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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1999 Commission file number 1-106
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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LYNCH INTERACTIVE CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 06-145056
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State of other jurisdiction (I.R.S. Employer
incorporation or organization Identification No.)
401 Theodore Fremd Avenue, Rye, NY 10580
- ---------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (914) 921-8821
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange
------------------- on which registered
Common Stock, No Par Value American Stock Exchange
Securities registered pursuant to section 12(g) of the Act: None
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 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 by mark if disclosure of delinquent filers pursuant to Item 405 of
Regulations S-K is not contained herein, and will not be contained, to the best
of the Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K, or any amendment to
this Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of the
Registrant (based upon the closing price of the Registrant's Common Stock on the
American Stock Exchange on March 22, 2000 of $129.50 per share) was
$135,439,360. (In determining this figure, the Registrant has assumed that all
of the Registrant's directors and officers are affiliates. This assumption shall
not be deemed conclusive for any other purpose.)
The number of outstanding shares of the Registrant's Common Stock was 1,412,183
as of March 22, 2000.
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DOCUMENTS INCORPORATED BY REFERENCE:
Part III: Certain portions of Registrant's Proxy Statement for the 2000
Annual Meeting of Shareholders.
FORWARD LOOKING INFORMATION
This Form 10-K contains certain forward looking information, including without
limitation, a "harvesting" initiative (pg. 2), Item 1-I.A "Regulatory
Environment" and possible changes thereto and "Competition" (pgs. 5-7 Item
1.-I.B "Cable Television" (Pgs. 7-8), Item 1-I.C "Personal Communications and
other Wireless Services," including without limitation the risks described (pgs.
9-11), Item 1-II. Morgan "Growth Strategy" (p. 11), "Independent
Owner-Operators" (p. 13) Fuel Cost (p. 14), "Long-Lived Assets" (p.14) and "Risk
Management, Safety and Insurance" (p. 14), Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations," including without
limitation Liquidity and Capital Resources, Year 2000 and Market Risk, and Notes
to Financial Statements (Item 14(a) below). 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 I
ITEM 1. BUSINESS
Lynch Interactive Corporation ("Interactive or the "Company") was incorporated
in 1996 under the laws of the State of Delaware. On September 1, 1999,
Interactive was spun-off by Lynch Corporation to its shareholders (the "Spin
Off") and became a public company. Prior to the Spin Off, Interactive had no
significant assets, liabilities or operations. As a successor to certain
businesses of Lynch Corporation, Interactive became a diversified holding
company with subsidiaries primarily engaged in multimedia and transportation
services. Interactive's executive offices are located at 401 Theodore Fremd
Avenue, Rye, New York 10580-1430. Its telephone number is 914/921-8821.
Interactive's business development strategy is to expand its existing operations
through internal growth and acquisitions. It may also, from time to time,
consider the acquisition of other assets or businesses that are not related to
its present businesses. For the year ended December 31, 1999, multimedia
operations provided 29% of the Company's consolidated revenues, and services
operations provided 71% of the Company's consolidated revenues. As used herein,
Interactive includes corporations, which are subsidiaries of Interactive.
In November 1998, Lynch Corporation announced a "harvesting" initiative, i.e.,
an effort to monetize certain assets, including considering selling all or
portions of certain operating entities. These may include Interactive's minority
interests in network affiliated television stations, and certain Interactive
telephone operations where competitive local exchange carrier opportunities are
not readily apparent. As part of this initiative, Interactive sold in December
1998 its DirectTV franchise serving certain counties in New Mexico for
approximately $3.1 million. Interactive intends to continue this initiative.
There is no assurance that any transaction can be consummated on terms favorable
or acceptable to Interactive.
I. MULTIMEDIA
A. Telecommunications
Operations. Interactive conducts its telecommunications operations through
subsidiary corporations. The telecommunications segment has been expanded
through the selective acquisition of local exchange telephone companies serving
rural areas and by offering additional services such as Internet service and
long distance service. From 1989 through 1999, Interactive has acquired eleven
telephone companies, four of which have indirect minority ownership of 2% to
20%, whose operations range in size from approximately 500 to over 10,000 access
lines. The Company's telephone operations are located in Iowa, Kansas, Michigan,
New Hampshire, New Mexico, New York, North Dakota and Wisconsin. As of December
31, 1999, total access lines were approximately 45,126, 100% of which are served
by digital switches. In January 2000, Interactive signed a letter of intent to
acquire a rural telephone company, which also has cellular, and other
telecommunications and cable television interests, in the general magnitude of
(though somewhat smaller than) its recent acquisition of Central Scott Telephone
Company.
These subsidiaries' principal business is providing 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.
Interactive holds franchises, licenses, and permits adequate for the conduct of
its business in the territories, which it serves.
Future growth in telephone operations is expected to be derived from the
acquisition of additional telephone companies, from providing service to new
customers or additional services to existing customers, from upgrading existing
customers to higher grades of service, and from additional service offerings.
The following table summarizes certain information regarding Interactive's
multimedia operations
Years Ended December 31,
1997 1998 1999
--------- --------- ----------
Telecommunications Operations
Access lines* .................................................... 36,525 37,604 45,126
% Residential .................................................. 75% 75% 75%
% Business ..................................................... 25% 25% 25%
Internet Subscribers ............................................. 3,506 7,977 15,524
Cable Subscribers + .............................................. 4,660 4,709 4,642
Total Multimedia Revenues
Telecommunications Operations
Local Service ................................................... 13% 13% 16%
Network Access & Long Distance .................................. 69% 67% 64%
Non-Regulated & Other** ......................................... 15% 17% 17%
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Total Telecommunications Operations ............................. 97% 97% 97%
-------- -------- --------
Cable Operations ................................................. 3% 3% 3%
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Total Multimedia Revenues ........................................ 100% 100% 100%
($ in 000)
Total Revenues ................................................... $ 47,908 $ 54,622 $ 59,011
EBITDA++ ......................................................... 24,666 29,389 31,443
Depreciation & Amortization ...................................... 12,175 12,995 14,115
Capital Expenditures ............................................. 10,914 11,028 11,742
Total Assets ..................................................... $196,285 $195,010 $211,622
* An "access line" is a telecommunications circuit between the customer's
establishment and the central switching office.
** Non-regulated and other revenues include Internet, PCS, Direct Broadcast
Satellite and other non-regulated revenues. + Does not include certain
cable systems in northeast Kansas, where a subsidiary of Registrant is
suing a 20% partner in CLR Video for diverting an opportunity to acquire
such additional systems.
++ EBITDA is earnings before interest, taxes, depreciation and amortization,
and corporate overhead allocation.
Telephone Acquisitions. Interactive pursues an active program of acquiring
operating telephone companies. From January 1, 1989 through December 31, 1999,
Interactive has acquired eleven telephone companies serving a total of
approximately 38,600 access lines at the time of these acquisitions for an
aggregate consideration totaling approximately $138.0 million. Such acquisitions
are summarized in the following table:
ACQUISITION HISTORY
Number of Number of Annual
Year of Access Lines Access Lines Revenues Ownership
Company Acquisition Yr. of Acq. 12/31/99 12/31/99 Percentage
- ------- ----------- ----------- -------- -------- ----------
($ in 000)
Western New Mexico Telephone Co. 1989 4,200 6,516 $17,105 83.1
Inter-Community Telephone Co. (a) 1991 2,550 2,624 3,305 100.0
Cuba City Telephone Co. &
Belmont Telephone Co. 1991 2,200 2,685 2,070 81.0
Bretton Woods Telephone Co. 1993 250 623 688 100.0
JBN Telephone Co. (b) 1993 2,300 2,776 4,388 98.0
Haviland Telephone Co. 1994 3,800 4,186 4,114 100.0
Dunkirk & Fredonia Telephone Co.
& Cassadaga Telephone Co. 1996 11,100 12,661 13,673 100.0
Upper Peninsula Telephone Co. 1997 6,200 7,009 9,854 100.0
Central Scott Telephone Co. 1999 6,000 6,046 4,787 100.0
(a) Includes 1,350 access lines acquired in 1996.
(b) Includes 354 access lines acquired in 1996.
In 1997, Interactive acquired Upper Peninsula Telephone Company for
approximately $26,500,000, and in 1999 Interactive acquired Central Scott
Telephone Company for approximately $28,100,000.
Interactive continually evaluates acquisition opportunities targeting domestic
rural telephone companies with a strong market position, good growth potential
and predictable cash flow. In addition, Interactive generally seeks companies
with excellent local management already in place who will remain active with
their company. Recently, certain large telephone companies have offered certain
of their rural telephone exchanges for sale, often on a state-wide or larger
area basis. Interactive has and in the future may, bid on such groups of
exchanges. Telephone holding companies and others actively compete for the
acquisition of telephone companies and such acquisitions are subject to the
consent or approval of regulatory agencies in most states. While management
believes it will be successful in making additional acquisitions, any
acquisition program is subject various risks, including being able to find and
complete acquisitions at an attractive price and being able to integrate and
operate successfully any acquisition made. See "Harvesting" initiative at page 2
above.
Related Services and Investments. Interactive also provides non-regulated
telephone related services, including internet access service and long distance
resale service, in certain of its telephone service (and adjacent) areas.
Interactive also intends to provide local telephone and other telecommunications
service outside certain of its franchise areas by establishing competitive local
exchange carrier (CLEC) operations in certain nearby areas. Affiliates of eight
of Interactive's telephone companies now offer Internet access service. At
December 31, 1999, Internet access customers totaled approximately 15,524
compared to approximately 8,000 at December 31, 1998.
In late 1998, an affiliate of Dunkirk & Fredonia Telephone Company began
providing long distance resale service, and affiliates of certain of
Interactive's other telephone companies are considering becoming long distance
resellers. An affiliate of Dunkirk & Fredonia Telephone Company began providing
(CLEC) service on a resale basis in neighboring Dunkirk, NY in the second
quarter of 1999, and on March 1, 2000, they announced that would be entering
into the Buffalo market. Affiliates of Inter-Community Telephone Company in
North Dakota, and Western New Mexico Telephone Company in New Mexico have filed
with the state regulatory commissions to provide CLEC services in those states.
Final plans to offer CLEC service in areas adjacent to Interactive's telephone
operations in those states have not been completed. In December 1998,
Interactive also acquired a 10 MHZ personal communications service (PCS) license
for the Basic Trading Area (BTA) covering the Las Cruces, New Mexico market and
is considering how to utilize that license. BTAs are used by the FCC to
designate the geographic area covered by a PCS License. BTAs are based on
materials copyright to the Rand McNally 1992 Commercial Atlas & Marketing Guide
and divide the United States into 493 separate geographic areas. The Las Cruces
BTA covers a population of approximately 197,166 (as of the 1990 census), and
Las Cruces is the principal city in the BTA. The company is currently developing
plans to utilize this license.
Central Scott provides long distance resale service. In addition, Central Scott
has a 10 MHz PCS License for its wireline territory. Central Scott is also
approximately 14% minority owner of an entity that has a 10 MHz PCS License for
portions of Clinton and Jackson Counties in Iowa.
At December 31, 1999, Interactive owned minority interests in certain entities
that provide wireless cellular telephone service in several Rural Service Areas
("RSAs") in New Mexico and North Dakota, covering areas with a total population
of approximately 231,000, of which Interactive's proportionate interest is
approximately 46,000. The company accounts for its net investment in the RSAs
under the equity method.
There is no assurance that Registrant can successfully develop these businesses
or that these new or expanded businesses can be made profitable within a
reasonable period line. Such businesses, in particular any CLEC business, would
be expected to operate at losses initially and for a period of time.
Regulatory Environment. Operating telephone companies are regulated by state
regulatory agencies with respect to its intrastate telephone services and the
Federal Communications Commission ("FCC") with respect to its interstate
telephone service and, with the enactment of the Telecommunications Act of 1996
(the "1996 Act"), certain other matters relating principally to fostering local
and intrastate competition.
Interactive's telephone subsidiaries participate in the National Exchange
Carrier Association ("NECA") common line and traffic sensitive tariffs and
participate in the access revenue pools administered by NECA for interstate
services. Where applicable, Interactive's subsidiaries also participate in
similar pooling arrangements approved by state regulatory authorities for
intrastate services. Such interstate and intrastate arrangements are intended to
compensate local exchange carriers ("LEC's"), such as Interactive's operating
telephone companies, for the costs, including a fair rate of return, of
facilities furnished in originating and terminating interstate and intrastate
long distance services.
In addition to access pool participation, certain of Interactive's subsidiaries
are compensated for their intrastate costs through billing and keeping access
charge revenues (without participating in an access pool). The intrastate access
charge revenues are developed based on intrastate access rates filed with the
state regulatory agency.
In addition, a 1989 FCC decision provided for price cap regulation for certain
interstate services. The price cap approach differs from traditional
rate-of-return regulation by focusing primarily on the prices of communications
services. The intention of price cap regulation is to focus on productivity and
the approved plan for telephone operating companies. This allows for the sharing
with its customers of profits achieved by increasing productivity. Alternatives
to rate-of-return regulation have also been adopted or proposed in some states
as well. Inter-Community Telephone Company is an example of one such subsidiary,
which has elected a price cap limitation on intrastate access charges. However,
management does not believe that this agreement will have a material effect on
the Company's results. In certain states, regulators have ordered the
restructuring of local service areas to eliminate nearby long distance calls and
substitute extended calling areas.
Various aspects of federal and state telephone regulation have in recent years
been subject to re-examination and on-going modification. In February 1996, the
Telecommunications Act of 1996 (the "1996 Act"), which is the most substantial
revision of communication law since the 1930's, became law. The 1996 Act is
intended generally to allow telephone, cable, broadcast and other
telecommunications providers to compete in each other's businesses, while
loosening regulation of those businesses. Among other things, the Act (i) would
allow major long distance telephone companies and cable television companies to
provide local exchange telephone service; (ii) would allow new local telephone
service providers to connect into existing local telephone exchange networks and
purchase services at wholesale rates for resale; (iii) would provide for a
commitment to universal service for high-cost, rural areas and authorizes state
regulatory commissions to consider their status on certain competition issues;
(iv) would allow the Regional Bell Operating Companies to offer long distance
telephone service and enter the alarm services and electronic publishing
businesses; (v) would remove rate regulation over non-basic cable service in
three years; and (vi) would increase the number of television stations that can
be owned by one party.
Although the FCC has completed numerous regulatory proceedings required to
implement the 1996 Act, the FCC is still in the process of promulgating new
regulations covering these and related matters. For certain issues, the FCC
bifurcated the proceedings between price cap and rate-of-return companies or in
the case of the Universal Service Fund (USF) between rural and non-rural
companies. In several cases, the regulations for the price-cap (or non-rural)
local exchange carriers (LECs) have been or are being determined first, followed
by separate proceedings for rate-of-return (or rural) companies. Since all of
Interactive's telephone subsidiaries are rural, rate-of-return companies for the
interstate jurisdiction, many of the issues are yet to be resolved by the FCC
for Interactive's subsidiaries. Current or anticipated proceedings, which could
have significant revenue impacts for rural, rate-of-return companies, include
changes in access charge regulations, jurisdictional separations rules (which
allocate costs between interstate and intrastate services), reevaluation of the
interstate rate-of-return and permanent USF procedures.
The USF is intended, among other things, to provide special support funds to
high cost rural LECs so that they can provide affordable services to their
customers notwithstanding their high cost due to low population density. In May
1997, the FCC adopted interim USF procedures effective January 1, 1998, which
continue to use actual embedded costs for rural companies. The interim
procedures transferred the Weighted DEM (which is a subsidy related to central
office switching equipment) and Long-Term Support (LTS) to the USF and required
all telecommunications companies (including Interactive's telephone
subsidiaries) to contribute to the fund. In addition, a cap was implemented on
the amount of corporate expense allowable for the computation of USF. The
interim rules are expected to be in effect until January 1, 2001. This is the
earliest date that a transition to a new universal service support mechanism may
begin. On July 1, 1998, the Federal-State Joint Board on Universal Service
(Joint Board) appointed a Rural Task Force ("RTF") to address changes to the
universal service support mechanisms for rural carriers. All of Interactive's
telephone companies are designated as rural carriers for universal service
support. On September 30, 2000 (i.e., nine months after the implementation of a
new universal service plan for non-rural carriers) the RTF is scheduled to make
recommendations to the Joint Board regarding any changes required to the current
universal service support mechanism for rural carriers. This includes, but is
not limited to, reviewing a proxy model built on Forward-Looking Economic Costs
(FLEC).
The FCC adopted permanent USF procedures for non-rural carriers effective
January 1, 2000. The new Federal universal service support mechanism for
non-rural carriers utilizes the FCC's synthesis cost proxy model with a
hold-harmless provision. The hold-harmless provision ensures that the non-rural
carrier will receive at least as much Federal USF as they had been receiving
under the previous system. The FCC is currently in the process of determining
how long the hold-harmless provision should last for non-rural carriers.
In addition to the changes to universal service, the FCC also has open dockets
related to access charges, jurisdictional separations and rate-of-return
reevaluation. The FCC made several changes to access charges for price cap
companies in May 1997. The FCC issued a proposal for similar changes to access
charges for rate-of-return carriers in June 1998. In October 1997, the FCC
initiated a proceeding where companies provided comments to the FCC regarding
how costs should be allocated between the intrastate and interstate
jurisdictions. In October 1998, the FCC requested comments regarding whether the
interstate rate-of-return was at the appropriate rate. No final decision
regarding proposed changes for rate-of-return carriers related to access
charges, jurisdictional separations or rate-of-return reevaluation has been
issued by the FCC. Since interstate revenues constituted approximately 50% of
the regulated revenues of the Registrant's telephone companies in 1998,
modifications to access charges, separations, rate-of-returns, and/or USF could
have a material effect. It is impossible to determine the impact of these
proposed changes on the Registrant's telephone companies at this time.
Interactive cannot predict the effect of the 1996 Act, state initiatives and new
proposed Federal and state regulations. Interactive's local exchange carrier
telephone operations do not have significant wireline competition at the present
time. Because of the rural nature of their operations and related low population
density, they are primarily high cost operations, which receive substantial
Federal and state subsidiaries. The regulatory environment for LEC operations
has begun to change. A principal purpose of the 1996 Act was to encourage
competition in local telephone services. Though the 1996 Act reaffirmed Federal
policy of universal telephony service at fair and reasonable rates, the 1996 Act
and related proceedings will also change the method of subsidizing high cost
rural LECs such as Interactive's and the new methods have not yet been finally
determined. Similar regulatory changes have also been initiated in many of the
states in which Interactive operates. Because of its low population density and
high cost operations, Interactive believes that competition will be slower in
coming to most of its service areas than to larger urban areas. Interactive also
believes that a satisfactory subsidization mechanism will be developed to
compensate Interactive's LECs for their high cost service areas; however, these
are very significant issues to Interactive and there can be no assurance as to
how such issues will ultimately be determined.
Competition. All of Interactive's current telephone companies are currently
monopoly wireline providers in their respective area of local telephone exchange
service; although there can be no assurance that this will continue. However, as
a result of the 1996 Act, FCC and state regulatory authority initiatives and
judicial decisions, competition has been introduced into certain areas of the
toll network wherein certain providers are attempting to bypass local exchange
facilities to connect directly with high-volume toll customers. For example, in
the last few years the States of New Mexico, New York, Michigan, Wisconsin and
Kansas passed or amended telecommunications bills intended to introduce more
competition among providers of local services and reduce regulation. Regulatory
authorities in certain states, including New York, have taken steps to promote
competition in local telephone exchange service, by requiring certain companies
to offer wholesale rates to resellers. A substantial impact is yet to be seen on
Interactive's telephone companies. Interactive's subsidiaries do not expect
bypass to pose a significant near-term competitive threat due to a limited
number of high-volume customers they serve. In addition, cellular radio or
similar radio-based wireless services, including personal communication services
("PCS"), and cable television and internet based services could provide an
alternative local telephone exchange service as well as possible competition
from electric companies.
Interactive's telephone companies, in the aggregate, own approximately 10,000
miles of cable and 1,000 miles of fiber optic cable. Substantially all of the
telephone companies' properties are encumbered under mortgages and security
interests, principally to the Rural Utilities Services. See Item 2. Properties
------------------
B. Cable Television/Broadcasting
Cable Television
It is part of Registrant's strategy to own cable television systems,
particularly in markets where Registrant is the telephone operator and adjacent
areas. The following table sets forth Registrant's cable interests:
Number of
Subscribers
Year of Cost of at Annual Revenues Ownership
Company Acquisition Acquisition Acquisition 12/31/99 Percentage
- --------------------------- ----------- ----------- ----------- ------------- ----------
Haviland Telephone Company 1994 200,000(1) 176 $ 46,000 100%
CLR Video 1995 5,200,000 4,489 $1,728,000 60%
Falcon/Westcom 1999 3,690,000(2) 3,053(2) $1,040,000(2) 60%(3)
(1) Allocated portion of total purchase price.
(2) Lynch Multimedia is suing Robert C. Carson, an affiliate of a 20%
partner in CLR Video and the former President and General Manager of
CLR Video, for diverting these properties from CLR Video to Carson
Communications, Inc. Information of these systems is estimated.
(3) Subject to a 20% profits interest awarded to Mr. Carson.
In late March 1999, Robert C. Carson, an affiliate of the 20% partner in CLR
Video and the former President and General Manager, caused Carson
Communications, Inc. to close on the acquisition of the Falcon/Westcom cable
systems, which Registrant claims as diverted from and belong to CLR Video. As a
result, in April 1999, Registrant's subsidiary, Lynch Multimedia Corporation,
filed a lawsuit in the Federal District Court in Wichita, Kansas, against Mr.
Carson, Carson Communications, Inc. and the Robert C. Carson Trust, claiming
that they diverted the acquisition of Falcon/Westcom cable systems from CLR
Video to Carson Communications, Inc. in violation of the CLR Video operating
agreement and their fiduciary obligations to CLR Video. The complaint contends
that a constrictive trust has been created and the diverted properties belong to
CLR Video and seeks an order of specific performance requiring the Carson
defendants to offer the Falcon/Westcom systems to CLR on the same terms that
they acquired the systems. In the alternative, Lynch Multimedia seeks damages in
the amount of $12.5 million. The complaint also seeks punitive damages. The
lawsuit is expected to go to trial in the summer of 2000.
Registrant also has letters of intent to acquire additional systems.
Broadcasting
See the "Harvesting" initiative at page 2 above concerning the television
operations.
STATION WHBF-TV - Lynch Entertainment Corporation ("Lynch Entertainment I"), a
wholly-owned subsidiary of Interactive, and Lombardo Communications, Inc.,
wholly-owned by Philip J. Lombardo, are the general partners of Coronet
Communications Company ("Coronet"). Lynch Entertainment I has a 20% interest in
Coronet and Lombardo Communications, Inc. has an 80% interest. Coronet owns a
CBS-affiliated television station WHBF-TV serving Rock Island and Moline,
Illinois and Davenport and Bettendorf, Iowa.
STATION WOI-TV - Lynch Entertainment Corporation II ("LEC-II"), a wholly-owned
subsidiary of Interactive, owns 49% of the outstanding common shares of Capital
Communications Corporation ("Capital") and convertible preferred stock, which
when converted, would bring LEC-II's common share ownership to 50%. On March 1,
1994, Capital acquired the assets of WOI-TV for $12.7 million. WOI-TV is an ABC
affiliate and serves the Ames/Des Moines, Iowa market. Lombardo Communications,
Inc. II, controlled by Philip J. Lombardo, has the remaining share interest in
Capital.
Operations. Revenues of a local television station depend to some extent upon
its relationship with an affiliated television network. In general, the
affiliation contracts of WHBF-TV and WOI-TV with CBS and ABC, respectively,
provide that the network will offer to the affiliated station the programs it
generates, and the affiliated station will transmit a number of hours of network
programming each month. The programs transmitted by the affiliated station
generally include advertising originated by the network, for which the network
is compensated by its advertisers.
The affiliation contract provides that the network will pay to the affiliated
station an amount which is determined by negotiation, based upon the market size
and rating of the affiliated station. Typically, the affiliated station also
makes available a certain number of hours each month for network transmission
without compensation to the local station, and the network makes available to
the affiliated station certain programs which will be broadcast without
advertising, usually public information programs. Some network programs also
include "slots" of time in which the local station is permitted to sell spot
advertising for its own account. The affiliate is permitted to sell advertising
spots preceding, following, and sometimes during network programs.
A network affiliation is important to a local station because network programs,
in general, have higher viewer ratings than non-network programs and help to
establish a solid audience base and acceptance within the market for the local
station. Because network programming often enhances a station's audience
ratings, a network-affiliated station is often able to charge higher prices for
its own advertising time. In addition to revenues derived from broadcasting
network programs, local television stations derive revenues from the sale of
advertising time for spot advertisements, which vary from 10 seconds to 120
seconds in length, and from the sale of program sponsorship to national and
local advertisers. Advertising contracts are generally short in duration and may
be canceled upon two-weeks notice. WHBF-TV and WOI-TV are represented by a
national firm for the sale of spot advertising to national customers, but have
local sales personnel covering the service area in which each is located.
National representatives are compensated by a commission based on net
advertising revenues from national customers.
Competition. WHBF-TV and WOI-TV compete for revenues with local television and
radio stations, cable television, and other advertising media, such as
newspapers, magazines, billboards and direct mail. Generally, television
stations such as WHBF-TV and WOI-TV do not compete with stations in other
markets.
Other sources of competition include community antenna television ("CATV")
systems, which carry television broadcast signals by wire or cable to
subscribers who pay a fee for this service. CATV systems retransmit programming
originated by broadcasters, as well as providing additional programming that is
not originated on, or transmitted from, conventional broadcasting stations. In
addition, some alternative media operators, such as multipoint distribution
service owners, provide for a fee and on a subscription basis, programming that
is not a part of regular television service. Additional program services are
provided by low-power television stations and direct broadcast satellites
provide video services as well.
Federal Regulation. Television broadcasting is subject to the jurisdiction of
the FCC under the Communications Act of 1934, as amended (the "Communications
Act"). The Communications Act, and/or the FCC's rules, among other things, (i)
prohibit the assignment of a broadcast license or the transfer of control of a
corporation holding a license without the prior approval of the FCC; (ii)
prohibit the common ownership of a television station and a daily newspaper in
the same market; (iii) prohibit ownership of a CATV system and television
station in the same market; (iv) restrict the total number of broadcast licenses
which can be held by a single entity or individual or entity with attributable
interests in the stations and prohibits such individuals and entities from
operating or having attributable interests in most types of stations in the same
service area (loosened in the 1996 Act); and (v) limit foreign ownership of FCC
licenses under certain circumstances. See Regulatory Environment under A. above
for a description of certain provisions of the 1996 Act including in particular
those, which would remove the regulations over non-basic cable service in three
years and permit telephone service providers to provide cable service. In
calculating media ownership interests, The Company's interests may be aggregated
under certain circumstances with certain other interests of Mr. Mario J.
Gabelli, Chairman and Chief Executive Officer of the Company, and certain of his
affiliates.
Television licenses are issued for terms of eight years and are renewable for
terms of eight years. The current licenses for WHBF-TV and WOI-TV expire on
December 1, 2005 and February 1, 2006, respectively.
Other
See the "harvesting" initiative at page 2 as to sale of Interactive's DirectTV
franchise in certain parts of New Mexico. In December 1998, Interactive sold for
approximately $3.1 million its right to market direct broadcasting TV services
via satellite in New Mexico. Financial results for the operation had not been
material.
C. Personal Communications and Other Wireless Services.
A subsidiary of Interactive is a 49.9% limited partner in Fortunet
Communications, L.P. ("Fortunet"). Fortunet is the successor to five
partnerships that won 30-megahertz personal communications services ("PCS")
licenses in the FCC's C-Block auction (restricted to small businesses and
certain other qualifying bidders), which concluded in 1996. Fortunet won 31
licenses in 17 states covering a population of approximately 7 million people.
The licenses had an aggregate purchase price of $216 million after a 25% bidding
credit.
Under FCC rules, Fortunet made a down payment equal to 10% of the cost (net of
bidding credits) of the licenses ($21.6 million). The Government provided
10-year installment financing, interest only for the first six years at an
interest rate of 7% per annum. Interactive's subsidiary has loaned Fortunet an
aggregate of approximately $24.0 million to fund the down payments and the first
interest payment on the licenses. The 50.1% general partner has no obligation to
provide loans or additional funds to Fortunet.
Certain C-Block licensees, including Fortunet, experienced substantial financial
problems in connection with servicing the FCC installment debt and/or building
out the licenses. The three largest C-Block licensees filed for protection under
the Federal Bankruptcy Act. As a result, the FCC in March 1997, suspended
interest payments on the FCC installment debt while it examined the situation.
In September 1997 the FCC gave C-Block licensees four alternatives with respect
to their licenses. In the third quarter of 1997, Interactive provided a reserve
of 30% of its subsidiary's investment in Fortunet ($4.6 million after-tax).
In June 1998, Fortunet, pursuant to the FCC restructuring program, elected to
give up all of its PCS licenses, except for 15 MHZ licenses in Tallahassee,
Panama City and Ocala, Florida. It used the FCC credits from the returned
licenses to pay the remaining purchase prices for the retained Florida licenses.
Fortunet also received back $3.9 million from the FCC, which was used to pay
down a portion of Fortunet's loan from Interactive's subsidiary. This reduced
the loan to Fortunet to approximately $20 million. On April 15, 1999, the FCC
completed a reauction of all the "C Block" licenses that were returned to it
subsequent to the original auction, including the 15 MHZ licenses that Fortunet
returned on June 8, 1998, in the basic trading areas of Tallahassee, Panama
City, and Ocala, Florida. In that reauction, the successful bidders paid a total
of $2.7 million for the three licenses as compared to the $18.7 million carrying
amount of Interactive's investment in Fortunet. In the quarter ended March 31,
1999, Interactive recorded a reserve of $15.4 million to write down its
investment in Fortunet to reflect the amount bid for similar licenses in the
reauction, plus an additional $0.7 million of capitalized expenses, to leave a
net carrying value of $3.4 million at December 31, 1999. The Company is
considering spinning off its 49.9% interest in Fortunet.
Another subsidiary of Interactive, Lynch PCS Corporation F ("LPCSF"), was a
49.9% limited partner in Aer Force Communications B, L.P. ("Aer Force"). In the
FCC's F-Block Auction (restricted to small businesses and certain other
qualifying bidders) of 10 megahertz PCS licenses, Aer Force won five licenses in
four states covering a population of approximately 20 million people. The
licenses had an aggregate purchase price of $19 million after a 25% bidding
credit. In December 1997, East/West Communications, Inc. ("East/West") succeeded
to the assets and liabilities of Aer Force, with LPCSF receiving 49.9% of the
common stock. Immediately thereafter, Lynch spun-off 39.9% of the common stock
of East/West to Lynch Corporation shareholders and transferred 10% of East/West
stock to Gabelli Funds, Inc. ("GFI") in satisfaction of an obligations to pay it
10% of the net profits of Aer Force (after an assumed cost of capital).
Interactive then owned 7,800 shares ($7,800,000 par and liquidation value) of 5%
payment-in-kind preferred stock of East/West with a carrying value of $4.8 at
December 31, 1999. In February 2000, East/West was merged into Omnipoint
Corporation and Interactive received approximately $8.7 million for its
preferred stock interest.
Another subsidiary of Interactive, Lynch PCS Corporation G ("LPCSG") had an
agreement with Rivgam Communications L.L.C. ("Rivgam"), a subsidiary of GFI,
which won licenses in the FCC's D and E Block PCS Auctions for 10 megahertz PCS
licenses, to receive a fee equal to 10% of the realized net profits of Rivgam
(after an assumed cost of capital) in return for providing bidding and certain
other services. Rivgam won 12 licenses in seven states covering a population of
33 million, with an aggregate cost of $85.1 million. In December 1998, Rivgam
settled its obligation under said agreement by transferring to LPCSG its 10 MHZ
PCS license for the Las Cruces, New Mexico, market.
LPCSG also has an agreement with Bal/Rivgam LLC (in which GFI has a 49.9% equity
interest), which won licenses in FCC's Wireless Communications Services ("WCS")
Auction in 1997, to receive a fee equal to 5% of the realized net profits of
Bal/Rivgam (after an assumed cost of capital), in return for providing bidding
and certain other services to Bal/Rivgam. Bal/Rivgam won 5 WCS licenses covering
a population of approximately 42 million with an aggregate cost of $0.7 million.
LPCSG also has an agreement to provide BCK\Rivgam L.L.C., in which GFI has a
49.9% equity interest, with similar services in connection with the FCC's Local
Multipoint Distribution Services ("LMDS") Auction ended on March 25, 1998.
Subject to final grant, BCK/Rivgam won three licenses covering a population of
1.3 million with an aggregate cost of $6.1 million. LPCSG has an agreement to
receive 5% of the net profits of BCK\Rivgam (after an assumed cost of capital).
Betapage Communications, L.L.C., a 49.9% owned limited liability company, was a
winning bidder in the recently concluded 929MHz auction for paging licenses.
Betapage won 24 paging licenses covering a population of 76.7 million for an
aggregate cost of $77,000.
Another subsidiary of Registrant is a 49.9% owner of PTPMS Communications,
L.L.C. ("PTPMS"), which has filed an application to bid in the FCC's upcoming
auction of licenses for fixed point-to-point microwave services scheduled to
begin in April 2000. That subsidiary has loaned PTPMS approximately $13.0
million for bidding purposes. There can be no assurance that PTPMS
communications will win any licenses or if it win any licenses, whether such
licenses can be successfully exploited.
Registrant expects to continue to participate in the spectrum auctions being
conducted by the FCC.
FCC rules impose build-out requirements that require PCS licensees to provide
adequate service to at least one-third of the population in the licensed area
within five years from the date of grant and to at least two-thirds within ten
years, as well as build out requirements for WCS, LMDS and paging licenses.
Neither Fortunet nor East/West has begun any build out of their licenses. There
are also substantial restrictions on the transfer of control of C and F Block
PCS licenses, WCS licenses, LMDS licenses and paging licenses.
There are many risks relating to PCS communications including without
limitation, the high cost of PCS licenses, the fact that it involves start-up
businesses, raising the substantial funds required to pay for the licenses and
the build out, determining the best way to develop the licenses and which
technology to utilize, the small size and limited resources of Fortunet compared
to other potential competitors, existing and changing regulatory requirements,
additional auctions of wireless telecommunications spectrum and actually
building out and operating new businesses profitably in a highly competitive
environment (including already established cellular telephone operators and
other new PCS licensees). There are also similar risks as to WCS, LMDS and
paging licenses. There can be no assurance that any licenses granted to
Fortunet, or other entities in which subsidiaries of Registrant have interests,
can be successfully sold or financed or developed, with Registrant's
subsidiaries recovering their debt and equity investments.
II. SERVICES
The Morgan Group, Inc.
The Morgan Group Inc. (including subsidiaries, "Morgan") is Interactive's only
service subsidiary. On July 22, 1993, Morgan completed an initial public
offering ("IPO") of 1,100,000 shares of its Class A common stock, $.015 par
value, at $9.00 per share. As a result of this offering, Interactive's equity
ownership in Morgan was reduced from 90% to 47%, represented by its ownership of
1,200,000 shares of Class B common stock. In December 1995, Interactive acquired
from Morgan 150,000 shares of Class A common stock (plus $1.3 million in cash
plus accrued dividends) in exchange for its 1,493,942 shares of Series A
Preferred Stock of Morgan. As of March 19, 1999, Morgan repurchased 102,528
shares of its Class A common stock at $9.00 per share in a "Dutch Auction." At
March 25, 1999, Interactive's equity ownership in Morgan was approximately 55%.
Because the Class B common stock is entitled to two votes per share, its voting
interest in Morgan at March 25, 1999 was approximately 70% and, therefore,
Interactive continues to consolidate Morgan's results in its financial
statements. Morgan Class A common stock is listed on the American Stock Exchange
under the symbol "MG."
Morgan is the nation's largest publicly owned service company in managing the
delivery of manufactured housing, commercial vehicles and specialized equipment
in the United States, and through its wholly owned subsidiary, Morgan Drive
Away, Inc. has been operating since 1936. Morgan provides outsourcing
transportation services through a national network of approximately 1,320
independent owner-operators and 1,470 other drivers who are its employees
(primarily part-time). Morgan dispatches its drivers from 98 locations in 32
states. Morgan's largest customers include Oakwood Homes Corporation, Fleetwood
Enterprises, Inc. Champion Enterprises, Inc., Winnebago Industries, Inc.
Cavalier Homes, Inc., Clayton Homes, Four Seasons Housing, Inc., Thor
Industries, Inc., Fairmont Homes, Inc. and Ryder Systems, Inc. Morgan also
provides certain insurance and financing services to its owner-operators through
its subsidiaries, Interstate Indemnity Company ("Interstate") and Morgan
Finance, Inc. ("Finance").
Growth Strategy. Morgan's strategy is to focus on the profitable core
transportation services of manufactured housing and driver outsourcing. Morgan
will also look for opportunities to grow through expansion in the niche
businesses already being serviced, along with pursuing acquisitions or joint
ventures in related industries. In addition, Morgan will look to expand
insurance product offerings to drivers through its Interstate subsidiary. Morgan
is continuously reviewing potential acquisitions and joint venture
opportunities, and is engaged in negotiations from time to time. There can be no
assurance that any future acquisitions will be effected or, if effected, that
they can be successfully integrated with Morgan's business. To enhance
profitability, Morgan is continuing the process of reducing overhead costs.
Industry Information. Morgan's business is substantially dependent upon the
manufactured housing industry. Morgan's operations are affected by, among other
things, fluctuations in interest rates and availability of credit of purchasers
of manufactured homes and motor homes, and the availability, and price of motor
fuels. This industry has been subject to broad productions cycles. Currently,
the manufactured housing industry is experiencing an industry-wide decline in
shipments, which is having an adverse impact on Morgan's operating revenues and
profitability. Morgan recently reduced administrative staff by approximately 25%
and is instituting other cost cutting measures.
Competition. All of Morgan's activities are highly competitive. In addition to
fleets operated by manufacturers, Morgan competes with several large national
interstate carriers, many of whom have substantially greater resources than
Morgan, and numerous small regional or local interstate and intrastate carriers.
Morgan's principal competitors in the manufactured housing and specialized
outsourcing services marketplaces are privately owned. No assurance can be given
that Morgan will be able to maintain its competitive position in the future.
Competition among carriers is based on the rate charged for services, quality of
service, financial strength and insurance coverage. The availability of tractor
equipment and the possession of appropriate registration approvals permitting
shipments between points required by the customer may also be influential.
Lines of Business. Morgan operates in these lines of businesses: Manufactured
Housing, Driver Outsourcing, Specialized Outsourcing
Services, and Insurance and Finance.
The largest portion of Morgan's operating revenues is derived from
transportation of manufactured housing, primarily new manufactured homes. A
manufactured home is an affordable housing alternative. During 1999, the
manufactured housing industry is experiencing a decline in shipments. However,
Morgan believes the manufactured housing industry production over the long-term
should continue to grow along with the general economy, especially when
employment statistics and consumer confidence remain strong. There is no
assurance, however, that manufactured housing production will increase. Unit
production by the manufactured housing industry (considering double-wide homes
as two shipments) in the United States decreased by approximately 5% from
602,000 in 1998 to 574,000 in 1999. In 1998, the increases was 8%.
Manufactured Housing provides specialized transportation to companies which
produce new manufactured homes, modular homes, and office trailers. In addition,
Manufactured Housing transports used manufactured homes and offices for
individuals, businesses, and the U.S. Government. Based on industry shipment
data available from the MHI, and Morgan's knowledge of the industry and its
principal competitors, Morgan believes that it is the largest transporter of
manufactured homes in the United States. Manufactured Housing ships products
through approximately 1,015 independent owner-operators some who drive specially
modified semi-tractors, referred to as "toters," used in manufactured housing
transportation to reduce combined vehicle length. Makers of manufactured housing
generally ship their products no more than a few hundred miles from their
production facilities. Therefore, to serve the regional structure of this
industry, Morgan positions its dispatch offices close to the production
facilities it is serving.
Morgan's Driver Outsourcing line of business provides outsourcing transportation
services primarily to manufacturers of recreational vehicles, commercial trucks,
and other specialized vehicles through a network of service centers in nine
states. Driver outsourcing engages the services of approximately 1,470 drivers
who are outsourced to customers to deliver the vehicles. In 1999, driver
outsourcing delivered approximately 49,900 units.
Morgan's Specialized Outsourcing Services line of business consists of large
trailer ("Towaway") delivery, travel and other small trailer delivery ("pick
up") and presently another specialized service called ("Decking"). In 1999, the
Towaway operation moved approximately 14,600 large trailers. Decking is the
delivery of two to four over-the-road highway tractors by means of mounting one
or more tractors on the rear of a preceding tractor. In 1997, Morgan initiated
transportation and delivery service called "Decking." Morgan contracts with
approximately 305 owner-operators to provide towaway and travel and other small
trailer services. Morgan is currently reviewing these businesses as to their
financial and strategic fit with the organization.
Morgan's insurance and finance line of business provides insurance and financing
to Morgan's drivers and independent owner-operators.
Selected Operating and Industry Participation Information. The following table
sets forth certain operating and industry participation information for each of
the five years ended December 31, 1999.
Manufactured Housing
Operating Information: 1995 1996 1997 1998 1999
---- ---- ---- ---- ----
New Home Shipments ........................... 114,890 121,136 154,389 161,543 148,019
Other Shipments .............................. 20,860 23,465 24,144 17,330 11,871
-------- -------- -------- -------- --------
Total Shipments .............................. 135,750 144,601 178,533 178,873 159,890
Linehaul Revenues (000s) (1) ................. $ 63,353 $ 72,616 $ 93,092 $ 94,158 $ 88,396
Manufactured Housing
Industry Participation: 1995 1996 1997 1998 1999
---- ---- ---- ---- ----
Industry Production (2) ...................... 505,819 553,133 558,435 601,678 573,629
New Home Shipments ........................... 114,890 121,136 154,389 161,543 148,019
Share of Unites Shipped ...................... 22.7% 21.9% 27.6% 26.8% 25.8%
Driver Outsourcing
Operating Information: ...................... 1995 1996 1997 1998 1999
---- ---- ---- ---- ----
Shipments .................................... 49,885 58,368 45,446 44,177 49,892
Linehaul Revenues (000s)(1) .................. $ 19,842 $ 23,090 $ 19,706 $ 19,979 $ 23,748
Specialized Outsourcing Services
Operating Information: ...................... 1995 1996 1997 1998 1999
---- ---- ---- ---- ----
Shipments .................................... 44,406 41,255 34,867 38,167 32,967
Linehaul Revenues (000s)(1) .................. $ 29,494 $ 26,169 $ 19,630 $ 23,015 $ 21,115
(1) Linehaul revenue is derived by multiplying the miles of a given shipment by
the stated mileage rate.
(2) Based on reports of Manufactured Housing Institute. To calculate share of
homes shipped, Morgan assumes two units shipped for each multi-section
home.
Customers and Marketing. Morgan's operating revenues are comprised primarily of
linehaul revenues derived by multiplying the miles of a given shipment by the
stated mileage rate. Operating revenues also include charges for permits,
insurance, escorts and other items. A substantial portion of Morgan's operating
revenues are generated under one, two, or three year contracts with producers of
manufactured homes, recreational vehicles, and the other products. In these
contracts, the manufacturers agree that a specific percentage (up to 100%) of
their transportation service requirements from a particular location will be
performed by Morgan on the basis of a prescribed rate schedule, subject to
certain adjustments to accommodate increases in Morgan's transportation costs.
Linehaul revenues generated under customer contracts in 1997, 1998 and 1999 were
60%, 64% and 71% of total linehaul revenues, respectively. Morgan's ten largest
customers have been served for at least three years and accounted for
approximately 66%, 69%, and 68% of its linehaul revenues in 1997, 1998 and 1999,
respectively. The following customers accounted for more than 10% of Morgan's
linehaul revenues in 1997, 1998 and 1999: Oakwood Homes Corporation accounted
for approximately $21.6 million or 16% in 1997, $31.8 million or 23% in 1998 and
$28.8 million or 21% in 1999; and Fleetwood Enterprises, Inc. accounted for
approximately $28.1 million or 21% in 1997, $26.0 million or 19% in 1998 and
$23.9 million or 18.0% in 1999. The Fleetwood manufactured housing contract is
continous unless cancelled by either party with thirty days notice. The Oakwood
manufacturing housing contract is renewable annually. Morgan has been servicing
Oakwood for ten years and Fleetwood for over 25 years and believes its
relationship with both companies is good. There is no assurance the customers
will agree to renew their contracts on acceptable terms or on terms as favorable
as those currently in force. The loss of one or more significant customer could
adversely affect Morgan's results of operations.
Independent Owner-Operators. The shipment of product by Manufactured Housing and
certain Specialized Outsourcing Services is conducted by contracting for the use
of the equipment of independent owner-operators. Recruitment and retention of
qualified drivers and independent owners-operators is highly competitive.
Morgan's contracts with independent owner-operators are terminable by either
party on ten days' notice. There is no assurance that Morgan's drivers will
continue to maintain their contracts in force or that Morgan will be able to
recruit a sufficient number of new drivers on terms similar to those presently
in force. Morgan may not be able to engage a sufficient number of new drivers to
meet customer shipment demands from time to time resulting in loss of operating
revenues that might otherwise be available to Morgan.
Owner-operators are independent contractors who own totters, tractors or pickup
trucks, which they contract to, and operate for, Morgan on a long-term basis.
Independent owner-operators are not generally approved to transport commodities
on their own in interstate or intrastate commerce. Morgan, however, possesses
such approvals and/or authorities (see "Regulation"), and provides marketing,
insurance, communications, administrative, and other support required for such
transportation.
Independent owner-operators are generally compensated for each trip on a per
mile basis. Independent owner-operators are responsible for operating expenses,
including fuel, maintenance, lodging, meals, and certain insurance coverage.
Morgan provides required permits, cargo and liability insurance (coverage while
transporting goods for Morgan), and communications, sales, and administrative
services. Independent owner-operators, except for owners of certain pick-up
trucks, are required to possess a commercial drivers license and to meet and
maintain compliance with requirements of the U.S. Department of Transportation
and standards established by Morgan.
From time to time, tax authorities have sought to assert that independent
contractors in the transportation service industry are employees, rather then
independent contractors. Under existing interpretations of federal and state tax
laws as well as Morgan's current method of operations, Morgan believes that its
independent contractors are not employees. There can be no assurance that tax
authorities will not challenge this position, or that such tax laws or
interpretations thereof will not change. If the independent contractors were
determined to be employees, such determination could materially increase
Morgan's payroll tax and workers' compensation insurance costs.
Agents and Employees. Morgan has approximately 91 terminal managers and
assistant managers who are involved directly with the management of equipment
and drivers. Of these, approximately 73 are full time employees and the
remainder are independent contractors who earn a commission. In addition to
terminal personnel, Morgan employs approximately 246 full-time employees.
Fuel Cost. The transportation industry is dependent upon the availability and
cost of fuel. Although fuel costs are paid by Morgan's independent
owner/operators, increases in fuel prices may have significant adverse effects
on Morgan's operations for various reasons. Since fuel costs vary between
regions, drivers may become more selective as to which regions they will
transport goods, resulting in diminished driver availability. Also, Morgan would
experience adverse effects during the time period from when fuel costs begin to
increase until the time when scheduled rate increases to customers are enacted.
Increases in fuel prices may also effect the sale of recreational vehicles by
making the purchase less attractive to consumers. A decrease in the sale of
recreational vehicles would be accompanied by a decrease in the transportation
of recreational vehicles and a decrease in the need for Driver Outsourcing
Services.
Long-Lived Assets. Morgan periodically assesses the net realizable value of its
long-lived assets and evaluates such assets for impairment whenever events or
changes in circumstances indicate the carrying amount of an asset may not be
recoverable. Morgan continues to assess the recoverability of the goodwill
associated with two recent acquisitions. The total amount under review by Morgan
is $5.6 million. Morgan does not believe there is an impairment of long-lived
assets, incuding goodwill.
Seasonality. Shipments of manufactured homes tend to decline in the winter
months in areas where poor weather conditions inhibit transport. This usually
reduces operating revenues in the first and fourth quarters of the year.
Morgan's operating revenues, therefore, tend to be stronger in the second and
third quarter.
Risk Management, Safety and Insurance. The risk of substantial losses arising
from traffic accidents is inherent in any transportation business. Morgan
carries insurance with a deductible of up to $250,000 per occurrence for
personal injury and property damage. Morgan has approved, but has not activated
a self-insurance authority of up to $1 million. Morgan carries cargo insurance
and effective April 1, 1999 is self insured for up to $1 million of cargo
coverage. The frequency and severity of claims under the Company's liability
insurance affect the cost, and potentially the availability, of such insurance.
If Morgan is required to pay substantially greater insurance premiums, or incurs
substantial losses above insurance coverage or below its $250,000 deductibles,
its results of operations can be materially adversely affected. Morgan continues
to review its insurance program, self insurance limits and excess policy
provisions. Morgan believes that its current insurance coverage is adequate to
cover its liability risks. There can be no assurance that Morgan can continue to
maintain its present coverage on acceptable terms.
The following table sets forth information with respect to bodily injury,
property damage, cargo claims, and automotive physical damage reserves for the
years ended December 31, 1997, 1998, and 1999, respectively.
Claims Reserve History
Years Ended December 31,
(In Thousands)
1997 1998 1999
------ ------ ------
Beginning Reserve Balance $ 4,660 $ 5,323 $ 8,108
Provision for Claims .... 7,204 7,698 8,633
Payments, net ........... (6,541) (4,913) (8,323)
------- ------- -------
Ending Reserve Balance $ 5,323 $ 8,108 $ 8,418
======= ======= =======
While Morgan's management has devoted substantial attention to controlling claim
costs, there is no assurance that claims and insurance costs will not in the
future substantially affect profitability.
Interstate makes available physical damage insurance coverage for the Company's
owner-operators. Interstate also writes performance surety bonds for Morgan
Drive Away, Inc.
Regulation. Morgan's interstate operations are subject to regulation by the
Federal Highway Administration, which is an agency of the United States
Department of Transportation ("D.O.T."). Effective August 26, 1994, essentially
all motor common carriers were no longer required to file individually
determined rates, classifications, rules or practices with the Interstate
Commerce Commission ("I.C.C.") Effective January 1, 1995, the economic
regulation of certain intrastate operations by various state agencies was
preempted by federal law. The states continue to have jurisdiction primarily to
insure that carriers providing intrastate transportation services maintain
required insurance coverage, comply with all applicable safety regulations, and
conform to regulations governing size and weight of shipments on state highways.
Most states have adopted D.O.T. safety regulations and conform to regulations
governing size and weight of shipments on state highway, and actively enforce
them in conjunction with D.O.T. personnel.
Carriers normally are required to obtain authority from the I.C.C. or its
successor as well as various state agencies. Morgan is approved to provide
transportation from, to, and between all points in the continental United
States.
Federal regulations govern not only operating authority and registration, but
also such matters as the content of agreements with owner-operators, required
procedures for processing of cargo loss and damage claims, and financial
reporting. Morgan believes that it is in substantial compliance with all
material regulations applicable to its operations.
The D.O.T. regulates safety matters with respect to the interstate operations of
Morgan. Among other things, the D.O.T. regulates commercial driver
qualifications and licensing; sets minimum levels of carrier liability
insurance; requires carriers to enforce limitations on drivers' hours of
service; prescribes parts, accessories and maintenance procedures for safe
operation of freight vehicles; establishes noise emission and employee health
and safety standards for commercial motor vehicle operators; and utilizes
audits, roadside inspections and other enforcement procedures to monitor
compliance with all such regulations. In 1997, the D.O.T. has established
regulations which mandate random, periodic, pre-employment, post-accident and
reasonable cause drug testing for commercial drivers. The D.O.T. has also
established similar regulations for alcohol testing. Morgan believes that it is
in substantial compliance with all material D.O.T. requirements applicable to
its operations.
Most manufactured homes, when being transported by toter, exceed the maximum
dimensions allowed on state highways without a special permit. Morgan obtains
these permits for its independent contractor owner-operators from each state,
which allows Morgan to transport their manufactured homes on state highways. The
states have special requirements for over-dimensional loads detailing permitted
routes, timing required, signage, escorts, warning lights and similar matters.
Most states and provinces also require operators to pay fuel taxes, comply with
a variety of other state tax and/or registration requirement, and keep evidence
of such compliance in their vehicles while in transit. Morgan coordinates
compliance with these requirement by its drivers and independent contractor
owner-operators, and monitors their compliance with all applicable safety
regulations.
From time to time, tax authorities have sought to assert that owner operators in
the trucking industry are employees, rather than independent contractors. No
such tax claim has been successfully made with respect to Morgan. Under existing
industry practice and interpretations of federal and state tax laws, as well as
Morgan's current method of operation, Morgan, based on the advice of counsel,
maintains that its owner operators are not employees. Whether an owner operator
is an independent contractor or employee is, however, generally a fact-sensitive
determination and the laws and their interpretations can vary from state to
state. There can be no assurance that tax authorities will not successfully
challenge this position, or that such tax laws or interpretations thereof will
not change. If the owner operators were determined to be employees, such
determination could materially increase Morgan's payroll tax and workers'
compensation insurance costs.
Interstate, Morgan's insurance subsidiary, is a captive insurance company
incorporated under Vermont law. It is required to report annually to the Vermont
Department of Banking, Insurance & Securities and must submit to an examination
by this Department on a triennial basis. Vermont regulations require Interstate
to be audited annually and to have its loss reserves certified by an approved
actuary. Morgan believes Interstate is in substantial compliance with Vermont
insurance regulations.
Morgan's finance subsidiary is subject to Indiana's Equal Credit Opportunity
Laws and other state and federal laws relating generally to fir financing
practices.
For additional information on Morgan, reference is made to Morgan's Form 10-K
and other filings with the Securities and Exchange Commission.
III. SPINNAKER STOCK
Interactive owns 1,000,000 shares of Common Stock of Spinnaker Industries, Inc.
(AMEX:SKK/SKKA), which constitutes 26.5% of the class and 13.6% of the total
outstanding shares of Spinnaker. Substantially all of the Registrant's Spinnaker
shares are pledged by Interactive to a bank to secure a line of credit to
Interactive for $10 million. Interactive intends to sell such shares from time
to time to fund its acquisition program. On March 15, 2000, the closing price in
limited trading of Spinnaker Common Stock on the AMEX was $9.75 per share.
Spinnaker is a leading manufacturer of adhesive backed paper label stock for the
packaging industry as well as being a major supplier of stock for pressure
sensitive U.S. postage stamps. In July and August 1999, Spinnaker sold its two
industrial tape business units to Intertape Polymer Group, Inc. (AMEX-ITP;
Toronto), Montreal, Quebec, Canada, for approximately U.S. $105 million and
300,000 five-year warrants to purchase Intertape common shares at a price of
U.S. $29.50 each. The sales are part of a plan to seek strategic alternatives,
which Spinnaker announced in November 1998. In addition to the risks of
Spinnaker's business, because of Interactive's large position and the limited
trading in Spinnaker Common Stock, it may be difficult for Interactive to sell
such stock and realize its value if and when it wants to. For further
information on Spinnaker, reference is made to its Form 10-K and other filings
with the Securities and Exchange Commission.
IV. OTHER INFORMATION
While Interactive holds licenses of various types, Interactive does not believe
they are critical to its overall operations, except for (1) the
television-broadcasting licenses of WHBF-TV and WOI-TV; (2) Interactive's
telephone subsidiaries' franchise certificates to provide local-exchange
telephone service within its service areas; (3) Western New Mexico Telephone
Company's FCC licenses to operate point-to-point microwave systems; (4) licenses
held by partnerships and corporations in which Western New Mexico Telephone
Company and Inter-Community Telephone Company own minority interests to operate
cellular telephone systems covering areas in New Mexico and North Dakota, (5)
CLR Video's franchises to provide cable television service within its service
areas and (6) personal communications services licenses held by companies in
which Interactive's subsidiaries have investments, as well as the licenses for
Las Cruces, New Mexico and portions of Iowa held by Interactive.
The capital expenditures, earnings and competitive position of Interactive have
not been materially affected by compliance with current federal, state, and
local laws and regulations relating to the protection of the environment;
however, Interactive cannot predict the effect of future laws and regulations.
Interactive has not experienced difficulties relative to fuel or energy
shortages but substantial increases in fuel costs or fuel shortages could
adversely affect the operations of Morgan.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" for a discussion of Year 2000 matters.
Interactive is a party to certain lawsuits in the ordinary course of business,
primarily at Morgan. See "Business of Interactive - II. Services - The Morgan
Group, Inc. - Risk Management, Safety and Insurance" for information on claims,
lawsuits and insurance relating to Morgan.
No portion of the business of Interactive is regarded as seasonal, except that,
in the case of Morgan, fewer shipments are scheduled during the winter months in
those parts of the country where weather conditions limit highway use.
There were no customers in 1998 or 1999 that represents 10% or more of
consolidated revenues, except for Oakwood Homes Corporation (23% in 1998 and 21%
in 1999) and Fleetwood Enterprises, Inc. (19% in 1998 and 18.0% in 1999).
Interactive does not believe that its multimedia business is dependent on any
single customer. Most local exchange carriers, including Registrant's, received
a significant amount of revenues in the form of access fees from long distance
companies including AT&T.
Excluding the following for Morgan: approximately 1,320 independent
owner-operators and 1,470 other drivers, Interactive had a total of
approximately 630 employees at December 31, 1998, compared to approximately 642
employees at December 31, 1999.
Additional information with respect to each of Interactive's segments is
included in Note 14 Segment Information to the Consolidated Financial Statements
included herein.
V. EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction G (3) of Form 10-K, the following list of
executive officers of the Registrant is included in Part 1 of this Annual Report
on Form 10-K in lieu of being included in the Proxy Statement for the 2000
Annual Meeting of Shareholders. Such list sets forth the names and ages of all
executive officers of Registrant indicating all positions and offices with the
Registrant held by each such person and each such person's principal occupations
or employment during the past five years.
Name Offices and Positions Held Age
---- -------------------------- ---
Mario J. Gabelli Chairman and Chief Executive Officer (since September 1999) 57
Chairman, since 1986, and Chief Executive Officer (1986 to
January 2000) of Lynch Corporation. Chairman and Chief
Executive Officer (since March 1980) of Gabelli Group Capital
Partners, a private company which makes investments for its
own account; and Chairman and Chief Executive Officer of
Gabelli Asset Management Inc. (since 1999), a NYSE listed
holding company for subsidiaries engaged in various aspects
of the securities business.
Robert E. Dolan Chief Financial Officer and Controller (since September 1999) 48
Chief Financial Officer (1992 - 2000) and Controller (1990 -
2000) of Lynch Corporation.
Robert A. Hurwich Vice President-Administration, Secretary & General Counsel 58
(since September 1999); Vice President-Administration
Secretary and General Counsel of Lynch Corporation (since
February 1994).
The executive officers of the Registrant are elected annually by the Board of
Directors at its organizational meeting in May and hold office until the
organizational meeting in the next subsequent year and until their respective
successors are chosen and qualified.
ITEM 2. PROPERTIES
Interactive leases space containing approximately 4,000 square feet for its
executive offices in Rye, New York.
Morgan owns approximately 24 acres of land with improvements in Elkhart,
Indiana. The improvements include a 23,000 square foot office building used as
Morgan's principal office, a 7,000 square foot leased building containing
additional offices, and a 9,000 square foot building used for Morgan's safety
and driver service departments and also for storage. Most of Morgan's 98 offices
are situated on leased property. Morgan also owns and leases property for
parking and storage of equipment at various locations throughout the United
States, usually in proximity to manufacturers of products moved by Morgan. The
property leases have lease term commitments of a minimum of thirty days and a
maximum of three years, at monthly rental ranging from $25 to $6,500. The
Elkhart facility is currently mortgaged to one of Morgan's lenders. In total,
Morgan owns 69 acres of land throughout the United States, including the Elkhart
facilities.
Western New Mexico Telephone Company owns a total of 16.9 acres at fourteen
sites located in southwestern New Mexico. Its principal operating facilities are
located in Silver City, where Western owns a building comprising a total of
6,480 square feet housing its administrative offices and certain storage
facilities. In Cliff, Western owns five buildings with a total of 14,055 square
feet in which are located additional offices and storage facilities as well as a
vehicle shop, a wood shop, and central office switching equipment. Smaller
facilities, used mainly for storage and for housing central office switching
equipment, with a total of 8,384 square feet, are located in Lordsburg, Reserve,
Magdalena and five other localities. In addition, Western leases 1.28 acres on
which it has constructed four microwave towers and a 120 square-foot equipment
building. Western has the use of 38 other sites under permits or easements at
which it has installed various equipment either in small company-owned buildings
(totaling 2,403 square feet) or under protective cover. Western also owns 3,317
miles of copper cable and 421 miles of fiber optic cable running through
rights-of-way within its 15,000 square mile service area. All Western's
properties described herein are encumbered under mortgages held by the Rural
Utilities Service ("RUS").
Inter-Community Telephone Company owns 12 acres of land at 10 sites. Its main
office at Nome, ND, contains 4,326 square feet of office and storage space. In
addition, it has 4,400 square feet of garage space and 5,035 square feet
utilized for its switching facilities. Inter-Community has 1,756 miles of copper
cable and 202 miles of fiber optic cable. All of Inter-Community's properties
described herein are encumbered under mortgages held by the National Bank for
Co-Operatives ("Co-Bank").
Cuba City Telephone Company is located in a 3,800 square foot brick building on
0.4 of an acre of land. The building serves as the central office, commercial
office, and garage for vehicle and material storage. The company also owns a
cement block storage building of 800 square feet on 0.1 of an acre. In Madison,
Wisconsin, Cuba City leases 900 square feet for administrative headquarters and
financial functions. Belmont Telephone Company is located in a cement block
building of 800 square feet on .5 acre of land in Belmont, Wisconsin. The
building houses the central office equipment for Belmont. The companies own a
combined total of 221 miles of copper cable and 28 miles of fiber optic cable.
All of Cuba City and Belmont's property described herein are encumbered under
mortgages held by the RUS and Rural Telephone Bank, respectively.
J.B.N. Telephone Company owns a total of approximately 2.25 acres at fifteen
sites located in northeast Kansas. Its administrative and commercial office
consisting of 7,000 square feet, located in Holton, Kansas and a 3,000 square
feet garage warehouse facility located in Wetmore, Kansas. In addition, J.B.N.
owns thirteen smaller facilities housing central office switching equipment and
over 1,186 miles of copper cable and 186 miles of fiber optic cable. All
properties described herein are encumbered under mortgages held by the RUS.
Haviland Telephone Company owns a total of approximately 3.9 acres at 20 sites
located in south central Kansas. Its administrative and commercial office
consisting of 4,450 square feet is located in Haviland, Kansas. In addition,
Haviland owns 19 smaller facilities housing garage, warehouse, and central
office switching equipment and over 1,316 miles of copper cable and 61 miles of
fiber optic cable. All properties described herein are encumbered under a
mortgage held by the RUS.
Dunkirk & Fredonia Telephone Company (including its subsidiaries) owns a total
of approximately 16.4 acres at 5 sites located in western New York. Its host
central office switching equipment, administrative and commercial offices
consisting of 18,297 square feet is located in Fredonia, New York. In addition,
Dunkirk & Fredonia owns 4 other smaller facilities housing garage, warehouse and
central office switching equipment and over 341 miles of copper cable and 30
miles of fiber optic cable. All properties described herein are encumbered under
a mortgage held by RUS.
Upper Peninsula Telephone Company owns a total of approximately 25 acres at 19
sites located principally in the Upper Peninsula of Michigan. Its host central
office switching equipment, administrative and commercial offices consisting of
11,200 square feet is located in Carney, Michigan. In addition, Upper Peninsula
owns 25 other smaller facilities housing garage, warehouse and central office
switching equipment and over 2,098 miles of copper cable and 93 miles of fiber
optic cable. All properties described herein are encumbered under mortgages held
by the RUS and Co-Bank.
Central Scott Telephone Company owns 3.5 acres of land at 6 sites. Its main
office in Eldridge, Iowa contains 3,104 square feet of office and 341 square
feet of storage space. In addition, it has 3,360 square feet of garage space and
2,183 square feet utilized for its switching facilities. Central Scott has
351.96 miles of copper cable and 18.18 miles of fiber optic cable. All of
Central Scott's properties described herein are encumbered under mortgages held
the First National Bank of Omaha.
CLR Video has its headquarters in Holton, Kansas, leased from J.B.N. Telephone
Company. It also owns one small parcel of land and leases 22 small sites, which
it uses for its cable receiving and transmission equipment. All properties
described herein are encumbered under a mortgage to Co-Bank. Also, see under
Item 1.1.B. Cable Television.
It is Registrant's opinion that the facilities referred to above are in good
operating condition and suitable and adequate for present uses.
ITEM 3. LEGAL PROCEEDINGS
Registrant is a party to certain lawsuits in the ordinary course of business
primarily at Morgan. See "Business of Interactive- II Services - The Morgan
Group, Inc. - Risk Management, Safety and Insurance."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Common Stock of Lynch Interactive Corporation is traded on the American
Stock Exchange under the symbol "LIC." The market price high and lows in
consolidated trading of the Common Stock since Registrant became a public
company on September 1, 1999:
Sept. 1-30, 1999 Oct. 1-Dec. 31, 1999
High 75 120
Low 42 51
At March 15, 2000, the Company had 892 shareholders of record. The Company has
not paid and does not expect to pay in the foreseeable future, cash dividends.
ITEM 6. SELECTED FINANCIAL DATA
LYNCH INTERACTIVE CORPORATION
FIVE-YEAR SUMMARY
SELECTED FINANCIAL DATA
(In Thousands, Except Per Share Data)
Years Ended December 31, (a)
------------- ------------ ------------ ------------ ------------
1995 1996 1997 1998 1999
------------- ------------ ------------ ------------ ------------
Revenues ................................... $ 145,900 $ 160,816 $ 194,062 $ 205,076 $ 204,640
Operating Profit (b) ....................... 6,099 1,940 11,288 16,657 12,849
Net Financing Activities (c) ............... (2,587) (4,024) (7,908) (8,201) (8,070)
Reserve for Impairment of Investment in PCS
License Holders(d)........................ -- -- (7,024) -- (15,406)
Gain on Sale of Subsidiary Stock and Other
Operating Assets.......................... 59 14 260 2,709 --
Income (Loss) Before Income Taxes,
Minority Interests, and Extraordinary Item 3,571 (2,010) (3,384) 11,165 (10,627)
(Provision) Benefit for Income Taxes ....... (1,695) 445 736 (5,012) 2,285
Minority Interests ......................... (1,409) 747 (631) (1,224) (714)
Income (Loss) Before Extraordinary Item .... 467 (818) (3,279) 4,929 (9,056)
Extraordinary Item (f) ..................... -- -- -- -- (160)
Net Income (Loss) .......................... 467 (818) (3,279) 4,929 (9,216)
Basic and Diluted Earnings
Per Common Share (g)
Income (Loss) Before Extraordinary Item..... 0.34 (0.59) (2.32) 3.48 (6.42)
Net Income (Loss)........................... 0.34 (0.59) (2.32) 3.48 (6.53)
Cash, Securities and Short-Term Investments 21,948 25,541 28,043 27,988 32,941
Total Assets ............................... 157,455 248,651 253,032 246,092 253,969
Long-Term Debt ............................. 75,472 123,002 134,200 127,663 165,701
Shareholders' Equity (h) ................... 29,427 45,068 32,995 39,314 26,911
(a) Includes results of Dunkirk and Fredonia Telephone Company from November
26, 1996, Transit Homes of America from December 30, 1996, Upper Peninsula
Telephone Company from March 18, 1997, and Central Scott Telephone Company
from July 16, 1999.
(b) Operating Profit is sales and revenues less operating expenses, which
excludes investment income, interest expense, share of operations of
affiliated companies, minority interests and taxes.
(c) Consists of investment income, interest expense and equity in earnings of
affiliated companies.
(d) See Footnote 4 "Wireless Communications Services" in the Company's
financial statements.
(e) See Footnote 2 "Acquisitions and Dispositions - Dispositions" in the
Company's financial statements
(f) Loss from Early Extinguishments of Debt, Net of Tax Benefit of $105
(g) Based on weighted average number of common shares outstanding - restated to
conform to SFAS #128 in 1996 and prior years.
(h) No cash dividends have been declared over the period.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
YEAR 1999 COMPARED TO 1998
This discussion should be read together with Consolidated Financial Statements
of Interactive and the notes thereto included herein.
Overview
Effective with the spin off of Interactive by Lynch Corporation, Interactive
owns the multimedia and services businesses previously owned by Lynch
Corporation. In addition, Interactive owns 1 million shares of Spinnaker.
Interactive operates as an independent, publicly traded company. As such, the
consolidated Interactive financial statement may not be indicative of
Interactive's future performance nor do they necessarily reflect what the
financial position and results of operations of Interactive would have been if
it had operated as a separate stand-alone entity during the periods covered.
Revenues
1999 total revenues were $204.6 million, a $0.5 million or 0.2% decrease from
the $205.1 million in 1998. Within the operating segments: multimedia revenues
increased $4.4 million, or 8% from the previous year, primarily due to the
acquisition of Central Scott Telephone Company ($1.9 million effect) and
partially due to growth in both telecommunications services as well as the
provision of non-traditional revenue services as: Internet, long distance
service and competitive local exchange carrier. Service revenues decreased by
$4.8 million or 3%. This decline is primarily attributed to the decline in
shipments of manufactured housing, which was evidenced in lower shipments by
some of the Company's major customers. The Company believes that this depressed
level of unit shipments in Manufactured Housing will continue through the first
half of 2000 and possibly moderating in the second half of the year. Despite the
current conditions, the Company believes that manufactured housing industry
production over the long term should continue to grow along with the general
economy.
Shipments of manufactured homes tend to decline in the winter months in areas
where poor weather conditions inhibit transport. This usually reduces operating
revenues in the first and fourth quarters of the year. Morgan's operating
revenues, therefore, tend to be stronger in the second and third quarter.
EBITDA
Earnings before interest, taxes, depreciation and amortization (EBITDA)
decreased to $28.2 million in 1999 from $30.9 million in 1998, a $2.7 million,
or 9% decrease. 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. EBITDA for the
telecommunications segment increased by $2.0 million, or 7% to $31.4 million
from $29.4 million in 1998. $1.1 million of this increase was due to the
acquisition of Central Scott Telephone Company. The remaining increase was due
to the growth in regulated and deregulated operations. EBITDA at The Morgan
Group decreased by $1.4 million, or 44%, from $3.3 million in 1998. The decrease
is primarily attributable to a decline in shipments of manufactured homes,
reduced operating revenues and profitability in the specialized outsourcing
services business and a continued increase in insurance and claims costs. For
purposes of this presentation, EBITDA does not include SARs expense (see below).
Morgan in March 2000 instituted staff reduction and other cost savings
initiatives. It is currently estimated that the cost savings of these
initiatives will approximate $2.4 million annually. The impact of the cost
savings for 2000 is expected to approximate $1.8 million, net of severance
costs.
Operating Profit
Operating profits for 1999 decreased to $12.8 million from $16.7 million
reported for 1998, a decrease of $3.9 million. This decline in operating profits
is principally attributable to SAR expense of $2.9 million coupled with a
decrease in operating results of $1.5 million from the services segment due to
lower revenues, which offset the increase of $0.3 million from the
telecommunications segment resulting from the acquisition of Central Scott
Telephone Company, net of goodwill amortization.
On February 29,1996, Lynch Corporation adopted a Stock Appreciation Rights
program for certain employees. Through September 1, 1999, 43,000 of Stock
Appreciation Rights ("SAR") had been granted at prices ranging from $63 to $85
per share. Upon the exercise of a SAR, the holder is entitled to receive an
amount equal to the amount by which the market value of the Lynch Corporation
common stock on the exercise date exceeds the grant price of the SAR. Effective
September 30, 1998, Lynch Corporation amended the SAR program so that the SARs
became exercisable only if the market price for the Lynch Corporation's shares
exceed 200% of the SAR exercise price within five years from the original grant
date. This amendment eliminated the recording of the profit and loss effect of
the SARs for changes in the market price in the Company's common stock until it
becomes probable that the SARs will become exercisable. Lynch Corporation and
Interactive offered to the SAR holders an option of turning in their SARs in
exchange for a payment based upon the combined market prices of Lynch
Corporation and Lynch Interactive Corporation and, in the case of SARs issued
prior to December 5, 1997, East/West Communications, Inc. East/West
Communications was spun off from Lynch Corporation on December 5, 1997 on a
share for share basis. All SAR holders accepted this proposal thereby
terminating the plan and the total payments of $3.8 million were allocated to
Lynch ($0.8 million) and Interactive ($3.0) on the basis of the relative market
value of December 31, 1999.
Investment income was approximately $2.0 million, or 7.9% increase compared to
1998. This increase is due to unrealized gain (loss) on trading securities.
Interest expense increased by $0.7 million to $11.1 million in 1999 compared to
$10.4 million in 1998. The increase is due primarily to the acquisition of
Central Scott Telephone Company on July 16, 1999 ($0.6 million) and the
Company's decision, effective January 1, 1999, to cease capitalizing interest on
its investment in PCS license holders ($1.6 million) offset by lower level of
borrowings at certain of the Company's subsidiaries.
During 1999, the Company recorded approximately $1.0 million of equity in
earnings of affiliated entities primarily due to operating income form its New
Mexico cellular RSA interests.
Tax Provision
The 1999 tax benefit of $2.3 million includes federal, state and local taxes and
represents an effective rate of 22% versus 45% effective tax benefit in 1998.
The difference in the effective rates is primarily due to the effects of the
amortization of non-deductible goodwill and the tax effect on losses of certain
subsidiaries.
Minority Interest
Minority interest declined from $1.2 million in 1998 to $0.7 million in 1999 due
to lower earnings at Morgan.
PCS Write-off
A subsidiary of Lynch Interactive has investments in, loans to, and deferred
costs associated with a 49.9% equity ownership in Fortunet Communications, L.P.
("Fortunet"), a partnership formed to acquire, construct and operate licenses
for the provision of personal communications services ("PCS") acquired in the
FCC's C-Block PCS auction. Fortunet holds licenses to provide PCS services of
15MHz of spectrum in the BTA of Tallahassee, Panama City and Ocala, Florida. On
April 15, 1999, the Federal Communications Commission completed a reauction
other 15 MHz PCS C-Block licenses, including the 15 MHz licenses in the basic
trading areas of Tallahassee, Panama City, and Ocala, Florida. The final net
cost of these licenses in the reauction was substantially below Fortunet's cost
of the licenses it retained in these markets. Accordingly, during 1999, Lynch
Interactive recorded an additional write down of $15.4 million. The Company is
considering spinning off its 49.9% interest in Fortunet.
Net Income
Net loss for year ended December 31, 1999 was $(9.2) million, or $(6.53) per
share, as compared to a net income of $4.9 million, or $3.48 per share for the
year ended December 31, 1998. The write-down associated with Fortunet was the
primary item affecting the net loss.
YEAR 1998 COMPARED TO 1997
Revenues
Revenues increased to $205.1 million in 1998 from $194.1 million in 1997, a 6%
increase. In the multimedia segment, revenues increased by $6.7 million, or 14%
from the previous year, partially due to the acquisition of Upper Peninsula
Telephone Company in which control was acquired on March 18, 1997 ($2.4 million
effect), the remainder primarily coming from growth in regulated and deregulated
revenues. In addition, 1998 results include management service income of $1.0
million related to compensation for bidding and administrative services provided
in certain PCS auctions. For telecommunications businesses owned for comparable
periods in both years, revenues increased 9%. At The Morgan Group, Inc.,
revenues increased by $4.3 million, or 3% due to gains in Specialized Transport.
EBITDA
Earnings before interest, taxes, depreciation and amortization (EBITDA)
increased to $30.9 million in 1998 from $24.6 million in 1997, a $6.3 million or
a 26% increase. 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. EBITDA for the
telecommunications segment, which for 1998 represented 93% of combined EBITDA,
increased by $4.7 million, or 20%, from 1997 to 1998. $1.4 million of this
increase was due to the acquisition of Upper Peninsula Telephone Company. The
remaining increase was due to growth in regulated and deregulated operations.
For telecommunications businesses owned for comparable periods in both years,
EBITDA increased by 13%. EBITDA at The Morgan Group, Inc. which represents 10%
of combined EBITDA increased by $1.1 million, or 52% from 1997's EBITDA
primarily due to the absence of special charges in 1998, special charges were
$0.6 million 1997.
Operating Profit
Operating profits for 1998 were $16.7 million, up from $11.3 million in 1997.
The telecommunications segment's operating profits grew $3.9 million due to the
inclusion of Upper Peninsula Telephone Company for the full year and revenue
growth. Operating profits in the services segment increased by $1.0 million, or
98%, from 1997 to 1998, due to the absence of special charges.
Effective September 30, 1998, the Company amended its SAR (stock appreciation
rights) Program so that the SARs became exercisable only in the event the price
for Lynch's shares double from the SAR grant price within five years from the
original issuance. This amendment eliminated the recording of the profit and
loss effect from changes in the market price in Lynch's common stock until it is
probable that the SARs will become exercisable. During 1997, Lynch allocated
$0.4 million SAR expense to Interactive and in 1998, prior to the amendment of
the program, $0.2 million in SAR income.
Investment income was approximately $1.9 million in 1998 compared to $1.7
million in 1997.
Interest expense increased by $0.6 million in 1998 when compared to 1997. This
increase is due primarily to the debt related to the purchase of Upper Peninsula
Telephone Company for the full year in 1998.
In 1997, Interactive recorded a write-off of 30% of the investment in, loans to,
and deferred costs associated with its subsidiary's 49.9% equity ownership in
Fortunet Communications, L.P., a partnership formed to acquire, construct and
operate licenses for the provision of personal communications services in the
so-called C-Block. Such write-off amounted to $7.0 million, or $4.6 million
after tax benefit. No such write-off occurred in 1998.
As of December 9, 1998, WNM Communications, Inc., a Lynch Telephone Corporation
subsidiary, sold the assets of its direct broadcast satellite business serving
portion of New Mexico for approximately $3.1 million. As a result of the
transaction, a pre-tax gain of the sale of the assets of approximately $2.7
million was recognized and classified as gain on sales of subsidiary stock and
other operating assets in the combined statement of operations.
The 1998 tax provision of $5.0 million includes federal, state and local taxes
and represents an effective rate of 45% versus 22% effective tax benefit rate in
1997. The difference in the effective rates is primarily due to the effects of
the amortization of goodwill, state taxes, and losses of subsidiaries.
During 1998, minority interest was $1.2 million compared with $0.6 million in
1997.
Liquidity and Capital Resources
As of December 31, 1999, Lynch Interactive Corporation had current assets of
$60.8 million and current liabilities of $48.7 million. Working capital was
therefore $12.1 million as compared to $5.6 million at December 31, 1998. This
increase in working capital is due to the sale of the convertible note of $25.0
million in December 1999 offset by reclassification of certain long-term debt to
current.
Capital Expenditures were $12.5 million in 1999 and $11.6 million in 1998.
Overall 2000 capital expenditures are expected to be approximately $0.6 million
above the 1999 level due to additional expenditures for the Company's Kansas
telephone operations.
On December 13, 1999, Lynch Interactive Corporation issued a $25 million 6%
convertible promissory note to Cascade Investment. This note is convertible into
common shares of Interactive at $85 per share and is due in 2004.
At December 31, 1999, total debt was $168.9 million, an increase of $24.1
million compared with the same period in 1998. The increase is primarily due to
$20.0 million borrowed to fund a portion of the Central Scott Telephone Company
acquisition. A portion of the proceeds of the sale of the $25.0 million
convertible note was used to pay down corporate lines of credit. At December 31,
1999 there was $151.9 million of fixed interest rate debt available averaging
7.0% and $17.1 million of variable interest rate debt averaging 8.1%.
Additionally, Interactive at December 31, 1999, had $23.6 million in unused
lines of credit of which Morgan had $3.1 million available. At December 31,
1998, Interactive borrowed $15.2 million from Lynch Corporation under two
short-term line of credit facilities with maximum availability totaling $20.0
million. These facilities were transferred to Interactive on August 31, 1999. At
December 31, 1999, Lynch Interactive had no borrowings under these facilities.
These facilities mirrored facilities between Lynch Corporation and third party
lenders. These renewed short-term lines of credit of $20.0 million will expire
on August 31, 2000. There are no actual or anticipated arrangements for Lynch
Corporation to provide funding to Interactive. It is Management's belief that it
has or will be able to obtain adequate resources to fund operations over the
next twelve months but there is no assurance that they will.
On February 22, 1999, The Morgan Group, Inc. filed a Schedule 13E4, that invited
its shareholders to tender up to 100,000 shares of Class A common stock, to
Morgan at prices not less than $8.50 nor greater than $10.00 per share. The
tender offer expired March 19, 1999, whereby Morgan purchased 103,000 shares at
$9 per share. Lynch Interactive Corporation did not tender any shares in
response to this offer.
Subsequent to the spin off by Lynch Corporation, the Board of Directors of Lynch
Interactive Corporation authorized the purchase of up to 100,000 shares of
common stock. Through December 31, 1999, 200 shares had been purchased at an
average cost of $99.16 per share.
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 December 31, 1999,
the ratio of total debt to equity was 6.3 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 to fund future growth as well as the
ongoing operations of the parent company. Interactive is currently considering
various alternative long and short-term financing arrangements. One alternative
is the equity offering of Interactive stock. Other alternatives, either in
addition to or in lieu of an Interactive equity offering, include a sale of
shares of Spinnaker stock or a sale of a portion or all of certain investment in
operating entities (see "harvesting" initiative discussed below), either
directly or through an exchangeable debt instrument. 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 continues a harvesting program that was initiated when it was part
of Lynch Corporation. This program is a concentrated effort to monetize certain
of the Company's assets, including selling a portion or all of certain
investments in Company's operating entities. These may include the Company's
minority interest in network affiliated television stations and certain
telephone operations where competitive local exchange carrier opportunities are
not readily apparent. The Company's approximately 14% ownership interest in
Spinnaker may also be sold in order to fund future growth initiatives. There is
no assurance that all or any part of this program can be effected on acceptable
terms.
Morgan periodically assesses the net realizable value of its long-lived assets
and evaluates such assets for impairment whenever events or changes in
circumstances indicate the carrying amount of an asset may not be recoverable.
Morgan continues to assess the recoverability of the goodwill associated with
two recent acquisitions. The total amount under review by Morgan is $5.6
million. Morgan does not believe there is any impairment of long-lived assets,
including goodwill.
On March 27, 2000, the Company loaned a 49.9% affiliate $13.0 million, which was
put on deposit with the Federal Communications Commission for the upcoming 39MHz
auction.
YEAR 2000
Over the past couple of years, the Company has performed a comprehensive review
of its computer systems to identify the systems that could be affected by the
"Year 2000" issue and resolve the issue. The Year 2000 problem is the result of
computer programs being written using two digits (rather than four) to define
the applicable year. Any of the Company's programs or programs utilized by
vendors to the Company that have time-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. This could result in a
major system failure or miscalculation. The Company's Year 2000 review was
performed primarily by internal staff, and in certain operations supplemented by
outside consultants. The principal Information Technology ("IT") systems that
could have been impacted by the Year 2000 for the Company's telecommunications
operations are central office switching, billing and accounting. The principal
IT systems for the Morgan Group are order entry dispatch and accounting. The
Year 2000 could also have impact various non-IT systems, including among other
things security systems, HVAC, elevator systems, and communications systems. In
addition, each of the Company's could have been impacted by the Year 2000
readiness of third party vendors/suppliers.
Due to the integral nature of switching equipment and billing software to their
operations, the telecommunications businesses could have been affected by the
Year 2000 issues. The telecommunications businesses rely on switching equipment
and software provided by third party vendors. The telecommunications businesses
periodically upgrade switching software in order to remain current with respect
to service features. The upgrades provided other enhanced service features as
well as included Year 2000 readiness and have been capitalized. Other
remediation costs, including internal costs have been charged to expense as
incurred. The total cost of Year 2000 remediation for the telecommunications
businesses was approximately $1.1 million, all of which has been spent to date
and the total cost for Morgan was approximately $336,000, all of which as been
spent to date.
The Company's Year 2000 procedures and testing plan was completed in all
material respects prior to the anticipated year 2000 failure dates. As of March
15, 2000, the Company has not experienced any materially important business
disruptions or system failures as a result of Year 2000 issues, nor is it aware
of any Year 2000 issues that have impacted its vendors, customers, suppliers or
other significant third parties to an extent significant to the Company.
However, Year 2000 compliance has many elements and potential consequences, some
of which may not be foreseeable or may be realized in future periods.
Consequently, there can be no assurance that unforeseen circumstances may not
arise, or that the Company will not in the future identify equipment or systems
which are not Year 2000 compliant.
MARKET RISK
The Company is exposed to market risk relating to changes in the general level
of U.S. interest rates. Changes in interest rates affect the amounts of interest
earned on the Company's cash equivalents and short-term investments
(approximately $33.0 million at December 31, 1999 and $28.0 million at December
31, 1998). The Company generally finances the debt portion of the acquisition of
long-term assets with fixed rate, long-term debt. The Company generally
maintains the majority of its debt as fixed rate in nature either 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 December 31, 1999, approximately $17.1 million, or 10% of Interactive'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 1998 and 1999 average interest rate under
these borrowings, it is estimated that Interactive's 1998 and 1999, interest
expense would have changed by $0.3 million and $0.2 milllion, respectively. 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The information required by this Item 7A is included under the caption "Market
Risk" in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in Item 7.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 is included under the caption
"Executive Officers of the Registrant" in Item 1 hereof and included under the
captions "Election of Directors" and "Section 16(a) Reporting" in Registrant's
Proxy Statement for its Annual Meeting of Shareholders for 2000, which
information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is included under the captions
"Compensation of Directors," "Executive Compensation," "Executive Compensation
and Benefits Committee Report on Executive Compensation" and "Performance Graph"
in Registrant's Proxy Statement for its Annual Meeting of Shareholders for 2000,
which information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is included under the caption "Security
Ownership of Certain Beneficial Owners and Management," in the Registrant's
Proxy Statement for its Annual Meeting of Shareholders for 2000, which
information is included herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is included under the caption
"Executive Compensation", and "Transactions with Certain Affiliated Persons" in
the Registrant's Proxy Statement for its Annual Meeting of Shareholders for
2000, which information is included herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The following documents are filed as part of this Form 10-K Annual
Report:
Financial Statements:
Reports of Independent Auditors and the following Consolidated
Financial Statements of the Company are
Balance Sheets - December 31, 1998 and 1999
Statements of Operations - Years ended December 31,
1997, 1998, and 1999 Statements of Shareholders'
Equity - Years ended December 31, 1999, 1998, and 1997
Statements of Cash Flows - Years ended December 31,
1999, 1998, and 1997 Notes to Financial Statements
(a)(2) Financial Statement Schedules:
Schedule I - Condensed Financial Information of Registrant
Schedule II - Valuation and Qualifying Accounts
(a)(3) Exhibits: See the Exhibit Index on pages 56-57.
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions, or are inapplicable, and therefore have been omitted.
See Page 2 above re Forward Looking Information.
(b) Reports on Form 8-K: Registrant filed a Form 8-K dated
December 10, 1999, relating to a $25 million private
placement of a convertible note.
(c) Exhibits: The following Exhibits listed in the Exhibit
Index are filed with this Form 10-K Annual Report:
21 - Subsidiaries of Registrant
23 - Consents of Independent Auditors
- Siepert & Company LLC (2)
- McGladrey & Pullen, LLP (2)
- Warinner, Gensinger & Associates, LLC
24 - Powers of Attorney
27 - Financial Data Schedule
99 - Report of Independent Auditors
- Report of Siepert & Co., L.L.P. of financial
statements of Cuba City Telephone Exchange
Company for the year ended December 31, 1999
- Report of Siepert & Co., L.L.P. on the financial
statements of Belmont Telephone Company
for the year ended December 31, 1999
- Report of McGladrey & Pullen, LLP on the financial
statements of Capital Communications Company for the
year ended December 31, 1997
- Report of McGladrey & Pullen, LLP on the financial
statements of Coronet Communications Company the year
ended December 31, 1997
- Report of Frederick & Warinner on the financial
statements of CLR Video, L.L.C. for the
year ended December 31, 1997
(d) Financial Statement Schedules: Financial Statement
Schedules are listed in response to Item 14(a)(2)
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Lynch Interactive Corporation
We have audited the accompanying consolidated balance sheet of Lynch Interactive
Corporation and subsidiaries ("Lynch Interactive Corporation" or the "Company")
as of December 31, 1999 and the related consolidated statements of operations,
shareholders' equity, and cash flows for the year then ended, and the
accompanying combined balance sheet of the net assets and operations to be
contributed to Lynch Interactive Corporation (see Note 1) as of December 31,
1998 and the related combined statements of operations, equity, investments by
and advances from Lynch Corporation and cash flows for each of the two years in
the period ended December 31, 1998. Our audits also included the financial
statement schedules listed in the index at Item 14(a). These financial
statements and schedules are the responsibility of the management of Lynch
Interactive Corporation. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits. We did not audit the
1999 financial statements of Cuba City Telephone Exchange Company and Belmont
Telephone Company, indirect wholly-owned subsidiaries of Lynch Interactive
Corporation, which statements reflect total revenues of $2,070,000 for the year
ended December 31, 1999, the 1997 financial statements of CLR Video, L.L.C., a
wholly-owned subsidiary of Lynch Multimedia (a wholly-owned subsidiary of Lynch
Interactive Corporation) which statements reflect total revenues of $1,505,000
for the year ended December 31, 1997 and the 1997 financial statements of
Coronet Communications Company and of Capital Communications Company, Inc.
(entities in which the Company has a 20% and 49% interest, respectively). Those
statements were audited by other auditors whose reports have been furnished to
us, and our opinion, insofar as it relates to data included for Cuba City
Telephone Exchange Company and Belmont Telephone Company in 1999, CLR Video,
L.L.C. in 1997, and Coronet Communications Company and Capital Communications
Company, Inc. in 1997, is based solely on the reports of other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits and the reports of other auditors
provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
consolidated balance sheet of Lynch Interactive Corporation and subsidiaires at
December 31, 1999 and the related consolidated statements of operations,
shareholders' equity and cash flows for the year then ended, and the combined
balance sheet of the net assets and operations to be contributed to Lynch
Interactive Corporation (see Note 1) at December 31, 1998 and the related
combined statements of operations, equity, investments by and advances from
Lynch Corporation and cash flows for each of the two years in the period ended
December 31, 1998, present fairly, in all material respects, the consolidated
financial position of Lynch Interactive Corporation and subsidiaries at December
31, 1999 and the consolidated results of their operations and their cash flows
for the year then ended, and the combined financial position of the net assets
and operations to be contributed to Lynch Interactive Corporation (see Note 1)
at December 31, 1998 and the combined results of its operations and its cash
flows for each of the two years in the period ended December 31, 1998, in
conformity with accounting principles generally accepted in the United States.
Also, in our opinion, based on our audits and the reports of other auditors, the
related financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all material respects,
the information set forth therein.
/s/ERNST & YOUNG LLP
Stamford, Connecticut
March 30, 2000
LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES
BALANCE SHEETS
December 31,
---------- ----------
1998 1999
------------------------
(In Thousands)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................... $ 27,021 $ 31,354
Marketable securities ................................... 967 1,587
Trade accounts receivable less allowances of $320 in 1998
and $415 in 1999....................................... 18,853 16,875
Deferred income taxes ................................... 4,265 3,404
Other current assets .................................... 6,941 7,573
--------- ---------
TOTAL CURRENT ASSETS 58,047 60,793
PROPERTY, PLANT AND EQUIPMENT:
Land .................................................... 1,247 1,347
Buildings and improvements .............................. 9,591 10,522
Machinery and equipment ................................. 129,251 142,558
--------- ---------
140,089 154,427
Accumulated Depreciation ................................ (48,906) (58,497)
--------- ---------
91,183 95,930
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS
ACQUIRED, NET........................................... 47,740 62,845
INVESTMENTS IN AND ADVANCES TO AFFILIATED ENTITIES ........ 24,438 9,479
INVESTMENT IN SPINNAKER INDUSTRIES, INC ................... 17,750 11,875
OTHER ASSETS .............................................. 6,934 13,047
--------- ---------
TOTAL ASSETS .............................................. $ 246,092 $ 253,969
========= =========
See accompanying notes.
LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES
BALANCE SHEETS
December 31,
---------- ----------
1998 1999
----------------------
(In Thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks ........................ $ 2,037 $ 3,271
Notes payable to Lynch ........................ 15,150 --
Trade accounts payable ........................ 4,662 4,465
Accrued interest payable ...................... 889 805
Accrued liabilities ........................... 19,017 21,751
Customer advances ............................. 1,996 1,974
Current maturities of long-term debt .......... 8,639 16,445
--------- ---------
TOTAL CURRENT LIABILITIES .................. 52,390 48,711
--------- ---------
LONG-TERM DEBT .................................. 119,024 149,256
DEFERRED INCOME TAXES ........................... 19,850 13,220
OTHER LIABILITIES ............................... 4,987 5,817
MINORITY INTEREST ............................... 10,527 10,054
COMMITMENT AND CONTINGENCIES
SHAREHOLDERS' EQUITY
COMMON STOCK, NO PAR VALUE-10,000,000 SHARES
AUTHORIZED: 1,471,171 SHARES, ISSUED (AT STATED
VALUE): 1,412,183 SHARES OUTSTANDING....... -- --
ADDITIONAL PAID-IN CAPITAL .................. -- 21,404
INVESTMENT BY AND ADVANCES (TO) FROM
LYNCH CORPORATION.......................... 30,813 --
RETAINED EARNINGS (ACCUMULATED DEFICIT) ..... -- (1,713)
ACCUMULATED OTHER COMPREHENSIVE INCOME ...... 8,501 7,240
TREASURY STOCK, 200 SHARES AT COST .......... -- (20)
--------- ---------
39,314 26,911
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ...... $ 246,092 $ 253,969
========= =========
LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES
STATEMENTS OF OPERATIONS
Years Ended December 31,
----------- ----------- ------------
1997 1998 1999
----------- ----------- ------------
(In Thousands, except share data)
SALES AND REVENUES:
Multimedia ................................................. $ 47,908 $ 54,622 $ 59,011
Services ................................................... 146,154 150,454 145,629
----------- ----------- -----------
$ 194,062 $ 205,076 $ 204,640
----------- ----------- -----------
COSTS AND EXPENSES:
Multimedia ................................................. 35,363 38,176 41,671
Services ................................................... 135,431 138,193 134,989
Selling and administrative ................................. 11,980 12,050 15,131
----------- ----------- -----------
OPERATING PROFIT ............................................. 11,288 16,657 12,849
----------- ----------- -----------
Other income (expense):
Investment income .......................................... 1,678 1,865 2,013
Interest expense ........................................... (9,740) (10,383) (11,140)
Equity in earnings of affiliated companies ................. 154 317 1,057
Reserve for impairment of investment in PCS license holders (7,024) -- (15,406)
Gain on sales of subsidiary stock and other operating assets 260 2,709 --
----------- ----------- -----------
(14,672) (5,492) (23,476)
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES, MINORITY INTERESTS AND
EXTRAORDINARY ITEM.......................................... (3,384) 11,165 (10,627)
Benefit (provision) for income taxes ......................... 736 (5,012) 2,285
Minority interests ........................................... (631) (1,224) (714)
----------- ----------- -----------
(LOSS) INCOME BEFORE EXTRAORDINARY ITEM ...................... $ (3,279) $ 4,929 $ (9,056)
LOSS FROM EARLY EXTINGUISHMENT OF DEBT,
NET OF TAX BENEFIT OF $105 -- -- (160)
----------- ----------- -----------
NET INCOME (LOSS) ............................................ $ (3,279) $ 4,929 $ (9,216)
=========== =========== ===========
Weighted average shares outstanding .......................... 1,415,000 1,418,000 1,412,000
=========== =========== ===========
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE:
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM ...................... $ (2.32) $ 3.48 $ (6.42)
EXTRAORDINARY ITEM ........................................... -- -- (0.11)
----------- ----------- -----------
NET INCOME (LOSS) ............................................ $ (2.32) $ 3.48 $ (6.53)
=========== =========== ===========
See accompanying notes.
LYNCH INTERACTIVE CORPORATION AND SUBSIDIAIRES
STATEMENTS OF SHAREHOLDERS' EQUITY
Equity,
Investments
Accumulated By and
Common Additional Other Advances
Stock Common Paid-in Retained Comprehensive Treasury from Lynch
Outstanding Stock Capital Earnings Income Stock Corporation Total
------------ ---------- ------------ ---------- ----------------- ---------- -------------- --------
(Thousands, except share data)
Balance at January 1, 1997 . -- -- -- -- -- -- 45,068 45,068
Investment by and advances
(to) from Lynch Corporation -- -- -- -- -- -- 1,066 1,066
Net loss for year .......... -- -- -- -- -- -- (3,279) (3,279)
Unrealized loss on available
for sale securities ........ -- -- -- -- -- -- (9,900) (9,900)
Comprehensive loss ...... -- -- -- -- -- -- (13,179) (13,179)
---------- ----------
Balance at December 31, 1997 . -- -- -- -- -- -- 32,955 32,955
Investment by and advances
(to) from Lynch Corporation . -- -- -- -- -- -- 2,930 2,930
Net income for year ........ -- -- -- -- -- -- 4,929 4,929
Unrealized gains on
available for sale securities -- -- -- -- -- -- (1,500) (1,500)
Comprehensive income ... -- -- -- -- -- -- 3,429 3,429
---------- ----------
Balance at December 31, 1998 -- -- -- -- -- -- 39,314 39,314
Investment by and advances
(to)from Lynch Corporation ... -- -- -- -- -- -- (1,980) (1,986)
Net loss for the period .... -- -- -- -- -- -- (7,503) (7,503)
Unrealized gains on
available for sale securities -- -- -- -- -- -- (1,020) (1,020)
Comprehensive loss ..... -- -- -- -- -- -- (8,523) (8,523)
---------- ----------
Balance at August 31, 1999 . -- -- -- -- -- -- 28,811 28,811
Distribution from
Lynch Corporation 1,412,383 -- 21,404 -- 7,407 -- (28,811) --
Net losss for the period .... -- -- -- (1,713) -- -- -- (1,713)
Unrealized loss on available
for sale securities ......... -- -- -- -- (167) -- -- (167)
Comprehensive loss ...... -- -- -- -- -- -- -- (1,880)
Purchase of treasury stock (200) -- -- -- -- (20) -- (20)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1999 1,412,183 0 21,404 (1,713) 7,240 (20) 0 26,911
========== ========== ========== ========== ========== ========== ========== ==========
LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
Years Ended December 31,
------------------------------------
1997 1998 1999
-------------------------------------
(In Thousands)
OPERATING ACTIVITIES
Net income (loss) ............................................. $ (3,279) $ 4,929 $ (9,216)
Depreciation and amortization ................................. 13,258 14,243 15,346
Net effect of purchases and sales of trading
securities................................................ 1,171 18 (620)
Minority interests ............................................ 631 1,224 714
Earnings of affiliates ........................................ (154) (317) (1,057)
Reserve for impairment in PCS license holders ................. 7,024 -- 15,406
Deferred income taxes ......................................... (1,647) (1,707) (5,646)
Changes in operating assets and liabilities, net of effects of
acquisitions:
Trade accounts receivables ................................ (1,858) 54 2,448
Trade accounts payable and accrued liabilities ............ 118 3,173 1,812
Other ..................................................... 2,620 752 (506)
Other ......................................................... (979) (2,654) --
-------- --------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES ..................... 16,905 19,715 18,681
-------- --------- --------
INVESTING ACTIVITIES
Acquisitions (total cost less debt assumed and cash equivalents
Upper Peninsula Telephone Company .......................... (24,568) -- --
Central Scott Telephone Company ............................ -- -- (23,985)
Investment in Personal Communications Services
Partnerships, net........................................... 1,644 3,692 --
Capital expenditures .......................................... (11,837) (11,642) (12,553)
Investment in Coronet Communications Company .................. 2,995 -- --
Sale of investments in cellular partnerships .................. 8,576 -- --
Other ......................................................... 1,573 272 (1,370)
-------- --------- --------
NET CASH USED IN INVESTING ACTIVITIES ......................... (21,617) (7,678) (37,908)
-------- --------- --------
FINANCING ACTIVITIES
Issuance of long-term debt .................................... 23,765 964 51,712
Payments to reduce long-term debt ............................. (24,643) (7,501) (13,674)
Net borrowings (payments), lines of credit .................... 8,742 (9,812) 2,718
Purchase of treasury stock .................................... -- -- (20)
Advances from Lynch Corporation ............................... 1,066 2,930 (15,987)
Other ......................................................... (545) 1,345 (1,189)
-------- --------- --------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES 8,385 (12,074) 23,560
-------- --------- --------
Net increase (decrease) in cash and cash equivalents .......... 3,673 (37) 4,333
Cash and cash equivalents at beginning of year ................ 23,385 27,058 27,021
-------- --------- --------
Cash and cash equivalents at end of year ...................... $ 27,058 $ 27,021 $ 31,354
========= ========= =========
See accompanying notes.
LYNCH INTERACTIVE CORPORATION & SUBSIDIARIES
Notes to Financial Statements
December 31, 1999
1. Accounting and Reporting Policies
Organization
On August 12, 1999, the Board of Directors of Lynch Corporation ("Lynch")
approved in principle the spin off to its shareholders of its multimedia and
services businesses as an independent publicly-traded company (the "Spin-Off").
The multimedia and services businesses and the independently publicly-traded
company to which the assets and liabilities were contributed are hereinafter
referred to as Lynch Interactive Corporation (the "Company," "Lynch Interactive"
or "Interactive"). Prior to and contemporaneous with the Spin Off, certain legal
and regulatory actions were taken to perfect the existence of the above
mentioned affiliated multimedia and service companies as subsidiaries of Lynch
Interactive. The Spin Off occurred on September 1, 1999. At the Spin Off, Lynch
distributed 100 percent of the outstanding shares of common stock of its
wholly-owned subsidiary, Interactive, to holders of record of Lynch's common
stock as of the close of business on August 23, 1999. As part of the Spin-Off,
Interactive received one million shares of common stock of Spinnaker Industries,
Inc. representing an approximately 13.6% equity ownership interest (and an
approximate 2.5% voting interest) and Lynch Interactive also assumed certain
short-term and long-term debt obligations of Lynch. Net assets contributed by
Lynch, were estimated to be approximately $23 million at the date of the spin
off. Such amount was subsequently decreased in the fourth quarter by $1.6
million to reflect a revision in the allocation of certain liabilities. Prior to
the Spin Off, Interactive succeeded to the credit facilities established by
Lynch.
In April 1999, Lynch received an Internal Revenue Service private letter ruling
that the distribution to its shareholders of the stock of Lynch Interactive
qualifies as tax-free for Lynch and its shareholders. In connection with
obtaining the rulings from the Internal Revenue Service ("IRS") as to the
tax-free nature of the Spin Off, Lynch made certain representations to the IRS,
which include, among other things, certain representations as to how Lynch and
Interactive intend to conduct their businesses in the future.
Basis of Presentation
As of December 31, 1999 and for the period from September 1, 1999 to December
31, 1999, the accompanying financial statements represents the consolidated
accounts of Interactive. Prior to September 1, 1999, the financial statements
have been prepared using the historical basis of assets and liabilities and
historical results of operations of the multimedia and services businesses and
other assets and liabilities, which were contributed to Interactive.
Accordingly, the results for the year ended December 31, 1999, represent a
combination of consolidated and combined financial information for the
respective periods. However, the historical financial information as of December
31, 1998 for the two years presented herein reflects periods during which the
Company did not operate as an independent public company and, accordingly,
certain assumptions were made in preparing such financial information. Such
information, therefore, may not necessarily reflect the results of operations,
financial condition or cash flows of the Company in the future or what they
would have been had the Company been an independent public company during the
reporting periods. Investments in affiliates in which the Company does not have
a majority voting control is accounted for in accordance with the equity method.
All material intercompany transaction and balances have been eliminated. The
Company consolidates the operating results of its telephone and cable television
subsidiaries (60-100% owned at December 31, 1999) and The Morgan Group, Inc.
("Morgan"), in which, at December 31, 1999, the Company owned 70.1% of the
voting power and 55.4% of common equity. The Company accounts for following
affiliated companies on the equity basis of accounting:
Coronet Communications Company (20% owned at December 31, 1999), Capital
Communications Company, Inc. (49% owned at December 31, 1999), Fortunet
Communications, L.L.P. (49.9% owned at December 31, 1999, and the cellular
operations in New Mexico (17% to 21% owned at December 31, 1999).
The shares of Spinnaker Industries, Inc., in which the company owns 2.5% of the
voting power and 13.6% of the common equity, are accounted for in accordance
with Statements of Financial Accounting Standards (SFAS) No. 115 "Investment in
Debt and Equity Securities."
Lynch had historically provided substantial support services such as finance,
cash management, legal and human resources to its various business units. Lynch
allocated the cost for these services among the business units supported based
principally on informal estimates of time spent by the corporate office on both
Interactive and Lynch matters. In the opinion of management, the method of
allocating these costs is reasonable; however, the costs of these services
allocated to the Company are not necessarily indicative of the costs that would
have been incurred by Interactive on a stand-alone basis.
At the Spin-Off, the employees of the corporate office of Lynch Corp. became
employees of Interactive and Interactive began providing corporate management
services to Lynch, which are charged a management fee for these services, this
allocation was $186,000 for the period from September 1, 1999 to December 31,
1999.
Interactive and Lynch have entered into certain agreements governing various
ongoing relationships, including the provision of support services and a tax
sharing agreement. The tax sharing agreement provides for the allocation of tax
attributes to each company as if it had actually filed with the respective tax
authority.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles 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.
Cash Equivalents
Cash equivalents consist of highly liquid investment with a maturity of less
than three months when purchased.
At December 31, 1998 and 1999, assets of $20.8 and $21.3 million, which are
classified as cash and cash equivalents, are invested in United States Treasury
money market funds for which affiliates of the Company serve as investment
managers to the respective funds.
Marketable Securities
Marketable securities consist principally of common stocks. At December 31,
1997, 1998 and 1999, respectively, certain marketable securities and United
States Treasury money market funds, classified as cash equivalents, were
classified as trading. Interactive's investment in Spinnaker Industries, Inc.
and certain other equity securities included in other assets with carrying
values of $1.0 million, $1.2 million and $16.8 million at December 31, 1997,
1998 and at December 31, 1999, respectively, were classified as
available-for-sale. Trading and available-for-sale securities are stated at fair
value with unrealized gains or losses on trading securities included in earnings
and unrealized gains or losses on available-for-sale securities included in
equity and as a component of comprehensive income (loss). Unrealized gains
(losses) of $169,000, $82,000 and $726,000 on trading securities have been
included in earnings for the years ended December 31, 1997, 1998 and 1999,
respectively. Unrealized gains on available-for-sale securities were $19.5
million, $14.7 million and $12.4 million for the years ended December 31, 1997,
1998 and 1999, respectively. The changes in unrealized gains in each of the
periods presented, net of tax, have been included in the Consolidated Statements
of Change in Equity, Investment by and Advances from Lynch Corporation as
"change in accumulated other comprehensive income (loss)."
The cost of marketable securities sold is determined on the specific
identification method. Realized gains of $229,000, $382,000 and $37,000, and
realized losses of $9,000, $0 and $0, are included in investment income for the
years ended December 31, 1997, 1998 and 1999, respectively.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost and include expenditures for
additions and major improvements. Maintenance and repairs are charged to
operations as incurred. Depreciation is computed for financial reporting
purposes using the straight-line method over the estimated useful lives of the
assets, which range from 3 to 35 years. For income tax purposes, accelerated
depreciation methods are used.
When a portion of the Company's depreciable property, plant and equipment
relating to its multimedia business is retired, the gross book value of the
assets, including cost of disposal and net of any salvage value, is charged to
accumulated depreciation.
Excess of Cost Over Fair Value of Net Assets of Companies Acquired, Net
Excess of cost over fair value of net assets of companies acquired (goodwill) is
being amortized on a straight-line basis over periods ranging from twenty to
forty years. The Company periodically reviews goodwill to assess recoverability,
and impairments would be recognized in operating results if a permanent
diminution in value were to occur. The Company measures the potential impairment
of recorded goodwill by the undiscounted value of expected future cash flows in
relation to its net capital investment in the subsidiary. Based on its review,
the Company does not believe that an impairment of its goodwill has occurred.
Excess of cost over fair value of net assets of companies acquired of $47.7 and
$62.8 million are net of accumulated amortization of $11.4 million and $14.2
million at December 31, 1998 and 1999, respectively.
Equity, Investment By and Advances From Lynch Corporation
Equity represents the net investment in and advances to Interactive by Lynch
through the date of the spin-off. It includes common stock, additional paid in
capital, net earnings and net intercompany balances with Lynch, which were
contributed at the time of the Spin Off.
Multimedia
Multimedia revenues include local and intrastate telephone company service
revenues, which are subject to review and approval by state public utility
commissions, and long distance network revenues, which are based upon charges to
long distance carriers through a tariff filed by the National Exchange Carriers
Association with the Federal Communications Commission. Revenues are based on
cost studies for the Company's exchanges, and have been estimated pending
completion of final cost studies. Estimated revenue is adjusted to actual upon
the completion of the cost studies.
Services
Service revenues and related estimated costs of transportation are recognized
when transportation of the manufactured housing, recreational vehicle or other
product is completed. Other operating expenses are recognized when incurred.
Morgan maintains personal injury and property damage insurance per occurrence;
with a deductible of $250,000, $150,000 and $250,000 for the policy periods of
April 1 to March 31, for the years of 1997, 1998, 1999 and prior respectively.
Morgan maintains cargo damage insurance with a deductible of $250,000, $150,000,
and $1,000,000 for the policy periods of April 1 to March 31, for the years
1997, 1998, 1999 and prior respectively. Morgan's insurance policy for the
period of April 1, 1998 to March 31, 1999 included a stop-loss provision, under
which Morgan has recorded a receivable of $30,900 at December 31, 1999. Morgan
carries statutory insurance limits on workers compensation with a deductible of
$50,000. Claims and insurance accruals reflect the estimated ultimate cost of
claims for cargo loss and damage, personal injury and property damage not
covered by insurance. Morgan believes that its current insurance coverage is
adequate to cover its liability risks. Morgan accrues its self-insurance
liability using a case reserve method based upon claims incurred and estimates
of unasserted and unsettled claims. These liabilities have not been discounted.
Earnings Per Share
In December 1997, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 128, Earnings Per Share which changed the methodology of
calculating earnings per share. Basic earnings per common share amounts are
based on the average number of common shares outstanding during each period,
excluding the dilutive effects of options, warrants, and convertible securities.
Diluted earnings per share reflect the effect, where dilutive of option,
warrants and convertible securities, using the treasury stock and if converted
methods as applicable.
Comprehensive Income
Effective January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components; however, the adoption of
SFAS No. 130 had no impact on the Company's net income or equity. SFAS No. 130
requires unrealized gains or losses on the Registrant's available-for-sale
securities, which prior to adoption were reported separately in shareholders'
equity to be included in other comprehensive income.
Segment Information
Effective December 1998, the Company adopted SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information. SFAS No. 131 superseded SFAS
No. 14, Financial Reporting for Segments of a Business Enterprise. SFAS No. 131
establishes new standards for reporting information about operating segments.
SFAS No. 131 requires disclosure of selected financial and descriptive
information for each operating segment based on management's internal
organizational decision-making structure. Additional information is required on
a company-wide basis for revenues by product or service, revenues and
identifiable assets by geographic location and information about significant
customers. The adoption of SFAS No. 131 did not affect results of operations or
financial position, but did affect the disclosure of segment information. Prior
year amounts have been reclassified to conform to the requirements of SFAS No.
131. See Note 14.
Pension and Other Post-Retirement Benefits
In February 1998, the FASB issued SFAS No. 132, Employers Disclosures About
Pensions and Other Post-Retirement Benefits, which is an amendment to SFAS Nos.
87, 88, and 106. This SFAS revises employers' disclosures about pension and
other post-retirement benefit plans. It does not change the measurement or
recognition of those plans. The adoption of SFAS No. 132 in 1998 did not have a
significant impact on the Company's financial statements as the Company's
benefit plans are not material.
Impairments
The Company accounts for its long-lived assets in accordance with the provision
of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of. The Company periodically assesses the net
realizable value of its long-lived assets and evaluates such assets for
impairment whenever events or changes in circumstances indicate the carrying
amount of an asset may not be recoverable. For assets to be held, impairment is
determined to exist if estimated undiscounted future cash flows are less than
the carrying amount. For assets to be disposed of, impairment is determined to
exist if the estimated net realizable value if less than carrying amount.
Stock Based Compensation
The Company applies the provision of SFAS No. 123, Accounting for Stock Based
Compensation. SFAS No. 123 establishes a fair value method of accounting and
reporting standards for stock based compensation plans. However, as permitted by
SFAS No. 123, the Company elected to continue to apply the provision of
Accounting Principles Board Opinion ("APB") No. 25, Accounting for Stock Issued
to Employees and related interpretations. Under APB No. 25, if the exercise
price of the Company's employee stock options was not less than the market price
of the underlying stock on the date of grant, no compensation expense is
recognized. The Company is required to disclose the pro forma net income (loss)
and net income (loss) per share as if the fair value method defined in SFAS No.
123 had been applied to all grants made on or after January 1, 1995 (see
Note 9).
Fair Value of Financial Instruments
Cash and cash equivalents, trade accounts receivable, short-term borrowings,
trade accounts payable and accrued liabilities are carried at cost which
approximates fair value due to the short-term maturity of these instruments. The
carrying amount of the Company's borrowings under its revolving line of credit
approximates fair value, as the obligations bear interest at a floating rate.
The fair value of other long-term obligations approximates cost based on
borrowing rates for similar instruments. A subsidiary of the Company is a party
to an interest rate swap agreement (which is accounted for as an adjustment to
interest expense) with a principal amount of $9.3 million and $8.5 million at
December 31, 1998 and 1999, which expires in December 2000. At December 31, 1998
and 1999, the Company estimated it would have paid $390,000 and $106,000,
respectively, to terminate the swap agreement.
Issuance of Stock by Subsidiary and Investees
Changes in the Company's equity in a subsidiary or an investee caused by
issuances of the subsidiary's or investees' stock are accounted for as gains or
losses where such issuance is not part of a broader reorganization.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standard Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 is
required to be adopted in years beginning after June 15, 2000. SFAS No. 133
requires the Company to recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value through
income. If the derivative is a hedge, depending on the nature of the hedge,
changes in fair value are either offset against the changes in fair value of
assets and liabilities through earnings or recognized in other comprehensive
income until the hedged item is recognized in earnings. Because of the Company's
minimal use of derivatives, management does not anticipate the adoption of SFAS
No. 133 will have a significant effect on Interactive's earnings or financial
position.
2. Acquisitions and Dispositions
Acquisitions
On July 16, 1999, Lynch Telephone Corporation IX, a subsidiary of Interactive,
acquired by merger, all of the stock of Central Scott Telephone Company for
approximately $28.1 million in cash. As a result of this transaction, the
Company recorded approximately $17.9 million in goodwill, which is being
amortized over 25 years. The Company has agreed to pay a fee to an affiliate of
the Chairman of Interactive for performance of services in connection with the
acquisition. Subsequnent to year end, in settlement of the fee, the Company has
agreed to transfer to that firm, it stock ownership in Lynch Capital
Corporation. Lynch Capital Corporation is a broker dealer that recorded revenues
of $1.0 thousand and a net loss of $20,000 in 1999.
On March 18, 1997, Lynch Michigan Telephone Holding Company, a wholly owned
subsidiary of Lynch acquired approximately 60% of the outstanding shares of
Upper Peninsula Telephone Company for $15.2 million and completed the
acquisition of the remaining 40% on May 23, 1997 (the "Upper Peninsula
Acquisition"). The total cost of the acquisition was $26.5 million. As a result
of this transaction, the Company recorded $7.4 million in goodwill, which is
being amortized over 25 years.
All of the above acquisitions were accounted for as purchases, and accordingly,
the assets acquired and liabilities assumed were recorded at their estimated
fair market values on their respective dates of acquisition. The operating
results of the acquired companies are included in the Statements of Operations
from their respective acquisition dates.
Disposition
As of December 9, 1998, WNM Communications, Inc. a Lynch Telephone Corporation
subsidiary sold the assets of its direct broadcast satellite business serving
portions of New Mexico for approximately $3.1 million (the "DBS Disposition").
As a result of the transaction, a pre-tax gain on the sale of the assets of
approximately $2.7 million was recognized and classified as gain on sale of
subsidiary stock and other operating assets in the Consolidated Statements of
Operations.
The following unaudited consolidated pro forma information shows the results of
the Company's operations presented as if the Central Scott Acquisition was made
at the beginning of 1998, Upper Peninsula Acquisition was made at the beginning
of 1997, and DBS Disposition was made at the beginning of 1997. The unaudited
pro forma information is not necessarily indicative of the results of operations
that would have occurred had the transaction been made at that date nor is it
necessarily indicative of future results of operations.
Years Ended December 31,
---------- --------- ---------
1997 1998 1999
---------- --------- ---------
Sales ..................................... $ 195,816 $ 208,676 $ 207,482
Net income (loss) before extraordinary item $ (3,215) $ 2,439 $ (10,147)
Earnings per share ........................ $ (2.27) $ 1.72 $ (7.19)
3. Special Charges
Morgan recorded a special charge in the Company's Operating Profit in 1997 of
$985,000 before taxes related to driver pay.
4. Wireless Communications Services
Lynch Interactive, through limited partnerships, participated in the auctions
conducted by the Federal Communications Commission ("FCC") for 30 megahertz and
10 megahertz of broadband spectrum to be used for personal communications
services, the "C-Block" and "F-Block" auctions, respectively. These two
auctions, which were part of six auctions conducted by the FCC for a total 90
megahertz of spectrum, were specially designated by the FCC to encourage small
businesses to participate in the wireless telecommunications industry, so-called
"entrepreneurial blocks." To effectuate this, the FCC provided certain
qualifying bidders a 25% bidding credit to be used during the auction as well as
long-term financing for a substantial portion of the cost of the licenses
acquired. The licenses represent the right to provide wireless communications
services to territorial areas of the United States. Under FCC regulations,
service must be provided to one-third of the population within the area of the
license within five years of the date of the award and to two-thirds of the
population within ten years of the date of award. Failure to comply may result
in the forfeiture of the license. Lynch Interactive held a 49.9% limited
partnership interest in each of these partnerships and had committed to funding
the government interest and certain other expenses up to a specified amount as
discussed below.
In the C-Block auction, which ended in May 1996, a subsidiary was a limited
partner in Fortunet Communications, L.P. ("Fortunet"), which acquired 31
licenses at a net cost, after the bidding credit, of $216 million. These
licenses were awarded in September 1996. The FCC provided 90% of the financing
of the cost of these licenses. A subsidiary had agreements to provide a total of
$41.8 million of funding to such partnership, of which $21.6 million was funded
through December 31, 1998. For accounting purposes, all cost and expenses,
including interest expense, associated with the licenses were being capitalized
until service is provided. The Company ceased capitalizing interest in this
investment on January 1, 1999.
Events during and subsequent to the auction, as well as other externally driven
technological and market forces, made financing the development of C-Block
licenses through the capital markets much more difficult than previously
anticipated. Fortunet, as well as many of the license holders from this auction,
petitioned the FCC for certain forms of financial and ownership structure
relief. The response from the FCC, which was announced in September 1997,
afforded license holders a choice of four options, one of which was the
resumption of current debt payments, which had been suspended in 1997. The
ramifications of choosing the other three courses of action could have resulted
in Lynch Interactive ultimately forfeiting either 30%, 50%, or 100% of its
investment in these licenses.
During 1997, Lynch Interactive provided a reserve on its investment in Fortunet
of $7.0 million, representing 30% of its investment, Lynch's management's
estimate of its impairment at the time.
On June 8, 1998, Fortunet elected to apply its eligible credits relating to its
original deposit to the purchase of three licenses for 15 MHZ of PCS spectrum in
Tallahassee, Panama City and Ocala, Florida. Fortunet returned all the remaining
licenses and forfeited 30% of its original deposit in full satisfaction of the
government debt. Accordingly, Fortunet is currently the licensee for 15 MHZ of
spectrum in the three Florida markets covering a population ("POP") of
approximately 785,000 at a net cost at auction of $20.09 per POP.
On April 15, 1999, the Federal Communications Commission completed a reauction
of all the "C-Block" licenses that were returned to it subsequent to the
original auction, including the 15MHz licenses that Fortunet returned on June 8,
1998, in the basic trading areas of Tallahassee, Panama City, and Ocala,
Florida. In that reauction, the successful bidders paid a total of $2.7 million
for the three licenses as compared to the $18.8 million carrying amount of
Interactive's investment in Fortunet at December 31, 1998. Accordingly, in the
quarter ended March 31, 1999, Interactive recorded a reserve of $15.4 million to
write down its investment in Fortunet to reflect the amount bid for similar
licenses in the reauction, plus an additional $0.7 million of capitalized
expenses and interest, with a carrying value of $3.4 million at December 31,
1999.
In the F-Block Auction, East/West Communications, Inc. ("East/West," formerly
Aer Force Communications B L.P.), acquired five licenses to provide personal
communications services in geographic areas of the United States with a total
population of 20 million at a net bid of $19.0 million. In order to fund
East/West's participation in the auction, the Company borrowed $11.8 million
under a short-term facility from Gabelli Funds, Inc. ("GFI"), an affiliate of
the Chairman and CEO of the Company. The money was repaid after completion of
the auction. $10.0 million of this was repaid with monies returned from the FCC
upon completion of the auction. In May and July 1997, the licenses were awarded.
$15.2 million of the cost of the licenses was financed with a loan from the
United States Government. As of November 30, 1997, Lynch Interactive had
invested $225,000 in partnership equity and provided the partnership with a loan
of $3.5 million. In December 1997, the partnerships converted to a corporation
with Lynch Interactive receiving 49.9% of the common stock. Lynch Interactive
spun off 39.9% of the common stock of East/West to its shareholders and
transferred 10% of East/West stock to GFI in satisfaction of an obligation to
pay it 10% of the net profits (after a capital charge) as partial compensation
for a loan. Prior to the conversion, Lynch Interactive contributed a portion of
the debt owed to it as a contribution to capital and immediately after the
conversion the remaining debt owed to it ($4.5 million book value) was converted
into 7,800 shares ($7,800,000 liquidation preference) of Redeemable Preferred
Stock. At that time Lynch Interactive's obligation to make further loans was
terminated. The Redeemable Preferred Stock has a 5% payment-in-kind dividend and
is mandatorially redeemable in 2009 subject to earlier payment in certain
circumstances. As a result of a merger with Omnipoint, Inc., in February 2000
the preferred stock was redeemed at $8.7 million including accrued dividends. As
a result of this redemption, the Company will record a gain of $4.2 million on a
pre-tax basis or $1.83 per share in the first quarter of 2000 after-tax.
During 1998, Rivgam Communicators, LLC ("Rivgam"), a subsidiary of GFI,
transferred to Lynch PCS Corporation G ("Lynch PCS G") a subsidiary of Lynch
Interactive, its 10 MHZ PCS license covering the Rand-McNally basic trading area
of Las Cruces, New Mexico. This transfer was in full settlement of an agreement
between Lynch PCS G and Rivgam. This agreement provided that Lynch PCS G would
be compensated for certain bidding and administrative services it provided to
Rivgam in the PCS D and E Block Auctions by receiving a 10% net profit interest
(after capital charges) in any PCS licenses acquired by Rivgam. The transfer was
accounted for as a non-monetary transaction and resulted in Lynch Interactive
recognizing management service income of $1.0 million in 1998 based upon the
estimated fair value of the license. Lynch PCS G has similar arrangements with
two separate entities in which GFI has minority interests in which Lynch PCS G
is entitled to receive a 5% net profit interest (after capital charges) in
licenses acquired in the WCS and LMDS Auctions.
5. Investments in Affiliated Companies
Lynch Entertainment Corporation ("LENCO"), a wholly-owned subsidiary of the
Company, has a 20% investment in Coronet Communications Company ("Coronet"),
which operates television station WHBF-TV, a CBS affiliate in Rock Island,
Illinois. Lynch Entertainment Corporation II ("LENCO II"), a wholly owned
subsidiary of the Company, has a 49% investment in Capital Communications
Company, Inc. ("Capital"), which operates television station WOI-TV, an ABC
affiliate in Des Moines, Iowa.
At December 31, 1998 and 1999, LENCO's investment in Coronet was carried at a
negative $1,262,000 and a negative $1,037,000, respectively, due to LENCO's
guarantee of $3.8 million of $12.2 million of Coronet's third party debt. In
1997, Coronet repaid a $2.9 million loan to LENCO plus accrued interest.
Long-term debt of Coronet, at December 31, 1999, totaled of $12.2 million due to
a third party lender which is due quarterly through December 31, 2003.
At December 31, 1998 and 1999, LENCO II's investment in Capital is carried at
zero as its share of net losses recognized to date have exceeded its net
investment. LENCO II also owns $10,000 of Preferred Stock B of Capital, which is
convertible at any time into the Common Stock of Capital in a sufficient amount
to bring LENCO II's ownership to 50%.
Subsidiaries of Lynch Telephone Corporation own minority positions in three
partnerships providing cellular service to three Rural Service Areas ("RSAs") in
New Mexico. Adjusting for the minority positions in non-wholly owned and
wholly-owned subsidiaries. Lynch Telephone Corporation's net equity interest in
the three RSA's is as follows: RSA #1 - 20.8%, RSA #3 - 21.1%, and RSA #5 -
17.0%. Lynch Telephone Corporation's net investment in these partnerships is
$1.5 million.
Summarized financial information for companies accounted for by the equity
method is as follows:
Consolidated Information
1997 1998 1999
------- ------ -------
(In Thousands)
Current assets ................................. $ 7,960 $ 6,963 $ 7,870
Property, plant & equipment, intangibles & other 24,119 23,433 23,315
Current liabilities ............................ 7,419 7,621 7,064
Long term debt & other long term liabilities ... 31,133 26,275 24,124
Net revenues ................................... 14,740 15,041 14,042
Gross profit ................................... 6,809 8,650 9,119
Net income before extraordinary item ........... 1,403 3,084 3,398
Net income ..................................... 1,403 3,084 3,398
6. Notes Payable and Long-term Debt
Long-term debt represents borrowings by specific entities, which are
subsidiaries of Interactive.
December 31,
1998 1999
-----------------------
(In Thousands)
Long-term debt consists of (all interest rates are at December 31, 1999):
Rural Electrification Administration (REA) and Rural Telephone Bank (RTB) notes
payable in equal quarterly installments through 2027 at fixed interest rates
ranging from 2% to 7.5% (4.8% weighted average), secured by
assets of the telephone companies of $113.9 million ............................ $ 45,264 $ 48,892
Bank credit facilities utilized by certain telephone and telephone holding
companies through 2009, $46.9 million at fixed interest rates averaging
8.2% and $13.8 million at variable interest rates averaging 8.1% ............... 50,623 60,740
Unsecured notes issued in connection with acquisitions through 2006, all at
fixed interest rates averaging 10% ............................................. 28,003 27,654
Convertible subordinated note due in December, 2004 at fixed interest rate
of 6% .......................................................................... -- 25,000
Other .......................................................................... 3,773 3,415
--------- ---------
127,663 165,701
Current maturities ............................................................. (8,639) (16,445)
--------- ---------
$ 119,024 $ 149,256
========= =========
REA debt of $11.5 million bearing interest at 2% has been reduced by a purchase
price allocation of $2.4 million reflecting an imputed interest rate of 5%.
Unsecured notes issued in connection with the telephone company acquisitions are
predominantly held by members of management of the telephone operating
companies.
On a consolidated basis, at December 31, 1999, the company maintains short-term
and long-term line of credit facilities totaling $43.8 million (subject to
limitations that reduce the availability to $34.9 million), of which $23.6
million was available for future borrowings. Interactive maintains $20.0 million
short-term line of credit facilities (which were transferred from Lynch in
connection with the spin-off), of which $20.0 million was available at December
31, 1999. Borrowings under these facilities during 1998, which are at the same
terms as between Lynch and third party lenders, are included under the caption
"Notes Payable to Lynch." On January 28, 1999, Morgan executed a new two-year
renewable $20.0 million revolving credit facility, which replaces the $15.0
million line. The Morgan Group maintains lines of credit totaling $20.0 million,
$11.2 million of which was available at December 31, 1999. If not renewed, this
credit facility will convert to a three-year term loan. The interest rates will
be variable and adjusted quarterly. These facilities, as well as facilities at
other subsidiaries of Lynch Interactive, generally limit the credit available
under the lines of credit to certain variables, such as receivables and other
current assets, and are secured by the operating assets of the subsidiary, and
include various financial covenants. At December 31, 1999, $23.8 million of
these total facilities expire within one year. The weighted average interest
rate for short-term borrowings at December 31, 1999 was 7.9%. The Company pays
fees ranging from 0% to 0.375% on its unused lines of credit. Morgan has $8.1
million of letters of credit outstanding at December 31, 1999, which are
required for self-insurance retention reserves and other business needs.
Morgan has a $20,000,000 revolving credit facility ("Credit Facility") which
expires February 28, 2001, and is subject to renewal annually, thereafter. If
not renewed, the Credit Facility shall convert to a three-year term loan. The
interest rate will be calculated, at Morgan's option, on either the lender's
base rate, or Eurodollar rate, all of which are adjusted on a quarterly basis
and include a margin based upon performance ratios. A commitment fee of .375% is
required on the unused portion. Total borrowings and outstanding letters of
credit are limited to qualified trade accounts receivable, qualified
owner-operator loans, and cash investments (the "Borrowing Base"). Thre Credit
Facility also provides for excess short-term borrowings of up to $5,000,000
based on a leverage test. This facility provides financing for working capital
and general corporate needs. At December 31, 1999, the Company had no outstading
debt under its Crecit Facility. Morgan had $8,100,000 of letters of credit
outstanding on December 31, 1999. Letters of credit are required for
self-insurance retention reserves and other coproate needs.
The Credit Facility contains financial covenants, the most restrictive of which
are a debt service to cash flow coverage ratio and interst eaxpense coverage
ratio. Morgan projected it was probable that a violation of one or more of the
financial covenants would occur at each of teh measurement dates during 2000. On
March 30, 2000, the Company and the bank agreed to modify th ecovenants which,
ased upon Morgan's projections, would probably be violated. This amendment will
limit th payment of dividends to $120,000 annually ($142,000 was declared in
1999), prohibits the acquisition of Morgan's common stock, and limits borrowings
and letters of credit to the Borrowing Base. This amendment provides for the
payment of up front fees of $25,000 an increase of twenty-five basis points in
the interst rate and an increase of twelve and one half basis points in the
commitment fee.
In general, the long-term debt facilities are secured by substantially all of
the Company's property, plant and equipment, receivables and common stock of
certain subsidiaries and contain certain covenants restricting distributions to
Lynch Interactive. At December 31, 1999 and 1998, substantially all the
subsidiaries' net assets are restricted.
In December 1999, Interactive completed the private placement of a $25 million
6% five-year unsecured, convertible subordinated note, convertible into
Interactive common stock at $85 per share. To assist the Company with the
private placement to Cascade Investment LLC, Mario J. Gabelli, Chairman and CEO
of the Company, 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 on December 15,
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 (approximately $160,000) plus
his counsel fees in connection with the option to sell agreement and obtaining
the letter of credit.
Cash payments for interest were $9.8 million, $10.1 million and $10.8 million
for the years ended December 31, 1997, 1998 and 1999, respectively.
Aggregate principal maturities of long-term debt at December 31, 1999 for each
of the next five years are as follows: 2000--$16.4 million; 2001--$12.6 million,
2002--$9.1 million, 2003--$18.8 million and 2004--$31.4 million.
7. Minority Interests and Other Related Party Transactions
Interactive owns all of the Class B common stock of The Morgan Group, Inc. and
155,900 shares of Morgan's Class A common stock, which in the aggregate
represents 70% of the consolidated voting power of the combined classes of
Morgan's common stock and 55% of the economic equity ownership. The Class B
Morgan common stock is entitled to two votes per common share.
Interactive has been added to a lease in 1999 for its corporate headquarters for
an annual payment of $90,000 with an affiliate of its Chairman and Chief
Executive Officer.
8. Shareholders' Equity
Subsequent to the spin-off by Lynch Corporation, the Board of Directors of Lynch
Interactive authorized the purchase of up to 100,000 shares of its common stock.
Through December 31, 1999, 200 shares have been purchased at an average cost of
$99.16 per share.
9. Stock Option Plans
On June 4, 1993, the Board of Directors of Morgan approved the adoption of a
stock option plan, which provides for the granting of incentive or non-qualified
stock options to purchase up to 200,000 shares of Class A Common Stock to
officers, including members of Morgan's Board of Directors, and other key
employees. No options may be granted under this plan at less than the fair
market value of the Common stock at the date of the grant, except for certain
non-employee directors. Although the exercise period is determined when options
are actually granted, an option shall not be exercised later than 10 years and
one day after it is granted. Stock options granted will terminate if the
grantee's employment terminates prior to exercise for reasons other than
retirement, death, or disability. Stock options vest over a four-year period
pursuant to the terms of the plan, except for stock options granted to a
non-employee director, which are immediately vested. The pro forma effect of
accounting for Morgan' stock options under the fair value method would have
reduced net income, or increased the net loss, by less than $0.1 million for
each period presented. For the purposes of these computations, the fair value of
the stock options at the date of the grant was estimated using a Black-Scholes
option pricing model with the following weighted average assumptions for all
periods presented: risk-free interest rate - 5%, expected dividend yield - 1%,
volatility factor of Morgan's Class A common stock - 0.25, expected life of
stock option - 10 years.
Employees and non-employee directors of Morgan have been granted non-qualified
stock options to purchase 140,875 and 40,000 shares, respectively, of Morgan's
Class A common stock, net of cancellations and shares exercised. There are
10,750 options reserved for future issuance.
In January 2000, in connection with the employment arrangement for the new
President and Chief Executive Officer of Morgan, Morgan granted such executive
ten-year options to acquire 120,000 shares of Morgan's Class A Common Stock,
40,000 of which have an exercise price of $5.625 per share, 40,000 of which have
an exercise price of $7.625 per share, and 40,000 have an exercise price of
$9.625 per share.
A summary of Morgan's stock option activity and related information follows:
Years Ended December 31,
------------------------- ------------------------- --------------------------
1997 1998 1999
------------------------- ------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Options Exercise Options Exercise Options Exercise
(000) Price (000) Price (000) Price
------------ ------------ ------------ ------------ ------------ -------------
Outstanding at beginning of year 176 $8.40 167 $8.32 170 $8.28
Granted 25 8.13 23 8.11 11 7.52
Exercised (26) 8.73 (7) 8.25 -- --
Canceled (8) 8.07 (13) 8.59 -- --
------------ ------------ ------------ ------------ ------------ -------------
Outstanding at end of year 167 $8.32 170 $8.28 181 $8.23
Exercisable at end of year 109 $8.35 124 $8.42 149 $8.31
Exercise prices for options outstanding as of December 31, 1999, ranged from
$6.20 to $10.19. The weighted-average remaining contractual life of those
options is 5.83 years. The weighted-average fair value of options granted during
each year was immaterial
On February 29,1996, Lynch Corporation adopted a Stock Appreciation Rights
program for certain employees. Through September 1, 1999, 43,000 of Stock
Appreciation Rights ("SAR") had been granted at prices ranging from $63 to $85
per share. Upon the exercise of a SAR, the holder is entitled to receive an
amount equal to the amount by which the market value of the Lynch Corporation
common stock on the exercise date exceeds the grant price of the SAR. Effective
September 30, 1998, Lynch Corporation amended the SAR program so that the SARs
became exercisable only if the market price for the Lynch Corporation's shares
exceed 200% of the SAR exercise price within five years from the original grant
date. This amendment eliminated the recording of the profit and loss effect of
the SARs for changes in the market price in the Company's common stock until it
becomes probable that the SARs will become exercisable. At the spin off, these
SARs were allocated to Lynch and Interactive. Lynch Corporation and Interactive
offered to the SAR holders an option of turning in their SARs in exchange for a
payment based upon the combined market prices of Lynch Corporation and Lynch
Interactive Corporation and, in the case of SARs issued prior to December 5,
1997, East/West Communications, Inc. East/West Communications was spun off from
Lynch Corporation on December 5, 1997 on a share for share basis. All SAR
holders accepted this proposal thereby terminating the plan and the total
payments of $3.8 million were allocated to Lynch ($0.8 million) and Interactive
(3.0 million) on the basis of the relative market value of December 31, 1999.
The net income (expense) relating to this program that was either allocated to
Interactive prior to the time of the amendment or recorded by Interactive SAR
was $2.9 million in 1999 and $0.3 million in 1997 and $0.1 million in income in
1998.
On March 9, 2000 the Board of Directors adopted a stock option plan, subject to
shareholder approval. The plan provides for the issuance of 83,000 shares.
10. Income Taxes
Lynch Corporation, including Interactive filed consolidated federal and state
income tax returns, which include all eligible subsidiaries, including
Interactive through the date of the spin off. The provisions (benefits) for
income taxes in the statements of operations for all periods presented have been
computed assuming Interactive was filed on a separate company basis. All income
tax payments are made by Interactive through Lynch.
Effective September 1, 1999, results of Interactive were no longer included in
the consolidated federal and state income tax returns of Lynch Corporation. At
that date, Interactive began filing separate returns with the governing
authorities.
Deferred income taxes for 1998 and 1999 are provided for the temporary
differences between the financial reporting basis and the tax basis of the
Company's assets and liabilities. Cumulative temporary differences at December
31, 1998 and 1999 are as follows:
Dec. 31, 1998 Dec. 31, 1999
Deferred Tax Deferred Tax
Asset Liability Asset Liability
-----------------------------------------------
(In Thousands)
Fixed assets revalued under purchase accounting
and tax over book depreciation ................. $ -- $ 7,535 -- $ 8,874
Discount on long-term debt ....................... -- 1,085 -- 986
Basis difference in subsidiary and affiliate stock -- 1,795 -- 1,795
Unrealized gains on marketable securities ........ -- 6,788 -- 5,819
Partnership tax losses in excess of book losses .. -- 1,309 -- (4,165)
Other reserves and accruals ...................... 4,145 -- 3,227 --
Other ............................................ 120 1,338 177 (89)
------- ------- ------- -------
Total deferred income taxes ...................... $ 4,265 $ 19,850 $ 3,404 $ 13,220
======= ======= ======= =======
The provision (benefit) for income taxes is summarized as follows:
1997 1998 1999
-------------------------------
(In Thousands)
Current payable taxes:
Federal ....... $(2,812) $ 2,887 $ 2,582
State and local 429 418 779
------- ------- -------
(2,383) 3,305 3,361
Deferred taxes:
Federal ........ 1,625 1,704 (5,734)
State and local 22 3 88
------- ------- -------
1,647 1,707 (5,646)
------- ------- -------
$ (736) $ 5,012 $(2,285)
======= ======= =======
A reconciliation of the provision (benefit) for income taxes from extraordinary
item operations and the amount computed by applying the statutory federal income
tax rate to income before income taxes, minority interest, and extraordinary
item follows:
1997 1998 1999
------------------------------------
(In Thousands)
Tax at statutory rate ....................... $(1,138) $ 3,796 $(3,613)
Increases (decreases):
State and local taxes, net of federal benefit 294 558 542
Amortization of goodwill .................... 314 387 556
Operating losses of subsidiaries ............ (224) 313 --
Reduction attributable to special election by
Captive Insurance Company (155) -- --
Other ....................................... 173 (42) 230
------- ------- -------
$ (736) $ 5,012 $(2,285)
======= ======= =======
Net cash payments for income taxes were $0.7 million, $5.6 million and $3.0
million for the years ended December 31, 1997, 1998 and 1999, respectively.
11. Comprehensive Income
Effective January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 established standards for reporting and
display of comprehensive income and its components; however, the adoption of
SFAS No. 130 had no impact on the Company's net income. SFAS No. 130 requires
unrealized gains or losses on the Company's available-for-sale securities, which
prior to adoption were reported separately in shareholders' equity to be
included in other comprehensive income. Comprehensive income has not been
reported in years ended 1998 and 1999, respectively, as such amount was a
component of Investments In and Advances to Affiliated Entities.
The components of comprehensive income, net of tax, at December 31, 1999 is as
follows:
1999
-------
Balance beginning of year ................................... $ 8,501
Current year unrealized gain on available-for-sale securities (1,261)
-------
Accumulated other comprehensive income ...................... $ 7,240
=======
The income tax effects allocated to each component of other comprehensive income
for the year ended December 31, 1999 are as follows:
Tax (Benefit)/
Before Tax Expense After Tax
---------- -------- ----------
Unrealized gains on available-for-sale securities $12,435 $ 5,195 $ 7,240
------- ------- -------
------- ------- -------
Other comprehensive income ....................... $12,435 $ 5,195 $ 7,240
======= ======= =======
12. Employee Benefit Plans
Lynch Interactive maintains several defined contribution plans at its telephone
subsidiaries, Morgan and corporate office. Lynch Interactive's contributions
under these plans, which vary by subsidiary, are based primarily on the
financial performance of the business units and employee compensation. Total
expense of these plans for the years ended December 31, 1997, 1998 and 1999 was
$0.7 million, $0.7 million, and $0.8 million, respectively.
In addition, three of the company's telephone subsidiaries participate in a
multi-employer defined benefit plan, which is administrated by a telephone
industry association. Under this plan accumulated benefits and plan assets are
not determined or allocated separately by individual employees. Accordingly,
such data is not currently available. Total expense of these plans was $0.1
million for each of the three years in the period ended December 31, 1999.
13. Commitments and Contingencies
Lynch Interactive has pending claims incurred in the normal course of business.
Management believes that the ultimate resolution of these claims will not have a
material adverse effect on the combined liquidity, financial position or
operations of Lynch Interactive.
The Company leases certain land, buildings computer equipment, computer
software, and network services equipment under non-cancelable operating leases
that expire in various years through 2004. Certain leases have renewal options
and escalation clauses. Rental expense under operating leases were $2.8 million,
$2.6 million, and $2.3 million for years ended December 31, 1997, 1998 and 1999,
respectively. The table below shows minimum lease payments due under
non-cancelable operating leases at December 31, 1999. Such payments total $2.3
million.
Years Ended
--------------------------------
(In millions)
2000 2001 2002 2003 2004
---- ---- ---- ---- ----
Operating leases $1.l $0.7 $0.3 $0.1 $0.1
14. Segment Information
Lynch Interactive is principally engaged in two business segments: multimedia
and services. All businesses are located domestically, and substantially all
revenues are domestic. The multimedia segment includes local telephone
companies, the investment in PCS entities and investments in two
network-affiliated television stations. The services segment includes
transportation and related services.
Services provided by Morgan to Oakwood Homes Corporation accounted for
approximately $21.6 million, $31.8 million, and $28.8 million of net sales in
1997, 1998, and 1999, respectively. In addition, another Morgan customer,
Fleetwood Enterprises, Inc. accounted for approximately $28.1 million, $26.0
million, and $23.9 million of linehaul revenues in 1997, 1998, and 1999,
respectively. $13.4 million and $10.4 million at 1998 and 1999, respectively, of
Lynch Interactive's accounts receivable are related to the services segment and
are principally due from companies in the mobile home and recreational vehicle
industry located throughout the United States. Lynch Interactive believes that
its telecommunications businesses are not dependent on any single customer.
EBITDA (before corporate allocation) for operating segments is equal to
operating profit before interest, taxes, depreciation, amortization and
allocated corporate expenses. EBITDA is presented because it is a widely
accepted financial indicator of value and ability to incur and service debt.
EBITDA is not a substitute for operating income or cash flows from operating
activities in accordance with generally accepted accounting principles.
Operating profit (loss) is equal to revenues less operating expenses, excluding
unallocated general corporate expenses, interest and income taxes. Lynch
Interactive allocates a portion of its general corporate expenses to its
operating segments. Such allocation to the subsidiaries were $632,000, $639,000,
and $1,269,000 during the years ended December 31, 1997, 1998 and 1999,
respectively. Identifiable assets of each industry segment are the assets used
by the segment in its operations excluding general corporate assets. General
corporate assets are principally cash and cash equivalents, short-term
investments and certain other investments and receivables.
Years Ended December 31,
--------------------------------
1997 1998 1999
--------------------------------
(In thousands)
Revenues
Multimedia .................................................. $ 47,908 $ 54,622 $ 59,011
Services .................................................... 146,154 150,454 145,629
--------- --------- ---------
Consolidated total .......................................... $ 194,062 $ 205,076 $ 204,640
========= ========= =========
EBITDA (before corporate allocation)
Multimedia ................................................ $ 24,666 $ 29,389 $ 31,443
Services .................................................. 2,190 3,337 1,865
Unallocated corporate expense ............................. (2,310) (1,826) (5,113)
--------- --------- ---------
Consolidated total ........................................ $ 24,546 $ 30,900 $ 28,195
========= ========= =========
Operating Profit
Multimedia ................................................ $ 11,845 $ 15,757 $ 16,057
Services .................................................. 1,015 2,007 550
Unallocated corporate expense ............................. (1,572) (1,107) (3,758)
--------- --------- ---------
Consolidated total ........................................ $ 11,288 $ 16,657 $ 12,849
========= ========= =========
Depreciation and amortization
Multimedia ................................................ $ 12,175 $ 12,995 $ 14,115
Services .................................................. 1,075 1,230 1,215
All other ................................................. 8 18 16
--------- --------- ---------
Consolidated total ........................................ $ 13,258 $ 14,243 $ 15,346
========= ========= =========
Capital expenditures
Multimedia ................................................ $ 10,914 $ 11,028 $ 11,742
Services .................................................. 919 566 811
General corporate ......................................... 4 48 --
--------- --------- ---------
Consolidated total ........................................ $ 11,837 $ 11,642 $ 12,553
========= ========= =========
Total assets
Multimedia ................................................ $ 196,285 $ 195,010 $ 211,622
Services .................................................. 33,784 33,590 32,264
General corporate ......................................... 22,963 17,492 10,083
--------- --------- ---------
Consolidated total ........................................ $ 253,032 $ 246,092 $ 253,969
========= ========= =========
Total operating profit for reportable segments .............. $ 11,288 $ 16,657 $ 12,849
Other profit or loss:
Investment income ......................................... 1,678 1,865 2,013
Interest expense .......................................... (9,740) (10,383) (11,140)
Equity in earnings of affiliated companies ................ 154 317 1,057
Reserve for impairment of investment in PCS license holders (7,024) -- (15,406)
Gain on sales of subsidiary and affiliate stock and
other operating assets ................................. 260 2,709 --
--------- --------- --------
Income (loss) before income taxes, minority interest and
extraordinary item ...................................... $ (3,384) $ 11,165 $ (10,627)
========= ========= =========
15. Quarterly Results of Operations (Unaudited)
1999-Three Months Ended
-------------------------------------------
March 31(a) June 30 September 30 December 31(b)
--------- --------- ----------- -----------
(In thousands)
Sales and revenues .................... $ 48,712 $ 54,225 $ 52,825 $ 48,878
Operating profit ...................... 3,567 4,257 4,569 456
Income (loss) before extraordinary item (9,305) 1,108 1,070 (1,929)
Net income (loss) ..................... (9,465) 1,108 1,070 (1,929)
Basic and diluted earnings per share:
Income (loss) before extraordinary item (6.56) 0.78 0.76 (1.40)
Extraordinary item .................... (0.11) -- -- --
Net income (loss) ..................... (6.67) 0.78 0.76 (1.40)
1998-Three Months Ended
---------------------------------------
March 31 June 30 September 31 December 31 (c)
----------------------------------------
(In thousands)
Sales and revenues .................. $46,903 $54,915 $53,331 $49,927
Operating profit .................... 2,323 5,361 4,769 4,204
Income (loss) ....................... 178 1,776 1,436 1,539
Net income (loss) ................... 178 1,776 1,436 1,539
Basic and diluted earnings per share:
Net income (loss) ................... 0.13 1.25 1.01 1.09
(a) For the three months ended March 31, 1999, includes a reserve for
impairment for PCS license holders of $15.4 million before income taxes
(see Footnote 4).
(b) For the three months ended December 31, 1999, includes $2.9 million of
expenses for termination of the SAR program (see Footnote 9).
(c) For the three months ended December 31, 1998, includes $2.7 million gain on
the company's sale of its DirectTV franchise.
16. Earnings Per Share
For the years ended December 1997 and 1998, the following table sets forth the
computation of pro forma basic and diluted earnings (loss) per share from
continuing operations before extraordinary items. Pro forma earnings (loss) per
share for these periods are calculated assuming that the shares outstanding for
all periods are the same as the shares outstanding for Lynch Corporation.
Subsequent to the Spin-Off, basic and dilutive earnings per share are based on
the average weighted number of shares outstanding.
On December 13, 1999, Lynch Interactive issued a $25 million 6% convertible
promissory note, which has been excluded from the calculation of diluted
earnings (loss) per share as assuming conversion would be antidilitive.
Years Ended December 31,
1997 1998 1999
----------- ----------- -----------
Numerator for basic and diluted earnings per share
Income (loss) before extraordinary item ............... $ (3,279,000) $ 4,929,000 $ (9,056,000)
Net income (loss)
(3,279,000) 4,929,000 (9,216,000)
Denominator for basic and diluted earnings per share-
weighted average shares 1,415,000 1,418,000 1,412,000
Basic earnings (loss) per share before extraordinary item (2.32) 3.48 (6.42)
Extraordinary item ...................................... -- -- (0.11)
Net income (loss) ....................................... (2.32) 3.48 (6.53)
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
LYNCH INTERACTIVE CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
Years Ended December 31,
-------------------------------
1997 1998 1999
-------------------------------
(In Thousands)
Interest, Dividends & Gains on Sale of Marketable Securities $ 195 $ 43 $ 86
Interest & Other Income from Securities .................... 35 35 49
------- ------- -------
TOTAL INCOME .......................................... 230 78 135
Cost and Expenses:
Unallocated Corporate Administrative Expense ............. 1,144 1,089 3,414
Interest Expense ......................................... 1,257 1,394 449
Interest Expense to Subsidiaries ......................... 741 830 1,685
------- ------- -------
TOTAL COST AND EXPENSES .............................. 3,142 3,313 5,548
LOSS BEFORE INCOME TAXES, EQUITY IN
INCOME (LOSS) OF SUBSIDIARIES (2,912) (3,235) (5,413)
Income Tax Benefit ......................................... 1,105 1,581 1,840
Equity in Income (Loss) of Subsidiaries .................... (1,472) 6,583 (5,643)
------- ------- -------
NET INCOME (LOSS) .......................................... $(3,279) $ 4,929 $(9,216)
======= ======= =======
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
In the parent company's financial statements, the Company's investment
in subsidiaries is stated at cost plus equity in undistributed earnings
of the subsidiaries.
NOTE B - DIVIDENDS FROM SUBSIDIARIES
No dividends were received from subsidiaries in any period.
NOTE C - LONG-TERM DEBT
Lynch Interactive Corporation has a note payable to a subsidiary with a
principal amount of $6.0 million at a fixed interest rate of 6% per
annum, due in 2001. The note is convertible at the subsidiary's option
into the Company's common stock at an exercise price of $120 per share.
NOTE D - LINES OF CREDIT
Lynch Corporation maintained short-term lines of credit facilities,
which were transferred to Lynch Interactive Corporation at the time of
the spin off (September 1, 1999). In the above presentation, these are
reported as Lynch Interactive Corporation lines of credit.
NOTE E - SEE NOTES TO FINANCIAL STATEMENTS FOR ADDITIONAL INFORMATION.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
LYNCH INTERACTIVE CORPORATION
CONDENSED BALANCE SHEETS
December 31,
------------------------
1998 1999
------------------------
(In Thousands)
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents ........................................ $ 291 $ 2,924
Deferred Income Taxes ............................................ 140 600
Other current assets ............................................. 40 528
------- -------
TOTAL CURRENT ASSETS 471 4,052
OFFICE EQUIPMENT (Net) .............................................. 52 36
OTHER ASSETS (Principally Investment in and Advances to Subsidiaries) 73,124 71,139
------- -------
TOTAL ASSEST ........................................................ $73,647 $75,227
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES ................................................. $22,832 $ 7,124
LONG TERM DEBT ...................................................... 8,623 38,995
DEFERRED INCOME TAX LIABILITIES ..................................... 980 --
DEFERRED CREDITS .................................................... 1,898 2,196
TOTAL SHAREHOLDERS' EQUITY .......................................... 39,314 26,911
------- -------
Total Liabilities and Shareholders' Equity .......................... $73,647 $75,227
======= =======
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
LYNCH INTERACTIVE CORPORATION
CONDENSED STATEMENT OF CASH FLOWS
Years Ended December 31,
---------------------------------
1997 1998 1999
---------------------------------
(In Thousands)
Cash Provided by (Used In) Operating Activities ..... $ 619 $ 1,119 $ 639
-------- -------- --------
INVESTING ACTIVITIES:
Investment and Advances to Brighton Communications (8,645) 3,692 (5,858)
Other ............................................ 3 (176) --
-------- -------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
(8,642) 3,516 (5,858)
FINANCING ACTIVITIES:
Net Borrowings Under:
Lines of Credit ................................. 7,779 (7,564) (15,150)
Issuance of Long Term Debt ...................... -- -- 25,000
Advances (To) From Lynch Corporation ............ 1,066 2,930 (1,980)
Other ........................................... 1 -- (18)
-------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
8,245 (4,634) 7,852
TOTAL INCREASE CASH AND CASH EQUIVALENTS ............ 222 1 2,633
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ...... 68 290 291
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR ............ $ 290 $ 291 $ 2,924
======== ======== ========
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
LYNCH INTERACTIVE CORPORATION
YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
ADDITIONS
BALANCE AT CHARGED TO CHARGED TO
BEGINNING COSTS AND OTHER ACCOUNTS DEDUCTIONS BALANCE AT
OF PERIOD EXPENSES DESCRIBE DESCRIBE END OF PERIOD
---------- --------- ------------ ----------- ----------
Year Ended December 31, 1999
Allowance for Uncollectible Accounts $320,000 $470,000 $ 0 $375,000(A) $415,000
Year Ended December 31, 1998
Allowance for Uncollectible Accounts $286,000 $409,000 $ 0 $375,000(A) $320,000
Year Ended December 31, 1997
Allowance for Uncollectible Accounts $182,000 $436,000 $ 0 $332,000(A) $286,000
(A) UNCOLLECTIBLE ACCOUNTS WRITTEN OFF ARE NET OF RECOVERIES.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 CORPORATION
By:s/ROBERT E. DOLAN
- --------------------
ROBERT E. DOLAN
Chief Financial Officer (Principal
Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Capacity Date
* MARIO J. GABELLI
- ------------------- Chairman of the Board of
MARIO J. GABELLI Directors and Chief Executive March 30, 1999
Officer (Principal Executive Officer)
* PAUL J. EVANSON Director March 30, 1999
- ------------------
PAUL J. EVANSON
* JOHN C. FERRARA Director March 30, 1999
- -----------------
JOHN C. FERRARA
* DAVID C. MITCHELL Director March 30, 1999
- -------------------
DAVID C. MITCHELL
* SALVATORE MUOIO Director March 30, 1999
- -----------------
SALVATORE MUOIO
* RALPH R. PAPITTO Director March 30, 1999
- ------------------
RALPH R. PAPITTO
s/ROBERT E. DOLAN Chief Financial Officer March 30, 1999
- ------------------ (Principal Financial
ROBERT E. DOLAN and Accounting Officer)
*s/ROBERT A. HURWICH
- --------------------
ROBERT A. HURWICH
Attorney-in-fact
EXHIBIT INDEX
Exhibit No. Description
2 Separation Agreement**
3.1 Amended and Restated Certificate of Incorporation of Interactive**
3.2 By-laws of Interactive**
4.1 Specimen Common Share Certificate**
4.2 Amended and Restated Certificate of Incorporation of Interactive (fled as Exhibit 3.1
4.3 By-laws of Interactive as amended (filed as Exhibit 3.2 hereto)
4.4 Mortgage, Security Agreement and Financing Statement among Haviland Telephone Company,
4.5 Restated Mortgage, Security Agreement and Financing Statement between Western New
Mexico Telephone Company, Inc. and the United States of America.**
4.6 (i) Note Purchase Agreement dated as of December 19, 1999, between Registrant and Cascade
4.6 (ii) Convertible Promissory Note dated December 10, 1999.+++
4.6 (iii) Registration Rights Agreement dated as of December 10, 1999, between Registrant and
10 (a) Partnership Agreement dated March 11, 1987, between Lombardo Communications, Inc. and
Lynch Entertainment Corporation (incorporated by
reference to Exhibit 10(e) of the Lynch
Corporation ("Lynch")'s Annual Report on Form 10-K
for the year ended December 31, 1987).
*(10) (b) Lynch Corporation 401(k) Savings Plan (incorporated by reference to Exhibit 10(b) to
Lynch's Report Form 10-K for the year ended December 31, 1995).
10 (c) Shareholders Agreement among Capital Communications Company, Inc., Lombardo
10 (d)(i) Loan Agreement, dated as of November 6, 1995, between Lynch PCS Corporation A and Aer
10 (d)(ii) Amendment No. 1 to the Loan Agreement, dated as of November 6, 1995, referred to in
10 (e)(i) Letter Agreement, dated as of August 12, 1996, between Rivgam Communicators, L.L.P.
10 (f)(ii) Letter Agreement dated as of December 16, 1998, between Rivgam Communicators, L.L.P.
10 (f) Letter Agreement between Lynch PCS Corporation G and Bal/Rivgam, L.L.C. (incorporated
10 (g) Letter Agreement, dated January 20, 1998, between Lynch PCS Corporation G and
*10 (h) Employment Agreement dated February 2, 1998, between Registrant and Mark Feldman
10 (i) Lease Agreement between Lynch and Gabelli Funds, Inc. (incorporated by reference to
10 (j) Letter Agreement dated November 11, 1998, between Registrant and Gabelli & Company,
10 (k) Separation Agreement (filed as Exhibit 2 hereto)**
10 (l) Agreement and Plan of Merger dated as of May 25, 1999, among Central Scott Telephone
21 Subsidiaries of Registrant+
23 Consents of Independent Auditors+
- Siepert & Company LLC (2)+
- McGladrey & Pullen, LLP (2)+
- Warinner, Gensinger & Associates, LLC+
24 Powers of Attorney+
27 Financial Data Schedule+
99 Report of Independent Auditors+
- Report of Siepert & Co., L.L.P. of
financial statements of Cuba City
Telephone Exchange Company for the year
ended December 31, 1999+
- Report of Siepert & Co., L.L.P. on
the financial statements of Belmont
Telephone Company for the year ended
December 31, 1999+
- Report of McGladrey & Pullen, LLP on the
financial statements of Capital
Communications Company for the year ended
December 31, 1997+
- Report of McGladrey & Pullen, LLP on the
financial statements of Coronet
Communications Company the year ended
December 31, 1997+
- Report of Frederick & Warinner on the
financial statements of CLR Video, L.L.C.
for the year ended December 31, 1997+
+ Filed with this Form 10-K
++ Filed as same Exhibit number with Form 10
** Filed as same Exhibit number with Form 10A-1
+++ Filed as the same Exhibit number to Registrant's
Form 8-K dated December 10, 1999
* Employee compensation document
The Exhibits listed above have been filed separately with the Securities and
Exchange Commission in conjunction with this Annual Report on Form 10-K or have
been incorporated by reference into this Annual Report on Form 10-K. Lynch
Interactive Corporation will furnish to each of its shareholders a copy of any
such Exhibit for a fee equal to Lynch Interactive Corporation's cost in
furnishing such Exhibit. Requests should be addressed to the Office of the
Secretary, Lynch Interactive Corporation, 401 Theodore Fremd Avenue, Rye, New
York 10580.