SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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
-------
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 April 30, 2000
----- -----------------------------
Common Stock, $.0001 par value 1,411,983
<PAGE>
INDEX
LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Balance Sheets
- March 31, 2000
- December 31, 1999
Condensed Statements of Operations:
- Three months ended March 31, 2000 and 1999
Condensed Statements of Cash Flows:
- Three months ended March 31, 2000 and 1999
Notes to Condensed Financial Statement
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
<PAGE>
Part 1 - FINANCIAL INFORMATION -
Item 1 - Financial Statements
<TABLE>
LYNCH INTERACTIVE CORPORATION AND SUBSIDIAIRES
CONDENSED BALANCE SHEETS
(In thousands)
<CAPTION>
March 31, December 31,
2000 1999
----------- ------------
ASSETS (Unaudited) (Note)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents .................................. $ 20,322 $ 31,354
Marketable securities ...................................... 1,424 1,587
Receivables, less allowances of $448 and $415 .............. 16,965 16,875
Deferred income tax ........................................ 3,404 3,404
Other current assets ....................................... 8,046 7,573
----------- -----------
TOTAL CURRENT ASSETS ........................................... 50,161 60,793
PROPERTY, PLANT AND EQUIPMENT:
Land ....................................................... 1,347 1,347
Buildings and improvements ................................. 10,558 10,522
Machinery and equipment .................................... 145,792 142,558
----------- -----------
157,697 154,427
Accumulated Depreciation ................................... (61,433) (58,497)
----------- -----------
96,264 95,930
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED, NET ..... 62,032 62,845
INVESTMENTS IN AND ADVANCES TO AFFILIATED ENTITIES ............. 18,411 9,479
INVESTMENT IN SPINNAKER INDUSTRIES INC ......................... 9,750 11,875
OTHER ASSETS ................................................... 13,102 13,047
----------- -----------
TOTAL ASSETS ................................................... $ 249,720 $ 253,969
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks ..................................... $ 3,932 $ 3,271
Trade accounts payable ..................................... 4,558 4,465
Accrued interest payable ................................... 848 805
Accrued liabilities ........................................ 17,438 21,751
Customer advances .......................................... 1,632 1,974
Current maturities of long-term debt ....................... 16,208 16,445
----------- -----------
TOTAL CURRENT LIABILITIES ...................................... 44,616 48,711
LONG-TERM DEBT ................................................. 148,579 149,256
DEFERRED INCOME TAXES .......................................... 12,344 13,220
OTHER LIABILITIES .............................................. 5,992 5,817
MINORITY INTERESTS ............................................. 9,951 10,054
SHAREHOLDERS' EQUITY
COMMON STOCK, $0.0001 PAR VALUE
10,000,000 SHARES AUTHORIZED; 1,412,383 OUTSTANDING
ADDITIONAL PAID - IN CAPITAL ............................... 21,404 21,404
RETAINED EARNINGS (ACCUMULATED DEFICIT) .................... 839 (1,713)
ACCUMULATED OTHER COMPREHENSIVE INCOME ..................... 6,035 7,240
TREASURY STOCK, 400 AND 200 SHARES AT COST ................. (40) (20)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY .................................. $ 28,238 $ 26,911
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .................... $ 249,720 $ 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>
</TABLE>
<PAGE>
<TABLE>
LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENT OF OPERATIONS
(UNAUDITED)
(In thousands, except per share amounts)
<CAPTION>
Three Months Ended
March 31,
2000 1999
---- ----
SALES AND REVENUES
<S> <C> <C>
Multimedia ....................................................... $ 15,571 $ 13,387
Services ......................................................... 27,867 35,325
----------- -----------
43,438 48,712
Costs and expenses:
Multimedia ....................................................... 11,192 9,585
Services ......................................................... 26,406 32,312
Selling and administrative ....................................... 3,002 3,248
----------- -----------
OPERATING PROFIT ................................................. 2,838 3,567
Other income (expense):
Investment income .............................................. 504 816
Interest expense ............................................... (3,230) (2,684)
Share of operations of affiliated companies .................... 299 59
Gain on redemption of East/West preferred stock ................ 4,125 0
Reserve for impairment of investment in PCS license holders .... 0 (15,406)
----------- -----------
1,698 (17,215)
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES, MINORITY INTERESTS AND
EXTRAORDINARY ITEM ............................................... 4,536 (13,648)
(Provision) benefit for income taxes ............................. (2,087) 4,542
Minority Interests ............................................... 103 (199)
----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM .......................... 2,552 (9,305)
----------- -----------
LOSS FROM EARLY EXTINGUISHMENT OF DEBT,
NET OF TAX BENEFIT OF $105...................................... 0 (160)
----------- -----------
NET INCOME (LOSS) ................................................ $ 2,552 $ (9,465)
=========== ===========
Basic weighted average shares .................................... 1,412,000 1,418,000
BASIC EARNINGS PER SHARE
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM .......................... $ 1.81 ($ 6.56)
EXTRAORDINARY ITEM ............................................... 0 (0.11)
----------- -----------
NET INCOME (LOSS) ................................................ $ 1.81 ($ 6.67)
=========== ===========
Diluted weighted average shares .................................. 1,706,000 1,418,000
DILUTED EARNINGS PER SHARE
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM .......................... $ 1.64 (6.56)
EXTRAORDINARY ITEM ............................................... 0 (0.11)
----------- -----------
NET INCOME (LOSS) ................................................ $ 1.64 ($ 6.67)
=========== ===========
</TABLE>
<PAGE>
<TABLE>
LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
<CAPTION> Three Months Ended
March 31
---------------------
2000 1999
---- ----
OPERATING ACTIVITIES
<S> <C> <C>
Net Income (loss) ............................................................. $ 2,552 $ (9,465)
Adjustments to reconcile net income (loss) to net cash
provided by (used in)
Depreciation and amortization .............................................. 4,108 3,612
Unrealized (gain) loss on trading securities ............................... 163 (320)
Deferred taxes ............................................................. 0 (5,696)
Share of operations of affiliated companies ............................... (299) (59)
Gain on redemption of East/West preferred stock ........................... (4,125) 0
Minority interests ........................................................ (103) 199
Reserve for impairment of PCS licenses .................................... 0 15,406
Changes in operating assets and liabilities:
Receivables ........................................................... (90) (853)
Accounts payable and accrued liabilities .............................. (2,791) (853)
Other ................................................................. (473) 1,518
Other ................................................................... 0 (284)
-------- --------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES ........................... (1,058) 3,205
-------- --------
INVESTING ACTIVITIES
Capital Expenditures .......................................................... (3,664) (2,270)
Investment in and advances to wireless telecommunications affiliates .......... (15,118) (3,106)
Proceeds from redemption of East/West preferred stock ......................... 8,712 0
Other ......................................................................... 194 48
-------- --------
NET CASH (USED IN) INVESTING ACTIVITIES ....................................... (9,876) (5,328)
-------- --------
FINANCING ACTIVITIES
Repayments of long term debt .................................................. (914) (1,991)
Net borrowings (repayments), lines of credit .................................. 661 (5,582)
Treasury stock transactions ................................................... (20) 0
Advances to Lynch Corporation ................................................. 0 (357)
Other ......................................................................... 175 (838)
-------- --------
NET CASH (USED IN) FINANCING ACTIVITIES ....................................... (98) (8,768)
-------- --------
Net decrease in cash and cash equivalents ..................................... (11,032) (10,891)
Cash and cash equivalents at beginning of period .............................. 31,354 27,021
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .................................... $ 20,322 $ 16,130
======== ========
</TABLE>
<PAGE>
NOTES TO CONDENSED FINANCIAL STATEMENTS
A. Subsidiaries of the Registrant
- -- ------------------------------
As of March 31, 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%
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> <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 share 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 March 31, 2000 and December 31, 1999, and for the three months ended March
31, 2000, the accompanying financial statements represent the consolidated
accounts of Interactive. For the three months ended March 31, 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 month period ended March 31, 1999, financial
information reflects a 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 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 at March 31, 2000) and The Morgan Group, Inc.
("Morgan"), in which, at March 31, 2000, the Company owned 70.0% of the voting
power and 55.4% of common equity. The Company accounts for following affiliated
companies on the equity basis of accounting: Coronet Communications Company (20%
owned at March 31, 2000), Capital Communications Company, Inc. (49% owned at
March 31, 2000), Fortunet Communications, L.L.P. (49.9% owned at March 31,
2000), and the cellular partnership operations in New Mexico (17% to 21% owned
at March 31, 2000).
The shares of Spinnaker Industries, Inc., in which the company owns 2.5% of the
voting power and 13.6% of the common equity, are accounted for in accordance
with Statements of Financial Accounting Standards (SFAS) No. 115 "Investment in
Debt and Equity Securities."
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 are charged a
management fee for these services. This charge was $120,000 for the three months
ended March 31, 2000.
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 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 three-month period
ended March 31, 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.
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 $28.1 million in cash. As a result of this
transaction, the Registrant recorded approximately $17.9 million in 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 recorded at their estimated fair
market values.
The operating results of the acquired company are included in the Statement 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
March 31,
2000 1999
---- ----
<S> <C> <C>
Sales and Revenues .............................. $ 43,438 $ 49,893
Net Income (loss) before Extraordinary Item...... 2,552 9,406
Basic Earnings (loss) per share ................. 1.81 (6.63)
Diluted Earnings (loss) per share ............... 1.64 (6.63)
</TABLE>
F. Investment in and advances to Affiliates Entities
- -- -------------------------------------------------
During the first quarter of 2000, a subsidiary of the Registrant made
investments in and advances to two separate 49% owned entities of $15.1 million
in total; these 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 auction was
the entities were high bidders in license with a net cost of $1.5 million. In
accordance with the terms of the agreement with the entities, the remaining
amount of the investment/advance will be returned to the Registrant subsequent
to March 31, 2000.
G. Indebtedness
- -- ------------
On a consolidated basis, at March 31, 2000, the Registrant maintained short-term
lines of credit facilities totaling $40.0 million, of which $21.6 million was
available. The parent company of the Registrant maintains two short-term lines
of credit facilities totaling $20.0 million, all of which was available at March
31, 2000. The parent company facilities will expire on August 31, 2000. The
Morgan Group maintains a line and letter of credit facility totaling $20.0
million, of which $1.6 million was available at March 31, 2000. The Morgan Group
facility expires on February 28, 2001. Morgan projected it was probable that a
violation of one or more of the financial covenants associated with this
facility would occur at each of the measurement dates during 2000. Morgan and
the bank, on March 30, 2000, agreed to modify the affected covenants. Morgan was
in compliance at March 31, 2000. In general, the credit facilities are secured
by receivables and common stock of certain subsidiaries and affiliates, in
addition, certain covenants of Morgan facility restricts distributions.
<TABLE>
<CAPTION>
Long-term debt consists of: March 31, December 31,
2000 1999
---- ----
<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 March 31, 2000 and 4.8% at
December 31, 1999), secured by assets of the telephone companies
of $113.9 million .............................................................. $ 49,483 $ 48,892
Bank Credit facilities utilized by certain telephone and telephone
holding companies through 2009, $46.0 million at a fixed interest
rate averaging 8.2% ($46.9 million, ave31, 1999) and $13.3 million
at variable interest rates averaging 7.8% ($13.8 million averaging
8.1% at December 31, 1999) .................................................... 59,346 60,740
Unsecured notes issued in connection with acquisitions through 2006, at
fixed interest rate of 10.0% ................................................... 27,555 27,654
Convertible subordinated note due in December 2004 at fixed interest
rate of 6%...................................................................... 25,000 25,000
Other .......................................................................... 3,403 3,415
--------- ---------
164,787 165,701
Current Maturities ............................................................. (16,208) (16,445)
--------- ---------
$ 148,579 $ 149,256
========= =========
</TABLE>
H. Earnings per share
- -- ------------------
For the three months ended March 31, 1999, the following table sets forth the
computation of pro forma basic and diluted earnings (loss) per share. Pro forma
earnings (loss) per share for this period is calculated assuming that the shares
outstanding for such period was the same as the shares outstanding for Lynch
Corporation. Subsequent to the Spin-Off, basic and diluted earnings per share
are based on the average weighted number of shares and share equivalent
outstanding. (On December 13, 1999, the Registrant issued a $25 million 6%
convertible promissory note, convertible into the Registrant's common stock at
$85.00 per share.)
<TABLE>
<CAPTION>
Three months ended
March 31,
Basic earnings per share 2000 1999
------------------------ ---- ----
<S> <C> <C>
Numerators:
Income (loss) before extraordinary item $2,552,000 $(9,305,000)
Extraordinary item -- (160,000)
-------------- --------------
Net Income (loss) $2,552,000 $(9,465,000)
============== ==============
Denominator:
Weighted average shares outstanding 1,412,000 1,418,000
============== ==============
Earnings (loss) per share:
Income (loss) before extraordinary item $1.81 $(6.56)
Extraordinary item -- (0.11)
-------------- --------------
Net income (loss) $1.81 $(6.67)
============== ==============
Diluted earnings per share
Numerators:
Income (loss) before extraordinary item $2,552,000 $(9,305,000)
Extraordinary item -- (160,000)
-------------- --------------
Net Income (loss) $2,552,000 $(9,465,000)
============== ==============
Interest saved on assumed conversion of
convertible notes - net of tax 248,000 --
============== ==============
Income (loss) before extraordinary item $2,800,000 $(9,305,000)
Extraordinary item -- (160,000)
-------------- --------------
Net Income (loss) $2,800,000 $(9,465,000)
============== ==============
Denominators:
Weighted average shares outstanding 1,412,000 1,418,000
Shares issued on conversion of convertible note 294,000 --
-------------- --------------
Weighted average share and share equivalents 1,706,000 1,418,000
============== ==============
Earnings (loss) per share:
Income (loss) before extraordinary item $1.64 $(6.56)
Extraordinary item -- (0.11)
-------------- --------------
Net income (loss) 1.64 (6.67)
============== ==============
</TABLE>
I. Comprehensive income
- -- --------------------
The comprehensive income, for the three-month periods ending in March 31, 2000
and 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
---- ----
<S> <C> <C>
Net Income (loss) for the period ............................................... $ 2,552 $ (9,465)
Unrealized losses on available for sale securities - net of tax............... (1,205) (2,539)
-------- --------
Comprehensive Income (loss) .................................................... $ 1,347 $(12,004)
======== ========
</TABLE>
At March 31, 2000 and December 31, 1999 accumulated other comprehensive income
consisted of unrealized gains (losses) on available for sale securities.
J. 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
$317,000 for the three months ended March 31, 2000, and $308,000 for the three
months ended March 31, 1999. Subsequent to the Spin-Off, the Registrant is
providing corporate management services to Lynch Corporation for a management
fee (see note B).
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
------ ------
Revenues:
<S> <C> <C>
Multimedia ............................................... $ 15,571 $ 13,387
Services ................................................. 27,867 35,325
-------- --------
Combined Total ........................................... $ 43,438 $ 48,712
======== ========
EBITDA (before corporate allocation):
Multimedia ............................................... $ 8,160 $ 7,123
Services ................................................. (580) 659
Corporate expenses, gross ................................ (634) (587)
-------- --------
Combined total ........................................... $ 6,946 $ 7,195
======== ========
Operating profit:
Multimedia ............................................... $ 4,025 $ 3,498
Services ................................................. (898) 325
Unallocated corporate expense ............................ (289) (256)
-------- --------
$2,838 $ 3,567
======== ========
Operating profit ......................................... $ 2,838 $ 3,567
Investment income ........................................ 504 816
Interest expense ......................................... (3,230) (2,684)
Equity in earnings of affiliated companies ............... 299 59
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 $4,536 $(13,648)
======== ========
</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 first three months of 2000 decreased by $5.3 million to $43.4
million from the first three months of 1999. Within the operating segments
multimedia revenues increased by $2.2 million or 16.3 %, which were offset by a
$7.5 million decrease at Morgan Group Inc. - Interactive's service subsidiary.
This decline in Morgan's revenues was attributed to lower shipments in both the
manufactured housing and in the specialized outsourcing operations. The
manufactured housing industry continues to be hampered by tighter credit and
high customer inventory levels, which directly impacts production and sales
volumes of Morgan's customers. The largest portion of Morgan's operating
revenues are derived from the transportation of manufactured homes. Morgan
believes that the depressed level of shipments in manufactured housing will
continue through the first half of 2000 and possibly moderating in the second
half of the year. In addition, Morgan is currently evaluating the profit
potential of its niche businesses and their growth potential. Multimedia
revenues grew partially due to the acquisition of Central Scott Telephone
Company, which was acquired on July 16, 1999, (and contributed $1.2 million to
the revenue growth) and partially to growth, in both regulated
telecommunications services as well as the provision of non-traditional
telephone services such as Internet.
Shipments of manufactured homes tend to decline in the winter months in areas
where poor weather conditions inhibit transport. This usually reduces operating
revenues in the first and fourth quarters of the year. Morgan's operating
revenues, therefore, tend to be stronger in the second and third quarters.
Operating profit for the first three months of 2000 decreased by $0.7 million to
$2.8 million from the first three months of 1999 as the increase in multimedia
operating profit of $0.5 million was offset by a decrease in services operating
profit of $1.2 million. Operating profit in the multimedia segment increased due
to the acquisition of Central Scott, $0.3 million, net of goodwill amortization.
Morgan's operating profits fell by $1.2 million due to the lower volume in
shipments. In March 2000, Morgan instituted staff reduction and other cost
savings 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. Morgan continues to review incremental marketing initiatives and
continuously is reviewing staffing levels and expenditures to reduce its
overhead structure.
Investment income for quarter ended March 31, 2000 was lower than the three
months ended March 31, 1999 due to unrealized loss on marketable securities,
classified as trading, offset by increased earnings due to higher investment
balances.
Interest expense for the first quarter increased by $0.5 million predominantly
due to the acquisition of Central Scott Telephone Company and the issuance of
the Convertible Note by the parent company on December 11, 1999.
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.
<PAGE>
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 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 $18.8 million
carrying amount of Lynch's investment in Fortunet. 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 three months ended March 31, 2000 and
1999, represent effective tax rates of 46% and (33.6%), 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 jurisdiction, 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.
Minority interests was $0.1 million contribution in earnings in 2000 and $0.2
million deduction for earnings in 1999. The change is primarily due to the
results of the Morgan Group Inc. Of note, the reserve for impairment of PCS
operations had no effect on minority interest.
Net income for the three months ended March 31, 2000 was $2.6 million or $1.81
per share (basic) as compared to a net loss of $9.5 million or $6.67 per share
(basic) in the previous years three-month period. The most significant items
affecting the swing in earnings were the gain on the redemption of East/West
preferred stock ($2.6 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 March 31, 2000, the Company had current assets of $50.2 million and
current liabilities of $44.6 million. Working capital was therefore $5.6 million
as compared to $12.1 million at December 31, 1999. Registrant's advances to
affiliated entities of $15.1 million, which were put on deposit with the Federal
Communication Commission, for purposes of bidding in FCC auctions for wireless
spectrum, was the primary cause of the decline.
The first three months capital expenditures were $3.7 million in 2000 and $2.3
million in 1999. Overall 2000 capital expenditures are expected to be
approximately $0.6 million above the 1999 level of $12.6 million due to
additional expenditures for the Company's Kansas telephone operations.
At March 31, 2000, total debt was $168.7 million, which was about the same as
the $168.9 million at the end of 1999. At March 31, 2000, there was $151.4
million of fixed interest rate debt averaging 7.0% and $17.3 million of variable
interest rate debt averaging 7.8%. 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%.
Additionally, the Company had $21.6 million in unused lines of credit at March
31, 2000, of which $1.6 million was attributable to Morgan. As of March 31,
2000, Interactive, the parent company had $20.0 million available under two
short-term line of credit facilities, the maximum availability. These short-term
lines of credit expire on August 31, 2000. Management anticipates that these
lines will be renewed when they expire. At March 31, 2000, Morgan had a $20.0
million revolving credit facility that expires on February 28, 2001. Morgan
projected it was probable that a violation of one or more of the financial
covenants would occur at each of the measurements dates during 2000.
Accordingly, Morgan and the bank, on March 30, 2000, agreed to modify the
covenants. Morgan was in compliance at March 31, 2000. In general, the credit
facilities are secured by receivables and common stock of certain subsidiaries
and affiliates, in addition, certain covenants of Morgan facility restricts
distributions.
Lynch has not paid any cash dividends on its Common Stock since 1989.
Interactive does not expect to pay cash dividends on its Common Stock in the
foreseeable future. Interactive currently intends to retain its earnings, if
any, for use in its business. Future financings may limit or prohibit the
payment of dividends.
Interactive has a high degree of financial leverage. As of March 31,2000, the
ratio of total debt to equity was 6.0 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.
<PAGE>
The Company has a significant need for resources primarily to fund future
growth. Interactive is currently considering various alternative long and
short-term financing arrangements. One alternative is the equity offering of
Interactive stock. 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. 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 actively pursues acquisitions of rural telephone companies.
Specifically, it has an agreement in principal to acquire a rural telephone
company, about 40% smaller in magnitude as its recent acquisition of Central
Scott Telephone Company.
<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
(approximately $21.7 million at March 31, 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 March 31, 2000, approximately $17.3 million, or 10% 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 three month interest expense
would have changed by less than $0.1 million. In the event of an adverse change
in interest rates, management would likely take actions to further mitigate its
exposure. However, due to the uncertainty of the actions that would be taken and
their possible effects, the analysis assumes no such actions. Further, the
analysis does not consider the effects of the change in the level of overall
economic activity that could exist in such an environment.
FORWARD LOOKING INFORMATION
Included in this Management Discussion and Analysis of Financial Condition and
Results of Operations 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.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
See "Quantitative and Qualitative Disclosure about 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
No reports on Form 8-K were filed during the quarter ended
March 31, 2000
<PAGE>
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
May 12, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from the Company's
Financial Statements as of March 31, 2000 and is qualified in its entirety by
reference to such financial information.
</LEGEND>
<CIK> 0001088771
<NAME> Lynch Interactive Corporation
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollar
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 20,322
<SECURITIES> 1,424
<RECEIVABLES> 16,965
<ALLOWANCES> 488
<INVENTORY> 0
<CURRENT-ASSETS> 50,161
<PP&E> 157,697
<DEPRECIATION> 61,433
<TOTAL-ASSETS> 249,720
<CURRENT-LIABILITIES> 44,616
<BONDS> 148,579
0
0
<COMMON> 0
<OTHER-SE> 28,238
<TOTAL-LIABILITY-AND-EQUITY> 249,720
<SALES> 43,438
<TOTAL-REVENUES> 43,438
<CGS> 37,598
<TOTAL-COSTS> 40,600
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,230
<INCOME-PRETAX> 4,536
<INCOME-TAX> (2,087)
<INCOME-CONTINUING> 2,552
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,552
<EPS-BASIC> 1.81
<EPS-DILUTED> 1.64
</TABLE>
