became employees of the Registrant and the Registrant began providing certain
corporate management services to Lynch Corporation, which is charged a
management fee for these services. This charge was $60,000 and $240,000 for the
three and nine months ended September 30, 2000, respectively.
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.
The accompanying unaudited condensed 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 Articles 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 three-month and
nine-month period ended September 30, 2000 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2000.
D. Accounting and Reporting Policies
Securities and Exchange Commission's Staff Accounting Bulletin 101summarizes
certain of the staff's views in applying generally accepted accounting
principles to revenue recognition in the financial statements. The Registrant is
currently assessing the impact, if any, that SAB will have on its revenue
recognition policy when it is adopted in the fourth quarter of 2000.
E. 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 $28.4 million in cash. As a result of this
transaction, the Registrant recorded approximately $17.0 million in goodwill,
which is being amortized over 25 years. In 2000, the Registrant finalized the
accounting for its acquisition of Central Scott Telephone Company. This
finalization increased other assets by $1.4 million, increased deferred income
tax liability by $1.1 million, reduced accumulated other comprehensive income by
$0.6 million, net of taxes, and decreased goodwill by $0.9 million.
The above acquisition was accounted for as a purchase, and accordingly, the
assets acquired and liabilities assumed were recorded at their estimated fair
market values.
<PAGE>
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 Registrant's operations as though the
acquisition of Central Scott was made at the beginning of 1999. (In Thousands of
Dollars, except per share data.)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---------------- ------------------
<S> <C> <C> <C> <C>
Sales and Revenues ........................ 46,063 53,420 135,481 158,139
Net Income (loss) before Extraordinary Item 1,200 900 4,885 (7,765)
Basic Earnings (loss) per share ........... .43 .32 1.73 (2.74)
Diluted Earnings (loss) per share ......... .42 .32 1.65 (2.74)
</TABLE>
On October 15, 2000, the Registrant signed an agreement to acquire Central Utah
Telephone, Inc. and subsidiaries, a 4,100-access line telephone company located
in Utah. Central Utah also has a contract to acquire certain telephone exchanges
from Qwest Communications International Inc. involving approximately 3,300
access lines. The Registrant has also agreed to acquire Central Telcom Services,
LLC, a related entity, which has certain PCS and MMDS interests and Internet,
long distant and telephone equipment businesses. The aggregate purchase prices,
including debt assumed, is roughly comparable to the Registrant's most recent
telephone acquisitions and is expected to be financed primarily through the
issuance of additional debt and the remaining coming from resources currently
available. The closing of the transactions, which are expected in the first
quarter of 2000, are subject to certain conditions including approvals by
certain regulatory authorities, as is the acquisition by Central Utah of the
Qwest exchanges.
F. Investment in and Advances to Affiliates Entities
During 2000, a subsidiary of the Registrant made investments in and advances to
three separate 49.9% owned entities. The funds were used as part of deposits
that were made to Federal Communications Commission by these entities to be
eligible to bid in auctions for spectrum to be used in wireless applications.
The results of the auctions were that the entities were high bidders in licenses
with a net cost of $7.8 million, $2.8 million of which has been funded through
September 30, 2000.
The Registrant has investments in two cellular telephone partnerships. During
the three months ended June 30, 2000, these partnerships sold the cellular
towers. As a result of this sale, Interactive recognized a gain of $0.7 million
prior to tax a minority interest affects, which is reflected in equity and
earnings.
G. Indebtedness
On a consolidated basis, at September 30, 2000, the Registrant maintained
short-term lines of credit facilities totaling $30.0 million, of which $11.8
million was available. The parent company of the Registrant maintains a
short-term line of credit facility totaling $10.0 million, all of which was
available at September 30, 2000. During the quarter ended September 30, 2000, an
additional $10.0 million facility expired. The parent company facility will
expire on August 31, 2001. The Morgan Group maintains a line and letter of
credit facility totaling $20.0 million, of which $1.8 million was available at
September 30, 2000 due to borrowing base considerations and outstanding letters
of credit. The Morgan Group facility expires on January 28, 2001. In general,
the credit facilities are secured by receivables and common stock of certain
subsidiaries and affiliates, in addition, certain covenants of the Morgan
facility restricts distributions.
<PAGE>
Morgan experienced a shortfall in the level of cash flow required under its
credit facility at September 30, 2000 and is projecting that it will continue to
be in violation of the cash flow and of other covenants in the fourth quarter.
Morgan received a waiver on November 10, 2000 of its shortfall through October
from its lender.
Morgan recently reduced its letters of credit required to $6,600,000. Although
the waiver reduced the credit facility to $7,600,000, Morgan believes that the
reduced capacity is sufficiently sized relative to its current requirements.
Additionally, the waiver prohibits a cash dividend in the fourth quarter. Morgan
and its lenders are in discussions and Morgan believes it will be able to
restructure or replace the facility before its January 28, 2001 maturity.
<TABLE>
<CAPTION>
Long-term debt consists of: September 30, December 31,
2000 1999
------------- ------------
(In thousands)
<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% (4.9%
weighted average at September 30, 2000 and 4.8% at December 31, 1999), secured
by assets of the telephone companies of $113.9 million $50,632 $48,892
Bank Credit facilities utilized by certain telephone and telephone holding
companies through 2009, $43.6 million at fixed interest rates averaging 8.2%
($46.9 million averaging 8.2% at December 31, 1999) and $12.9 million at
variable interest rates averaging 8.3% ($13.8 million averaging 8.1% at
December 31, 1999) 56,554 60,740
Unsecured notes issued in connection with acquisitions through 2006, at fixed
interest rates of 10.0% 27,358 27,654
Convertible subordinated note due in December 2004 at a fixed interest rate 25,000 25,000
of 6%
Other 2,937 3,415
-------- ---------
162,481 165,701
Current Maturities (15,427) (16,445)
--------- ---------
$147,054 $149,256
========= =========
</TABLE>
H. Morgan Credit Risk
With the severe downturn in the Manufactured Housing industry, Morgan's
management is continually reviewing credit worthiness of its customers and
taking appropriate steps to ensure the quality of the receivables. As of
September 30, 2000, $3.6 million of its open trade accounts receivable was with
two manufactured housing customers, of which 97% was within 45 days of invoice.
In total, $9.9 million of the open trade receivables are also within 45 days of
invoice. If either of the two major customers would significantly delay their
payments, it will have a negative impact on Morgan's cash flow.
I. Comprehensive Income
Balances of accumulated other comprehensive income, net of tax, which consists
of unrealized gains (losses) on available for sale of securities, at September
30, 2000 and December 31, 1999 are as follows (in thousands):
<PAGE>
<TABLE>
<S> <C>
Balance at December 31, 1999 ................ $ 7,240
Adjustment relating to acquisition accounting (566)
Reclassification adjustment ................. (454)
Current year unrealized losses .............. (2,249)
-------
Balance at September 30, 2000 $3,971
=======
</TABLE>
The comprehensive income (loss), for the three and nine months periods ending in
September 30, 2000 and 1999 is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
September 30,
2000 1999
-----------------
<S> <C> <C>
Net income for the period .................................... $ 1,200 $ 1,070
Unrealized gains (losses) on available for
sale securities - net of income tax benefit
(provision) of $342 and $(1,340), respectively .............. (486) 1,850
Reclassification adjustment - net of income tax benefit of $12 (18) --
------- -------
Comprehensive income ..................................... $ 696 $ 2,920
======= =======
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
2000 1999
---------------
<S> <C> <C>
Net income (loss) for the period .............................. $ 4,885 $(7,447)
Unrealized losses on available for sale
securities - net of income tax benefits
of $1,614 and $387, respectively ............................. (2,249) (535)
Reclassification adjustment - net of income tax benefit of $316 (454) --
------- -------
Comprehensive income (loss) ............................... $ 2,182 $(7,982)
======= =======
</TABLE>
J. Principal Executive Bonus Plan
At the Registrant's Annual Meeting on May 11, 2000, the shareholders approved a
Principal Executive Bonus Plan. $0.1 million and $0.4 million of expense was
recognized in accordance with this plan for the three months and nine months
ended September 30, 2000.
K. Stock Split
A two-for-one stock split, was affected through a distribution to its
shareholders of one share of Registrant's Common Stock for each share of Common
Stock owned. The record date was August 28, 2000, and the distribution date was
September 11, 2000.
Share and per share data in the accompanying financial statements and notes have
been adjusted to reflect this change.
<PAGE>
L. Earnings per share
For the three and nine months ended September 30, 1999, the following table (in
thousands, except for per share data) sets forth the computation of pro forma
basic and diluted earnings (loss) per share. Pro forma earnings (loss) per share
for these periods are calculated assuming that the shares outstanding for the
period prior to the Spin-Off, September 1, 1999, were the same as the shares
outstanding for Lynch Corporation and, subsequent to the Spin-Off, based on the
actual average weighted number of shares and share equivalents outstanding of
the Registrant. On December 13, 1999, the Registrant issued a $25 million 6%
convertible promissory note, convertible into the Registrant's common stock at
$42.50 per share.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
------- ------- ------ --------
Basic earnings per share
Numerators:
<S> <C> <C> <C> <C>
Income (loss) before extraordinary item $ 1,200 $ 1,070 $ 4,885 $(7,287)
Extraordinary item .................... -- -- -- (160)
------- ------- ------- -------
Net Income (loss) ..................... $ 1,200 $ 1,070 $ 4,885 $(7,447)
======= ======= ======= =======
Denominator:
Weighted average shares outstanding ... 2,823 2,824 2,824 2,830
======= ======= ======= =======
Earnings (loss) per share:
Income (loss) before extraordinary item $ 0.43 $ 0.38 $ 1.73 $ (2.57)
Extraordinary item .................... -- -- -- (0.06)
------- ------- ------- -------
Net income (loss) ..................... $ 0.43 $ 0.38 $ 1.73 $ (2.63)
======= ======= ======= =======
Diluted earnings per share
Numerators:
Income (loss) before extraordinary item $ 1,200 $1070 $ 4,885 $(7,287)
Extraordinary item ..................... -- -- -- (160)
------- ------- ------- -------
Net Income (loss) ...................... $ 1,200 $ 1,070 $ 4,885 $(7,447)
======= ======= ======= =======
Interest saved on assumed conversion of
convertible notes - net of tax ..... 248 -- 743 --
------- ------- ------- -------
Income (loss) before extraordinary item $ 1,448 $ 1,070 $ 5,628 $(7,287)
Extraordinary item ..................... -- -- -- (160)
------- ------- ------- -------
Net Income (loss) ...................... $ 1,448 $ 1,070 $ 5,628 $(7,447)
======= ======= ======= =======
Denominators:
Weighted average shares outstanding ... 2,823 2,824 2,824 2,830
Shares issued on conversion of
convertible Note ...................... 588 -- 588 --
------- ------- ------- -------
Weighted average share and share
Equivalents ........................ 3,411 2,824 3,412 2,830
======= ======= ======= =======
Earnings (loss) per share:
Income (loss) before extraordinary item $ 0.42 $ 0.38 $ 1.65 $ (2.57)
Extraordinary item .................... -- -- -- (0.06)
------- ------- ------- -------
Net income (loss) ..................... $ 0.42 $ 0.38 $ 1.65 $ (2.63)
======= ======= ======= =======
</TABLE>
<PAGE>
M. 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, and after the spin-off the Registrant allocated a portion of
its general corporate expenses to its operating segments. Such allocation was
$366,000 and $1 million for the three and nine months ended September 30, 2000
respectively, and $317,000 and $952,000 for the three and nine months ended
September 30, 1999. Subsequent to the Spin-Off, the Registrant is providing
corporate management services to Lynch Corporation for a management fee (see
note C).
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
-------------------- ----------------------
Revenues: (In thousands)
<S> <C> <C> <C> <C>
Multimedia .................................... $ 17,899 $ 15,513 $ 49,489 $ 42,855
Services ...................................... 28,164 37,312 85,992 112,907
--------- --------- --------- ---------
Combined Total ................................ $ 46,063 $ 52,825 $ 135,481 $ 155,762
========= ========= ========= =========
EBITDA (before corporate allocation):
Multimedia .................................... $ 9,763 $ 8,475 $ 26,408 $ 23,389
Services ...................................... 439 534 285 1,962
Corporate expenses, gross ..................... (1,066) (518) (2,675) (1,688)
--------- --------- --------- ---------
Combined total ................................ $ 9,136 $ 8,491 $ 24,018 $ 23,663
========= ========= ========= =========
Operating profit:
Multimedia .................................... $ 5,366 $ 4,572 $ 13,654 $ 12,140
Services ...................................... 178 208 (607) 969
Unallocated corporate expense ................. (664) (211) (1,566) (716)
--------- --------- --------- ---------
Combined Total ................................ $ 4,880 $ 4,569 $ 11,481 $ 12,393
========= ========= ========= =========
Operating profit .............................. $ 4,880 $ 4,569 $ 11,481 $ 12,393
Investment income ............................. 1,014 682 2,751 1,716
Interest expense .............................. (3,281) (2,874) (9,740) (8,121)
Equity in earnings of affiliated companies .... 195 44 1,464 147
Reserve for impairment of investment
in PCS license holders ....................... -- -- -- (15,406)
Gain on redemption of East/West Preferred Stock -- -- 4,125 --
--------- --------- --------- ---------
Income (loss) before income taxes, minority
interests and extraordinary item .............. $ 2,808 $ 2,421 $ 10,081 $ (9,271)
========= ========= ========= =========
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Effective with the spin-off of Interactive by Lynch Corporation on September 1,
1999, Interactive owns the multimedia and services businesses previously owned
by Lynch Corporation, as well as, 1 million shares of Spinnaker Industries Inc.
(ASE:SKK). Since the spin-off, Interactive has operated as an independent,
publicly traded company. As such, the consolidated Interactive financial
statements for periods prior to the spin-off may not be indicative of
Interactive's future performance nor do they necessarily reflect what the
financial position and results of operations of Interactive would have been if
it had operated as a separate stand-alone entity during the periods covered.
SALES AND REVENUES
Revenues for the three months ended September 30, 2000 decreased by $6.8 million
to $46.1 million from the third quarter of 1999. Within the operating segments,
multimedia revenues increased by $2.4 million or 15%, which were offset by a
$9.1 million decrease at The Morgan Group Inc. ("Morgan") - Interactive's
service subsidiary. This decline in Morgan's revenues was attributed to sharp
industry-wide decline in shipments in both manufactured housing and specialized
outsourcing. The manufactured housing industry continues to be hampered by
tighter credit standards and rising interest rates at the retail level, and a
resultant excess inventory of new and repossessed homes, which directly impacts
production and sales volume of Morgan's customers. Morgan believes that the
depressed level of shipments in manufactured housing will continue through this
year, possibly moderating in the second half of the following year. Multimedia
revenues grew primarily due to the acquisition of Central Scott Telephone
Company, which was acquired on July 16, 1999, and contributed $0.4 million to
the revenue growth, growth in both regulated telecommunications services as well
as the provision of non-traditional telephone services such as Internet and
certain regulatory revenue adjustments recorded during the quarter ($0.5
million).
Revenues for the first nine months of 2000 decreased by $20.3 million to $135.5
million from the first nine months of 1999. Within the operating segments,
multimedia revenues increased $6.6 million, or 15%, which were offset by a $26.9
million decline in revenues at Morgan. The factors noted above that resulted in
Morgan's third quarter revenue decline were also responsible for Morgan's
nine-month decline. Multimedia revenues increased due to the acquisition of
Central Scott ($2.9 million incremental contribution), growth in regulated and
non-traditional telephone services and certain regulatory revenue adjustments.
Shipments of manufactured homes tend to decline in the winter months in areas
where poor weather conditions inhibit transport. This usually reduces operating
revenues in the first and fourth quarters of the year. Morgan's operating
revenues, therefore, tend to be stronger in the second and third quarters.
Operating profit for the three months ended September 30, 2000 increased by $0.3
million to $4.9 million from the third quarter of 1999. Within the operating
segments, multimedia's operating profit increased $0.6 million, Morgan's
operating profit was flat at $0.2 million, and corporate expenses increased by
$0.3 million. Operating profit in the multimedia segment increased due to the
acquisition of Central Scott and certain regulatory revenue adjustments of $0.5
million offset by $0.3 million of additional start-up costs and operating losses
in developing new communications services, i.e., CLEC. Morgan's operating
results stayed flat as lower volume in shipments by its manufactured housing and
<PAGE>
specialized outsourcing businesses were offset by lost savings relating to
driver outsourcing, insurance and other lower Morgan claims overhead. Morgan has
instituted staff reduction and other cost savings initiatives and continues to
review incremental marketing initiatives. It is currently estimated that the
cost savings of these initiatives will approximate $2.4 million annually. The
impact of the cost savings for 2000 is expected to approximate $1.8 million, net
of severance costs. Net corporate expense increased by $0.3 million.
Operating profit for the nine months ended September 30, 2000 decreased by $0.9
million from the prior year. Within the operating segment: multimedia operating
profit increased by $1.2 million (net operating profit from Central Scott was
$0.7 million) and Morgan's operating profit fell by $1.6 million to a loss of
$0.6 million. Unallocated corporate expenses increased by $0.6 million. The
factors that affected the third quarter results were also the primary factors
that affected the nine months results.
Investment income for the quarter ended September 30, 2000 increased by $0.3
million primarily due to higher investment balances and unrealized gains on
marketable securities. For the nine-month period ended September30, 2000,
investment income increased by $1.0 million due predominantly to realized gains
on sales of available-for-sale securities of $0.8 million and higher investment
balances.
Interest expense increased from the prior year period for both the third quarter
and first nine months of 2000 by $0.4 and $1.6 million, respectively, due
predominantly to the financing of the acquisition of Central Scott and the
issuance of the Convertible Note on December 13, 1999.
Equity in earnings of affiliated companies for the nine months ended September
30, 2000 was impacted by a net gain of $0.7 million on the sale of cellular
towers at two of the Registrant's cellular telephone company investments, which
was recorded in the second quarter.
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 Registrant held a redeemable preferred stock of East/West Communications,
Inc. with a liquidation value of $8.7 million, including payment in kind of
dividends to date. In accordance with its terms, the preferred stock was
redeemed at its liquidation value and as a result the Registrant recorded a
pre-tax gain of $4.1 million in the first quarter of 2000.
A subsidiary of Lynch Interactive has investments in, loans to, and deferred
costs associated with a 49.9% equity ownership in Fortunet Communications, L.P.
("Fortunet"), a partnership formed to acquire, construct and operate licenses
for the provision of personal communications services ("PCS") acquired in the
FCC's C-Block PCS auction. Fortunet holds licenses to provide PCS service of
15MHz of spectrum in the BTA's of Tallahassee, Panama City and Ocala, Florida.
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 the $18.8
million carrying amount of Lynch's investment in Fortunet at that time. The
final net cost of these licenses in the reauction was substantially below
Fortunet's cost of the licenses it retained in these markets. Accordingly,
during the first quarter of 1999, Lynch Interactive recorded an additional write
down of $15.4 million. The Company is considering spinning off its 49.9%
interest in Fortunet.
The income tax provision (benefit) includes federal, as well as state and local
taxes. The tax provision (benefit) for the nine months ended September 30, 2000
and 1999, represent effective tax rates of 47.3% and (28.0%), respectively. The
causes of the difference from the federal statutory rate and between the two
periods are principally due to 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. 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 in 1999.
<PAGE>
Due to the current operating results at Morgan, its management continues to
review the necessity for a valuation allowance relating to a deferred tax asset
of about $3.6 million.
Minority interest reduced earnings by $0.3 million and $0.2 million for the
three months ended September 30, 2000 and 1999, respectively, as lower earnings
of Morgan were more than offset by the minority interest effect on the improved
operations of the telephone companies in which there is a minority ownership.
Minority interest effects for the nine-month period ended September 30, 2000
were reduced by $0.2 million due to the lower operating results of Morgan. Of
note, the reserve for impairment of PCS operations and the gain on the
redemption of East/West preferred stock had no effect on minority interest.
Net income for the three months ended September 30, 2000 was $1.2 million or
$0.43 per share (basic) as compared to net income of $1.1 million, or $0.38 per
share (basic), in the previous years three-month period. Net income for the nine
months ended September 30, 2000 was $4.9 million or $1.73 per share (basic) as
compared to a net loss of $7.4 million or $2.63 per share (basic) in the
previous year nine-month period. The most significant items affecting the swing
in earnings were the gain on the redemption of East/West preferred stock ($2.5
million, net of income tax provision) in 2000 and the reserve for the impairment
of the investment in PCS license holders ($10.2 million, net of income tax
benefit) in 1999.
FINANCIAL CONDITION
Liquidity/ Capital Resources
As of September 30, 2000, the Company had current assets of $64.5 million and
current liabilities of $46.1 million. Working capital was therefore $18.4
million as compared to $12.1 million at December 31, 1999. Proceeds from the
redemption of the East/West Preferred stock offset by payments under the
Company's SAR Program were the primary reason for the increase.
The first nine months capital expenditures were $11.7 million in 2000 and $8.2
million in 1999. Overall 2000 capital expenditures are expected to be
approximately $4.3 million above the 1999 level of $12.6 million due to
additional expenditures for the Company's Kansas telephone operations.
At September 30, 2000, total debt was $166.5 million, which was $2.5 million
lower than the $169.0 million at the end of 1999. At September 30, 2000, there
was $149.5 million of fixed interest rate debt averaging 7.0% and $17.0 million
of variable interest rate debt averaging 8.5%. Debt at year-end 1999 included
$151.9 million of fixed interest rate debt, at an average interest rate of 7.0%
and $17.1 million of variable interest rate debt at an average interest rate of
8.1%.
As of September 30, 2000, Interactive, the parent company, had $10.0 million
available under a short-term line of credit facility, which expires on August
31, 2001.
Morgan experienced a shortfall in the level of cash flow required under its
credit facility at September 30, 2000 and is projecting that it will continue to
be in violation of the cash flow and of other covenants in the fourth quarter.
The Company has received a waiver on November 10, 2000 of its shortfall through
October from its lender.
Morgan recently reduced its letters of credit required to $6,600,000. Although
the waiver reduced the credit facility to $7,600,000, Morgan believes that the
reduced capacity is sufficiently sized relative to its current requirements.
Additionally, the waiver prohibits a cash dividend in the fourth quarter.
<PAGE>
Morgan and its lender are in discussions and Morgan believes it will be able to
restructure the facility in the fourth quarter of the year 2000. There is no
assurance that such negotiations will be successful. In that event, Morgan would
seek alternatives financing. There can be no assurance that such alternative
financing can be obtained. If such situation is not resolved favorably to
Morgan, it could have a material adverse effect on Morgan and its financial
condition.
With the severe downturn in the manufactured housing industry, Morgan's
management is continually reviewing credit worthiness of its customers and
taking appropriate steps to ensure the quality of the receivables. As of
September 30, 2000, $3.6 million of the open trade accounts receivable was with
two manufactured housing customers, of which 97% was within 45 days of invoice.
In total, $9.9 million of the open trade receivables are also within 45 days of
invoice. If either of the two major customers would significantly delay their
payments from current practice, it will have a negative impact on Morgan's cash
flow.
Morgan periodically assesses the net realizable value of its long-lived assets
and evaluates such assets for impairment whenever events or changes in
circumstances indicate the carrying amount of an asset may not be recoverable.
As a result of the severe downturn in the manufactured housing industry, Morgan
continues to assess the recoverability of the goodwill associated with its last
acquisition. The total amount under review is $3.3 million. Morgan does not
believe there is an impairment of such assets.
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, 2000,
the ratio of total debt to equity was 5.9 to 1. Certain subsidiaries also have
high debt to equity ratios. In addition, the debt at subsidiary companies
contains restrictions on the amount of readily available funds that can be
transferred to the respective parent of the subsidiaries.
The Company has a need for resources primarily to fund future long-term growth
objectives. Interactive considers various alternative long-term financing
sources: debt, equity, or sale of an investment asset. While management expects
to obtain adequate financing resources to enable the Company to meet its
obligations, there is no assurance that such can be readily obtained or at
reasonable costs.
On October 15, 2000, the Registrant signed an agreement to acquire Central Utah
Telephone, Inc. and subsidiaries, a 4,100-access line telephone company located
in Utah. Central Utah also has a contract to acquire certain telephone exchanges
from Qwest Communications International Inc. involving approximately 3,300
access lines. The Registrant has also agreed to acquire Central Telcom Services,
LLC, a related entity, which has certain PCS and MMDS interests and Internet,
long distant and telephone equipment businesses. The aggregate purchase prices,
including debt assumed, is roughly comparable to the Registrant's most recent
telephone acquisitions and is expected to be financed primarily through the
issuance of additional debt and the remaining coming from resources currently
available. The closing of the transactions, which are expected in the first
quarter of 2000, are subject to certain conditions including approvals by
certain regulatory authorities, as is the acquisition by Central Utah of the
Qwest exchanges.
The Registrant has initiated an effort to monetize certain of its assets,
including selling a portion or all of certain investments in certain of its
operating entities. These may include minority interest in network affiliated
television stations and certain telephone operations where competitive local
exchange carrier opportunities are not readily apparent. The Registrant's
approximately 14% ownership interest in Spinnaker 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.
<PAGE>
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 ($35.6
million at September 30, 2000 and $32.9 million at December 31, 1999).
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, 2000, approximately $17.0 million, or 10.2% 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 2000 average interest rate under these
borrowings, it is estimated that the Company's 2000 nine- month interest expense
would have changed by less than $0.1 million. In the event of an adverse change
in interest rates, management would likely take actions to further mitigate its
exposure. However, due to the uncertainty of the actions that would be taken and
their possible effects, the analysis assumes no such actions. Further, the
analysis does not consider the effects of the change in the level of overall
economic activity that could exist in such an environment.
FORWARD LOOKING INFORMATION
Included in this Management Discussion and Analysis of Financial Condition and
Results of Operations are certain forward looking financial and other
information, including the cost savings and operations at Morgan, the ability of
Morgan to obtain waivers from its creditors and collect its receivables,
possible financings, possible acquisitions including Central Utah Telephone,
Central Telecom Services and Central Utah Telephone's contracted for acquisition
of certain exchanges from Qwest Communications, possible spectrum auction
participation, a possible spin off of Registrant's interest in Fortunet,
Registrant's effort to monetize certain assets, and Market Risk. It should be
recognized that such information are projections, estimates or forecasts based
on various assumptions, including without limitation, meeting its assumptions
regarding expected operating performance and other matters specifically set
forth, as well as the expected performance of the economy as it impacts the
Registrant's businesses, government and regulatory actions and approvals, and
tax consequences and cautionary statements set forth in documents filed by
Registrant and The Morgan Group with the Securities and Exchange Commission. As
a result, such information is subject to uncertainties, risks and inaccuracies,
which could be material.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
See "Quantitative and Qualitative Disclosure about Market
Risk" under Item 2 above.
<PAGE>
PART II OTHER INFORMATION
Item 5. Other Information
On August 11, 2000, the Registrant announced a two-for-one stock split, to be
effected through a distribution to its shareholders of one share of Registrant's
Common Stock for each share of Common Stock owned. The record date was August
28, 2000, and the distribution date was September 11, 2000.
Item 6. Exhibits and Reports on Form 8-K
---------------------------------
(a) Exhibits
27 -Financial Data Schedule
(b) Reports on Form 8-K
None
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 14, 2000
