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SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Edgarized from this one 11-13--2
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 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
-------- ----------
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 November 1, 2002
----- -------------------------------
Common Stock, $.0001 par value 2,794,351
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INDEX
LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
--------------------------------
Condensed Consolidated Balance Sheets:
- September 30, 2002
- December 31, 2001
Condensed Consolidated Statements of Operations:
- Three months ended September 30, 2002 and 2001
- Nine months ended September 30, 2002 and 2001
Condensed Consolidated Statements of Cash Flows:
- Three months ended September 30, 2002 and 2001
- Nine months ended September 30, 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
---------------------------------------------------------
Item 4. Controls and Procedures
-----------------------
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
SIGNATURE
CERTIFICATIONS
i
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
LYNCH INTERACTIVE CORPORATION AND SUBSIDIAIRES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
September 30, December 31,
2002 2001
---------------- -----------------
(Unaudited) (Note)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................................................. . $ 25,338 $ 23,664
Restricted cash ............................................................. 10,598 7,569
Receivables, less allowances of $345 and
$424, respectively ........................................................ 9,381 9,963
Material and supplies ....................................................... 3,739 3,373
Prepaid expenses and other current assets ................................... 2,472 1,757
Current assets of Morgan Group Holding Co. ...................................
distributed to shareholders ............................................... -- 12,757
--------- ---------
TOTAL CURRENT ASSETS ........................................................... 51,528 59,083
PROPERTY, PLANT AND EQUIPMENT:
Land ......................................................................... 840 840
Buildings and improvements ................................................... 10,952 10,858
Machinery and equipment ...................................................... 190,018 178,110
--------- ---------
201,810 189,808
Accumulated Depreciation ..................................................... (85,661) (74,419)
--------- ---------
116,149 115,389
GOODWILL ....................................................................... 60,889 60,889
OTHER INTANGIBLE ASSETS, NET ................................................... 7,087 7,858
INVESTMENTS IN AND ADVANCES TO AFFILIATED ENTITIES ............................. 8,223 14,277
OTHER ASSETS ................................................................... 9,741 11,611
NON CURRENT ASSETS OF MORGAN GROUP HOLDING CO ..................................
DISTRIBUTED TO SHAREHOLDERS .............................................. -- 10,241
--------- ---------
TOTAL ASSETS ................................................................... $ 253,617 $ 279,348
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks ....................................................... $ 10,744 $ 10,336
Trade accounts payable ....................................................... 801 921
Accrued interest payable ..................................................... 1,419 1,579
Accrued liabilities .......................................................... 19,322 15,700
Current maturities of long-term debt, includes $10,500 of convertible notes
due 2004, but subject to a put provision (See note G) ......................... 26,981 28,126
Current liabilities of Morgan Group Holding Co. ..............................
distributed to shareholders ................................................. -- 11,281
--------- ---------
TOTAL CURRENT LIABILITIES ................................................... 59,267 67,943
LONG-TERM DEBT .............................................................. 160,632 165,076
DEFERRED INCOME TAXES ....................................................... 5,721 8,515
OTHER LIABILITIES ........................................................... 752 887
MINORITY INTERESTS .......................................................... 6,999 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; 2,796,251
and 2,820,051 outstanding ................................................. -- --
ADDITIONAL PAID-IN CAPITAL ................................................... 21,406 21,406
RETAINED EARNINGS (DEFICIT) .................................................. (247) 1,800
ACCUMULATED OTHER COMPREHENSIVE INCOME ....................................... 181 1,542
TREASURY STOCK, 28,515 and 4,715 shares, at cost ............................. (1,094) (231)
-------- ---------
TOTAL SHAREHOLDER'S EQUITY ................................................... 20,246 24,517
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................................... $ 253,617 $ 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.
1
LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except per share and share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
-------------------------------------------------------
SALES AND REVENUES ........................................... $ 22,983 $ 23,934 $ 65,055 $ 58,594
COSTS AND EXPENSES:
Operations, exclusive of depreciation and amortization ....... 10,928 9,931 31,687 27,040
Depreciation and amortization ................................ 4,857 4,961 14,448 13,177
Selling and administrative ................................... 1,307 677 3,328 2,133
---------- ----------- ---------- -----------
OPERATING PROFIT ............................................. 5,891 8,365 15,592 16,244
Other income (expense):
Gain on sale of cellular partnership ...................... -- -- 4,965 --
Investment income ......................................... 162 200 1,394 2,593
Interest expense .......................................... (3,240) (3,865) (9,911) (10,697)
Impairment of investment in Spinnaker Industries, Inc. .... -- (1,294) -- (1,294)
Reserve for impairment of investment in spectrum license
Holder .................................................. (5,479) -- (5,479) --
Equity in earnings of affiliated companies, predominantly
cellular ................................................ 429 213 857 582
---------- ----------- ----------- -----------
(8,128) (4,746) (8,174) (8,816)
---------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES, MINORITY INTERESTS AND
OPERATIONS OF MORGAN GROUP HOLDING CO ........................ (2,237) 3,619 7,418 7,428
(Provision) benefit for income taxes ......................... 550 (1,649) (3,233) (3,554)
Minority Interests ........................................... (185) (185) (879) (508)
---------- ----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS .................... (1,872) 1,785 3,306 3,366
---------- ----------- ----------- -----------
Income (loss) from operations of Morgan Group Holding Co. ....
distributed to shareholders, net of income taxes of $0, $255,
$0 and $255, respectively and minority interests of $0, $69
$868 and $31, respectively ................................... -- (190) (1,888) (143)
---------- ----------- ----------- -----------
NET INCOME (LOSS) ............................................ $ (1,872) $ 1,595 $ 1,418 $ 3,223
=========== =========== =========== ===========
Basic weighted average shares outstanding .................... 2,799,000 2,822,000 2,809,000 2,822,000
Diluted weighted average shares outstanding - used in earnings
per share computation (if the shares to be issued on
conversion of the convertible note were included, fully
diluted shares would be 3,035,000; 3,057,000; 3,044,000; and
3,128,000 respectively) ...................................... 2,799,000 2,822,000 2,809,000 2,822,000
BASIC EARNINGS PER SHARE
INCOME (LOSS) FROM CONTINUING OPERATIONS .................... $ (0.67) $ 0.63 $ 1.18 $ 1.19
Loss from operations of Morgan Group Holding Co. .............
distributed to shareholders ................................ 0.00 (0.06) (0.68) (0.05)
----------- ----------- ----------- -----------
NET INCOME (LOSS) ............................................ $ (0.67) $ 0.57 $ 0.50 $ 1.14
=========== =========== =========== ===========
DILUTED EARNINGS PER SHARE
INCOME (LOSS) FROM CONTINUING OPERATIONS ..................... $ (0.67) $ 0.63 $ 1.18 $ 1.19
Loss from operations of Morgan Group Holding Co. ............. 0.00 (0.06) (0.68) (0.05)
----------- ----------- ----------- -----------
NET INCOME (LOSS) ............................................ $ (0.67) $ 0.57 $ 0.50 $ 1.14
=========== =========== =========== ===========
See accompanying notes.
2
LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -----------------------
2002 2001 2002 2001
------------ ----------- ----------- -----------
OPERATING ACTIVITIES
Net Income (Loss) ............................................ ($ 1,872) $ 1,595 $ 1,418 $ 3,223
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ............................. 4,857 4,961 14,448 13,177
Net effect of purchases and sales of trading securities ... -- 768 -- (304)
Deferred Taxes ............................................ (1,863) 0 (1,863) 0
Equity in earnings of affiliated companies ................ (429) (213) (857) (582)
Minority interests ........................................ 185 185 879 508
Impairment of investment in Spinnaker Industries, Inc. .... -- 1,294 -- 1,294
Reserve for the impairment of investment in spectrum
license holder 5,479 -- 5,479 --
Gain on sale of cellular partnership ...................... -- -- (4,965) --
Gain on sale of available for sale securities ............. -- (142) (24) (296)
Non-cash items and assets and operating liabilities
from operations of Morgan Group Holding Co. ............. -- (1,867) 1,888 (1,057)
distributed to shareholders
Changes in operating assets and liabilities:
Receivables .......................................... (399) (581) 656 101
Accounts payable and accrued liabilities ............. 2,085 2,888 3,259 823
Other ................................................ (81) 711 (1,081) (516)
-------- -------- -------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES .................... 7,962 9,599 19,237 16,371
-------- -------- -------- ---------
INVESTING ACTIVITIES
Capital expenditures ......................................... (6,580) (5,427) (14,374) (12,982)
Investment in and advances to affiliated entities ............ 2,013 1 101 (185)
Proceeds from sale of available for sale securities .......... -- 253 398 494
Proceeds from sale of cellular partnership ................... -- -- 5,570 --
Acquisition of Central Utah Telephone Company (total
cost, less debt assumed and cash equivalents acquired) ...... -- -- -- (6,889)
Investing activities of operations of Morgan Group
Holding Co. distributed to shareholders .................... -- (3,582) -- (3,681)
Other ........................................................ (127) (255) (202) (377)
-------- -------- -------- ---------
NET CASH USED IN INVESTING ACTIVITIES ........................ (4,694) (9,010) (8,507) (23,620)
-------- --------- --------- ---------
FINANCING ACTIVITIES
Issuance of long term debt ................................... 3,076 (220) 5,041 27,148
Repayments of long term debt ................................. (3,047) (2,775) (10,652) (21,148)
Net repayments (borrowings) lines of credit .................. (2,032) 5,047 408 4,314
Treasury stock transactions .................................. (172) 11 (863) 11
Investment in restricted cash ................................ (46) -- (3,029) --
Financing activities of operations of Morgan Group Holding
Co. distributed to shareholders ............................ -- 3,200 -- 3,081
Other ........................................................ -- -- 39 --
-------- --------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
(2,221) 5,263 (9,056) 13,406
-------- -------- -------- ---------
Net increase in cash and cash equivalents .................... 1,047 5,852 1,674 6,157
Cash and cash equivalents at beginning of Period ............. 24,291 25,139 23,664 24,834
-------- -------- -------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................... $ 25,338 $ 30,991 $ 25,338 $ 30,991
======== ======== ======== =========
See accompanying notes.
3
LYNCH INTERACTIVE CORPORATION & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A. Subsidiaries of the Registrant
As of September 30, 2002, the Subsidiaries of the Registrant are as follows:
Subsidiary Owned by Lynch
Brighton Communications Corporation ............ 100.0%
Lynch Telephone Corporation IV ............... 100.0%
Bretton Woods Telephone Company ............ 100.0%
World Surfer, Inc. ......................... 100.0%
Lynch Broadband 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%
4
Subsidiary
Owned by Lynch
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%
WNM 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%
Valley Communications, Inc. .............. 100.0%
Lynch Telephone Corporation III ............ 81.0%
Cuba City Telephone Exchange Company ..... 81.0%
Belmont Telephone Company ................ 81.0%
5
B. Basis of Presentation
The Company consolidates the operating results of its telephone and cable
television subsidiaries (81-100% owned at September 30, 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 September 30, 2002 and
December 31, 2001), Capital Communications Company, Inc. (49% owned at September
30, 2002 and December 31, 2001) and the cellular partnership operations in New
Mexico (17% to 21% owned at September 30, 2002 and December 31, 2001).
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
consolidated financial statements as of December 31, 2001 and for the three and
nine months ended September 30, 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 management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and nine-month periods ended September 30, 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 reclassified 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 September 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 tests 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 performed 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 and
determined that there are no impairments at the current time.
6
The application of the non-amortization provisions of Statement No. 142 has
increased net income in the third quarter of 2002 by approximately $0.6 million
($0.22 per basic share) whereas the similar amortization charge for the quarter
in 2001 was approximately $0.7 million ($0.23 per basic share). For the nine
months ended September 30, 2002 and 2001, the amounts were $1.9 million, or
$0.68 in basic earning per share, and $1.7 million, or $0.61 in basic earning
per share, respectively.
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 Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
------------------------------- --------
As reported: (000s) (000s)
Income (loss) from continuing operations . $ (1,872) $ 1,785 $3,306 $ 3,366
(Loss) from operations of Morgan ........ -- (190) (1,888) (143)
-------- ------- ------ -------
Net Income (loss) ........................ $ (1,872) $ 1,595 $1,418 $ 3,223
======== ======= ====== =======
Adjustment from non-amortization
Continuing operations net of income taxes
of $0, $74, $0, $221 and minority interest
of $0, $15, $0, $31, respectively ........ -- $ 678 -- $ 1,719
Operations of Morgan, net of minority
interests and income taxes ............ -- $ 73 -- $ 214
As adjusted:
Income (loss) from continuing operations . $ (1,872) $ 2,463 $3,306 $ 5,085
Income (loss) from operations of Morgan .. -- (117) (1,888) 71
-------- ------- ------ -------
Net income ............................... $ (1,872) $ 2,346 $1,418 $ 5,156
======== ======= ====== =======
Basic earnings per share
Income (loss) from continuing operations . $ (0.67) $ 0.87 $ 1.18 $ 1.80
Income (loss) from operations of Morgan .. -- (0.04) (0.68) 0.03
-------- ------- ------ -------
Net Income (loss) ........................ $ (0.67) $ 0.83 $ 0.50 $ 1.83
======== ======= ====== =======
Diluted earnings per share
Income (loss) from continuing operations . $ (0.67) $ 0.87 $ 1.18 $ 1.80
Income (loss) from operations of Morgan .. -- (0.04) (0.68) 0.03
-------- ------- ------ -------
Net income (loss) ........................ $ (0.67) $ 0.83 $ 0.50 $ 1.83
======== ======= ====== =======
7
The following tables display the details of goodwill and intangible assets as of
the dates shown.
(000s)
September 30, 2002 December 31, 2001
--------------------------------------------------------
Accumulated Accumulated
Intangible assets subject to amortization: Assets Amortization Assets Amortization
----------------- ---------------- -------------- -----------
Subscriber lists ...................... $7,629 $2,192 $7,194 $ 986
2002 2001
---- ----
Total amortization expense for
the three months ended September 30 . $ 422 $ 764
====== ======
Total amortization expense for the nine
months ended September 30 .......... $1,206 $1,991
====== ======
2003 2004 2005 2006 2007
---------------------------------------------------
Estimated aggregate amortization
expense by year ......................... $ 1,691 $ 1,580 $ 275 $ 213 $ 213
September 30, December 31,
2002 2001
------- -------
Intangible assets not subject to amortization:
Goodwill .................................. $60,889 $60,889
Cellular licenses ......................... 1,650 1,650
In October 2001, the FASB issued Statement of Financial Accounting Standard No.
144, Accounting for the 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 $11.5 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.
8
The operating results of the acquired companies are included in the Statements
of Operations from the acquisition date. The following unaudited pro forma
information shows the results of the Company's operations as though the
acquisition of Central Utah and related entities 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 transactions been made at this date nor is it necessarily indicative of
future results of operations. (In thousands of dollars, except per share data).
Nine Months
Ended
September 30,
2001
----------------
Sales and revenues .............. $ 62,321
Income from continuing operations 3,511
Basic earnings per share ........ 1.24
Diluted earnings per share ...... 1.24
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. Sunshine PCS Corporation
In October 2002, the Company agreed to restructure it's investment in Sunshine
PCS Corporation ("Sunshine") by exchanging $18.5 million of the subordinate
notes receivable from Sunshine for two separate classes of preferred stock of
Sunshine, one with a liquidation value of $12.5 million and a second with a
liquidation value of $2.0 million. The second class of preferred stock will be
convertible into Sunshine's Class A Common Stock at $1.00 per share. As the book
value of the Company's investment in Sunshine, including the subordinate notes,
is $3.0 million no profit or loss was recorded as a result of this exchange.
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.
F. Investment in Spectrum Holders
The Company has made loans to and has investments in PTPMS Communications, LLC
II, totaling $6.1 million. PTPMS II acquired wireless spectrum in an auction
conducted by the Federal Communications Commission in 2000 called the 700 MHz
Guard Band Auction. In a recently conducted FCC auction for similar spectrum,
which ended on September 18, 2002 , the Lower 700 MHz Band Auction, the price
per MHz of population was materially lower than the price paid by PTPMS II in
2000. Accordingly, during the third quarter of 2002, Interactive provided a
reserve for impairment for its investment in PTPMS II of $5.5 million, resulting
in a net book value, at September 30, 2002, of $0.7 million.
In addition the Company has an investment in separate affiliates who acquired
wireless spectrum in a different auction in 2000, the 39 GHz Auction. The
Company's loans to investment in this affiliate is $1.5 million. While trading
in the public markets for companies that own and operate wireless Spectrum has
declined substantially since the end of these Auctions, there is no indication
that the value of this Spectrum has declined due in part, to the limited trading
of these licenses. The Company will closely monitor the results of future
auctions and non auction sales and will provide a reserve for impairment should
the results warrant.
9
During the quarter ended September 30, 2002, the Company, through a wholly-owned
subsidiary, participated in an auction for wireless spectrum, the above noted
Lower 700 MHz Band Auction. The Company was high bidder for licenses with a
total cost of $1.1 million. The Company has on deposit $0.2 million for these
licenses and will be required to pay the remainder when the FCC issues the
licenses which should occur in 2002 or early 2003.
G 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
$46.4 million ($5.4 million to date of spin-off) in the first nine months of
2002 and $81.7 million in the first nine months 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 at the time, 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.
On October 18, 2002, Morgan and two of its operating subsidiaries filed
voluntary petitions under Chapter11 of the United States Bankruptcy Code in the
United States Bankruptcy Court for the Northern District of Indiana, South Bend
Division, for the purpose of conducting an orderly liquidation of its assets.
H. Indebtedness
The parent company maintains a short-term line of credit facility totaling $10.0
million. Borrowings under this facility were $7.9 million and $7.6 million at
September 30, 2002 and December 31, 2001, respectively. This facility will
expire on August 31, 2003. Long-term debt consists of (all interest rates are at
September 30, 2002):
10
September 30,
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%(5%
weighted average at September 30, 2002), secured by assets of the telephone
companies of $152.8 million .................................................... $ 57,379 $ 55,499
Bank Credit facilities utilized by certain telephone and telephone holding
companies through 2016, $31.2 million at fixed interest rates averaging 7.9%
and $50.8 million at variable interest rates averaging 4.8% ................... 82,007 87,127
Unsecured notes issued in connection with acquisitions through 2006, at fixed
interest rates of 10.0% ........................................................ 34,903 34,512
Convertible subordinated note due in December 2004 at a fixed interest rate of
6%.............................................................................. 10,000 10,000
Other .......................................................................... 3,324 6,064
--------- ---------
187,613 193,202
Current maturities ............................................................. (26,981) (28,126)
--------- ---------
$ 160,632 $ 165,076
========= =========
On December 12, 1999, the Company completed the private placement of a $25
million 6% five-year note, convertible into Interactive common stock at $42.50
per share. 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. The obligation of the Chairman under this option to
sell agreement was secured by a bank letter of credit, which, in turn, was
secured by a pledge of certain securities of the Chairman. The Company also
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 and the
Company's Chairman was modified and extended. As a condition to such
modification and extension, Cascade demanded and obtained 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 notes to the
Chairman between November 15 and December 1, 2002 (the "Put"). The Put is at
105% of principal amount sold plus accrued and unpaid interest and is secured by
a fully collateralized letter of credit.
In order to induce the Chairman to grant the Put, the Company entered into an
agreement in December 2000 with its Chairman whereby it agreed (i) to pay for
and acquire, on the same terms and conditions, any portion of the note sold by
Cascade under the Put, (ii) to reimburse the Chairman for the costs for
extending and maintaining the letter of credit and (iii) to pay the Chairman or
his assigns a collateral maintenance fee of 10% per annum for any collateral
provided by them.
During January 2001, Cascade exercised the Put 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 notes held by Cascade.
11
The option to sell the remaining $10 million continues to be secured by a
collateralized letter of credit. Until March 31, 2002, all or a portion of the
collateral for the letter of credit was provided by an affiliate of the Chairman
and, as noted above, the Company had agreed to pay all legal fees, letter of
credit fees and a 10% per annum collateral fee on the amount of collateral
provided. As the Company has always had the right to substitute its collateral
for that provided, as of March 31, 2002, the Company had replaced all of the
$10.5 million of the collateral provided by an affiliate of the Chairman with
$10.5 million of the Company's U.S. Treasury Bills, which have been pledged to
the issuers of the letter of credit and are classified as "Restricted Cash" on
the Company's balance sheet.
The balance of the convertible subordinated note is classified as current at
September 30, 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. It is Management's belief that the Put will be exercised with respect
to the remaining $10 million of notes outstanding prior to December 31, 2002.
I. Comprehensive Income
Balances of accumulated other comprehensive income, net of tax, which consists
of unrealized gains (losses) on available for sale of securities, at September
30, 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 .... (374) 146 (228)
Current period unrealized losses (1,918) 785 (1,133)
------- ------- -------
Balance at September 30, 2002 $ 307 $ (126) $ 181
======= ======= =======
The comprehensive income (loss), for the three and nine month periods ended
September 30, 2002 and 2001 are as follows (in thousands):
Three Months Ended
September 30,
---------------------
2002 2001
---------------------
Net income (loss) for the period ......................................... $(1,872) $ 1,595
Reclassification adjustment-net of income tax benefit of $326 ............ -- (449)
Unrealized gains (losses) on available for sale securities - net of income
tax (provision) (benefit) of $206 and $(498), respectively ............... (286) 685
------- -------
Comprehensive income (loss) ............................................ $(2,158) $ 1,831
======= =======
Nine Months Ended
September 30,
2002 2001
---------------------
Net income for the period ................................................... $ 1,418 $ 3,223
Reclassification adjustment-net of income tax benefit of $146 and $1,099,
respectively ................................................................ (228) (1,514)
Unrealized gains (losses) on available for sale securities - net of income
tax (provision) benefit of $785 and $462, respectively ...................... (1,133) 633
------- -------
Comprehensive income ...................................................... $ 57 $ 2,342
======= =======
12
J. Earnings per share
The following table set forth the computation of basic and diluted earnings per
share for the periods indicated: During the nine months ended September 30,
2002, the Company purchased 23,800 shares of its common stock for treasury.
Subsequent to September 30, 2002, the Company purchased an additional 1,900
shares of Treasury stock.
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
--------------- ------------- --------------- ---------------
Basic earnings per share
Numerator:
Net Income (Loss) .................... $(1,872,000) $ 1,595,000 $ 1,418,000 $ 3,223,000
Denominator:
Weighted average shares outstanding .. 2,799,000 2,822,000 2,809,000 2,822,000
Earnings per share:
Net income (loss) .................... $ ( 0.67) $ 0.57 $ 0.50 $ 1.14
=========== =========== =========== ===========
Diluted earnings per share
Numerator:
Net Income (loss) ..................... $(1,872,000) $ 1,595,000 $ 1,418,000 $ 3,223,000
Interest saved on assumed conversion of
convertible notes - net of tax .... -- -- -- --
----------- ----------- ----------- -----------
Net Income (Loss) ..................... $(1,872,000) $ 1,595,000 $ 1,418,000 $ 3,223,000
----------- ----------- ----------- -----------
Denominator:
Weighted average shares outstanding .. 2,799,000 2,822,000 2,809,000 2,822,000
Shares issued on assumed conversion of
convertible note .................. -- -- -- --
----------- ----------- ----------- -----------
Weighted average shares and share
equivalents ....................... 2,799,000 2,822,000 2,809,000 2,822,000
----------- ----------- ----------- -----------
Earnings per share:
Net income (loss) .................... $ (0.67) $ 0.57 $ 0.50 $ 1.14
=========== =========== =========== ===========
For all periods presented, the 235,294 shares to be issued on conversion of the
Company's convertible note (see note H) have been excluded because their
inclusion would be anti-dilutive.
K. Segment Information
As a result of the decision to spin-off its investment in Morgan (see Note G),
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.
Management uses EBITDA to evaluate the operating performance of the Company's
operations. EBITDA is not a substitute for operating income or cash flows from
operating activities in accordance with generally accepted accounting
principles.
13
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 $301,000 for the three
months ended September 30, 2002 and 2001, respectively and $982,000 and $903,000
for the nine months ended September 30, 2002 and 2001, respectively.
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
------------------------------- -----------------------------
Unaudited
(In thousands)
Sales and revenues: .............................. $ 22,983 $ 23,934 $ 65,055 $ 58,594
======== ======== ======== ========
EBITDA (before corporate allocation):
Operations ..................................... $ 11,579 $ 13,950 $ 32,316 $ 31,620
Corporate expenses, gross ...................... (831) (624) (2,276) (2,199)
-------- -------- -------- --------
Combined total ................................. $ 10,748 $ 13,326 $ 30,040 $ 29,421
======== ======== ======== ========
Operating profit:
Operations ..................................... $ 6,429 $ 8,657 $ 16,928 $ 17,439
Corporate expenses, net ........................ (538) (292) (1,336) (1,195)
-------- -------- -------- --------
Combined total ................................. $ 5,891 $ 8,365 $ 15,592 $ 16,244
======== ======== ======== ========
Operating profit ................................. $ 5,891 $ 8,365 $ 15,592 $ 16,244
Other income (expense):
Gain on sale of cellular partnership ........... -- -- 4,965 --
Investment income .............................. 162 200 1,394 2,593
Interest expense ............................... (3,240) (3,865) (9,911) (10,697)
Impairment of investment in Spinnaker
Industries, Inc. ............................... -- (1,294) -- (1,294)
Reserve for impairment of investment in Spectrum
license holder ................................. (5,479) -- (5,479) --
Equity in earnings of affiliated companies,
predominantly cellular operations .............. 429 213 857 582
-------- -------- -------- --------
Income (loss) before income taxes, minority
interests and operations of Morgan Group Holding
Co. distributed to shareholders .................. ($ 2,237) $ 3,619 $ 7,418 $ 7,428
======== ======== ======== ========
L. Litigation
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 in this lawsuit is R.C. Taylor III, an individual who, to the best
of our knowledge, has no relationship to any of the Lynch entities and
affiliates that have been named parties in this litigation. Indeed at the time
of his filings, and to the best of our knowledge, Mr. Taylor was a lawyer at
Gardner, Carton & Douglas.
14
Thereafter, we believe he was a lawyer with a Washington, D.C., law firm. We do
not know his current status. We issued a press release dealing with this
litigation on January 16, 2002.
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.
Interactive was formally served with the complaint on July 10, 2002. On
September 19, 2002, Interactive filed two motions with the United States
District Court for the District of Columbia: a motion to dismiss the lawsuit and
a motion to transfer the action to the Southern District of New York. The
relator has until November 25, 2002, to respond to Interactive's motions.
M. Write-off of Uncollectible Receivables
During the nine months ended September 30, 2002, the Company wrote off $0.9
million of receivables, classified as a "Selling and Administrative Expenses",
relating to the bankruptcy of MCI/Worldcom and Global Crossing, $0.2 million of
which was written off during the three months ended September 30, 2002.
15
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Sales And Revenues
Revenues for the three months ended September 30, 2002 decreased by $1.0 million
to $23.0 million from the third quarter of 2001. During the third quarter of
2001, Interactive recorded a $2.8 million contingent administrative fee for
services it had previously performed in an auction for wireless spectrum.
Interactive sporadically has recorded this type of fee over the years. Apart
from this variance, revenues increased by $1.8 million, attributable to higher
regulated telephone service, including regulatory true -ups, and the provision
of non-traditional telephone services such as: Internet, long distance service
and local exchange carrier service. The acquisition of American Alarm Company,
which occurred on November 30, 2001 contributed $0.8 million in revenues to the
current year's quarter.
For the nine months ended September 30, 2002, revenues were $65.1 million, an
increase of $6.5 million from the $58.6 million recorded in the first nine
months of 2001. 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 $5.2 million to the increase and the
acquisition of American Alarm added $2.2 million to the increase. Offsetting
these increases the absence of an administration fee in 2002, decreased current
years revenues from the prior years period. In addition, as a result of certain
regulatory initiatives in some of the states in which our companies operate, it
is possible that revenues at certain telecommunication operations may be reduced
in the near future.
Operating Profit
Operating profit for the three months ended September 30, 2002 decreased by $2.5
million to $5.9 million from the third quarter of 2001. The administration fee
of $2.8 million was the major cause of the variance. The acquisition of American
Alarm reduced operating profit by $0.2 million during the quarter due to the
amortization of customer contracts of $0.4 million recorded during the quarter.
The absence of $0.6 million of amortization expense as a result of the
implementation of SFAS 142 improved the quarter's results. Also, during the
quarter the Company recorded $0.2 million in allowance for doubtful accounts
associated with the recent bankruptcy of MCI/Worldcom. The bankruptcy filings
may adversely impact the interstate revenues pools administered by the National
Exchange Carrier Association ("NECA") of which all of the Company's telephone
operating subsidiaries participate. If the Company's access settlements from
NECA are reduced, the Company's operating results in the remainder of 2002 could
be materially affected.
For the nine months ended September 30, 2002, operating profits decreased by
$0.7 million to $15.6 million, also reflecting the absence of the administrative
fee of $2.8 million in 2002. The Central Utah acquisition increased operating
profit by $1.7 million. American Alarm reduced operating profit by $0.2 million,
due to the amortization of customer contracts of $1.1 million and the
non-amortization of goodwill added $2.0 million of operating profit in
comparison to the previous year. The recording of $0.9 million of write-offs of
receivables also affected the nine month activity.
Other Income (Expense)
The Company has made loans to and has investments in PTPMS Communications, LLC
II, totaling $6.1 million. PTPMS II acquired wireless spectrum in an auction
conducted by the Federal Communications Commission in 2000 called the 700 MHz
Guard Band Auction. In a recently conducted FCC auction for similar spectrum,
which ended on September 18, 2002 , the Lower 700 MHz Band Auction, the price
per MHz of population was materially lower than the price paid by PTPMS II in
2000. Accordingly, during the third quarter of 2002, Interactive provided a
reserve for impairment for its investment in PTPMS II of $5.5 million, resulting
in a net book value, at September 30, 2002, of $0.7 million.
16
In addition the Company has an investment in separate affiliates who acquired
wireless spectrum in a different auction in 2000, the 39 GHz Auction. The
Company's loans to investment in this affiliate is $1.5 million. While trading
in the public markets for companies that own and operate wireless spectrum has
declined substantially since the end of these Auctions, there is no indication
that the value of this spectrum has declined due in part, to the limited trading
of these licenses. The Company will closely monitor the results of future
auctions and non auction sales and will provide a reserve for impairment should
the results warrant.
For the three months ended September 30, 2002 investment income was down
slightly from the previous year due to lower treasury rates. For the nine months
ended September 30, 2002, investment income decreased by $1.2 million from the
prior year period primarily due to the unrealized gains recorded in 2001 in
connection with Tremont Advisers, Inc. All of the Company's interest in Tremont
was sold in October 2001. Offsetting these 2001 gains, there was higher dividend
income on the Company's ownership of bank stocks in 2002.
During the first quarter, the Company sold its interest in a cellular
partnership in New Mexico (RSA 1 (North) ) for $5.6 million resulting in a
pre-tax gain of $5.0 million.
Interest expense decreased by $0.6 million in the third quarter due primarily to
reduced interest rates, lower levels of borrowings and the absence, in 2002, of
a collateral fee associated with a Put on the Company's convertible debt
outstanding. Interest expense decreased by $0.8 million for the nine months
ended September 30, 2002, for essentially the same reasons as the quarter, but
these reductions were offset by increased interest expense associated debt
incurred for the acquisitions of Central Utah and American Alarm.
Income Tax Provision
The income tax provision includes federal as well as state and local taxes. The
tax provision for the nine months ended September 30, 2002 and 2001, represent
effective tax rates of 43.6% and 47.8%, 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 Interests
Minority interests decreased earnings by $185,000 for the three months ended
September 30, 2002 and $185,000 a year earlier as increased minority interests
on earnings of telephone operations was offset by minority interest in losses
associated with American Alarm.
For the nine months ended September 30, 2002, minority interest decreased
earnings by $0.9 million versus $0.5 million for the period last year. The
Change was principally due to minority interest associated with the gain from
the sale of RSA 1 (North) in New Mexico.
Net Income (Loss)
The Company recorded a loss from continuing operations for the three months
ended September 30, 2002 of $1.9 million, $0.67 per share (basic and diluted),
for the third quarter of 2002 compared to income from continuing operations for
the same period last year of $1.8 million, or $0.63 per share (basic and
diluted). The reserve for impairment of PCS license holder was the primary cause
of the loss in 2002.
17
For the nine months ended September 30, 2002 income from continuing operations
was $3.3 million, or $1.18 per share (basic and diluted), as compared to income
from continuing operations in 2001 of $3.4 million, or $1.19 per share (basic
and diluted). Factors contributing to this increase were: the gain from the sale
of RSA 1 (North) in New Mexico, ($2.5 million, after tax and minority interests
effects) offset by the reserve for impairment of wireless spectrum license
holder ($3.6 million, after tax effects).
Net loss for the three months ended September 30, 2002 was $1.9 million or $0.67
per share (basic and diluted) as compared to net income of $1.6 million, or
$0.57 per share (basic and diluted), in the previous years' three-month period.
For the nine months ended September 30, 2002 net income was $1.4 million or
$0.50 per share (basic and diluted), as compared to $3.2 million or $1.14 per
(basic and diluted) share in the previous year. In addition to the factors
influencing the change in income from continuing operations, the operating
result of Morgan impacted the net income results.
Morgan Spin-Off
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. The Company retains
234,294 shares of Morgan Group Holding Co. in escrow to be provided to the
holder(s) of the Company's convertible notes at the time of the conversion.
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 periods
ended September 30, 2002 and 2001 as "distributed to shareholders."
FINANCIAL CONDITION
Liquidity/Capital Resources
As of September 30, 2002, the Company had current assets of $51.6 million and
current liabilities of $59.3 million. Working capital deficiency was therefore
$7.7 million as compared to $10.3 million at December 31, 2001, net of Morgan
amounts.
For the nine months, capital expenditures were $14.4 million in 2002 versus
$13.0 million in 2001.
At September 30, 2002, total debt was $198.4 million, which was $5.2 million
lower than the $203.5 million at the end of 2001. At September 30, 2002, there
was $134.7 million of fixed interest rate debt averaging 7.0% and $63.7 million
of variable interest rate debt averaging 4.9%. 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%.
Cascade Investment, LLC has the right to elect to sell the outstanding $10
million in principal amount of the Company's 6% convertible notes to the
Company's Chairman between November 15 and December 1, 2002 (the "Put"). In
order to induce the Chairman to grant the Put, Company entered into an agreement
in December 2000 with its Chairman whereby it agreed to pay for and acquire, on
the same terms and conditions, any portion of the note sold by Cascade under the
Put. Based on recent communications between Cascade and the Company's Chairman,
the Company expects Cascade to exercise the Put. The Put is at 105% of principal
amount sold plus accrued and unpaid interest and, accordingly, the Company
expects to reacquire the outstanding notes for approximately $10.5 million in
December 2002.
As of September 30, 2002, Interactive, the parent company, had $2.1 million
available under a $10 million short-term line of credit facility, which expires
on August 31, 2003.
18
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.
During the quarter ended September 30, 2002, the Company, through a wholly-owned
subsidiary, participated in an auction for wireless spectrum, the Lower 700 MHz
Band Auction. The Company was high bidder for licenses with a total cost of $1.1
million. The Company has on deposit $0.2 million for these licenses and will be
required to pay the remainder when the FCC issues the licenses which should
occur in 2002 or late 2003.
Interactive has a high degree of financial leverage. As of September 30, 2002,
the ratio of total debt to equity was 9.8 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 (b) 2 - 3 years 4 - 5 years After 5 years
-------------------------------------------------------------------
Long-term Debt (a) ............... $187,613 $ 26,981 $ 45,564 $ 48,609 $ 66,459
Operating Leases ................. 1,306 321 564 321 100
-------- -------- -------- -------- --------
Total Contractual Cash Obligations $188,919 $ 27,302 $ 46,128 $ 48,930 $ 66,559
======== ======== ======== ======== ========
(a) Does not include interest payments on debt
(b) Includes $10 million of
convertible subordinated debt due in 2004, that has a put option that if
exercised, as management currently expects 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 Less than
Other Commercial Commitments Committed 1 year 1 - 3 years 4 - 5 years Over 5 years
------------------------------------------------------------------
Lines of Credit ............ $10,744 $10,744 - - -
Standby Letter of Credit ... 10,500 10,500 - - -
------- ------- ------- ------- -------
Total Commercial Commitments $21,244 $21,244 - - -
======= ======= ======== ======== ========
19
The Company has initiated an effort to monetize certain of its assets, including
selling a portion or all of certain in vestment and/or 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 1 (North), 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.
20
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 and the period of
their 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 ($35.9 million at September
30, 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 September 30, 2002, approximately $63.7 million, or 32% 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 nine-month interest expense
would have changed by less than $0.4 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.
21
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
Our chief executive officer and chief financial officer have evaluated the
effectiveness of the Company's disclosure controls and procedures (as
defined in Rules 13a-14(c) and 15d-14(c) of the Securities Exchange Act of
1934 (the "Act")) as of a date within 90 days of the filing date of this
quarterly report (Evaluation Date). They have concluded that, as of the
Evaluation Date, the Company's disclosure controls and procedures were
adequate and effective to ensure that information required to be disclosed
by the Company in the reports that if files or submits under the Act is
recorded, processed, summarized and reported, within the time periods
specified in the rules and forms of the Securities and Exchange Commission.
(b) Changes in internal controls.
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to
the Evaluation Date, nor were there any significant deficiencies or
material weaknesses in these controls requiring corrective actions.
22
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.
23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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 in this lawsuit is R.C. Taylor III, an individual who, to the best
of our knowledge, has no relationship to any of the Lynch entities and
affiliates that have been named parties in this litigation. Indeed at the time
of his filings, and to the best of our knowledge, Mr. Taylor was a lawyer at
Gardner, Carton & Douglas. Thereafter, we believe he was a lawyer with a
Washington, D.C., law firm. We do not know his current status. We issued a press
release dealing with this litigation on January 16, 2002.
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.
Interactive was formally served with the complaint on July 10, 2002. On
September 19, 2002, Interactive filed two motions with the United States
District Court for the District of Columbia: a motion to dismiss the lawsuit and
a motion to transfer the action to the Southern District of New York. The
relator has until November 25, 2002, to respond to Interactive's motions.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 99.1 - Chief Executive Officer Section 906 Certification.
Exhibit 99.2 - Chief Financial Officer Section 906 Certification.
(b) None.
24
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
November 14, 2002
25
CERTIFICATIONS
I, Mario J. Gabelli, the Chief Executive Officer of the Registrant, certify
that:
1. I have reviewed this quarterly report on Form 10-Q of Lynch Interactive
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Mario J. Gabelli
--------------------
Mario J. Gabelli
Chief Executive Officer of
Lynch Interactive Corporation
November 14, 2002
26
I, Robert E. Dolan, the Chief Financial Officer of the Registrant, certify
that:
1. I have reviewed this quarterly report on Form 10-Q of Lynch Interactive
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Robert E. Dolan
-------------------
Robert E. Dolan
Chief Financial Officer of
Lynch Interactive Corporation
November 14, 2002
27