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, 2002
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 1-15097
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LYNCH INTERACTIVE CORPORATION
-----------------------------
(Exact name of Registrant as specified in its charter)
Delaware 06-1458056
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State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
401 Theodore Fremd Avenue, Rye, New York 10580
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(Address of principal executive offices) (Zip Code)
(914)921-8821
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Registrant's telephone number, including area code
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the Registrant's classes of
Common Stock, as of the latest practical date.
Class Outstanding at May 1, 2002
----- --------------------------
Common Stock, $.0001 par value 2,811,651
INDEX
LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
-------------------------------
Condensed Consolidated Balance Sheets
- March 31, 2002
- December 31, 2001
Condensed Consolidated Statements of Operations:
- Three months ended March 31, 2002 and 2001
Condensed Consolidated Statements of Cash Flows:
- Three months ended March 31, 2002 and 2001
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
Item 3. Quantitative and Qualitative Disclosure About Market Risk
---------------------------------------------------------
PART II. OTHER INFORMATION
SIGNATURE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
LYNCH INTERACTIVE CORPORATION AND SUBSIDIAIRES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
March 31, December 31,
2002 2001
---------- ------------
(Unaudited) (Note)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................................................. $ 35,337 $ 31,233
Receivables, less allowances of $483 and
$424, respectively ....................................................... 9,767 9,963
Material and supplies ...................................................... 3,453 3,373
Prepaid expenses and other current assets .................................. 2,406 1,757
Current assets of Morgan Group Holding Co. .................................
distributed to shareholders ............................................ -- 12,757
--------- ---------
TOTAL CURRENT ASSETS ......................................................... 50,963 59,083
PROPERTY, PLANT AND EQUIPMENT:
Land ....................................................................... 840 840
Buildings and improvements ................................................. 10,858 10,858
Machinery and equipment .................................................... 184,401 182,109
--------- ---------
196,099 193,807
Accumulated Depreciation ................................................... (78,434) (74,530)
--------- ---------
117,665 119,277
GOODWILL ..................................................................... 61,566 61,566
OTHER INTANGIBLE ASSETS ...................................................... 2,281 2,370
INVESTMENTS IN AND ADVANCES TO AFFILIATED ENTITIES ........................... 13,785 14,277
OTHER ASSETS ................................................................. 11,814 12,534
NON CURRENT ASSETS OF MORGAN GROUP HOLDING CO ................................
DISTRIBUTED TO SHAREHOLDERS ............................................... -- 10,241
--------- ---------
TOTAL ASSETS ................................................................. $ 258,074 $ 279,348
========= =========
IABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks ..................................................... $ 9,804 $ 10,336
Trade accounts payable ..................................................... 480 921
Accrued interest payable ................................................... 1,690 1,579
Accrued liabilities ........................................................ 19,007 15,700
Current maturities of long-term debt ....................................... 21,154 28,126
Current liabilities of Morgan Group Holding Co. ............................
distributed to shareholders ........................................... -- 11,281
--------- ---------
TOTAL CURRENT LIABILITIES ............................................... 52,135 67,943
LONG-TERM DEBT ............................................................... 167,638 165,076
DEFERRED INCOME TAXES ........................................................ 8,117 8,515
OTHER LIABILITIES ............................................................ 843 887
MINORITY INTEREST ............................................................ 6,752 6,120
NON CURRENT LIABILITIES AND MINORITY
INTERESTS OF MORGAN GROUP HOLDING CO .......................................
DISTRIBUTED TO SHAREHOLDERS ................................................ -- 6,290
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
COMMON STOCK, $0.0001 PAR VALUE-10,000,000
SHARES AUTHORIZED; 2,824,766 ISSUED; 2,814,151
and 2,820,051 outstanding ............................................... -- --
ADDITIONAL PAID-IN CAPITAL ................................................. 21,406 21,406
RETAINED EARNINGS .......................................................... 720 1,800
ACCUMULATED OTHER COMPREHENSIVE INCOME ..................................... 946 1,542
TREASURY STOCK, 10,615 and 4,715 shares, at cost ........................... (483) (231)
--------- ---------
22,589 24,517
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................................... $ 258,074 $ 279,348
========= =========
Note: The balance sheet at December 31, 2001 has been derived from the audited
financial statements at that date, but does not include all of the information
and footnotes required by accounting principles generally accepted in the Untied
States for complete financial statements.
See accompanying notes.
LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except per share and share amounts)
Three Months Ended
March 31,
2002 2001
-------- --------
SALES AND REVENUES ........................... $ 20,974 $ 17,209
COSTS AND EXPENSES:
Multimedia ................................... 15,038 12,748
Selling and administrative ................... 692 812
----------- -----------
OPERATING PROFIT ............................. 5,244 3,649
Other income (expense):
Gain on sale of cellular partnership ...... 4,965 --
Investment income ......................... 997 1,218
Interest expense .......................... (3,373) (3,415)
Equity in earnings of affiliated companies 204 165
----------- -----------
2,793 (2,032)
----------- -----------
INCOME BEFORE INCOME TAXES, MINORITY
INTERESTS AND OPERATIONS OF MORGAN ......... 8,037 1,617
Provision for income taxes ................... (3,132) (839)
Minority Interests ........................... (632) (168)
----------- -----------
INCOME FROM CONTINUING OPERATIONS ............ 4,273 610
INCOME (LOSS) FROM OPERATIONS OF MORGAN
GROUP HOLDING CO. DISTRIBUTED TO
SHAREHOLDERS NET OF INCOME TAXES $0 and $0,
RESPECTIVELY AND MINORITY INTERESTS $868
AND $240, RESPECTIVELY .................... (1,888) (301)
----------- -----------
NET INCOME ................................... $ 2,385 $ 309
=========== ===========
Basic weighted average shares outstanding .... 2,818,000 2,822,000
Diluted weighted average shares outstanding .. 3,053,000 2,822,000
BASIC EARNINGS PER SHARE
INCOME FROM CONTINUING OPERATIONS ............ $ 1.52 $ 0.22
INCOME (LOSS) FROM OPERATIONS OF MORGAN GROUP
HOLDING CO. DISTRIBUTED TO SHAREHOLDERS .... (0.67) (0.11)
----------- -----------
NET INCOME ................................... $ 0.85 $ 0.11
=========== ===========
DILUTED EARNINGS PER SHARE
INCOME FROM CONTINUING OPERATIONS ............ $ 1.45 $ 0.22
INCOME (LOSS) FROM OPERATIONS OF MORGAN GROUP
HOLDING CO. DISTRIBUTED TO SHAREHOLDERS .... (0.62) (0.11)
----------- -----------
NET INCOME ................................... $ 0.83 $ 0.11
=========== ===========
See accompanying notes
LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
Three Months Ended
March 31,
2002 2001
---------- ---------
OPERATING ACTIVITIES
Net Income ...................................................... $ 2,385 $ 309
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ................................ 4,811 4,096
Net effect of purchases and sales of trading securities ...... -- (426)
Equity in earnings of affiliated companies ................... (204) (165)
Minority interests ........................................... 632 168
Gain on sale of cellular partnership ......................... (4,965) --
Non-cash items and changes in operating assets and liabilities
from operations of Morgan Group Holding Co. ................
distributed to shareholders ................................ 1,888 430
Changes in operating assets and liabilities:
Receivables ............................................. 270 706
Accounts payable and accrued liabilities ................ 2,911 (1,198)
Other ................................................... (752) (97)
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NET CASH PROVIDED BY OPERATING ACTIVITIES ....................... 6,976 3,823
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INVESTING ACTIVITIES
Capital expenditures ............................................ (3,371) (2,975)
Investment in and advances to affiliated entities ............... (476) (58)
Proceeds from sale of available for sale securities ............. 345 --
Proceeds from sale of cellular partnership ...................... 5,570 --
Investing activities of operations of Morgan Group
Holding Co. distributed to shareholders ....................... -- (87)
Other ........................................................... 254 (597)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES ........................... 2,322 (3,717)
-------- --------
FINANCING ACTIVITIES
Issuance of long term debt ...................................... 603 27,098
Repayments of long term debt .................................... (5,035) (17,110)
Net repayments (borrowings) lines of credit ..................... (532) (562)
Treasury stock transactions ..................................... (252) --
Financing activities of operations of Morgan Group Holding
Co. distributed to shareholders ............................... -- (42)
Other ........................................................... 22 --
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ............. (5,194) 9,384
-------- --------
Net increase in cash and cash equivalents ....................... 4,104 9,490
Cash and cash equivalents at beginning of period ................ 31,233 24,834
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ...................... $ 35,337 $ 34,324
======== ========
See accompanying notes.
LYNCH INTERACTIVE CORPORATION & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A. Subsidiaries of the Registrant
As of March 31, 2002, the Subsidiaries of the Registrant are as follows:
Subsidiary Owned by Lynch
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Brighton Communications Corporation ............ 100.0%
Lynch Telephone Corporation IV ............... 100.0%
Bretton Woods Telephone Company ............ 100.0%
World Surfer, Inc. ......................... 100.0%
Lynch Kansas Telephone Corporation ........... 100.0%
Lynch Telephone Corporation VI ............... 98.0%
JBN Telephone Company, Inc. ................ 98.0%
JBN Finance Corporation .................. 98.0%
CLR Video, L.L.C ......................... 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%
DFT Telephone Holding Company, L.L.C ...... 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%
DFT Security Services, Inc. ................ 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%
Lynch Telephone Corporation X ................ 100.0%
Central Utah Telephone, Inc. .............. 100.0%
Central Telecom Services, LLC ............. 100.0%
Cache Valley Wireless, LC .............. 100.0%
Subsidiary Owned by Lynch
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Lynch Entertainment, LLC .................. 100.0%
Lynch Entertainment Corporation II ........ 100.0%
Lynch Multimedia Corporation .............. 100.0%
Lynch Paging Corporation .................. 100.0%
Lynch PCS Communications Corporation ........ 100.0%
Lynch PCS Corporation A ................... 100.0%
Lynch PCS Corporation F ................... 100.0%
Lynch PCS Corporation G ................... 100.0%
Lynch PCS Corporation H ................... 100.0%
Lynch Telephone Corporation ................. 83.1%
Western New Mexico Telephone Company, Inc. 83.1%
Interactive Networks Corporation .......... 83.1%
WNM Communications Corporation ............ 83.1%
WMN Interactive, L.L.C .................... 83.1%
Wescel Cellular, Inc. ..................... 83.1%
Wescel Cellular of New Mexico, L.P. ..... 42.4%
Wescel Cellular, Inc. II .................. 83.1%
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%
B. Basis of Presentation
-- ---------------------
The Company consolidates the operating results of its telephone and cable
television subsidiaries (81-100% owned at March 31, 2002 and December 31, 2001).
All material intercompany transactions and balances have been eliminated.
Investments in affiliates in which the Company does not have a majority voting
control are accounted for in accordance with the equity method. The Company
accounts for the following affiliated companies on the equity basis of
accounting: Coronet Communications Company (20% owned at March 31, 2002 and
December 31, 2001), Capital Communications Company, Inc. (49% owned at March 31,
2002 and December 31, 2001) and the cellular partnership operations in New
Mexico (17% to 21% owned at March 31, 2002 and December 31, 2001).
The shares of Spinnaker Industries, Inc. ("Spinnaker"), in which the company
owns 2.5% of the voting power and 13.6% of the common equity, are accounted for
in accordance with Statements of Financial Accounting Standards (SFAS) No. 115
"Investment in Debt and Equity Securities." During 2001, the Company recorded
impairment charges relating to its investment in Spinnaker that resulted in a
write-down of the carrying amount to $0.
On January 24, 2002, Interactive spun off its interest in The Morgan Group, Inc.
("Morgan"), its only services subsidiary, via a tax-free dividend to its
shareholders of the stock of Morgan Group Holding Co., a corporation that was
formed to serve as a holding company for Interactive's controlling interest in
Morgan. Morgan Group Holding Co. is now a public company. Accordingly, the
amounts for Morgan are reflected on a one-line basis in the condensed financial
statements as of December 31, 2001 and for the three months ended March 31, 2002
and 2001, as amounts "distributed to shareholders."
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Articles 10 and 11 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by accounting principles
generally accepted in the United States for complete financial statements. In
the opinion of 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, 2002 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2002. The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that effect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.
Certain 2001 amounts have been restated to conform to the 2002 presentation.
C. Recent Accounting Pronouncements
-- --------------------------------
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets effective for fiscal years beginning after
December 15, 2001. Statement 141 required that the purchase method of accounting
be used for all business combinations initiated after June 30, 2001. Statement
141 also includes guidance on the initial recognition and measurement of
goodwill and other intangible assets arising from business combinations
completed after June 30, 2001. Statement 142 prohibits the amortization of
goodwill and assets with indefinite lives. Statement 142 requires that these
assets be reviewed for impairment at least annually. Intangible assets with
finite lives will continue to be amortized over their estimated useful lives.
The Company will test goodwill for impairment using the two-step process
prescribed in Statement 142. The first step is a screen for potential
impairment, while the second step measures the amount of impairment, if any. The
Company expects to perform the first of the required impairment tests of
goodwill and indefinite lived intangible assets as of January 1, 2002 in the
second quarter of 2002. Any impairment charge resulting from these transitional
impairment tests will be reflected as the cumulative effect of a change in
accounting principle in the second quarter of 2002, as of the first quarter. The
Company has not yet determined what the effect of these tests will be on the
earnings and financial position of the Company.
The application of the non-amortization provisions of Statement No. 142 has
increased net income in the first quarter of 2002 by approximately $0.7 million
($0.24 per basic share) whereas the similar amortization charge for the quarter
in 2001 was approximately $0.5 million ($0.18 per basic share).
The following table discloses what the effects of the non-amortization of
goodwill and indefinite lived intangible assets would be for income and per
share amounts for the periods displayed:
Three Months Ended
March 31,
2002 2001
--------- ---------
As reported: .............................. (000s)
Income from continuing operations ..... $ 4,273 $ 610
Income (loss) from operations of Morgan (1,888) (301)
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Net Income ............................ 2,385 $ 309
======= =======
Adjustment from non-amortization
Continuing operations net of minority
interest $16 and income taxes $74 .. -- $ 516
Operations of Morgan net of minority
interest and income taxes .......... -- 79
As adjusted:
Income from continuing operations ..... $ 4,273 $ 1,126
Income (loss) from operations of Morgan (1,888) (222)
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Net income ............................ $ 2,385 $ 904
======= =======
Basic earnings per share
Income from continuing operations ..... $ 1.52 $ 0.40
Income (loss) from operations of Morgan (0.67) (0.08)
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Net income ............................ $ 0.85 $ 0.32
======= =======
The following tables display the details of goodwill and intangible assets as of
the dates shown.
(000s)
March 31, 2002 December 31, 2001
--------------------------------------------
Intangible assets subject Accumulated Accumulated
to amortization: Assets Amortization Assets Amortization
--------------------------------------------
Subscriber lists ...... $3,195 $ 961 $3,195 $ 875
Other intangible assets 105 58 105 55
------ ------ ------ ------
Total ............... $3,300 $1,019 $3,300 $ 930
====== ====== ====== ======
2002 2001
---- ----
Total amortization expense for
the three months ended March 31 $ 89 $752
==== ====
2003 2004 2005 2006 2007
--------------------------------
Estimated aggregate amortization
expense by year ................ $332 $332 $332 $330 $320
March 31 December 31
2002 2001
---------------------
Intangible assets not subject to amortization:
Goodwill - net ........................... $61,566 $61,566
In October 2001, the FASB issued Statement of Financial Accounting Standard No.
144, Accounting for Impairment or Disposal of Long-Lived Assets, effective for
fiscal years beginning after December 15, 2001. The FASB's new rules on asset
impairment supersede FASB Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of, and provide a
single accounting model for long-lived assets to be disposed of. Although
retaining many of the fundamental recognition and measurement provisions of FASB
Statement No. 121, the new rules significantly change the criteria that would
have to be met to classify an asset as held-for-sale. The new rules also will
supersede the provisions of APB Opinion 30 with regard to reporting the effects
of a disposal of a segment of a business and will require expected future
operating losses from discontinued operations to be displayed in discontinued
operations in the periods in which the losses are incurred (rather than as of
the measurement date as presently required by APB 30). In addition, more
dispositions will qualify for discontinued operations treatment in the income
statement. The Company has determined that there is no effect of FASB Statement
No. 144 on the earnings and financial position of the Company.
D. Acquisitions and Dispositions
On June 22, 2001, Lynch Telephone Corporation X, a subsidiary of Interactive,
acquired Central Utah Telephone, Inc. and its subsidiaries, and Central Telecom
Services, LLC, a related entity, for approximately $15.6 million in cash and
notes. The Company has recorded approximately $11.7 million in goodwill.
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 on the date of acquisition.
The operating results of the acquired companies are included in the Statements
of Operations from their acquisition dates. The following unaudited pro forma
information shows the results of the Company's operations as though the
acquisition of Central Utah and related entities and the distribution of Morgan
were made at the beginning of 2001. The unaudited pro forma information is not
necessarily indicative of the results of operations that would have occurred had
the transaction been made at this date nor is it necessarily indicative of
future results of operations. (In thousands of dollars, except per share data).
Three Months Ended
March 31,
2001
-------------------
Sales and revenues .............. $ 18,545
Income from continuing operations 638
Basic earnings per share ........ 0.23
Diluted earnings per share ...... $ 0.23
In March 2002, the Company sold its 20.8% interest in the New Mexico cellular
partnership, RSA #1B, to Verizon Wireless for $5.6 million ($5 million pre-tax
gain) and repaid $2.6 million of outstanding indebtedness to Verizon.
E. Spin-off of Morgan
On January 24, 2002, Interactive spun off its interest in The Morgan Group,
Inc., its only services subsidiary, via a tax-free dividend to its shareholders
of the stock of Morgan Group Holding Co., a corporation that was formed to serve
as a holding company for Interactive's controlling interest in The Morgan Group,
Inc. Morgan Group Holding Co. is now a public company. Morgan's revenues were
$16.3 million ($5.4 million to date of spin-off) in the first quarter of 2002
and $23.7 million in the first quarter of 2001. The net assets of Morgan
distributed at the spin-off were approximately $3.5 million.
Accordingly, prior period financial statements have been restated to reflect the
amounts for Morgan on a one-line basis as "distributed to shareholders."
The report of Ernst & Young LLP, Morgan's independent auditors, with respect to
its financial statements as of December 31, 2001 and 2000, and for each of the
three years in the period ended December 31, 2001 contained an explanatory
paragraph which expresses substantial doubt as to Morgan's ability to continue
as a going concern.
F. Indebtedness
The parent company maintains a short-term line of credit facility totaling $10.0
million. Borrowings under this facility were $7.4 million and $7.6 million at
March 31, 2002 and December 31, 2001, respectively. This facility will expire on
August 31, 2002, unless extended. Long-term debt consists of (all interest rates
are at March 31, 2002):
March 31,
2002 December 31,
(Unaudited) 2001
-------------- ------------
(In thousands)
Rural Electrification Administration (REA) and Rural Telephone Bank (RTB) notes
payable through 2027 at fixed interest rates ranging from 2% to 7.5% (4.9%
weighted average at March 31, 2002), secured by assets of the telephone
companies of $149.5 million .................................................... $ 55,305 $ 55,499
Bank Credit facilities utilized by certain telephone and telephone holding
companies through 2016, $32.7 million at fixed interest rates averaging 7.9%
and $52.9 million at variable interest rates averaging 4.8% ................... 85,667 87,127
Unsecured notes issued in connection with acquisitions through 2006, at fixed
interest rates of 10.0% ........................................................ 34,454 34,512
Convertible subordinated note due in December 2004 at a fixed interest rate of
6%.............................................................................. 10,000 10,000
Other .......................................................................... 3,366 6,064
--------- ---------
188,792 193,202
Current maturities ............................................................. (21,154) (28,126)
--------- ---------
$ 167,638 $ 165,076
========= =========
On December 12, 1999, Interactive completed the private placement of a $25
million 6% five-year note, convertible into Interactive common stock at $42.50
per share (adjusted for subsequent 2 to 1 stock split). At that time, to assist
the Company with the private placement to Cascade Investment LLC ("Cascade"),
the Chairman and CEO of Interactive, agreed to give the acquirer of the note, a
one-time option to sell the note to him at 105% of the principal amount thereof.
The exercise period was from November 15, 2000 to December 1, 2000. This option
to sell is secured by a bank letter of credit, which is secured by the
Chairman's escrow of securities. The Company agreed to reimburse the Chairman
for the cost of the letter of credit plus his counsel fees in connection with
the option to sell agreement and obtaining the letter of credit.
On January 16, 2001, the option to sell agreement between Cascade Investments
and the Company's Chairman was amended. As amended, Cascade had the right to
sell up to $15 million of the notes back to the Chairman at any time prior to
January 31, 2001 and the right to sell the remaining $10 million of the note
between November 15 and December 1, 2002. The option to sell is at 105% of
principal amount sold plus accrued and unpaid interest. As a condition to
modifying and extending the option to sell, the Company entered into an
agreement in December 2000, with its Chairman whereby it will pay for and
acquire, on the same terms and conditions, any portion of the note sold by
Cascade under this option. During January 2001, Cascade exercised this option
with regard to the $15 million of the notes and on February 14, 2001, the
Company transferred $15.9 million to Cascade, including the 5% premium plus
accrued and unpaid interest in exchange for $15.0 million of the note held by
Cascade.
The option to sell the remaining $10 million is secured by a collateralized
letter of credit in which the collateral is provided by an affiliate of the
Chairman. The Company has agreed to pay all legal fees, letter of credit fees
and a 10% per annum collateral fee on the amount of collateral provided, which
at March 31, 2002 was $0 and was $3.0 million at December 31, 2001.
The Company can replace the collateral at any time and the fees would be
eliminated thereafter. As of March 31, 2002, the Company has replaced all of the
$10.5 million of escrow collateral securing the above noted letter of credit by
segregating $10.5 million of U.S. Treasury Bills (which are classified as "cash
and cash equivalents") in a separate account and pledging this account to the
issuers of the letter of credit. The balance of the convertible subordinated
note is classified as current at March 31, 2002 and December 31, 2001 as the
holder has the ability to demand payment of such amount, plus the $0.5 million
premium, prior to December 31, 2002. Management is currently unaware of
Cascade's intention with regard to their potential exercise of the option to
sell the $10 million note back to the Company.
G. Comprehensive Income
Balances of accumulated other comprehensive income, net of tax, which consists
of unrealized gains (losses) on available for sale of securities, at March 31,
2002 and December 31, 2001 are as follows (in thousands):
Unrealized
Gain
(Loss) Tax Effect Net
Balance at December 31, 2001 ... $ 2,599 $(1,057) $ 1,542
Reclassification adjustment .... (322) 126 (196)
Current period unrealized losses (672) 272 (400)
------- ------- -------
Balance at March 31, 2002 ...... $ 1,605 $ (659) $ 946
======= ======= =======
The comprehensive income (loss), for the three-month periods ending March 31,
2002 and 2001 are as follows (in thousands):
Three Months Ended
March 31,
2002 2001
------------------
Net income for the period .............................................. $ 4,678 $ 309
Reclassification adjustment-net of income tax benefit of $126........... (196) --
Unrealized (losses) on available for sale securities - net of income tax
benefit of $272 and $898, respectively .............................. (400) (1,240)
------- -------
Comprehensive income (loss) ............................................ $ 4,082 $ (931)
======= =======
H. Earnings per share
The following table set forth the computation of basic and diluted earnings per
share for the periods indicated: During the three months ended March 31, 2002,
the Company purchased 5,900 shares of its common stock for treasury. Subsequent
to March 31, 2002, the Company purchased an additional 3,000 shares of Treasury
stock.
Three Months Ended
March 31,
2002 2001
------------------------
Basic earnings per share
Numerator:
Net Income ............................................ $2,385,000 $ 309,000
Denominator:
Weighted average shares outstanding ................... 2,818,000 2,822,000
Earnings per share:
Net income ............................................ $ 0.85 $ 0.11
========== ==========
Diluted earnings per share
Numerator:
Net Income ............................................. $2,385,000 $ 309,000
Interest saved on assumed conversion of
convertible notes - net of tax ..................... 161,000 --
---------- ----------
Net Income ............................................. $2,546,000 $ 309,000
---------- ----------
Denominator:
Weighted average shares outstanding ................... 2,818,000 2,822,000
Shares issued on assumed conversion of convertible note 235,000 --
---------- ----------
Weighted average shares and share equivalents ......... 3,053,000 2,822,000
---------- ----------
Earnings per share:
Net income ............................................ $ 0.83 $ 0.11
========== ==========
The effect of assumed conversion of the convertible note in the first quarter of
2001 was anti-dilutive.
I. Segment Information
As a result of the decision to spin-off its investment in Morgan (see Note E),
the Company is engaged in one business segment: multimedia. All businesses are
located domestically, and substantially all revenues are domestic. The Company's
operations include local telephone companies, a cable TV company, investment in
PCS entities and investment in two network-affiliated television stations. The
Company's primary operations are located in the states of Iowa, Kansas,
Michigan, New Hampshire, New Mexico, New York, North Dakota, Utah and Wisconsin.
75% of the Company's telephone customers are residential. The remaining
customers are businesses.
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, including
unallocated general corporate expenses and excluding, interest and income taxes.
The Registrant allocates a portion of its general corporate expenses to its
operating segment. Such allocation was $327,000 and $338,000 for the three
months ended March 31, 2002 and 2001, respectively.
Three Months Ended
March 31,
2002 2001
----------------------
Unaudited Restated
In thousands)
Sales and revenues: .......................................................... $ 20,974 $ 17,209
======== ========
EBITDA (before corporate allocation):
Operations ................................................................. $ 10,743 $ 8,602
Corporate expenses, gross .................................................. (687) (857)
-------- --------
Combined total ............................................................. $ 10,056 $ 7,745
======== ========
Operating profit:
Operations ................................................................. $ 5,609 $ 4,169
Corporate expenses, net .................................................... (365) (520)
-------- --------
Combined total ............................................................. $ 5,244 $ 3,649
======== ========
Operating profit ............................................................. $ 5,244 $ 3,649
Other income (expense):
Investment income .......................................................... 5,962 1,218
Interest expense ........................................................... (3,373) (3,415)
Equity in earnings of affiliated companies ................................. 204 165
-------- --------
Income before income taxes, minority interests and operations of Morgan Group
Holding Co. distributed to shareholders ...................................... $ 8,037 $ 1,617
======== ========
J. Recent Events
Sunshine Rights Offering. In February 2002, Sunshine PCS Corporation issued
rights to its shareholders to purchase up to 1,531,593 shares of its Class A
Common Stock at a price of $1.00 per share. On May 3, 2002, the rights offering
expired and on May 7, 2002, Sunshine announced that the rights offering was
oversubscribed. As the holder of 235,294 shares of Sunshine, Interactive
exercised its rights (but did not oversubscribe) to purchase 58,824 shares of
Class A Common Stock in the rights offering.
Taylor Litigation. Interactive and several other parties, including our Chief
Executive Officer, and Fortunet Communications, L.P., which was Sunshine PCS
Corporation's predecessor-in-interest, have been named as defendants in a
lawsuit brought under the so-called "qui tam" provisions of the federal False
Claims Act in the United States District Court for the District of Columbia. The
complaint was filed under seal with the court on February 14, 2001. At the
initiative of one of the defendants, the seal was lifted on January 11, 2002.
Under the False Claims Act, a private plaintiff, termed a "relator," may file a
civil action on the U.S. government's behalf against another party for violation
of the statute. In return, the relator receives a statutory bounty from the
government's litigation proceeds if he is successful.
The relator is this lawsuit is R.C. Taylor III. The main allegation in the case
is that the defendants participated in the creation of "sham" bidding entities
that allegedly defrauded the federal Treasury by improperly participating in
certain Federal Communications Commission spectrum auctions restricted to small
businesses, as well as obtaining bidding credits in other spectrum auctions
allocated to "small" and "very small" businesses. The lawsuit seeks to recover
an unspecified amount of damages, which would be subject to mandatory trebling
under the statute.
Interactive strongly believes that this lawsuit is completely without merit, and
intends to defend the suit vigorously. The U.S. Department of Justice has
notified the court that it has declined to intervene in the case. Nevertheless,
we cannot predict the ultimate outcome of the litigation, nor can we predict the
effect that the lawsuit or its outcome will have on our business or plan of
operation.
The defendants have yet to be formally served with the complaint.
Item 2. Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations
-----------------------------------
Overview
On January 24, 2002, Interactive spun off its investment in The Morgan Group,
Inc. ("Morgan"), its only services subsidiary via a tax-free dividend to its
shareholders of the stock of Morgan Group Holding Co., a corporation that was
formed to serve as a holding company for Interactive's controlling interest in
Morgan. Morgan Group Holding Co. is now a public company. Accordingly, the
amounts for Morgan are reflected on a one-line basis in the condensed financial
statements as of December 31, 2001, and for the quarters ended March 31, 2002
and 2001as "distributed to shareholders."
Sales And Revenues
Revenues for the three months ended March 31, 2002 increased by $3.8 million to
$21.0 million from the first quarter of 2001. Revenues grew primarily due to
acquisitions. The acquisition of Central Utah Telephone, Inc. and its
subsidiaries, and Central Telecom Services, L.L.C., a related entity, which were
acquired on June 22, 2001, contributed $2.6 million to the increase. The balance
of the increased revenues can be attributed to the growth in both regulated
telco services and the provision of non-traditional telephone services such as:
Internet, long distance service and local exchange carrier service and the
acquisition of American Alarm ($0.7 million) on November 30, 2001.
Operating Profit
Operating profit for the three months ended March 31, 2002 increased by $1.6
million to $5.3 million from the first quarter of 2001, primarily the result of
increased operations in the Company's regulated telecommunications operations.
The acquisition of Central Utah added $0.8 million to operating profit during
the quarter. The absence of $0.6 million of amortization of expenses a result of
implementing of SFAS 142, also improved the quarter results.
Other Income (Expense)
Investment income for the quarter ended March 31, 2002 decreased by $0.2 million
primarily due to lower gains on marketable securities. In addition, during the
quarter, the Company sold its Company's interest in a cellular partnership, RSA
#1B in New Mexico for $5.6 million resulting in a pre-tax gain of $5.0 million.
Interest expense is approximately the same as the prior year period at $3.4
million as increased levels of borrowing were offset by lower rates.
Income Tax Provision
The income tax provision includes federal, as well as state and local taxes. The
tax provision for the three months ended March 31, 2002 and 2001, represent
effective tax rates of 39.0% and 51.9%, respectively. The causes of the
difference from the federal statutory rate are principally the effect of state
income taxes, including the effect of earnings and losses attributable to
different state jurisdictions, and the amortization of non-deductible goodwill
in 2001.
Minority interest decreased earnings by $0.6 million for the three months ended
March 31, 2002 versus $0.2 million a year earlier due to the minority interest
associated with the gain from the sale of RSA #1B in New Mexico.
Net Income
Income from continuing operations was $4.3 million, $1.52 per basic share, for
the first quarter of 2002 compared to income from continuing operations in 2001
of $0.6 million, or $0.22 per basic share.
Factors contributing to this increase were: the gain from the sale of RSA #1B in
New Mexico, the acquisitions previously mentioned ($0.3 million) and the
cessation of the amortization of goodwill ($0.5 million).
Net income for the three months ended March 31, 2002 was $2.4 million or $0.85
per basic share ($0.83 diluted) as compared to net income of $0.3 million, or
$0.11 per share (basic and diluted), in the previous years' three-month period.
In addition to the factors influencing the change in income from continuing
operations, the spin-off of Morgan ($1.9 million loss in 2002 and $0.3 million
loss in 2001 first quarter) contributed to the change in net income for the
periods.
FINANCIAL CONDITION
Liquidity/ Capital Resources
As of March 31, 2002, the Company had current assets of $51.0 million and
current liabilities of $52.1 million. Working capital deficiency was therefore
$1.1 million as compared to $10.3 million at December 31, 2001 net of Morgan
amounts.
For the first three months, capital expenditures were $3.4 million in 2002 and
$3.0 million in 2001.
At March 31, 2002, total debt was $198.6 million, which was $4.9 million lower
than the $203.5 million at the end of 2001. At March 31, 2002, there was $133.6
million of fixed interest rate debt averaging 7.0% and $65.0 million of variable
interest rate debt averaging 4.6%. Debt at year-end 2001 included $137.1 million
of fixed interest rate debt, at an average interest rate of 7.0% and $66.4
million of variable interest rate debt at an average interest rate of 4.8%.
On December 12, 1999, Interactive completed the private placement of a $25
million 6% five-year note, convertible into Interactive common stock at $42.50
per share (adjusted for subsequent 2 to 1 stock split). At that time, to assist
the Company with the private placement to Cascade Investment LLC ("Cascade"),
the Chairman and CEO of Interactive, agreed to give the acquirer of the note, a
one-time option to sell the note to him at 105% of the principal amount thereof.
The exercise period was from November 15, 2000 to December 1, 2000. This option
to sell is secured by a bank letter of credit, which is secured by the
Chairman's escrow of securities. The Company agreed to reimburse the Chairman
for the cost of the letter of credit plus his legal counsel fees in connection
with the option to sell agreement and obtaining the letter of credit.
On January 16, 2001, the option to sell agreement between Cascade Investments
and the Company's Chairman was amended. As amended, Cascade had the right to
sell up to $15 million of the notes back to the Chairman at any time prior to
January 31, 2001 and the right to sell the remaining $10 million of the note
between November 15 and December 1, 2002. The option to sell is at 105% of
principal amount sold plus accrued and unpaid interest. As a condition to
modifying and extending the option to sell, the Company entered into an
agreement in December 2000, with its Chairman whereby it will pay for and
acquire, on the same terms and conditions, any portion of the note sold by
Cascade under this option. During January 2001, Cascade exercised this option
with regard to the $15 million of the notes and on February 14, 2001, the
Company transferred $15.9 million to Cascade, including the 5% premium plus
accrued and unpaid interest in exchange for $15.0 million of the note held by
Cascade.
The option to sell the remaining $10 million is secured by a collateralized
letter of credit in which the collateral is provided by an affiliate of the
Chairman. The Company has agreed to pay all legal fees, letter of credit fees
and a 10% per annum collateral fee on the amount of collateral provided, which
at March 31, 2002 was $0 and was $3.0 million at December 31, 2001.
The Company can replace the collateral at any time and the fees would be
eliminated thereafter. As of March 31, 2002, the Company has replaced all of the
$10.5 million of escrow collateral securing the above noted letter of credit by
segregating $10.5 million of U.S. Treasury Bills in a separate account and
pledging this account to the issuers of the letter of credit. The balance of the
convertible subordinated note is classified as current at March 31, 2002 and
December 31, 2001 as the holder has the ability to demand payment of such
amount, plus the $0.5 million premium, prior to December 31, 2002. Management is
currently unaware of Cascade's intention with regard to their potential exercise
of the option to sell the $10 million note back to the Company.
As of March 31, 2002, Interactive, the parent company, had $2.6 million
available under a $10 million short-term line of credit facility, which expires
on August 31, 2002.
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, 2002, the
ratio of total debt to equity was 8.8 to 1. Certain subsidiaries also have high
debt to equity ratios. In addition, the debt at subsidiary companies contains
restrictions on the amount of readily available funds that can be transferred to
the respective parent of the subsidiaries.
The Company has a need for resources primarily to fund future long-term growth
objectives. Interactive considers various alternative long-term financing
sources: debt, equity, or sale of an investment asset. While management expects
to obtain adequate financing resources to enable the Company to meet its
obligations, there is no assurance that such can be readily obtained or at
reasonable costs.
The Company is obligated under long-term debt provisions and lease agreements to
make certain cash payments over the term of the agreements. The following table
summarizes these contractual obligations for the period shown:
Payments Due by Period
(In thousands)
Less than
Total 1 year 1 - 3 years 4 - 5 years After 5 years
-----------------------------------------------------------
Long-term Debt (a) ............... $188,792 $ 21,154 $ 43,664 $ 44,903 $ 79,071
Operating Leases ................. 969 326 400 243 --
-------- -------- -------- -------- -------
Total Contractual Cash Obligations $189,761 $ 21,480 $ 44,064 $ 45,146 $ 79,071
======== ======== ======== ======== ========
(a) Does not include interest payments on debt
(b) Contains $10 million of convertible subordinated debt due in 2004,
that has a put option that if exercised, would accelerate the debt to
the last quarter of 2002.
The company has certain financing commitments from banks and other financial
institutions that provide liquidity. The following table summarizes the
expiration of these commitments for the periods shown:
Amount of Commitment Expiration
Per Period
(In thousands)
Total
Amounts
Committed Less than
Other Commercial Commitments 1 year 1 - 3 years 4 - 5 years Over 5 years
------------------------------------------------------------
Lines of Credit .............. $14,336 $14,336 - - --
Standby Letter of Credit ..... 10,500 10,500 - - --
Guarantees
Standby Repurchase Obligations
Other Commercial Commitments
- - - - --
------- ------- -------- --------- ---------
Total Commercial Commitments . $24,836 $24,836 - - --
======= ======= ========= ========= =========
The Company has initiated an effort to monetize certain of its assets, including
selling a portion or all of certain in vestment in certain of its operating
entities. These may include minority interest in network affiliated television
stations and certain telephone operations where growth opportunities are not
readily apparent. There is no assurance that all or any part of this program can
be effectuated on acceptable terms. In March 2002, the Company sold its 20.8%
interest in the New Mexico cellular property, RSA #1B, to Verizon Wireless for
$5.6 million and repaid certain outstanding indebtedness to Verizon.
Critical Accounting Policies and Estimates
General
Interactive's discussion and analysis of its financial condition and results of
operations are based upon its consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires
Interactive to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an ongoing basis, Interactive evaluates its
estimates, including those related to revenue recognition, carrying value of its
investments in the spectrum entities and long-lived assets, purchase price
allocations, and contingencies and litigation. Interactive bases its estimates
on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Interactive believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements.
Revenue Recognition
The principal business of Interactive's telephone companies is to provide
telecommunications services. These services fall into four major categories:
local network, network access, long distance and other non-regulated
telecommunications services. Toll service to areas outside franchised telephone
service territory is furnished through switched and special access connections
with intrastate and interstate long distance networks.
Local service revenues are derived from providing local telephone exchange
services. Local service revenues are based on rates filed with various state
telephone regulatory bodies.
Revenues from long distance network services are derived from providing certain
long distance services to the Company's local exchange customers and are based
on rates filed with various state regulatory bodies.
Revenue from intrastate access is generally billed monthly in arrears based on
intrastate access rates filed with various state regulatory bodies. Interactive
recognizes revenue from intrastate access service based on an estimate of the
amounts billed to interexchange carriers in the subsequent month. Estimated
revenues are adjusted monthly as actual revenues become known.
Revenue from interstate access is derived from settlements with the National
Exchange Carrier Association ("NECA"). NECA was created by the FCC to administer
interstate access rates and revenue pooling on behalf of small local exchange
carriers who elect to participate in a pooling environment. Interstate
settlements are determined based on the various subsidiaries' cost of providing
interstate telecommunications service. Interactive recognizes interstate access
revenue based on an estimate of the current year cost of providing service.
Estimated revenue is adjusted to actual upon the completion of cost studies in
the subsequent period.
Other ancillary revenues derived from the provision of directory advertising and
billing and collection services are billed monthly based on rates under
contract.
Purchase Price Allocation
Interactive's business development strategy is to expand its existing operations
through internal growth and acquisition. From 1989 through 2001, the Company has
acquired twelve telephone companies. Significant judgments and estimates are
required to allocate the purchase price of acquisitions to the fair value of
tangible assets acquired and identifiable intangible assets and liabilities
assumed. Any excess purchase price over the above fair values is allocated to
goodwill. Additional judgments and estimates are required to determine if
identified intangible assets have finite or indefinite lives.
Depreciation and Amortization
The calculation of depreciation and amortization expense is based on the
estimated economic useful lives of the underlying property, plant and equipment
and intangible assets. Although Interactive believes it is unlikely that any
significant changes to the useful lives of its tangible or intangible assets
will occur in the near term, rapid changes in technology, the discontinuance of
accounting under SFAS No. 71 by the Company's wireline subsidiaries, or changes
in market conditions could result in revisions to such estimates that could
materially affect the carrying value of these assets and the Company's future
consolidated operating results.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The Company is exposed to market risk relating to changes in the general level
of U.S. interest rates. Changes in interest rates affect the amounts of interest
earned on the Company's cash and cash equivalents ($35.3 million at March 31,
2002 and $31.2 million at December 31, 2001).
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, 2002, approximately $65.0 million, or 33% 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 2002 average interest rate under these
borrowings, it is estimated that the Company's 2002 three-month interest expense
would have changed by less than $0.2 million. In the event of an adverse change
in interest rates, management would likely take actions to further mitigate its
exposure. However, due to the uncertainty of the actions that would be taken and
their possible effects, the analysis assumes no such actions. Further, the
analysis does not consider the effects of the change in the level of overall
economic activity that could exist in such an environment.
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 without limitation, the Company's effort to monetize
certain assets, Liquidity and Capital Resources and Market Risk. It should be
recognized that such information are estimates or forecasts based upon various
assumptions, including the matters, risks, and cautionary statements referred to
therein, as well as meeting the Registrant's internal performance assumptions
regarding expected operating performance and the expected performance of the
economy and financial markets as it impacts Registrant's businesses. As a
result, such information is subject to uncertainties, risks and inaccuracies,
which could be material.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
---------------------------------
None
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LYNCH INTERACTIVE CORPORATION
(Registrant)
By: s/Robert E. Dolan
---------------------
Robert E. Dolan
Chief Financial Officer
May 15, 2002