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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, 2001 Commission file number 1-106
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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
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(Exact name of Registrant as specified in its charter)
Delaware 06-1458056
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State of other jurisdiction (I.R.S. Employer
incorporation or organization Identification No.)
401 Theodore Fremd Avenue, Rye, NY 10580
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(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
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Common Stock, $.0001 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. [ ]
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 18, 2002 of $40.25 per share) was $87,400,903.
(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 2,816,551
as of March 18, 2002.
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DOCUMENTS INCORPORATED BY REFERENCE:
Part III: Certain portions of Registrant's Proxy Statement for the 2002 Annual
Meeting of Shareholders.
FORWARD LOOKING INFORMATION
This Form 10-K contains certain forward looking information, including without
limitation Item 1-I.A "Regulatory Environment" and possible changes thereto and
"Competition," Item 1.-I.B "Cable Television," Item 1-I.C "Personal
Communications and other Wireless Services'," including without limitation the
risks described, "Impairment of Assets," and "Risk Management, Safety and
Insurance," Item 7. "Management's Discussion and Analysis of Financial Condition
and Results of Operations," including without limitation Liquidity and Capital
Resources, and Market Risk. It should be recognized that such information are
estimates or forecasts based upon various assumptions, including the matters,
risks, and cautionary statements referred to therein, as well as meeting the
Registrant's internal performance assumptions regarding expected operating
performance and the expected performance of the economy and financial markets as
it impacts Registrant's businesses. As a result, such information is subject to
uncertainties, risks and inaccuracies, which could be material.
PART 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. In January 2002, Interactive spun off its interest in
The Morgan Group, Inc., its only services subsidiary, via a tax-free dividend to
its shareholders of the stock of Morgan Group Holding Co., a corporation that
was formed to serve as a holding company for Interactive's controlling interest
in The Morgan Group, Inc. Morgan Group Holding Co. is now a public company.
Accordingly, the Company now operates in one business segment, i.e., multimedia,
which consists of telecommunications, cable television and broadcasting. As used
herein, Interactive includes subsidiaries.
I. MULTIMEDIA
A. Telecommunications
Operations. Interactive conducts its telecommunications operations through
subsidiary companies. The telecommunications group has been expanded through the
selective acquisition of local exchange telephone companies serving rural areas
and by offering additional services such as Internet service, long distance
service and competitive local exchange carrier service. From 1989 through 2001,
Interactive has acquired twelve telephone companies, four of which have indirect
minority ownership of 2% to 19%, whose operations range in size from
approximately 800 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, Utah and Wisconsin. As of December 31, 2001, total access
lines were approximately 53,800, 100% of which are served by digital switches.
In June 2001, Interactive acquired Central Utah Telephone Inc., a 7,000-access
line telephone company located in Fairview, Utah. The combined aggregate $15.6
million purchase price was financed primarily through the issuance of additional
debt, with the remaining amount funded from available cash. As part of the
Central Utah transaction, Interactive acquired Central Telecom Services, LLC, a
related entity that owns certain Personal Communications Services ("PCS") and
Multichannel Multipoint Distribution Service ("MMDS") interests and Internet,
long distance, and telephone equipment businesses in Utah.
The principal business of Interactive's telephone companies is to provide
telecommunications services. These services fall into four major categories:
local network, network access, long distance and other non-regulated
telecommunications services. Toll service to areas outside franchised telephone
service territory is furnished through switched and special access connections
with intrastate and interstate long distance networks.
Interactive holds franchises, licenses and permits adequate for the conduct of
its business in the geographic areas that it serves.
We expect future growth in telephone operations 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 new service offerings.
The following table summarizes certain information regarding Interactive's
multimedia operations:
Years Ended December 31,
1999 2000 2001
-------- --------- --------
Telecommunications Operations
Access lines (a) ........................... 45,126 46,312 53,804
% Residential ............................ 75% 75% 75%
% Business ............................... 25% 25% 25%
Internet Subscribers ....................... 15,524 19,535 23,558
Cable Subscribers .......................... 4,642 4,515 2,959
Total Multimedia Revenues
Telecommunications Operations
Local Service ............................. 16% 15% 14%
Network Access & Long Distance ............ 64% 61% 60%
Non-Regulated & Other (b) ................. 17% 21% 24%
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Total Telecommunications Operations ....... 97% 97% 98%
Cable Operations ........................... 3% 3% 2%
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Total Multimedia Revenues .................. 100% 100% 100%
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($ in 000)
Total Revenues ............................. $ 59,011 $ 66,983 $ 79,352
EBITDA of Telecommunications Operations(c) . 31,443 34,699 41,274
Depreciation & Amortization ................ 14,115 15,781 18,268
Capital Expenditures ....................... 11,742 17,196 20,524
Total Assets ............................... $211,622 $211,562 $247,034
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(a) An "access line" is a telecommunications circuit between the customer's
establishment and the central switching office.
(b) Non-regulated and other revenues include Internet, PCS, CLEC and other
non-regulated revenues.
(c) EBITDA is earnings before interest, taxes, depreciation and amortization,
and corporate overhead allocation. 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 profit ($16,057,000,
$17,531,000 and $21,534,000 for the years ended December 31, 1999, 2000 and
2001, respectively) or net cash provided by operating activities
($16,324,000, $13,619,000 and $24,348,000 for the years ended December 31,
1999, 2000 and 2001, respectively) in accordance with generally accepted
accounting principles.
Telephone Acquisitions. Interactive pursues an active program of acquiring
operating telephone companies. From January 1, 1989 through December 31, 2001,
Interactive acquired twelve telephone companies serving a total of approximately
45,600 access lines, at the time of these acquisitions, for an aggregate
consideration totaling approximately $153.6 million. Such acquisitions are
summarized in the following table:
Number of Number of
Year of Access Lines Access Lines Ownership
Company Acquisition Yr. of Acq. 12/31/01 Percentage
----------- -------------- -------------- ----------
Western New Mexico Telephone Co. .......... 1989 4,200 6,741 83.1
Inter-Community Telephone Co. (a) ......... 1991 2,550 2,601 100.0
Cuba City Telephone Co. &
Belmont Telephone Co. ................. 1991 2,200 2,769 81.0
Bretton Woods Telephone Co. ............... 1993 250 808 100.0
JBN Telephone Co. (b) ..................... 1993 2,300 2,858 98.0
Haviland Telephone Co. .................... 1994 3,800 3,927 100.0
Dunkirk & Fredonia Telephone Co. ..........
& Cassadaga Telephone Co. ............. 1996 11,100 13,121 100.0
Upper Peninsula Telephone Co. ............. 1997 6,200 7,278 100.0
Central Scott Telephone Co. ............... 1999 6,000 6,334 100.0
Central Utah Telephone Co. ................ 2001 7,000 7,367 100.0
(a) Includes 1,350 access lines acquired in 1996.
(b) Includes 354 access lines acquired in 1996.
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 statewide 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
to 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.
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 provides and intends to provide more 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 nine of Interactive's telephone companies now offer
Internet access service. At December 31, 2001, Internet access customers totaled
approximately 23,558 compared to approximately 19,535 at December 31, 2000.
Affiliates of four of Interactive's telephone companies now offer long distance
service, and an affiliate of one of Interactive's telephone companies now offers
CLEC services.
An affiliate of Dunkirk & Fredonia Telephone Company ("DFT") provides CLEC
service on a resale basis in neighboring Dunkirk, New York, certain areas of the
Buffalo, New York, market and two other western New York counties. Some of DFT's
CLEC services are now being provided via an "unbundled network elements
platform", which allows for increased margins over a resale CLEC business model.
In addition, facilities-based services are continuing to be evaluated for DFT's
CLEC business.
DFT Security Systems, Inc., another affiliate of DFT, acquired American Alarm
Company in December 2001. American Alarm provides alarm services to western New
York, including the Buffalo area. With the addition of American Alarm, DFT
Security Systems now services over 6,000 alarm customers.
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.
There is no assurance that Interactive can successfully develop these businesses
or that these new or expanded businesses can be made profitable within a
reasonable period of time. 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 intrastate telecommunications services and
the Federal Communications Commission ("FCC") with respect to interstate
telecommunications services.
For the interstate services, Interactive's telephone subsidiaries participate in
the National Exchange Carrier Association ("NECA") common line and traffic
sensitive tariffs and access revenue pools. 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 ("LECs"), 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
intrastate access charge revenues (without participating in an access pool).
Intrastate access charge revenues are based on intrastate access rates filed
with the state regulatory agency.
In recent years, various aspects of federal and state telephone regulation have
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 communications 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 1996 Act (i)
allows major long distance telephone companies and cable television companies to
provide local exchange telephone service; (ii) allows new local telephone
service providers to connect into existing local telephone exchange networks and
purchase services at wholesale rates for resale; (iii) provides 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) allows
the Regional Bell Operating Companies to offer long distance telephone service
and enter the alarm services and electronic publishing businesses; (v) removes
rate regulation over non-basic cable service; and (vi) increases the number of
television stations that can be owned by one party. The 1996 Act had dual goals
of fostering local and intrastate competition while ensuring universal service
to rural America.
The FCC has completed numerous regulatory proceedings required to implement the
1996 Act. 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 have been
or are being determined first, followed by separate proceedings for
rate-of-return (or rural) companies. All of Interactive's telephone subsidiaries
are rural, rate-of-return companies for interstate regulatory purposes. The
rate-of-return designation is an election made by the carrier with the FCC. The
price cap approach differs from traditional rate-of-return regulation by
focusing primarily on the prices of communications services rather than the
telephone companies' costs.
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. 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 originally ensured that the non-rural carrier receives
at least as much USF as they had been receiving under the previous system. The
hold-harmless support is being gradually phased out for non-rural carriers.
The FCC completed three major regulatory proceedings during 2001 related to
rural LECs to provide a more stable, predictable source of interstate and USF
revenues. In May 2001, the FCC adopted an order related to USF for rural
carriers based on the Rural Task Force recommendation. Such order mandates the
continued use of actual embedded costs as the basis for USF support for rural
carriers through June 2006. In such order, the FCC emphasized that it would
provide predictability, certainty and stability to rural LECs for five years, so
as to allow rural carriers to continue to provide supported telecommunications
services at affordable rates to American consumers. In May 2001, the FCC adopted
the Separations Freeze Order in which the FCC stressed how freezing separations
factors would bring stability and regulatory certainty to the separations
process to avoid sudden cost shifts in a time of rapid market and technology
changes. Finally, in October 2001, the FCC adopted the Multi-Association Group
(MAG) Order, in which the FCC declared that some of the primary benefits are to
provide certainty and stability for rate-of-return carriers and to encourage
investment in rural America. The MAG Order reaffirmed that the 11.25% interstate
rate-of-return was appropriate for rate-of-return carriers. In addition, the MAG
Order increased the Subscriber Line Charges billed to end user customers
effective January 2002 and created a new universal service support mechanism
called the Interstate Common Line Support fund to be effective July 2002.
Interactive cannot predict the effects of the 1996 Act state legislative
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 subsidies. However, 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. Although the
1996 Act reaffirmed the Federal policy of maintaining universal telephony
service at fair and reasonable rates, the 1996 Act and related proceedings also
promote competition and USF portability. 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.
Competition. All of Interactive's current telephone companies are monopoly
wireline providers in their respective area for local telephone exchange
service, except to a very limited extent in Iowa, but there can be no assurance
that this will continue. 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, 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. See Item 2. Properties
B. Cable Television/Broadcasting
Cable Television
It is part of Interactive's strategy to own cable television systems,
particularly in markets where Interactive is the telephone operator and adjacent
areas.
CLR Video, L.L.C. - CLR Video, L.L.C., a 98% owned subsidiary of Interactive, is
a provider of cable television in northeast Kansas with approximately 2,800
subscribers. During 2001, Interactive acquired 40% in CLR by distributing to its
two previous partners their respective 20% ownership in exchange for net assets
of CLR and transferred its entire interest to Lynch Telephone Corporation VI.
Broadcasting
Station WHBF-TV - Lynch Entertainment, L.L.C. ("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.
C. Personal Communications and Other Wireless Services.
In February 2001, Interactive spun off its 49.9% interest in Sunshine PCS
Corporation ("Sunshine") to its shareholders. Sunshine PCS Corporation succeeded
by merger to the assets and liabilities of Fortunet Communications, L.P.
Sunshine holds 15 MHz PCS licenses in Tallahassee, Panama City and Ocala,
Florida. Interactive currently holds $16.1 million of 9% (payable in kind)
subordinated debt of Sunshine, 10,000 shares of 7% preferred stock of Sunshine
(payable in kind through February 2006, and in cash thereafter) with a
liquidation value of $10.0 million, warrants expiring February, 2006 to purchase
4,300,000 shares of Class A Common Stock of Sunshine at $0.75 per share, which
represents approximately 43% of the common equity on a fully diluted basis. In
addition, Interactive owns 235,294 shares of Sunshine's Class A Common Stock,
which are held in escrow for the benefit of Cascade Investment LLC in the event
Cascade converts any part of the Convertible Notes into Interactive common
stock, in which case Cascade would receive an equal number of shares of
Sunshine's Class A Common Stock from such escrow. The Company's total book basis
in its Sunshine investment is $3.2 million. In February 2002, Sunshine issued
rights to its shareholders to purchase up to 1,531,593 shares of its Class A
Common Stock at a price of 1.00 per share. To date, Interactive has subscribed
for 58,824 shares of Class A Common Stock by exercising its rights in respect of
235,294 shares of Sunshine, which Interactive holds in escrow. Taking into
account the warrants, the shares held in escrow and the subscription pursuant to
the rights offering, Interactive beneficially owns 43.8% of the outstanding
Class A Common Stock of Sunshine and 61.9% of the total outstanding shares of
Sunshine. In September 2001, Sunshine met the FCC requirement that it provide
service coverage to at least one-quarter of the population in its licensed
areas. However, Sunshine does not presently have the funds necessary to fully
build out the system necessary to provide commercial operations, which it
estimates would cost between $20 and $50 million; moreover, obtaining financing
from third parties may be difficult, because of Sunshine's lack of operating
history and the substantial indebtedness that it has incurred to acquire its
licenses. Sunshine has disclosed that it would consider selling its licenses or
entering into a joint venture with a company that provides service to a nearby
area and then developing our licenses together. However, Sunshine has not yet
adopted a business plan and there can be no assurance of Sunshine's ability to
achieve any of its potential objectives. Moreover, because Sunshine has incurred
losses since its inception and has not yet determined how to finance its
operations, the latest report of its independent auditors contains an
explanatory paragraph, which expresses substantial doubt as to Sunshine's
ability to continue as a going concern.
Another subsidiary of Interactive, Lynch PCS Corporation G ("LPCSG") holds a 10
MHz PCS license for the Basic Trading Area (BTA) covering Las Cruces, New
Mexico. Las Cruces is the principal city in the BTA, which covers a population
of approximately 197,166 (as of the 1990 census). LPCSG expects to build out the
license sufficiently to meet FCC requirement that it provide service coverage to
at least one-quarter of the population in this BTA by the end of April 2002.
As part of the acquisition of Central Utah Telephone Company by Interactive in
June 2001, Interactive acquired Central Telecom Services, LLC, a related entity
that has a contractual right to acquire 7.5 MHz of a 10 MHz PCS license in the
Logan, Utah, BTA, which has a population of approximately 102,702. Central
Telecom Services believes that such license has been build out sufficiently to
meet the FCC requirement that service coverage be available to at least
one-quarter of the population in this BTA. Interactive intends to donate 20% of
the net equity sales proceeds from any sale of the Logan license to the Church
of Jesus Christ of Latter Day Saints.
In addition, Central Scott has a 10 MHz PCS License for its wireline territory
covering a population of 11,470.
At December 31, 2001, 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 413,000, of which Interactive's proportionate interest is
approximately 57,000. In March 2002, Interactive sold its interest in New Mexico
RSA 1 for $5.5 million to Verizon Wireless, and in connection therewith prepaid
certain outstanding indebtedness to Verizon. The Company expects to report a
pre-tax gain of $4.9 million in the first quarter of 2002. Interactive owned
approximately 20.8% of New Mexico RSA 1, which had approximately 10,000
customers at December 31, 2001.
Central Scott is also an approximately 14% minority owner of an entity that has
a 10 MHz PCS license for portions of Clinton and Jackson Counties in Iowa, with
a total population at December 31, 2001 of 68,470, of which Interactive's
proportionate share is 9,852.
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 with BCK\Rivgam L.L.C. in which GFI has a 49.9%
equity interest which won licenses in the FCC's Local Multipoint Distribution
Services ("LMDS") Auction, which ended on March 25, 1998, received 5% of the net
profits of BCK\Rivgam (after an assumed cost of capital). BCK/Rivgam won three
licenses covering a population of 1.3 million with an aggregate cost of $6.1
million. Betapage Communications, L.L.C., a 49.9% owned limited liability
company, was a winning bidder in the FCC auction for 929 MHz paging licenses,
which was conducted in 2000. Betapage won 24 paging licenses covering a
population of 76.7 million at a cost of approximately $77,000. Interactive's
subsidiary also has the right to receive a fee equal to 20% of the realized net
profits of Betapage (after an assumed cost of capital). While no impairment
reserve is required for investment in these licenses, management would caution
that the utilization of this spectrum is still in the development stage and
there are a limited number of likely purchasers.
Another subsidiary of Interactive is a 49.9% owner of PTPMS Communications,
L.L.C. ("PTPMS"), which was a winning bidder in the FCC auction of licenses for
fixed point-to-point microwave services, which was conducted in 2000. PTPMS won
22 licenses covering a population of 27.6 million for an aggregate cost of $1.5
million. Interactive's subsidiary has loaned PTPMS approximately $1.4 million.
Interactive's subsidiary also has the right to receive a fee equal to 20% of the
realized net profits of PTPMS (after an assumed cost of capital).
Another subsidiary of Interactive is a 49.9% owner of PTPMS Communications II,
L.L.C ("PTPMS II"), which was a winning bidder in the FCC auction of licenses
for 700 MHz Guard Band spectrum for wireless data transmission and wireless
Internet services, which was conducted in 2000. PTPMS II won three licenses
covering a population of 6.4 million in BTAs including the cities of Buffalo,
NY, Des Moines-Quad-Cities, IA and El Paso, TX, at an aggregate cost of
approximately $6.3 million. Interactive has loaned PTPMS II approximately $6.1
million, $5.0 million of which was loaned in 2001. Interactive's subsidiary has
the right to receive a fee equal to 20% of the realized net profits of PTPMS II
(after an assumed cost of capital).
Another subsidiary of Interactive is an approximate 10% owner of Theta
Communications, L.L.C., which won a 10 MHz PCS license for Gainesville, Florida
in the FCC's reauction of PCS licenses, which ended on January 26, 2001. The
cost of the license was approximately $4 million. Interactive's subsidiary has
committed to fund a portion (an additional $0.3 million) of such license cost
and to receive a 5% realized net profits fee (after an assumed cost of capital).
Interactive expects to continue to participate in the spectrum auctions being
conducted by the FCC.
In addition to the build out requirements for PCS licenses, FCC rules impose
build-out requirements for WCS, LMDS, paging licenses, point-to-point microwave
services and 700 MHz (guard band). There are also substantial restrictions on
the transfer of control of PCS licenses, WCS licenses, LMDS, paging,
point-to-point microwave services and 700 MHz (guard band) licenses.
There are many risks relating to PCS and other FCC wireless licenses including
without limitation, the high cost of PCS and certain other 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 companies 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 can be no assurance that any
licenses granted to Sunshine, or other entities in which subsidiaries of
Interactive have interests, can be successfully sold or financed or developed,
thereby allowing Interactive's subsidiaries to recover their debt and equity
investments.
II. SPINNAKER STOCK
Interactive owns 1,000,000 shares of Spinnaker Industries, Inc. common stock.
Spinnaker is a 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. As described in the Notes to the accompanying
financial statements, Interactive accounts for this investment under the
provision of Statement of Financial Accounting Standards No. 115 "Accounting for
Certain Investments in Debt and Equity Securities." Under the provision of this
standard, Interactive records this investment at its publicly traded market
price at the end of each accounting period and records the change in unrealized
gain (loss) in that period's comprehensive income. In addition, under the
provisions of this statement, if the quoted market indicated by that valuation
is below Interactive's basis, management is required to consider if the decline
in value is other than temporary and, if so determined, write down the
investment to its publicly traded value by recording the loss in the Statement
of Operations. As of December 31, 2000, the basis of the Spinnaker shares was
$3.2 million, or $3.19 per share. On November 13, 2001, Spinnaker announced that
it had commenced voluntary proceedings under Chapter 11 of the U.S. Bankruptcy
Code for the purpose of facilitating and accelerating its financial
restructuring. Spinnaker also announced that is had reached agreement, subject
to Bankruptcy Court approval, with its existing lenders to provide up to $30
million in debtor-in possession financing, which Spinnaker believes will allow
it to continue operating its business in the ordinary and customary manner. As a
result of Spinnaker's bankruptcy filing, Interactive believes that the decline
on quoted value of Spinnakers's stock is not temporary and, accordingly, has
recorded a loss of $3.2 million during the year ended December 31, 2001, to
write down its investment in Spinnaker to $0 at December 31, 2001.
For further information on Spinnaker, reference is made to Spinnaker's filings
with the Securities and Exchange Commission.
III. 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 their 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 and other wireless communication
licenses held by companies in which Interactive's subsidiaries have investments,
including the PCS licenses for Las Cruces, New Mexico, Logan, Utah, and portions
of Iowa as described above in more detail.
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.
No portion of the business of Interactive is regarded as seasonal.
Interactive does not believe that its multimedia business is dependent on any
single customer of local telephone service. Most local exchange carriers,
including Interactive's, received a significant amount of revenues in the form
of access fees from long distance companies.
Interactive had a total of approximately 328 employees at December 31, 2001,
compared to approximately 280 employees at December 31, 2000.
IV. 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 2002
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 59
1999); Vice Chairman (and from 1986 to August 2001 Chairman
and Chief Executive Officer) of Lynch Corporation;
Chairman, Chief Executive Officer, Chief Investment Officer
and a director of Gabelli Asset Management Inc. and its
predecessors (since November 1976) (and in connection with
those responsibilities, he serves as director or trustee
and/or an officer of registered investment companies
managed by subsidiaries of Gabelli Asset Management);
Chairman and Chief Executive Officer of Gabelli Group
Capital Partners, Inc., a private company.
Robert E. Dolan Chief Financial Officer and Controller (since September 50
1999); Chief Financial Officer (1992-2000) and Controller
(1990-2000) of Lynch Corporation.
John Fikre Vice President--Corporate Development, General Counsel and 37
Secretary (since August 2001); Associate, Willkie Farr &
Gallagher (since August 1994).
The executive officers of the Registrant are elected annually by the Board of
Directors at its 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 approximately 3,400 square feet of office space from an
affiliate of its Chairman for its executive offices in Rye, New York.
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 one building comprising a total of
6,480 square feet housing its administrative offices and certain storage
facilities and another building comprising 216 square feet, which houses core
network equipment. 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") and the National Bank for Co-Operatives
("Co-Bank").
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 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 1,490 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 340 miles of copper cable and 33 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 is located in Holton, Kansas and a 3,000 square
feet garage warehouse facility is 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 1,213 miles of copper cable and 198 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 six locations 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 five other properties, including a service garage, a
paging tower site, a small central office housing switching equipment, sales and
service center in Jamestown, New York, and one rental property in Ashville, New
York. Dunkirk & Fredonia also owns 362 miles of copper telephone cable and 54
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 353
miles of copper cable and 24.09 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.I.B. Cable Television.
Central Utah Telephone, Inc., and its subsidiaries own a total of 8.25 acres at
sixteen sites and have an additional 1.12 acres at fourteen sites, which are
under leases, permits or easements. These sites are located in the central,
northeastern and mid-western areas of Utah. Central Utah Telephone's principal
operating facilities are located in Fairview, Utah, where it owns a commercial
office and central office building containing 5,200 square feet. In addition it
has 720 square feet of office space, 1,080 square feet of warehouse space, 3,025
square feet of vehicle maintenance facility, 4,252 square feet of protective
cover, 1,584 square feet of leased corporate office facility and 2 rental homes.
Central Utah Telephone owns smaller facilities used mainly for housing central
office switching equipment with a total of 9,405 square feet in 25 various
locations. In addition, Central Utah Telephone owns 820 miles of copper cable
and 151 miles of fiber optic cable running through rights-of-way within its
6,867 square mile service area. All of Central Utah Telephone's properties
described herein are encumbered under mortgages held by the RUS and CoBank.
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
Interactive is a party to ordinary routine litigation incidental to its
business. Based on information currently available, Interactive believes that
none of this ordinary routine litigation, either individually or in the
aggregate, will have a material effect on its business.
Additionally, Interactive and several other parties, including our Chief
Executive Officer, and Fortunet Communications, L.P., which was Sunshine PCS
Corporation's predecessor-in-interest, have been named as defendants in a
lawsuit brought under the so-called "qui tam" provisions of the federal False
Claims Act in the United States District Court for the District of Columbia. The
complaint was filed under seal with the court on February 14, 2001. At the
initiative of one of the defendants, the seal was lifted on January 11, 2002.
Under the False Claims Act, a private plaintiff, termed a "relator," may file a
civil action on the U.S. government's behalf against another party for violation
of the statute. In return, the relator receives a statutory bounty from the
government's litigation proceeds if he is successful.
The relator is this lawsuit is R.C. Taylor III. The main allegation in the case
is that the defendants participated in the creation of "sham" bidding entities
that allegedly defrauded the federal Treasury by improperly participating in
certain Federal Communications Commission spectrum auctions restricted to small
businesses, as well as obtaining bidding credits in other spectrum auctions
allocated to "small" and "very small" businesses. The lawsuit seeks to recover
an unspecified amount of damages, which would be subject to mandatory trebling
under the statute.
Interactive strongly believes that this lawsuit is completely without merit, and
intends to defend the suit vigorously. The U.S. Department of Justice has
notified the court that it has declined to intervene in the case. Nevertheless,
we cannot predict the ultimate outcome of the litigation, nor can we predict the
effect that the lawsuit or its outcome will have on our business or plan of
operation. The defendants have yet to be formally served with the complaint.
ITEM 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 for the last two years are as follows
adjusted for the two-for-one stock split which occurred on September 11, 2000:
2001
Three Months Ended
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
High 48.25 63.01 73.50 69.00
Low 34.50 40.00 48.03 43.50
2000
Three Months Ended
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
High 66.00 64.00 56.00 57.00
Low 49.00 46.00 45.00 43.00
At March 18, 2002, Interactive had 864 shareholders of record and the closing
price of our Common Stock was $40.25.
Neither Interactive nor Lynch Corporation, the company from which Interactive
was spun off, has 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. Current and future financings may limit or
prohibit the payment of dividends.
ITEM 6. SELECTED FINANCIAL DATA
LYNCH INTERACTIVE CORPORATION
SELECTED FINANCIAL DATA
(In Thousands, Except Per Share Data)
Years Ended December 31, (a)
--------------------------------------------------------------
1997 1998 1999 2000 2001
----------- ------------ ------------ ------------ -----------
Revenues ............................................. $ 47,908 $ 54,622 $ 59,011 $ 66,983 $ 79,352
Operating profit (b) ................................. 10,273 14,650 12,299 15,331 19,985
Net financing activities (c) ......................... (7,189) (7,656) (7,732) (8,639) (10,142)
Impairment of investment in Spinnaker Industries, Inc. -- -- -- -- (3,194)
Reserve for impairment of investment in PCS
license holders (d) ................................ (7,024) -- (15,406) -- --
Gain on sale of subsidiary stock and other
assets (e) ......................................... 260 2,709 -- 4,187 --
--------- --------- --------- --------- ---------
Income (loss) before income taxes, minority
interests, extraordinary item and
operations of Morgan ............................... (3,680) 9,703 (10,839) 10,879 6,649
(Provision) benefit for income taxes ................. 836 (4,453) 2,478 (4,971) (3,454)
Minority interests ................................... (504) (763) (686) (877) (661)
--------- --------- --------- --------- ---------
Income (loss) from continuing operations before
extraordinary item and operations of Morgan ...... (3,348) 4,487 (9,047) 5,031 2,534
Extraordinary item (f) .............................. -- -- (160) -- --
(Loss) from operations of Morgan
to be distributed to shareholders (j) .............. 69 442 (9) (2,666) (1,386)
--------- --------- --------- --------- ---------
Net income (loss) .................................. $ (3,279) $ 4,929 $ (9,216) $ 2,365 $ 1,148
========= ========= ========= ========= =========
Basic and diluted earnings
Per common share (g) (h)
Income (loss) from continuing operations before
extraordinary item and operations of Morgan ...... $ (1.18) $ 1.58 $ (3.21) $ 1.78 $ 0.90
Income (loss) from operations of Morgan
to be distributed to shareholders (j) ............ $ 0.02 $ 0.16 $ (0.00) $ (0.94) $ (0.49)
Net income (loss) .................................. $ (1.16) $ 1.74 $ (3.27) $ 0.84 $ 0.41
Cash, securities and short-term investments .......... $ 27,663 $ 26,498 $ 29,094 $ 26,900 $ 31,233
Total assets ......................................... $ 219,897 $ 212,705 $ 221,705 $ 217,742 $ 256,350
Long-term debt ....................................... $ 131,687 $ 126,183 $ 164,736 $ 162,304 $ 193,202
Shareholders' equity (i) ............................. $ 26,693 $ 32,285 $ 20,211 $ 19,391 $ 19,734
(a) Includes results of Upper Peninsula Telephone Company from March 18, 1997,
Central Scott Telephone Company from July 16, 1999 and Central Utah
Telephone Company from June 23, 2001, their respective dates of
acquisition.
(b) Operating profit is sales and revenues less operating expenses, which
excludes investment income, interest expense, equity in earnings of
affiliated companies, reserve for impairment in PCS license holders in 1997
and 1999, gains on sales of subsidiary stock and other assets, minority
interests and taxes, and extraordinary items and operations of Morgan.
(c) Consists of investment income, interest expense and equity in earnings of
affiliated companies.
(d) See Note 4 "Wireless Communications Services" in the Company's consolidated
financial statements.
(e) See Note 4 "Wireless Communications Services" in the Company's consolidated
financial statements.
(f) Loss from Early Extinguishment of Debt, Net of Tax Benefit of $105
(g) Based on weighted average number of common shares outstanding.
(h) Adjusted to reflect a 2 for 1 stock split which occurred on September 11,
2000.
(i) No cash dividends have been declared over the period.
(j) Net of income tax and minority interest.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This discussion should be read together with the Consolidated Financial
Statements of Interactive and the notes thereto included elsewhere in this
Annual Report.
RESULTS OF OPERATIONS
Year 2001 compared to 2000
Overview
In January 2002, Interactive spun off its investment in The Morgan Group, Inc.
("Morgan"), its only services subsidiary, via a tax-free dividend to its
shareholders of the stock of Morgan Group Holding Co., a corporation that was
formed to serve as a holding company for Interactive's controlling interest in
Morgan. Morgan Group Holding Co. is now a public company. Accordingly, the
amounts for Morgan are reflected on a one-line basis in the consolidated
financial statements as of December 31, 2001, and for the year then ended as "to
be distributed to shareholders." Similarly, the prior years' financial
statements have been restated to be comparable with the current year's
presentations.
The narratives below reflect these changes in reporting and restatements of
prior periods.
Revenues
2001 total revenues were $79.3 million, an increase of $12.3 million, or 18.4%,
from the $67.0 million recorded in 2000. Revenues grew primarily due to the
recognition, in the third quarter of 2001, of an administrative fee of $2.8
million; the acquisition of Central Utah Telephone Company, Inc. and its
subsidiaries, and Central Telecom Services, L.L.C., a related entity which were
acquired on June 23, 2001, which combined contributed $4.8 million in revenues
and, to a lesser extent, the growth in both regulated telecommunications
services and provisions of non-traditional telephone services such as: Internet,
long distance service and competitive local exchange carrier and the acquisition
of American Alarm on November 30, 2001. During the third quarter of 2001, the
Company recorded an administration fee of $2.8 million for services provided to
a related entity in a Federal Communication Commission auction for spectrum to
be used for the provision of personal communications services. The auction was
conducted in 1999 and the fee was based on the entity's gain on the sale of
licenses acquired.
EBITDA
Earnings before interest, taxes, depreciation and amortization ("EBITDA")
increased to $38.3 million in 2001 from $31.0 million in 2000, an increase of
$7.3 million, or 23.3%. EBITDA is presented because it is widely accepted
financial indicator of value and ability to incur and service debt. EBITDA is
not a substitute for operating income, see below, or cash flows from operating
activities, $24.3 million and $13.6 million for the years ended December 31,
2001 and 2000 respectively, in accordance with generally accepted accounting
principles. Of the $7.3 million increase in EBITDA, $2.6 million of the increase
was due to the acquisition of Central Utah Telephone Company. In addition,
during 2001, the Company recorded $2.8 million of administrative fee income. The
remaining increase was primarily due to the increase in regulated operations and
reduced losses by the Company's CLEC operations.
Operating Profit
Operating profit for 2001 increased to $19.9 million from $15.3 million reported
for 2000, an increase of $4.6 million. This increase in operating profits is
principally attributable to the inclusion of the results of operations of
Central Utah from the date of acquisition and the $2.8 million administrative
fee.
Other Income (Expense)
Investment income was approximately $2.9 million in 2001 compared to investment
income of $3.3 million in 2000. The lower level of investable securities was the
primary cause of the decrease in investment income.
Interest expense increased by $0.4 million to $13.9 million in 2001 compared to
$13.5 million in 2000. The increase is due primarily to the acquisition of
Central Utah on June 23, 2001 ($0.9 million) offset by higher debt levels at
lower average interest rates on the variable debt, the restructuring of the
Company's Convertible Note discussed below, and the absence of the amortization
of the put premium associated with the Company's Convertible Note for the
duration of 2000.
During 2001, the Company recorded approximately $0.9 million of equity in
earnings of affiliated entities compared to $1.7 million in 2000. The decrease
of $0.8 million was primarily due to a net gain of $0.7 million in 2000 on the
sale of cellular towers at two of the Registrant's cellular telephone company
investments.
On February 25, 2000, Omnipoint acquired through a merger, all of the
outstanding shares of East/West Communications, Inc. At the time of the merger,
Interactive held a redeemable preferred stock of East/West Communications, Inc.
with a liquidation value of $8.7 million, including payment in kind of dividends
to date. In accordance with its terms, the preferred stock was redeemed at its
liquidation value and as a result, Registrant recorded a pre-tax gain of $4.2
million in the year ended December 31, 2000.
The Company owns 1,000,000 shares of Spinnaker Industries, Inc. common stock. As
described in the Notes to the accompanying financial statements, the Company
accounts for this investment under the provision of Statement of Financial
Accounting Standards No. 115 "Investment and Debt and Equity Securities." Under
the provision of this standard, the Company records this investment at its
publicly traded market price at the end of each accounting period and records
the change in unrealized gains (loss) in that period's comprehensive income. In
addition, under the provisions of this statement, if the quoted market indicated
by that valuation is below the Company's basis, management is required to
consider if the decline in value is other than temporary and, if so determined,
write down the investment to its publicly traded value by recording the loss in
the Statement of Operations. As of December 31, 2000, the basis of the Spinnaker
shares was $3.2 million, or $3.19 per share. At December 31, 2001, the quoted
market price of these shares was $0 per share. During the year ended December
31, 2000, Spinnaker recorded a loss from continuing operations of $17.7 million.
Losses of $5.2 million and $2.8 million were recorded for the years ended
December 31, 1999 and 1998, respectively. In the nine months ended September 30,
2001, Spinnaker recorded a net loss of $53.9 million, including $41.2 million of
restructuring and asset impairment reserves related to the close of its
Spinnaker Coating facility in Westbrook, Maine. On October 15, 2001, Spinnaker
Industries announced that it would not be making that day's scheduled interest
payment with regard to its 10 3/4% Senior Notes and it was actively engaged in
discussion with a majority of the holders of those notes for the purpose of
negotiating a consensual restructuring of its indebtedness.
On November 13, 2001, Spinnaker announced that it has commenced voluntary
proceedings under Chapter 11 of the U.S. Bankruptcy Code for the purpose of
facilitating and accelerating its financial restructuring. Spinnaker also
announced that it had reached agreement, subject to Bankruptcy Court approval,
with its existing lenders to provide up to $30 million in debtor-in possession
financing, which Spinnaker believes will allow it to continue operating its
business in the ordinary and customary manner.
On January 9, 2002, both classes of Spinnaker's stock were de-listed from the
American Stock Exchange. The stock is now traded on the over the counter
"bulletin board" (pink sheets). There has been no quoted price since the stock
was de-listed in 2002. The Company believes that the decline in quoted value is
other than temporary and, accordingly, has recorded a loss of $3.2 million
during 2001 to write down its investment in Spinnaker to $0 at December 31,
2001.
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards ("SFAS") No. 141, Business Combinations, and No.
142, Goodwill and Other Intangible Assets, effective for fiscal years beginning
after December 15, 2001. Under the new rules, goodwill and intangible assets
deemed to have indefinite lives will no longer be amortized but will be subject
to annual impairment tests in accordance with the Statements. Other intangible
assets will continue to be amortized over their useful lives. The Company has
not yet completed its analysis on how the new rules will affect its accounting
for goodwill and other intangible assets, for which, implementation is required
beginning in the first quarter for 2002. Based on a preliminary analysis,
application of the nonamortization provisions of SFAS No. 142 would have
resulted in an increase in income from continuing operations of $2.2 million,
$0.74 per share, for the year ended December 31, 2000 and $2.4 million, $0.86
per share, for the year ended December 31, 2001 and is expected to increase Net
income in 2002 by $2.9 million. The Company expects to perform the first of the
required impairment tests of goodwill and indefinite lived intangible assets as
of January 1, 2002 in the first quarter of 2002. Any impairment charge resulting
from these transitional impairment tests will be reflected as the cumulative
effect of a change in accounting principle in the first quarter of 2002. The
Company has not yet determined what the effect of these tests will be on the
earnings and financial position of the Company.
In October 2001, the FASB issued Statement of Financial Accounting Standard No.
144, Accounting for Impairment or Disposal of Long-Lived Assets, effective for
fiscal years beginning after December 15, 2001. The FASB's new rules on asset
impairment supersede FASB Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and provide a
single accounting model for long-lived assts to be disposed of. Although
retaining many of the fundamental recognition and measurement provision of FASB
Statement 121, the new rules significantly change the criteria that would have
to be met to classify an asset as held-for-sale. The new rules also will
supersede the provisions of APB opinion 30 with regard to reporting the effects
of a disposal of a segment of a business and will require expected future
operating losses from discontinued operations to be displayed in discontinued
operations in the periods in which the losses are incurred (rather as of the
measurement date as presently required by APB 30). In addition, more
dispositions will qualify for discontinued operations treatment in the income
statement. The Company has not yet determined what the effect of FASB 144 will
be on the earnings and financial position of the Company.
Tax Provision
The 2001 tax provision of $3.5 million includes federal, state and local taxes
and represents an effective rate of 51.9% versus 45.7% effective tax rate of
$5.0 million in 2000. The causes of the difference from the federal statutory
rate are principally the effect of state income taxes, including the effect of
earnings and losses attributable to different state jurisdictions, and the
amortization of non-deductible goodwill. Beginning on January 1, 2002, the
Company will no longer be amortizing goodwill in its results of operations. As a
result, the Company's effective tax rate will be lower in the future.
Minority Interest
Minority interest was a reduction to earnings of $0.7 million in 2001 and $0.9
million in 2000. The reduction in net earnings in 2001 at telephone operations
in which there is a minority ownership was the cause of the variance between
years.
Net Income
Income from continuing operations was $2.5 million ($0.90 per diluted share) in
2001 compared to income from continuing operations of $5.0 million ($1.78 per
diluted share) in 2000, net income for the year ended December 31, 2001 was $1.1
million, or $0.41 per diluted share, as compared to a net income of $2.4
million, or $0.84 per diluted share for the year ended December 31, 2000. In
2001, the recording of the administrative fee noted above and the results of
Central Utah were offset by lower investment income, higher interest expense and
the impairment of the Spinnaker shares. The most significant item affecting the
swing in earnings was the gain on the redemption of the East/West preferred
stock ($2.5 million, net of income tax provision) in 2000.
Year 2000 compared to 1999
Overview
Effective with the Spin off of Interactive by Lynch Corporation on September 1,
1999, Interactive owns the multimedia and services businesses previously owned
by Lynch Corporation, as well as 1 million shares of Spinnaker Industries, Inc.
Since the Spin off, Interactive has operated as an independent, publicly traded
company. As such, the consolidated Interactive financial statements for the
periods prior to the spin-off may not be indicative of Interactive's future
performance nor do they necessarily reflect what the financial position and
results of operations of Interactive would have been if it had operated as a
separate stand-alone entity during the periods covered.
The narrative below has been restated to reflect the distribution of Morgan to
shareholders.
Revenues
2000 total revenues were $67.0 million, an increase of $8.0 million, or 13.5%,
from the $59.0 million recorded in 1999, primarily due to the acquisition of
Central Scott Telephone Company, which was acquired on July 16, 1999 ($3.0
million effect) and the growth in both regulated telecommunications services as
well as the provision of non-traditional revenue services as: Internet, long
distance service and competitive local exchange carrier.
EBITDA
Earnings before interest, taxes, depreciation and amortization ("EBITDA")
increased to $31.0 million in 2000 from $26.3 million in 1999, an increase of
$4.7 million, or 17.8%. For purposes of this discussion, EBITDA does not include
SARs expense (see below). 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, see below, or cash flows from operating
activities, $13.6 million and $16.3 million for the years ended December 31,
2000 and 1999, respectively, in accordance with generally accepted accounting
principles. EBITDA for the multimedia segment increased by $3.2 million, or
10.2% to $34.7 million from $31.5 million in 1999. $1.7 million of this increase
was due to the acquisition of Central Scott Telephone Company. The remaining
increase was primarily due to the increases in regulated operations offset by
losses in the start-up of the CLEC operation ($0.7 million).
Operating Profit
Operating profits for 2000 increased to $15.3 million from $12.3 million
reported for 1999, an increase of $3.0 million. This increase in operating
profits is principally attributable to the absence of SAR expense during 2000.
In 1999, the company reported a SAR expense of $2.9 million, see description
below. The absence of the SAR expense in 2000 coupled with the increase of $0.3
million from the multimedia segment, resulting from the acquisition of Central
Scott Telephone Company, accounted for the operating profit increase.
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 $32 to $43
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 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
million) on the basis of the relative market value of December 31, 1999.
Other Income (Expense)
Investment income was approximately $3.3 million compared to $2.0 million in
1999. Realized gains on sales of "available-for-sale-securities," was the
primary cause of the increase.
Interest expense increased by $2.8 million to $13.6 million in 2000 compared to
$10.8 million in 1999. The increase is due primarily to the acquisition of
Central Scott Telephone Company on July 16, 1999 ($0.8 million) and the issuance
by the Company of a $25.0 million Convertible Note in December 1999 ($2.0
million) including interest paid and accretion of option to sell premium (see
Note 5 to the Consolidated Financial Statements).
During 2000, the Company recorded approximately $1.7 million of equity in
earnings of affiliated entities primarily due to operating income from its New
Mexico cellular RSA interests, including a gain of $0.7 million on the sale of
certain cellular towers.
On February 25, 2000, Omnipoint acquired through a merger, all of the
outstanding shares of East/West Communications, Inc. At the time of the merger,
Interactive held a redeemable preferred stock of East/West Communications, Inc.
with a liquidation value of $8.7 million, including payment in kind of dividends
to date. In accordance with its terms, the preferred stock was redeemed at its
liquidation value and as a result, the Registrant recorded a pre-tax gain of
$4.2 million in the year ended December 31, 2000.
A subsidiary of Lynch Interactive has investments in, loans to, and deferred
costs associated with a 49.9% equity ownership in Fortunet Communications, L.P.
("Fortunet"), a partnership formed to acquire, construct and operate licenses
for the provision of personal communications services ("PCS") acquired in the
FCC's C-Block PCS auction. Fortunet holds licenses to provide PCS 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 of
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. In 2001,
Interactive spun-off its 49.9% equity interest in Fortunet, but retained a note
receivable with a net book value of $3.4 million.
Tax Provision
The 2000 tax provision of $5.0 million includes federal, state and local taxes
and represents an effective rate of 45.7% versus 22.9% effective tax benefit of
$2.5 million in 1999. Differences in the effective rates are attributable to the
amortization of non-taxable goodwill and tax effect on losses of certain
subsidiaries.
Minority Interest
Minority interest was a reduction to earnings of $0.7 million in 1999 and a
reduction to earnings of $0.9 million in 2000. Increased net income at telephone
operations in which there is a minority ownership was the cause of the variance
between years.
Net Income
Income from continuing operations was $5.0 million ($1.78 per share) in 2000
compared to a loss from continuing operations of $9.0 million ($3.21 per share)
in 1999 and net income for year ended December 31, 2000 was $2.4 million, or
$0.84 per share, as compared to a net loss of $9.2 million, or $3.27 per share
for the year ended December 31, 1999. The impairment charge associated with
Fortunet was the primary item affecting the net loss in 1999.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2001, Lynch Interactive Corporation has current assets of
$59.1 million and current liabilities of $67.9 million. Working capital was
therefore a negative $8.8 million as compared to $6.8 million at December 31,
2000. The debt restructurings discussed below, the acquisition of Central Utah
Telephone Company and related entities, increased capital expenditures and the
additional investment in Morgan were the primary causes of the change in working
capital.
Capital expenditures were $20.5 million in 2001 and $17.2 million in 2000.
Anticipated capital expenditures in 2002 are approximately $25.0 million.
On December 12, 1999, Interactive completed the private placement of a $25
million 6% five-year note, convertible into Interactive common stock at $42.50
per share (adjusted for subsequent 2 to 1 stock split). At that time, to assist
the Company with the private placement to Cascade Investment LLC ("Cascade"),
the Chairman and CEO of Interactive, agreed to give the acquirer of the note, a
one-time option to sell the note to him at 105% of the principal amount thereof.
The exercise period was from November 15, 2000 to December 1, 2000. This option
to sell is secured by a bank letter of credit, which is secured by the
Chairman's escrow of securities. The Company agreed to reimburse the Chairman
for the cost of the letter of credit (approximately $160,000) plus his legal
fees in connection with the option to sell agreement and obtaining the letter of
credit.
On January 16, 2001, the above option to sell agreement was amended. As amended,
Cascade had the right to sell up to $15 million of the notes back to the
Chairman at any time prior to January 31, 2001 and the right to sell the
remaining $10 million of the note between November 15 and December 1, 2002. The
option to sell is at 105% of the principal amount of Convertible Notes plus
accrued and unpaid interest. As a condition to modifying and extending the
option to sell, the Company entered into an agreement in December 2000, with its
Chairman whereby it will pay for and acquire, on the same terms and conditions,
any portion of the Convertible Notes sold by Cascade under this option. During
January 2001, Cascade exercised this option with regard to the $15 million of
Convertible Notes and pursuant to the agreement between the Company and
Chairman, on February 14, 2001, the Company transferred $15.9 million to
Cascade, including the 5% premium plus accrued and unpaid interest in exchange
for $15.0 million of notes held by Cascade.
The option to sell the remaining $10 million is secured by a collateralized
letter of credit in which the collateral is provided by an affiliate of the
Chairman. The Company has agreed to pay all legal fees, letter of credit fees
and a 10% per annum collateral fee on the amount of collateral provided, $10.5
million. The Company can replace the collateral at any time and the collateral
fee would be eliminated from thereafter. As of December 31, 2001, the Company
has replaced $7.5 million of the escrow collateral securing the above noted
letter of credit by segregating $7.5 million of Treasury Bills in a separate
account and pledging this account to the issuer of the letter of credit.
Subsequent to December 31, 2001, the remaining collateral of $3.0 million was
replaced by the Company. Management is currently unaware of Cascade's intention
with regard to their potential exercise of the option to sell the $10 million
but because the decision is beyond the control of management the debt has been
classified as current in the accompanying balance sheet.
At December 31, 2001, total debt was $203.5 million, an increase of $36.9
million from December 31, 2000. At December 31, 2001 there was $137.1 million of
fixed interest rate debt outstanding averaging 7% and $66.4 million of variable
interest rate debt averaging 4.8%. In January 2001, a subsidiary of the Company
borrowed $27.0 million secured by the stock of Western New Mexico Telephone
Company. The loan is to be repaid in equal monthly installments over twelve
years beginning in April 2001, bearing interest at either the bank's prime rate
or LIBOR plus 2.5%, or at the Company's option, it can be fixed for its term.
$15.9 million of the proceeds were used to acquire the Convertible Note of the
Company owned by Cascade Investment L.L.C. The stock of Western New Mexico
Telephone Company had previously been used to secure the acquisition facility,
the balance of which was $7.9 million prior to its repayment in December 2000.
As of December 31, 2001, a subsidiary of the Company was in default of a term
loan totaling $4.8 million. The subsidiary is currently restructuring their
facility and management expects to have a new facility in place with the current
lender by April 2002. If such is not accomplished, Interactive expects to be
able to refinance the subsidiary as well as other subsidiaries to generate the
funds necessary to repay the current lender.
A subsidiary of the Company has guaranteed $3.8 million of an equity investees'
total debt of $10.6 million.
The parent company of Interactive has a short-term line of credit facility,
which expires August 31, 2002, with maximum availability totaling $10.0 million
of which $7.6 million was outstanding at December 31, 2001. The Company is
pursuing various financing alternatives including renewal of the line of credit,
refinancing substantially all or individual pieces of its currently outstanding
debt, and sale of certain investments. The Company expects that this line of
credit facility will be renewed in August 2002 when it expires. 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.
In general, the long-term debt facilities at subsidiaries 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 distribution to Lynch Interactive. At December 31, 2000 and 2001,
substantially all of the subsidiaries' net assets are restricted.
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, 2001, 4,900 shares had been purchased at an
average cost of $49.03 per share. Subsequent to year-end, an additional 5,300
shares have been acquired at an average cost of $42.98 per share.
Lynch Corporation, the Company's predecessor, has not paid any cash dividends on
its common stock since 1989. The Company has not paid any cash dividends since
its inception in 1999 and 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. Further financing may limit or
prohibit the payment of dividends.
Interactive has a high degree of financial leverage. As of December 31, 2001,
the ratio of total debt to equity was 9.6 to 1. Certain subsidiaries also have
high debt to equity rations. In addition, the debt at subsidiary companies
contains restrictions on the amount of funds that can be transferred to the
respective parent of the subsidiaries.
The Company has a need for resources primarily to fund future long-term growth
initiatives. The Company considers various alternative long-term financing
sources: debt, equity, or sale of an investment asset. While management expects
to obtain adequate financing resources to enable the Company to meet its
obligations, there is no assurance that such can be readily obtained or at
reasonable costs. The Company is obligated under long-term debt provisions and
lease agreements to make certain cash payments over the term of the agreements.
The following table summarizes these contractual obligations for the periods
shown:
Payments Due by Period
(In thousands)
Less than
Total 1 year 1 - 3 years 4 - 5 years After 5 years
-------- ----------- ---------- --------- ------------
Long-term Debt (a) ............... $193,202 $ 28,126(b) $ 44,476 $ 43,703 $ 76,897
Operating Leases ................. 969 326 400 243 --
-------- ------------ -------- -------- --------
Total Contractual Cash Obligations $194,171 $ 28,452 $ 44,876 $ 43,946 $ 76,897
======== ========== ======== ======== ========
(a) Does not include interest payments on debt
(b) Contains $10 million of convertible subordinated debt due in 2004, that has
a put option that if exercised, would accelerate the debt to the last
quarter of 2002.
The company has certain financing commitments from banks and other financial
institutions that provide liquidity. The following table summarizes the
expiration of these commitments for the periods shown:
Amount of Commitment Expiration
Per Period
(In thousands)
Total Amounts Less than
Other Commercial Commitments Committed 1 year 1-3 years 4-5 years Over 5 years
--------------- --------------- ------------- ------------ ------------
Lines of Credit $14,336 $14,336 - - -
Standby Letter of Credit 10,500 10,500 - - -
Guarantees
Standby Repurchase Obligations
Other Commercial Commitments
--------------- --------------- ---------------- --------------- ---------------
Total Commercial Commitments $24,836 $24,836 - - -
=============== =============== ================ =============== ===============
On June 22, 2001, a subsidiary of the Company acquired Central Utah Telephone
Company, Inc. and its subsidiaries, a 7,000-access line telephone company
located in Utah. The Company has also acquired Central Telecom Services, LLC, a
related entity, which has certain PCS and MMDS interests and Internet, long
distance and telephone equipment businesses. The combined aggregate $15.6
million purchase price was financed primarily through the issuance of additional
debt.
The Company has initiated an effort to monetize certain of its assets, including
selling a portion or all of certain in vestment in certain of its operating
entities. These may include minority interest in network affiliated television
stations and certain telephone operations where growth opportunities are not
readily apparent. There is no assurance that all or any part of this program can
be effectuated on acceptable terms. In March 2002, the Company sold its 20.8%
interest in the New Mexico cellular property, RSA #1 To Verizon Wireless for
$5.5 million and repaid certain outstanding indebtedness to Verizon. (See Note 5
in the accompanying financial statements)
Critical Accounting Policies and Estimates
General
Interactive's discussion and analysis of its financial condition and results of
operations are based upon its consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires
Interactive to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an ongoing basis, Interactive evaluates its
estimates, including those related to revenue recognition, carrying value of its
investments in the spectrum entities and long-lived assets, purchase price
allocations, and contingencies and litigation. Interactive bases its estimates
on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Interactive believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements.
Revenue Recognition
The principal business of Interactive's telephone companies is to provide
telecommunications services. These services fall into four major categories:
local network, network access, long distance and other non-regulated
telecommunications services. Toll service to areas outside franchised telephone
service territory is furnished through switched and special access connections
with intrastate and interstate long distance networks.
Local service revenues are derived from providing local telephone exchange
services. Local service revenues are based on rates filed with various state
telephone regulatory bodies.
Revenues from long distance network services are derived from providing certain
long distance services to the Company's local exchange customers and are based
on rates filed with various state regulatory bodies.
Revenue from intrastate access is generally billed monthly in arrears based on
intrastate access rates filed with various state regulatory bodies. Interactive
recognizes revenue from intrastate access service based on an estimate of the
amounts billed to interexchange carriers in the subsequent month. Estimated
revenues are adjusted monthly as actual revenues become known.
Revenue from interstate access is derived from settlements with the National
Exchange Carrier Association ("NECA"). NECA was created by the FCC to administer
interstate access rates and revenue pooling on behalf of small local exchange
carriers who elect to participate in a pooling environment. Interstate
settlements are determined based on the various subsidiaries' cost of providing
interstate telecommunications service. Interactive recognizes interstate access
revenue based on an estimate of the current year cost of providing service.
Estimated revenue is adjusted to actual upon the completion of cost studies in
the subsequent period.
Other ancillary revenues derived from the provision of directory advertising and
billing and collection services are billed monthly based on rates under
contract.
Purchase Price Allocation
Interactive's business development strategy is to expand its existing operations
through internal growth and acquisition. From 1989 through 2001, the Company has
acquired twelve telephone companies. Significant judgments and estimates are
required to allocate the purchase price of acquisitions to the fair value of
tangible assets acquired and identifiable intangible assets and liabilities
assumed. Any excess purchase price over the above fair values is allocated to
goodwill. Additional judgments and estimates are required to determine if
identified intangible assets have finite or indefinite lives.
Depreciation and Amortization
The calculation of depreciation and amortization expense is based on the
estimated economic useful lives of the underlying property, plant and equipment
and intangible assets. Although Interactive believes it is unlikely that any
significant changes to the useful lives of its tangible or intangible assets
will occur in the near term, rapid changes in technology, the discontinuance of
accounting under SFAS No. 71 by the Company's wireline subsidiaries, or changes
in market conditions could result in revisions to such estimates that could
materially affect the carrying value of these assets and the Company's future
consolidated operating results.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to market risks relating to changes in the general level
of U.S. interest rates. Changes in interest rates affect the amount of interest
earned on the Company's cash equivalents and short-term investments
(approximately $31.2 million at December 31, 2001 and $24.8 million at December
31, 2000). 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 by borrowing on a
fixed long-term basis. 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, 2001, approximately $66.4 million, or 32.6% of Interactive's
long-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 2001 average interest rate under these
borrowings, it is estimated that Interactive's 2001 interest expense would have
changed by approximately $0.7 million. In the event of an adverse change in
interest rates, management would likely take actions to further mitigate its
exposure. However, due to the uncertainty of the actions that would be taken and
their possible effects, the analysis assumes no such actions. Further, the
analysis does not consider the effects of the change in the level of overall
economic activity that could exist in such an environment.
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 2002, 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 2002,
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 2002, 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
2002, 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 Financial
Statements of the Company are included herein:
Consolidated Balance Sheets - December 31, 2000 and 2001
Consolidated Statements of Operations - Years ended December 31,
1999, 2000, and 2001 Consolidated Statements of Shareholders'
Equity - Years ended December 31, 1999, 2000, and 2001
Consolidated Statements of Cash Flows - Years ended December 31,
1999, 2000, and 2001 Notes to Consolidated 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 52 through 54
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: There were no Current Reports on Form
8-K filed during the fourth quarter of 2001.
(c) Exhibits: The following Exhibits listed in the Exhibit Index
are filed with this Form 10-K Annual Report:
10(n) - Separation and Distribution Agreement, dated as of January
18, 2002, by and among Lynch Interactive Corporation,
Morgan Group Holding Co. and The Morgan Group, Inc.
10(o) - Employment Agreement, dated as of August 1, 2001, between
John Fikre and Lynch Interactive Corporation
21 - Subsidiaries of Registrant
24 - Powers of Attorney
99 - Report of Independent Auditors
- Report of Siepert & Co., L.L.P. on the financial statements
of Cuba City Telephone Exchange Company for the year ended
December 31, 2000 and 2001
- Report of Siepert & Co., L.L.P. on the financial statements
of Belmont Telephone Company for the year ended December 31,
2000 and 2001
- Report of Siepert & Co., L.L.P. on the financial statements
of Lynch Michigan Telephone Holding Corporation for the year
ended December 31, 2001
(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 sheets of Lynch
Interactive Corporation and subsidiaries (the "Company") as of December 31, 2000
and 2001 and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 2001. 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 financial statements of Cuba
City Telephone Exchange Company and Belmont Telephone Company, indirect wholly
owned subsidiaries of Lynch Interactive Corporation, which statements reflect
total assets of $4,149,000 in 2000 and $4,347,000 in 2001, and total revenues of
$2,070,000 in 1999, $2,076,000 in 2000, and $2,139,000 in 2001 nor the 2001
financial statements of Lynch Michigan Telephone Holding Corporation, an
indirect wholly-owned subsidiary of Lynch Interactive Corporation, which
statements reflect total assets of $33,147,000 and total revenues of $11,246,000
for the year then ended. 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, 2000 and 2001 and Lynch Michigan Holding Corporation in 2001,
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
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Lynch Interactive Corporation and
subsidiaries at December 31, 2000 and 2001, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2001, 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.
Stamford, Connecticut
March 12, 2002
LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
----------- ------------
2000 2001
----------- ------------
(In Thousands)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ...................... $ 24,834 $ 31,233
Marketable securities .......................... 2,066 --
Receivables, less allowances of $155 and
$424, respectively ............................ 7,266 9,963
Material and supplies .......................... 3,387 3,373
Prepaid expenses and other current assets ...... 2,529 1,757
Current assets of Morgan Group Holding Co.
to be distributed to shareholders ............ 11,619 12,757
--------- ---------
TOTAL CURRENT ASSETS ............................. 51,701 59,083
PROPERTY, PLANT AND EQUIPMENT:
Land ........................................... 490 840
Buildings and improvements ..................... 8,559 10,858
Machinery and equipment ........................ 151,481 182,109
--------- ---------
160,530 193,807
Accumulated Depreciation ....................... (64,961) (74,530)
--------- ---------
95,569 119,277
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS
ACQUIRED, NET .................................. 52,222 63,936
INVESTMENTS IN AND ADVANCES TO AFFILIATED ENTITIES 13,284 14,277
INVESTMENT IN SPINNAKER INDUSTRIES, INC .......... 5,250 --
OTHER ASSETS ..................................... 11,335 12,534
NON CURRENT ASSETS OF MORGAN GROUP HOLDING CO.
TO BE DISTRIBUTED TO SHAREHOLDERS .............. 11,049 10,241
--------- ---------
TOTAL ASSETS ..................................... $ 240,410 $ 279,348
========= =========
See accompanying notes.
LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
-------------------------
2000 2001
----------- -------------
(In Thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks ............................ $ 4,333 $ 10,336
Trade accounts payable ............................ 424 921
Accrued interest payable .......................... 2,504 1,579
Accrued liabilities ............................... 14,472 15,700
Current maturities of long-term debt .............. 12,365 28,126
Current liabilities of Morgan Group Holding Co.
to be distributed to shareholders ............... 10,801 11,281
--------- ---------
TOTAL CURRENT LIABILITIES ...................... 44,899 67,943
LONG-TERM DEBT ...................................... 149,939 165,076
DEFERRED INCOME TAXES ............................... 8,347 8,515
OTHER LIABILITIES ................................... 502 887
MINORITY INTEREST ................................... 5,539 6,120
NON CURRENT LIABILITIES AND MINORITY
INTERESTS OF MORGAN GROUP HOLDING CO
TO BE DISTRIBUTED TO SHAREHOLDERS ................. 7,785 6,290
COMMITMENTS AND CONTINGENCIES (Note 13)
SHAREHOLDERS' EQUITY
COMMON STOCK, $0.0001 PAR VALUE-10,000,000
SHARES AUTHORIZED; 2,824,766 ISSUED; 2,821,666
and 2,820,051 outstanding ....................... -- --
ADDITIONAL PAID-IN CAPITAL ........................ 21,404 21,406
RETAINED EARNINGS ................................. 652 1,800
ACCUMULATED OTHER COMPREHENSIVE INCOME ............ 1,495 1,542
TREASURY STOCK, 3,100 and 4,715 shares, at cost ... (152) (231)
--------- ---------
23,399 24,517
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .......... $ 240,410 $ 279,348
========= =========
See accompanying notes.
LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
----------------------------------
1999 2000 2001
-------- -------- -------
(In Thousands, except per share data)
SALES AND REVENUES ................................ $ 59,011 $ 66,983 $ 79,352
COSTS AND EXPENSES:
Multimedia cost of sales ........................ 41,671 48,477 57,019
Selling and administrative ...................... 5,041 3,175 2,348
-------- -------- --------
OPERATING PROFIT .................................. 12,299 15,331 19,985
-------- -------- --------
Other income (expense):
Investment income ............................... 2,013 3,260 2,862
Interest expense ................................ (10,802) (13,568) (13,936)
Equity in earnings of affiliated companies ...... 1,057 1,669 932
Impairment of investment in Spinnaker
Industries, Inc. .............................. -- -- (3,194)
Reserve for impairment of investment
in PCS license holders ........................ (15,406) -- --
Gain on sales of subsidiary stock
and other assets .............................. -- 4,187 --
-------- -------- --------
(23,138) (4,452) (13,336)
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES, MINORITY
INTERESTS, EXTRAORDINARY ITEM AND
OPERATIONS OF MORGAN ............................ (10,839) 10,879 6,649
(Provision) benefit for income taxes .............. 2,478 (4,971) (3,454)
Minority interests ................................ (686) (877) (661)
-------- -------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
EXTRAORDINARY ITEM AND
OPERATIONS OF MORGAN GROUP HOLDING CO
TO BE DISTRIBUTED TO SHAREHOLDERS ............. (9,047) 5,031 2,534
LOSS FROM EARLY EXTINGUISHMENT OF DEBT, NET ....... (160) -- --
LOSS FROM OPERATIONS OF MORGAN GROUP HOLDING
CO. TO BE DISTRIBUTED TO SHAREHOLDERS NET OF
TAXES $193, $2,451, $(166) AND MINORITY
INTEREST $28, $2,133, $603 ..................... (9) (2,666) (1,386)
-------- -------- --------
NET INCOME (LOSS) ................................. $ (9,216) $ 2,365 $ 1,148
======== ======== ========
Basic and diluted weighted average
shares outstanding ............................. 2,824,000 2,823,000 2,822,000
=========== ========= =========
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE:
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM
AND OPERATIONS OF MORGAN GROUP HOLDING
CO. TO BE DISTRIBUTED TO SHAREHOLDERS .......... $ (3.21) $ 1.78 $ 0.90
EXTRAORDINARY ITEM, NET .......................... (0.06) -- --
LOSS FROM OPERATIONS OF MORGAN GROUP HOLDING
CO. TO BE DISTRIBUTED TO SHAREHOLDERS .......... -- (0.94) (0.49)
----- ----- -----
NET INCOME (LOSS) ................................ $ (3.27) $ 0.84 $ 0.41
===== ===== =====
See accompanying notes.
LYNCH INTERACTIVE CORPORATION AND SUBSIDIAIRES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In Thousands, Except Share Data)
Accumulated Investments
Shares of Other By and
Common Additional Compre- Advances from
Stock Common Paid-in Retained hensive Treasury Lynch
Outstanding Stock Capital Earnings Income Stock Corporation Total
---------- ---------- ----------- ------------ ----------- ----------- -------------- ----------
Balance at December 31, 1998 .. -- $ -- $ -- $ -- $ -- $ -- $ 39,314 $ 39,314
Investment by and advances (to)
from Lynch Corporation ...... -- -- -- -- -- -- (1,980) (1,980)
Net loss for the period ....... -- -- -- -- -- -- (7,503) (7,503)
Unrealized loss on available
for sale securities (net of tax
benefit of $739) ............. -- -- -- -- -- -- (1,020) (1,020)
Comprehensive loss .......... -- -- -- -- -- -- -- (8,523)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at August 31, 1999 .... -- -- -- -- -- -- 28,811 28,811
Distribution by Lynch ......... 1,412,383 -- $ 21,404 -- $ 7,407 -- (28,811) --
Corporation
Net loss for the period ....... -- -- -- $ (1,713) -- -- -- (1,713)
Unrealized loss on available
for sale securities (net of tax
benefit of $121) .............. -- -- -- -- (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
Two-for-one stock split ....... 1,412,183 -- -- -- -- -- -- --
Net income for the period ..... -- -- -- 2,365 -- -- -- 2,365
Unrealized loss on available
for sale securities ........... -- -- -- -- (4,699) -- -- (4,699)
Reclassification adjustment ... -- -- -- -- (480) -- -- (480)
Comprehensive income ........ -- -- -- -- -- -- -- (2,814)
Adjustment relating to
acquisition ................... -- -- -- -- (566) -- -- (566)
cost
Purchase of treasury stock .... (2,700) -- -- -- -- (132) -- (132)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 2000 .. 2,821,666 0 21,404 652 1,495 (152) 0 23,399
Net income for the period ..... -- -- -- 1,148 -- -- -- 1,148
Unrealized loss on available
for sale securities ........... -- -- -- -- (1,688) -- -- (1,688)
Reclassification adjustment.... -- -- -- -- 1,735 -- -- 1,735
Comprehensive income ...... -- -- -- -- -- -- -- 1,195
Issuance of Treasury Shares ... 185 -- 2 -- -- 9 -- 11
Purchase of Treasury Stock .... (1,800) -- -- -- -- (88) -- (88)
---------- ---------- --------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 2001 .. 2,820,051 $ 0 $ 21,406 $ 1,800 $ 1,542 $ (231) $ 0 $ 24,517
========== ========= ========= ========== ========= ========== ========== ==========
See accompanying notes.
LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
----------------------------------
1999 2000 2001
----------------------------------
(In Thousands)
OPERATING ACTIVITIES
Net income (loss) ................................... $ (9,216) $ 2,365 $ 1,148
Depreciation and amortization ....................... 14,131 15,797 18,283
Unrealized gain on trading securities ............... (620) (479) --
Net proceeds from sale of trading securities ........ -- -- 2,066
Minority interests .................................. 686 877 661
Equity in Earnings of affiliated companies .......... (1,057) (1,669) (932)
Reserve for impairment of investment
in PCS license holders ............................ 15,406 -- --
Gain on redemption of East/West preferred stock ..... -- (4,125) --
Impairment of investment in Spinnaker
Industries, Inc. .................................. -- -- 3,194
Gain on sale of securities .......................... -- (909) (198)
Deferred income taxes ............................... (5,226) (2,101) (724)
Non-cash items and changes in operating
assets and liabilities
from operations of Morgan Group Holding Co. to
be distributed to shareholders .................... 2,511 3,539 1,032
Assets transferred in settlement
of litigation ..................................... -- -- 415
Changes in operating assets and liabilities,
net of effects of acquisitions:
Trade accounts receivable ....................... (511) (834) (1,082)
Trade accounts payable and accrued liabilities .. 1,291 2,850 (629)
Other ........................................... (1,071) (658) 1,326
Other ............................................... -- (1,034) (212)
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES ........... 16,324 13,619 24,348
-------- -------- --------
INVESTING ACTIVITIES
Acquisition (total cost less debt assumed and
cash equivalents acquired):
Central Scott Telephone Company ................. (23,985) -- --
Central Utah Telephone Company .................. -- -- (6,914)
American Alarm Company .......................... -- -- (3,085)
Investment in Personal Communications Services
Partnerships, net ................................. -- (7,988) (186)
Proceeds from redemption of East/West preferred stock -- 8,712 --
Capital expenditures ................................ (11,742) (17,208) (20,533)
Proceeds from sale of securities .................... -- 1,563 494
Cash received from liquidation of partnership ....... -- -- 550
Investing activities of operations of
Morgan Group Holding Co. to be
distributed to shareholders ....................... (839) (104) (2,718)
Other ............................................... (1,342) 896 1,276
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES ............... (37,908) (14,129) (31,116)
-------- -------- --------
FINANCING ACTIVITIES
Issuance of long-term debt .......................... 51,563 13,489 30,847
Payments to reduce long-term debt ................... (13,010) (16,021) (24,499)
Net borrowings, lines of credit ..................... 2,718 1,062 6,003
Purchase of Treasury stock .......................... (20) (132) (88)
Advances to Lynch Corporation ....................... (15,987) -- --
Financing activities of operations
of Morgan Group Holding Co. to be
distributed to shareholders ........................ (1,663) (769) 439
Other ............................................... (41) 208 465
-------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 23,560 (2,163) 13,167
-------- -------- --------
Net increase (decrease) in cash
and cash equivalents .............................. 1,976 (2,673) 6,399
Cash and cash equivalents at beginning of year ...... 25,531 27,507 24,834
-------- -------- --------
Cash and cash equivalents at end of year ............ $ 27,507 $ 24,834 $ 31,233
======== ======== ========
See accompanying notes.
LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001
1. Accounting and Reporting Policies
Organization
On August 12, 1999, the Board of Directors of Lynch Corporation 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," 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 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 Interactive also assumed certain short-term and long-term debt
obligations of Lynch Corporation. Prior to the Spin-Off, Interactive succeeded
to the credit facilities established by Lynch Corporation.
In April 1999, Lynch Corporation received an Internal Revenue Service private
letter ruling that the distribution to its shareholders of the stock of
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 Corporation made certain representations
to the IRS, which include, among other things, certain representations as to how
Lynch Corporation and Interactive intend to conduct their businesses in the
future.
Interactive and Lynch Corporation have entered into certain agreements governing
various ongoing relationships, including the provision of support services and a
tax allocation agreement. The tax allocation agreement provides for the
allocation of tax attributes to each company as if it had actually filed with
the respective tax authority. At the spin off, the employees of the corporate
office of Lynch Corporation became the employees of Lynch Interactive
Corporation and Lynch Interactive Corporation began providing certain support
services to Lynch. The Company charged a management fee for these services to
Lynch Corporation amounting to approximately $200,000 in 1999, $265,000 in 2000
and $208,000 in 2001. In September 2001, Interactive stopped charging a
management fee to Lynch Corporation since the corporate offices of Lynch
Corporation were relocated at that time.
In January 2002, Interactive spun off its interest in The Morgan Group, Inc.
("Morgan"), its only services subsidiary, via a tax-free dividend to its
shareholders of the stock of Morgan Group Holding Co., a corporation that was
formed to serve as a holding company for Interactive's controlling interest in
Morgan. Morgan Group Holding Co. is now a public company. Accordingly, the
amounts for Morgan are reflected on a one-line basis in the consolidated
financial statements as of December 31, 2001 and for the year then ended as
amounts "to be distributed to shareholders." Similarly, the prior years'
financial statements have been restated to be comparable with the current year's
presentation.
Basis of Presentation
As of December 31, 2000 and 2001, the years ended December 31, 2000 and 2001,
and for the period from September 1, 1999 to December 31, 1999, the accompanying
financial statements represent 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, on a combined basis. Accordingly, the
results for the year ended December 31, 1999, represent a combination of
consolidated and combined financial information for the respective periods. As
the historical financial information prior to September 1, 1999 herein reflects
periods during which the Company did not operate as an independent public
company, 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.
The Company consolidates the operating results of its telephone (81%-100% owned
during each of the three years ended December 31, 2001) and cable television
(60% at December 31, 2000 and 100% owned at December 31, 2001) subsidiaries. All
material intercompany transactions and balances have been eliminated.
Investments in affiliates in which the Company does not have a majority voting
control are accounted for in accordance with the equity method. The Company
accounts for the following affiliated companies on the equity basis of
accounting:
Coronet Communications Company (20% owned at December 31, 2001), Capital
Communications Company, Inc. (49% owned at December 31, 2001), Fortunet
Communications, L.L.P. (49.9% owned at December 31, 2001), and the cellular
operations in New Mexico, Iowa and North Dakota (17% to 21% owned at December
31, 2001).
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." At December 31, 2001, the quoted market price of
these shares was $0 per share. During the year ended December 31, 2000,
Spinnaker recorded a loss from continuing operations of $17.7 million. Losses of
$5.2 million and $2.8 million were recorded for the years ended December 31,
1999 and 1998, respectively. In the nine months ended September 30, 2001,
Spinnaker recorded a net loss of $53.9 million, including $41.2 million of
restructuring and asset impairment reserves related to the close of its
Spinnaker Coating facility in Westbrook, Maine. On October 15, 2001, Spinnaker
Industries announced that it would not be making that day's scheduled interest
payment with regard to its 10 3/4% Senior Notes and it was actively engaged in
discussion with a majority of the holders of those notes for the purpose of
negotiating a consensual restructuring of its indebtedness.
On November 13, 2001, Spinnaker announced that it has commenced voluntary
proceedings under Chapter 11 of the U.S. Bankruptcy Code for the purpose of
facilitating and accelerating its financial restructuring. Spinnaker also
announced that it had reached agreement, subject to Bankruptcy Court approval,
with its existing lenders to provide up to $30 million in debtor-in possession
financing, which Spinnaker believes will allow it to continue operating its
business in the ordinary and customary manner.
On January 9, 2002, both classes of Spinnaker's stock were de-listed from the
American Stock Exchange. The stock is now traded on the over the counter
"bulletin board" (pink sheets). There has been no quoted price since the stock
was de-listed in 2002. The Company believes that the decline in quoted value is
other than temporary and, accordingly, has recorded a loss of $3.2 million
during 2001 to write down its investment in Spinnaker to $0 at December 31,
2001.
Use of Estimates/Reclassifications
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that effect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates. Certain prior year amounts in the accompanying
consolidated financial statements have been reclassified to conform to current
year presentation.
Cash Equivalents
Cash equivalents consist of highly liquid investment with a maturity three
months or less when purchased.
At December 31, 2000 and 2001, assets of $18.7 million and $14.6 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.
At December 31, 2001, the Company has segregated $7.5 million of U.S. Treasury
Bills in a separate account and pledged this account as collateral on a letter
of credit that secures a put (option to sell) on certain of the Company's debt.
(See Note 6-Notes Payable and Long-term Debt).
Marketable Securities
Marketable securities consist principally of common stocks. At December 31, 2000
and 2001, 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 $7.3 million and $3.8 million
at December 31, 2000 and 2001, 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 on
available-for-sale securities were $12.4 million, $2.6 million and $2.6 million
for the years ended December 31, 1999, 2000 and 2001, respectively. The changes
in unrealized gains in each of the periods presented, net of tax, have been
included in the Consolidated Statements of Shareholder's Equity, Investment by
and Advances from Lynch Corporation prior to September 1, 1999 and "Accumulated
other comprehensive income" thereafter.
The cost of marketable securities sold is determined on the specific
identification method. Realized gains included in investment income were
$37,000, $909,000 and $1,355,000 for the years ended December 31, 1999, 2000 and
2001, 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 Acquired, Net
Excess of cost over fair value of net assets 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 acquired of $52.2 million and $63.9
million are net of accumulated amortization of $13.1 million and $15.8 at
December 31, 2000 and 2001, 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 Corporation,
which were contributed at the time of the Spin-Off.
Revenues
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.
Sales of communications products represent a separate earnings process and are
recognized when products are delivered and accepted by customers. For each
transaction involving both the installation and activations of service and the
sale of equipment, the Company has allocated revenues based on fair value for
the service element and the residual method for all other elements of the
transaction.
Earnings (Loss) Per Share
Basic earnings (loss) 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 options, warrants and convertible
securities, using the treasury stock and if converted methods as applicable.
Comprehensive Income
The Company follows the provisions of SFAS No. 130, "Reporting Comprehensive
Income" that requires unrealized gains or losses on the Registrant's
available-for-sale securities to be included as a separate component of
Shareholder Equity and in other comprehensive income (loss).
Segment Information
The Company follows the provisions of SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information." 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.
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 is less than carrying amount. The
calculation of impairment would then be based on appropriate discounted cash
flows. (See recent accounting pronouncements below--SFAS No. 144).
Stock Based Compensation
The Company applies the disclosure only provisions 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 in accounting for its
equity awards. 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.
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.
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 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations," and No. 142,
"Goodwill and Other Intangible Assets" effective for fiscal years beginning
after December 15, 2001. Statement 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
Statement 141 also includes guidance on the initial recognition and measurement
of goodwill and other intangible assets arising from business combinations
completed after June 30, 2001. Statement 142 prohibits the amortization of
goodwill and assets with indefinite lives. Statement 142 requires that these
assets be reviewed for impairment at least annually. Intangible assets with
finite lives will continue to be amortized over their estimated useful lives.
The Company will apply Statement 142 beginning in the first quarter of 2002.
Application of the nonamortization provisions of Statement 142 is expected to
result in an increase in net income of $2.9 million, $1.03 per share in 2002,
and would have resulted in an increase in net income of $1.7 million, $0.60 per
share, $2.1 million, $0.74 per share and $2.4 million, $0.86 per share for the
years ended December 31, 1999, 2000 and 2001, respectively. The Company will
test goodwill for impairment using the two-step process prescribed in Statement
142. The first step is a screen for potential impairment, while the second step
measures the amount of impairment, if any. The Company expects to perform the
first of the required impairment tests of goodwill and indefinite lived
intangible assts as of January 1, 2002 in the second quarter of 2002. Any
impairment charge resulting from these transitional impairment tests will be
reflected as the cumulative effect of a change in accounting principle in the
first quarter of 2002. The company has not yet determined what the effect of
these tests will be on the earnings and financial position of the Company.
In October 2001, the FASB issued Statement of Financial Accounting Standard No.
144, "Accounting for Impairment or Disposal of Long-Lived Assets", effective for
fiscal years beginning after December 15, 2001. The FASB's new rules on asset
impairment supersede FASB Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and provide a
single accounting model for long-lived assts to be disposed of. Although
retaining many of the fundamental recognition and measurement provision of FASB
Statement 121, the new rules significantly change the criteria that would have
to be met to classify an asset as held-for-sale. The new rules also will
supersede the provisions of APB opinion 30 with regard to reporting the effects
of a disposal of a segment of a business and will require expected future
operating losses from discontinued operations to be displayed in discontinued
operations in the periods in which the losses are incurred (rather as of the
measurement date as presently required by APB 30). In addition, more
dispositions will qualify for discontinued operations treatment in the income
statement. The Company has not yet determined what the effect of FASB 144 will
be on the earnings and financial position of the Company.
2. Spin-off of Morgan
On July 12, 2001, the Company made an additional $2.0 million investment in
Morgan, which increased its equity ownership from 55.6% to 70.2% and its voting
control from 68.59% to 80.8%.
On August 17, 2001, the Board of Directors of Interactive authorized management
to distribute its holdings in Morgan to Interactive's shareholders.
In January 2002, Interactive spun off its interest in The Morgan Group, Inc.,
its only services subsidiary, via a tax-free dividend to its shareholders of the
stock of Morgan Group Holding Co., a corporation that was formed to serve as a
holding company for Interactive's controlling interest in The Morgan Group, Inc.
Morgan Group Holding Co. is now a public company.
Morgan currently has on file with the Securities and Exchange Commission a
preliminary registration statement registering warrants that will be issued to
all of its current shareholders to acquire newly issued share of Class A and
Class B Morgan common stock. The warrants that are to be issued to Interactive
will also be placed in Morgan Holding. Pursuant to the spin off, each
Interactive shareholder would receive one share of Morgan Holding for each share
of Interactive owned.
As a result, the Company's services segment, which consisted solely of the
operations of Morgan, is being reported as operations to be distributed to
shareholders. Accordingly, operating results of Morgan have been segregated from
continuing operations and reported as a separate line item in the Statements of
Operations.
Interactive has restated its prior year financial statements to present the
operating results of Interactive on a comparable basis. Morgan's net sales were
$101.2 million, $128.4 million, and $172.5 million for the years ended December
31, 2001, 2000 and 1999, respectively.
The net assets of Morgan included in the accompanying consolidated balance
sheets as of December 31, 2000 and 2001, consist of the following:
(In thousands) December 31,
2000 2001
-------- --------
Cash and cash equivalents .................................... $ 2,092 $ 1,017
Accounts receivable, net ..................................... 7,881 6,322
Prepaids and other (includes restricted cash
of $2.6 million in 2001) ................................... 1,646 5,418
------- -------
Current assets to be distributed to shareholders ............. $11,619 $12,757
======= =======
Property, plant and equipment, net ........................... $ 3,688 $ 3,385
Excess of cost over net fair value of net assets acquired, net 6,727 6,256
Other assets ................................................. 634 600
------- -------
Non-current assets to be distributed to shareholders ......... $11,049 $10,241
======= =======
Notes payable ................................................ $-- $ 580
Accounts payable ............................................. 2,299 4,505
Accrued liabilities .......................................... 8,285 6,027
Current portion of long term debt ............................ 217 169
------- -------
Current liabilities to be distributed to shareholders ........ $10,801 $11,281
======= =======
Long term debt ............................................... $ 71 $ 13
Other liabilities ............................................ 4,521 4,078
Minority interest ............................................ 3,193 2,199
------- -------
Non-current liabilities and minority interest to be
distributed to shareholders ................................ $ 7,785 $ 6,290
======= =======
The report of Ernst & Young LLP, Morgan's independent auditors, with respect to
its financial statements as of December 31, 2001 and 2000, and for each of the
three years ended in the period ended December 31, 2001, contains an explanatory
paragraph which expresses substantial doubt as to Morgan's ability to continue
as a going concern.
3. 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, through December 31, 2001 (see Note 1). The Company had
agreed to pay a fee to an affiliate of the Chairman of Interactive for
performance of services in connection with the acquisition. (During 2000, in
settlement of the fee, the Company transferred to that firm its stock ownership
in Lynch Capital Corporation. Lynch Capital Corporation is a broker dealer that
recorded revenues of $6,000 and a net loss of $16,000 in 2000. The Company
recorded a $61,000 pre-tax gain from this transfer in 2000.)
On June 22, 2001, Lynch Telephone Corporation X, a subsidiary of Interactive,
acquired Central Utah Telephone, Inc. and its subsidiaries, and Central Telcom
Services, LLC, a related entity, for approximately $6.9 million in cash and $8.7
million in notes. The Company has recorded approximately $11.7 million of
goodwill, which is being amortized over 25 years, through December 31, 2001 (see
Note 1).
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 the dates of acquisition. The operating results of the acquired
companies are included in the Statements of Operations from their respective
acquisition dates.
The following unaudited consolidated pro forma information shows the results of
the Company's operations presented as if the Central Scott and Central Utah
acquisitions and the distribution of Morgan were made at the beginning of 1999.
The unaudited pro forma information is not necessarily indicative of the results
of operations that would have occurred had the transactions been made at these
dates nor is it necessarily indicative of future results of operations.
Years Ended December 31,
---------------------------------
1999 2000 2001
--------- -------- --------
Sales .................................. $ 66,342 $ 71,705 $ 82,129
Income (loss) from continuing operations
before extraordinary item ............ $ (9,626) $ 5,361 $ 2,491
Net income (loss) ...................... (9,786) 5,361 2,491
Basic and diluted earnings per share:
Net income (loss) ................... $ (3.47) $ 1.90 $ 0.88
4. Wireless Communications Services
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. The licensee must construct
personal communication service networks that provide adequate service to at
lease one-quarter of the population in the related personal communications
service market, or make a showing of substantial service in a licensed area
within five years of the license grant date. Failure to comply may result in the
forfeiture of the license. 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 (based on 1999 census data) 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 February 2001, Fortunet converted from a partnership to a
corporation with Interactive receiving 49.9% of the common stock. It also
changed its name to Sunshine PCS Corporation. On February 22, 2001, Lynch
Interactive spun-off its common stock of Sunshine to its shareholders. Prior to
the conversion, Interactive contributed a portion of the debt owned to it as a
contribution to capital and restructured the terms of the remaining debt. The
face value of the restructured debt is $16.1 million and the carrying value is
$3.4 million at December 31, 2000 and 2001. In addition, in exchange for a cash
infusion of $250,000, Lynch Interactive acquired (1) 10,000 shares of preferred
stock in Sunshine with an aggregate liquidation preference of $10.0 million and
(2) warrants to purchase 4,300,000 shares of Sunshine Class A common stock at
$0.75 per share and 235,294 shares of Sunshine common stock which are currently
held in escrow (see Note 6). At the time, Interactive's obligation to make
further loans was terminated. Subsequent to December 31, 2001, Interactive
advanced $550,000 to Sunshine. It will be used to buy additional shares of
Sunshine or be returned to the Company. In February 2002, Sunshine issued rights
to its shareholders to purchase up to 1,531,593 shares of its Class A Common
Stock at a price of 1.00 per share. To date, Interactive has subscribed for
58,824 shares of Class A Common Stock by exercising its rights in respect of
235,294 shares of Sunshine, which Interactive holds in escrow.
During 2000, Interactive invested in four limited liability companies, which
participated in four separate auctions. In the paging auction, Betapage
Communications, L.L.C. acquired 24 licenses at a net cost of $77,000;
Interactive owns 49.9% of Betapage's equity. In the 39 MHz auction, PTPMS
Communications, L.L.C. acquired 22 licenses for a net cost of $1.5 million;
Interactive has loans to PTPMS of $1.4 million and owns 49.9% of PTPMS equity.
In the Guard Band auction, PTPMS II Communications, L.L.C. acquired three
licenses at a net cost of $6.3 million; Interactive has loans to PTPMS II of
$6.1 million, $5.0 million of which was funded in the first quarter of 2001, and
owns 49.9% of PTPMS II equity. In the C&F Block PCS Reauction, which ended on
January 26, 2001, Theta Communications, LLC acquired one license at a net cost
of $4.0 million. The license has not yet been awarded, and, as required under
Federal Communications Commission rules, Theta has 20% of the cost of the
license on deposit. During the year ended December 31, 2001, $5.0 million of
loans from Interactive to Theta were returned. Lynch Interactive owns 10% of
Theta and has committed to fund a portion of the remaining license cost. An
affiliate of Interactive also has invested in Theta.
On February 25, 2000, Omnipoint Incorporated acquired, through a merger, all of
the outstanding shares of East/West Communications, Inc. At the time of the
merger, the Registrant held a redeemable preferred stock of East/West
Communications, Inc. with a liquidation value of $8.7 million, including payment
in kind of dividends to date. In accordance with its terms, the preferred stock
was redeemed at its liquidation value and as a result, Interactive recorded a
pre-tax gain of $4.2 million in the first quarter of 2000.
During the third quarter of 2001, the Company recorded an administration fee of
$2.8 million for services provided to an entity, in which an affiliate of the
Chairman of the Company has a minority investment in a Federal Communications
Commission conducted auction for spectrum to be used for the provision of
personal communications services. The auction was conducted in 1999 and the fee
was based on the entity's realization of the licenses acquired. This fee is
included in the "Sales and Revenues" in the Consolidated Statement of
Operations.
There are many risks relating to PCS and other FCC wireless licenses including,
without limitation, the high cost of PCS and certain other 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 companies 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 can be no assurance that any
licenses granted to Sunshine, or other entities in which subsidiaries of
Interactive have interests, can be successfully sold or financed or developed,
thereby allowing Interactive's subsidiaries to recover their debt and equity
investments.
5. Investments in Affiliated Companies
Lynch Entertainment, L.L.C. ("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, 2000 and 2001, LENCO's investment in Coronet was carried at a
negative $867,000 and a negative $946,000, respectively, due to LENCO's
guarantee of $3.8 million of Coronet's third party debt. Long-term debt of
Coronet, at December 31, 2001, totaled $10.6 million due to a third party lender
which is due quarterly through December 31, 2005.
At December 31, 2000 and 2001, 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
$1.8 million at December 31, 2000 and $2.6 million at December 31, 2001. In
January 2002, the Company sold its interest in RSA #1 for $5.5 million, and
expects to record a pre-tax gain of approximately $4.9 million in the first
quarter of 2002.
Undistributed earnings of companies accounted for using the equity method that
are included in consolidated retained earnings are $.5 million and $1.0 million
at December 31, 2000 and 2001, respectively.
Summarized financial information for companies accounted for by the equity
method is as follows:
Consolidated Information
1999(a) 2000(a) 2001
-------- -------- --------
(In Thousands)
Current assets ................................. $ 9,176 $10,955 $11,139
Property, plant & equipment, intangibles & other 26,072 41,899 44,606
Total Assets ................................... 35,248 52,854 55,745
Current liabilities ............................ 7,904 6,651 5,720
Long term liabilities .......................... 24,507 36,628 36,641
Minority interest .............................. 1,211 1,819 3,024
Equity ......................................... 1,626 7,755 10,359
Total liabilities & equity ..................... 35,248 52,854 55,745
Revenues ....................................... 27,344 37,442 39,837
Gross profit ................................... 10,429 11,306 18,636
Net income ..................................... 4,399 4,679 4,712
(a) Prior years have been restated to conform with current year presentation.
6. Notes Payable and Long-term Debt
Long-term debt represents borrowings by specific entities, which are
subsidiaries of Interactive.
December 31,
2000 2001
-------------------------
(In Thousands)
Long-term debt consists of (all interest rates are at December 31, 2001):
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% (4.9% weighted average), secured by
assets of the telephone companies of $148 million ............................. $ 52,188 $ 55,499
Bank credit facilities utilized by certain telephone and telephone holding
companies through 2016, $33.4 million at fixed interest rates averaging
7.9% and $53.7 million at variable interest rates averaging 5.0% .............. 54,799 87,127
Unsecured notes issued in connection with acquisitions through 2008, all at
fixed interest rates averaging 10% ............................................ 27,259 34,512
Convertible subordinated note due in December, 2004 at fixed interest rate
of 6% ......................................................................... 25,000 10,000
Other ......................................................................... 3,058 6,064
-------- ---------
162,304 193,202
Current maturities ............................................................ (12,365) (28,126)
-------- ---------
149,939 165,076
======== =========
REA debt of $10.8 million bearing interest at 2% has been reduced by a purchase
price allocation of $1.9 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.
The parent company of Interactive maintains a $10.0 million short-term line of
credit facility, which expires in August 2002. There were no borrowings under
this line at December 31, 2000 and $7.6 million was outstanding at December 31,
2001. Management expects that such line will be renewed by its expiration date
although there are no assurances that this will be accomplished. In such an
event, the company has other financing alternatives to continue its operations.
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, 2000 and 2001, substantially all the
subsidiaries' net assets are restricted.
On December 12, 1999, Interactive completed the private placement of a $25
million 6% five-year unsecured, convertible subordinated note, convertible into
Interactive common stock at $42.50 per share, (adjusted for subsequent 2 for 1
stock split). At that time, to assist the Company with the private placement to
Cascade Investment LLC ("Cascade"), the 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. The exercise period was from November 15,
2000 to December 1, 2000. Under generally accepted accounting principles
relating to significant shareholders, during 2000, Interactive recorded $1.25
million in interest expense to recognize the 5% premium incorporated in the
option to sell. 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.
In January 2001, the above option to sell agreement was amended. As amended,
Cascade had the right to sell up to $15 million of the note back to the Chairman
at any time prior to January 31, 2001 and the right to sell the remaining $10
million of the notes between November 15 and December 1, 2002. The option to
sell is at 105% of principal amount sold plus accrued and unpaid interest. As a
condition to modifying and extending the option to sell, the Company entered
into an agreement with its Chairman whereby it will pay for and acquire, on the
same terms and conditions, any portion of the note sold by Cascade under this
option. During January 2001, Cascade exercised this option with regard to the
$15 million of the notes and on February 14, 2001, the Company paid $15.9
million to Cascade, including 5% premium plus accrued and unpaid interest in
exchange for $15.0 of the note held by Cascade.
The option to sell the remaining $10 million is secured by a collateralized
letter of credit in which a portion of the collateral is provided by an
affiliate of the Chairman. The company has agreed to pay all legal fees, letter
of credit fees and a 10% per annum collateral fee on the amount of collateral
provided, which at December 31, 2001 was valued at $3.0 million. The Company
expensed $0.2 million and $0.8 million in 2000 and 2001 relating to this
agreement. Amounts payable at December 31, 2000 and 2001 were $0 and $0.3
million, respectively. The Company can replace the collateral at any time and
the fees would be eliminated thereafter. As of December 31, 2001, the company
has replaced $7.5 million of the escrow collateral securing the above noted
letter of credit by segregating $7.5 million of U.S. Treasury Bills in a
separate account and pledging this account to the issuers of the letter of
credit. Subsequent to December 31, 2001, the remaining collateral of $3.0
million was replaced by the Company. The remaining balance of the convertible
subordinated note is classified as current at December 31, 2001 as the holder
has the ability to demand payment of such amount, plus the $.5 million premium,
prior to December 31, 2002. Management is currently unaware of Cascade's
intention with regard to their potential exercise of the option to sell the $10
million.
On January 31, 2001, a subsidiary of the Company borrowed $27.0 million on a
long-term basis, secured by the stock of Western New Mexico Telephone Company.
$15.9 million of the proceeds were used to acquire the Convertible Note of the
Company owned by Cascade. The loan is to be repaid in equal monthly installments
over twelve years beginning in April 2001, bearing interest at either the bank's
prime rate or LIBOR plus 2.5%, or at the Company's option, it can be fixed for
its term. The stock of Western New Mexico Telephone Company had previously been
used to secure the acquisition facility, the balance of which was $7.9 million
prior to repayment in December 2000.
As of December 31, 2001, a subsidiary of the Company was in default of a term
loan totaling $4.8 million. The subsidiary is currently restructuring their
facility and management expects to have a new facility in place with the current
lender by April 2002. If such is not accomplished, Interactive expects to be
able to refinance the subsidiary as well as other subsidiaries to generate the
funds necessary to repay the current lender.
The Company has a need for resources primarily to fund future long-term growth
initiatives. The Company considers various alternative long-term financing
sources: debt, equity, or sale of an investment asset. While management expects
to obtain adequate financing resources to enable the Company to meet its
obligations, there is no assurance that such can be readily obtained or at
reasonable costs.
Cash payments for interest were $10.6 million, $11.6 million and $14.6 million
for the years ended December 31, 1999, 2000 and 2001, respectively.
Aggregate principal maturities of long-term debt at December 31, 2001 for each
of the next five years are as follows: 2002--$28.1 million, 2003--$17.8 million,
2004--$26.7 million, 2005--$11.0 million and 2006--$32.7 million.
7. CLR Video, L.L.C.
At December 31, 2000, the Company owned a 60% interest in CLR Video, L.L.C., a
provider of cable television services in northeast Kansas. In conjunction with
two pending lawsuits, CLR distributed certain of its assets to the holders of
the remaining 40% interest in exchange for their interest in CLR and cash.
8. Related Party Transactions
Interactive leases its corporate headquarters for an annual payment of $70,000
including utilities with an affiliate of its Chairman and Chief Executive
Officer. In addition, expenses relating to administrative support,
transportation, and communications (approximately $75,000, $124,000 and $104,000
for the years ended December 31, 1999, 2000 and 2001, respectively) are paid to
an affiliate of its Chairman and Chief Executive Officer. See Notes 1, 4 and 6
for additional references to related party transactions.
9. Shareholder's Equity
Subsequent to the spin-off by Lynch, the Board of Directors of Lynch Interactive
authorized the purchase of up to 100,000 shares of its common stock. Through
December 31, 2001, 4,900 shares have been purchased at an average cost of $49.03
per share. Subsequent to year-end, the Company has purchased an additional 5,300
shares at an average cost of $42.98 per share.
A two-for-one stock split was affected through a distribution to its
shareholders of one share of Registrant's Common Stock for each share of Common
Stock owned. The record date was August 28, 2000 with a distribution date of
September 11, 2000. All shares and per share amounts have been adjusted to
reflect the split.
10. Income Taxes
Lynch Corporation filed consolidated federal and state income tax returns, which
included 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 prior to the spin-off have been computed
assuming Interactive was filed on a separate company basis. All income tax
payments during the period were made by Interactive through Lynch. Effective
September 1, 1999, the 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 2000 and 2001 are provided for the temporary
differences between the financial reporting bases and the tax bases of the
Company's assets and liabilities. Cumulative temporary differences at December
31, 2000 and 2001 are as follows:
Dec. 31, 2000 Dec. 31, 2001
Deferred Tax Deferred Tax
Asset Liability Asset Liability
-----------------------------------------
(In Thousands)
Fixed assets revalued under purchase
accounting and tax over book depreciation ..... $ -- $ 6,279 $ -- $ 7,283
Discount on long-term debt ....................... -- 826 -- 734
Basis difference in subsidiary and affiliate stock -- 2,568 -- 2,499
Unrealized gains on marketable securities ........ -- 1,869 -- 2,153
Partnership tax losses in excess of book losses .. -- (4,547) -- (4,547)
Other reserves and accruals ...................... -- 1,057 -- 393
Other ............................................ -- 295 -- --
------- ------- ------- -------
Total deferred income taxes .................. $ 0 $ 8,347 $ 0 $ 8,515
======= ======= ======= =======
The provision (benefit) for income taxes before extraordinary item is summarized
as follows:
1999 2000 2001
--------------------------------
(In Thousands)
Current payable taxes:
Federal ............ $ 2,067 $ 5,728 $ 3,438
State and local..... 681 1,344 740
------- ------- -------
2,748 7,072 4,178
Deferred taxes:
Federal ............. (5,381) (1,891) (671)
State and local ..... 155 (210) (53)
------- ------- -------
(5,226) (2,101) (724)
------- ------- -------
$(2,478) $ 4,971 $ 3,454
======= ======= =======
A reconciliation of the provision (benefit) for income taxes before
extraordinary item and the amount computed by applying the statutory federal
income tax rate to income before income taxes, minority interest, and
extraordinary item follows:
1999 2000 2001
---------------------------------
(In Thousands)
Tax at statutory rate ....................... $(3,685) $ 3,673 $ 2,261
Increases (decreases):
State and local taxes, net of federal benefit 522 779 453
Amortization of non-deductible goodwill ..... 556 880 596
Other ....................................... 129 (361) 144
------- ------- -------
$(2,478) $ 4,971 $ 3,454
======= ======= =======
Net cash payments for income taxes were $3.0 million, $4.9 million and $4.9
million for the years ended December 31, 1999, 2000 and 2001, respectively.
11. Accumulated Other Comprehensive Income
Balances of accumulated other comprehensive income, net of tax, which consists
of unrealized gains (losses) on available for sale of securities at December 31,
2000 and 2001 are as follows (in thousands):
Unrealized Gain
(Loss) Tax Effect Net
--------- ---------- ---------
Balance at December 31, 2000 ........... $ 2,576 $(1,081) $ 1,495
Reclassification adjustment ............ 2,994 (1,259) 1,735
Change in unrealized gains (losses), net (2,971) 1,283 (1,688)
------- ------- -------
Balance at December 31, 2001 ......... $ 2,599 $(1,057) $ 1,542
======= ======= =======
As of March 21, 2002, accumulated other comprehensive income, net of tax,
declined to $1,086,000.
12. Employee Benefit Plans
Interactive maintains several defined contribution plans at its telephone
subsidiaries and corporate office. 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, 1999, 2000 and 2001 was $0.7
million, $0.9 million and $0.9 million, respectively.
At the Registrant's Annual Meeting on May 11, 2000, the shareholders approved a
Principal Executive Bonus Plan. No amounts were recognized under this program
for the years ended December 31, 2000 and 2001.
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 expenses of these plans were $0.1
million for each of the three years in the period ended December 31, 2001.
13. Commitments and Contingencies
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 2006. Certain leases have renewal options
and escalation clauses. Rental expense under operating leases was $0.2 million,
$0.4 million and $0.3 million for years ended December 31, 1999, 2000 and 2001,
respectively. The table below shows minimum lease payments due under
non-cancelable operating leases at December 31, 2001. Such payments total
approximately $1.0 million.
Years Ended December 31,
2002 2003 2004 2005 2006
-------- -------- -------- -------- -------
Operating leases $326,000 $216,000 $184,000 $145,000 $98,000
Interactive is a party to ordinary routine litigation incidental to its
business. Based on information currently available, Interactive believes that
none of this ordinary routine litigation, either individually or in the
aggregate, will have a material effect on its business.
Additionally, Interactive and several other parties, including the Company's
Chief Executive Officer, and Fortunet Communications, L.P., which was Sunshine
PCS Corporation's predecessor-in-interest, have been named as defendants in a
lawsuit brought under the so-called "qui tam" provisions of the federal False
Claims Act in the United States District Court for the District of Columbia.
Although the complaint was filed under seal with the court on February 14, 2001,
and the seal was lifted on January 11, 2002, the defendants have yet to be
formally served with the complaint. Under the False Claims Act, a private
plaintiff, termed a "relator," may file a civil action on the U.S. government's
behalf against another party for violation of the statute. In return, the
relator receives a statutory bounty from the government's litigation proceeds if
he is successful.
The relator is this lawsuit is R.C. Taylor III, who is allegedly an attorney
specializing in telecommunications law. The main allegation in the case is that
the defendants participated in the creation of "sham" bidding entities that
allegedly defrauded the federal Treasury by improperly participating in certain
Federal Communications Commission spectrum auctions restricted to small
businesses, as well as obtaining bidding credits in other spectrum auctions
allocated to "small" and "very small" businesses. The lawsuit seeks to recover
an unspecified amount of damages, which would be subject to mandatory trebling
under the statute.
Interactive strongly believes that this lawsuit is completely without merit, and
intends to defend the suit vigorously. The U.S. Department of Justice has
notified the court that it has declined to intervene in the case. Nevertheless,
we cannot predict the ultimate outcome of the litigation, nor can we predict the
effect that the lawsuit or its outcome will have on our business or plan of
operation.
14. Segment Information
As a result of the decision to spin off its investment in Morgan (see Note 2),
the Company is engaged in one business segment: multimedia. All businesses are
located domestically, and substantially all revenues are domestic. The Company's
operations include local telephone companies, a cable TV company, investment in
PCS entities and investment in two network-affiliated television stations. The
Company's primary operations are located in the states of Iowa, Kansas,
Michigan, New Hampshire, New Mexico, New York, North Dakota, Utah, and
Wisconsin. 75% of the Company's telephone customers are residential. The
remaining customers are businesses.
EBITDA (before corporate allocation) is equal to operating profit before
interest, taxes, depreciation, amortization and allocated corporate expenses.
EBITDA is presented because it is 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 accounting
principles generally accepted in the United States.
Operating profit is equal to revenues less operating expenses, including
unallocated general corporate expenses, interest and income taxes. The Company
allocates a portion of its general corporate expenses to its operating segment.
Such allocation was $1.2 million, $1.3 million and $1.3 million for the years
ended December 31, 1999, 2000 and 2001, respectively. Identifiable assets of the
operating 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,
-----------------------------------
1999 2000 2001
-----------------------------------
(In thousands)
Sales and revenues ......................... $ 59,011 $ 66,983 $ 79,352
========= ========= =========
EBITDA (before corporate allocation)
Operations ............................... $ 31,443 $ 34,699 41,274
Unallocated corporate expense ............ (5,113) (3,671) (3,006)
--------- --------- ---------
Consolidated total ....................... $ 26,330 $ 31,028 $ 38,268
========= ========= =========
Operating Profit
Operations ............................... $ 16,057 $ 17,531 $ 21,534
Corporate expense, net ................... (3,758) (2,200) (1,549)
--------- --------- ---------
Consolidated total ....................... $ 12,299 $ 15,331 $ 19,985
========= ========= =========
Depreciation and amortization
Operations ............................... $ 14,115 $ 15,781 $ 18,268
General corporate ........................ 16 16 15
--------- --------- ---------
Consolidated total ....................... $ 14,131 $ 15,797 $ 18,283
========= ========= =========
Capital expenditures
Operations ............................... $ 11,742 $ 17,196 $ 20,524
General corporate ........................ -- 12 9
--------- --------- ---------
Consolidated total ....................... $ 11,742 $ 17,208 $ 20,533
========= ========= =========
Total assets (excludes total assets of
Morgan Group Holding Co. of $32,264,
$22,668 and $22,998, respectively)
Operations ............................... $ 211,622 $ 211,562 $ 247,034
General corporate ........................ 10,083 6,180 9,316
--------- --------- ---------
Consolidated total ....................... $ 221,705 $ 217,742 $ 256,350
========= ========= =========
Operating profit for reportable segments ... $ 12,299 $ 15,331 $ 19,985
Other profit or loss:
Investment income ........................ 2,013 3,260 2,862
Interest expense ......................... (10,802) (13,568) (13,936)
Equity in earnings of affiliated companies 1,057 1,669 932
Reserve for impairment of investment
in PCS license holders ................. (15,406) -- --
Gain on sales of subsidiary and
affiliate stock and other assets ....... -- 4,187 --
Impairment of Spinnaker Industries, Inc. . -- -- (3,194)
--------- --------- ---------
Income (loss) before income taxes,
minority interest and extraordinary item
and operations of Morgan ............... $ (10,839) $ 10,879 $ 6,649
========= ========= =========
15. Quarterly Results of Operations (Unaudited)
2001-Three Months Ended (a)
------------------------------------------------
March 31 June 30 September 30(d) December 31(f)
-----------------------------------------------
(In thousands, except per share amounts)
Sales and revenues ......................... $ 17,209 $ 17,451 $ 23,934 $ 20,758
Operating profit ........................... 3,649 4,230 8,365 3,741
Income (loss) from continuing operations (e) 610 971 1,785 (832)
Basic and diluted earnings per share:(b)
Income (loss) from continuing operations (e) $ 0.22 $ 0.34 $ 0.63 $ (0.30)
2000-Three Months Ended (a)
--------------------------------------------
March 31(c) June 30 September 30 December 31
--------------------------------------------
(In thousands, except for per share amounts)
Sales and revenues ......................... $15,571 $16,019 $17,899 $17,494
Operating profit ........................... 3,736 3,650 4,702 3,243
Income (loss) from continuing operations (e) 2,622 904 933 572
Basic and diluted earnings per share (b):
Income (loss) from continuing operations (e) $ 0.93 $ 0.32 $ 0.33 $ 0.20
(a) Quarterly results for the periods March 31, 2001, June 30, 2001, and all
periods in 2000 have been restated to reflect the spin off of Morgan.
(b) Earnings per share for all periods are adjusted to reflect two-for-one
stock split on record date of August 28, 2000.
(c) The three months ended March 31, 2000, includes a $2.5 million net gain on
redemption on East/West Communications, Inc. preferred stock.
(d) The three months ended September 30, 2001, includes a $2.8 million
administrative fee revenue for services rendered to an affiliated entity in
an FCC auction for spectrum in 1999 and a $1.3 million impairment write
down in the carrying value of Spinnaker stock (see Note 1).
(e) Reflects income before extraordinary item and operations of Morgan.
(f) The three months ended December 31, 2001, includes a $1.9 million
impairment write down in the carrying value of Spinnaker stock (see Note
1).
16. Earnings (Loss) Per Share
For the period through the September 1999 spin-off from Lynch Corporation, the
following table sets forth the computation of pro forma basic and diluted
earnings (loss) per share before extraordinary item. Pro forma earnings (loss)
per share for these periods are calculated assuming that the shares outstanding
for 1999 are the same as the shares outstanding for Lynch Corporation.
Subsequent to September 1999, 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 was convertible into 588,235 shares of the Company's
common stock. Such securities were excluded for the calculation of diluted
earnings (loss) per share in 1999 and 2000 as assuming conversion would be
anti-dilutive. In January 2001, $15 million of the note was repaid. The
resulting $10 million convertible note is convertible into 235,294 shares of the
Company's common stock. Such securities were excluded for the calculation of
dilutive earnings (loss) per share in 2001, since assuming conversion would be
anti-dilutive.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
LYNCH INTERACTIVE CORPORATION
CONDENSED STATEMENT OF OPERATIONS
Years Ended December 31,
---------------------------------
1999 2000 2001
----------------------------------
(In Thousands)
Interest, Dividends & Gains on Sale of Marketable Securities $ 86 $ 278 $ 891
Interest & Other Income from Securities .................... 49 280 313
------- ------- -------
TOTAL INCOME .......................................... 135 558 1,204
Cost and Expenses:
Unallocated Corporate Administrative Expense ............. 3,414 2,248 1,549
Interest Expense ......................................... 2,134 4,115 4,612
------- ------- -------
TOTAL COST AND EXPENSES .............................. 5,548 6,363 6,161
------- ------- -------
LOSS BEFORE INCOME TAXES AND EQUITY IN
INCOME (LOSS) OF SUBSIDIARIES .............................. (5,413) (5,805) (4,957)
Income Tax Benefit ......................................... 1,840 1,974 1,685
Equity in Income (Loss) of Subsidiaries .................... (5,634) 8,862 5,806
Loss from operations of Morgan - Net ....................... (9) (2,666) (1,386)
------- ------- -------
NET INCOME ................................................. $(9,216) $ 2,365 $ 1,148
======= ======= =======
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 ("Interactive") was spun-off from Lynch
Corporation on September 1, 1999. Interactive has a note payable to a
subsidiary with a principal amount of $9.2 million at a fixed interest
rate of 6% per annum, due in 2003. The note is convertible at the
subsidiary's option into common stock of Lynch Corporation (1 share)
and Interactive (2 shares) with a combined exercise price of $120 per
share.
NOTE D - SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
ADDITIONAL INFORMATION.
NOTE E - PRIOR REPORTING PERIODS ARE RECLASSED TO CONFORM WITH CURRENT YEAR
REPORTING PRESENTATIONS
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
LYNCH INTERACTIVE CORPORATION
CONDENSED BALANCE SHEETS
Years Ended December 31,
--------------------
2000 2001
--------------------
(In Thousands)
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents ........................................ $ 2,451 $ 7,631
Deferred Income Taxes ............................................ 804 85
Other current assets ............................................. 444 158
------- -------
3,699 7,874
OFFICE EQUIPMENT (Net) .............................................. 31 24
OTHER ASSETS (Principally Investment in and Advances to Subsidiaries) 71,682 84,543
------- -------
TOTAL ASSETS ........................................................ $75,412 $92,441
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES ................................................. $ 5,910 $21,778
LONG TERM DEBT ...................................................... 41,437 44,100
DEFERRED INCOME TAX LIABILITIES ..................................... 2,453 --
DEFERRED CREDITS .................................................... 2,213 2,046
TOTAL SHAREHOLDERS' EQUITY .......................................... 23,399 24,517
------- -------
Total Liabilities and Shareholders' Equity .......................... $75,412 $92,441
======= =======
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
LYNCH INTERACTIVE CORPORATION
CONDENSED STATEMENT OF CASH FLOWS
Years Ended December 31,
-----------------------------------
1999 2000 2001
-----------------------------------
(In Thousands)
Cash Provided by (Used In) Operating Activities ..... $ 639 $ 1,355 $ (3,924)
-------- -------- --------
INVESTING ACTIVITIES:
Investment and Advances to Brighton Communications (5,858) 843 (12,861)
Proceeds from sale of securities ................. -- -- 1,679
-------- -------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
(5,858) 843 (11,182)
-------- -------- --------
FINANCING ACTIVITIES:
Net Borrowings Under:
Lines of Credit ................................. (15,150) -- 7,700
Issuance of Long Term Debt ...................... 25,000 171 27,784
Repayment of Long Term Debt ..................... -- -- (15,121)
Advances (To) From Lynch Corporation ............ (1,980) -- --
Purchase of Treasury Stock ...................... -- -- (88)
Other ........................................... (18) (132) 11
-------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
7,852 39 20,286
-------- -------- --------
TOTAL INCREASE (DECREASE) CASH AND CASH
EQUIVALENTS ...................................... 2,633 (473) 5,180
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ...... 291 2,924 2,451
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR ............ $ 2,924 $ 2,451 $ 7,631
======== ======== ========
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
LYNCH INTERACTIVE CORPORATION
YEARS ENDED DECEMBER 31, 1999, 2000, AND 2001
COLUMN A COLUMN B COLUMN C - ADDITIONS COLUMN D COLUMN E
CHARGED TO
DESCRIPTION BALANCE AT CHARGED TO OTHER BALANCE AT
BEGINNING COSTS AND ACCOUNTS DEDUCTIONS END OF
OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
---------------- --------------------------------------- ------------------ -----------------
Year Ended December 31, 2001
Allowance for Uncollectible Accounts $155,000 $276,000 $22,000(B) $29,000(A) $424,000
Year Ended December 31, 2000
Allowance for Uncollectible Accounts
$102,000 $123,000 $ 0 $70,000(A) $155,000
Year Ended December 31, 1999
Allowance for Uncollectible Accounts
$112,000 $55,000 $ 0 $65,000(A) $102,000
(A) UNCOLLECTIBLE ACCOUNTS WRITTEN OFF ARE NET OF RECOVERIES.
(B) BEGINNING BALANCE OF ACQUIRED SUBSIDIARY
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 INTERACTIVE 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 March 27, 2002
- -------------------
MARIO J. GABELLI Directors and Chief Executive
Officer (Principal Executive Officer)
* PAUL J. EVANSON Director March 27, 2002
- ------------------
PAUL J. EVANSON
JOHN C. FERRARA Director March 27, 2002
- -----------------
JOHN C. FERRARA
* DANIEL R. LEE Director March 27, 2002
- -------------------
DANIEL R. LEE
* DAVID C. MITCHELL Director March 27, 2002
- -------------------
DAVID C. MITCHELL
* SALVATORE MUOIO Director March 27, 2002
- -----------------
SALVATORE MUOIO
* RALPH R. PAPITTO Director March 27, 2002
- ------------------
RALPH R. PAPITTO
* VINCENT TESE Director March 27, 2002
- ------------------
VINCENT TESE
s/ROBERT E. DOLAN Chief Financial Officer March 27, 2002
- ------------------
ROBERT E. DOLAN (Principal Financial
and Accounting Officer)
*s/ROBERT E. DOLAN
ROBERT E. DOLAN
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 (filed as
Exhibit 3.1 hereto)
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, Inc.,
the United States of America and the Rural
Telephone Bank.**
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 Investment
LLC ("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 Cascade.+++
4.6 (iv) Agreement between Registrant and Mario J. Gabelli
dated as of December 26, 2000 (incorporated by
reference to Exhibit 10(a) to Registrant's Form 8-K
dated January 16, 2001).
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 Corporation's Form 10-K for the year ended
December 31, 1995).
10 (c) Shareholders Agreement among Capital Communications
Company, Inc., Lombardo Communications, Inc. and
Lynch Entertainment Corporation II (incorporated by
reference to Exhibit 10 of Lynch's Form 8-K,
dated March 14, 1994).
10 (d)(i) Loan Agreement, dated as of November 6, 1995,
between Lynch PCS Corporation A and Aer Force
Communications L.P. (now Fortunet Wireless, L.P.)
(plus four similar loan agreements with Fortunet
Wireless, L.P.) (incorporated by reference to
Exhibit 10(w) to Lynch's Form 10-K for the year
ended December 31, 1995.
10 (d)(ii) Amendment No. 1 to the Loan Agreement, dated as of
November 6, 1995, referred to in 10(d)(i)
incorporated by reference to Exhibit 10(a) to
Lynch's Form 10-Q for quarter ended
March 31, 1996).
10 (e)(i) Letter Agreement, dated as of August 12, 1996,
between Rivgam Communicators, L.L.P. and Lynch PCS
Corporation G (incorporated by reference to Exhibit
10(u)(ii) to Lynch's Form 10-K for the year ended
December 31, 1996).
10 (f)(ii) Letter Agreement dated as of December 16, 1998,
between Rivgam Communicators, L.L.P. and Lynch PCS
Corporation G (incorporated by reference in Exhibit
10(u)(iv) to Lynch's Form 10-K for the year ended
December 31, 1998).
10 (f) Letter Agreement between Lynch PCS Corporation G
and Bal/Rivgam, L.L.C. (incorporated by reference
to Exhibit 10(x) to Lynch's Form 10-Q for the
Quarter ended September 30, 1997).
10 (g) Letter Agreement, dated January 20, 1998, between
Lynch PCS Corporation G and BCK/Rivgam, L.L.C.
(incorporated by reference to Exhibit 10(y) to
Lynch's Form 10-K for the year ended
December 31, 1997).
*10 (h) 2000 Stock Option Plan (incorporated by reference
to the Exhibit to Registrant's Proxy Statement
dated April 18, 2000).
10 (i) Lease Agreement between Lynch and Gabelli Funds,
Inc. (incorporated by reference to Exhibit 10(a)
(a) to Lynch's Form 10-Q for the Quarter ended
March 31, 1998).
10 (j) Letter Agreement dated November 11, 1998, between
Registrant and Gabelli & Company, Inc.
(incorporated by reference to Exhibit 10(c)(c)
to Lynch Form 10-K for the year ended
December 31, 1998).
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 Company,
Brighton Communications Corporation and Brighton
Iowa Acquisition Corporation (schedules omitted)
(incorporated by reference to Exhibit 10.1 to
Lynch's Form 8-K dated July 16, 1999). Registrant
agrees to furnish to the Securities and Exchange
Commission the schedules upon receipt.
10 (m) Principal Executive Bonus Plan.
10 (n) Separation and Distribution Agreement, dated as of
January 18, 2002, by and among Lynch Interactive
Corporation, Morgan Group Holding Co. and The
Morgan Group, Inc.+
10 (o) Employment Agreement, dated as of August 1, 2001,
between John Fikre and Lynch Interactive
Corporation.+
21 Subsidiaries of Registrant+
24 Powers of Attorney+
99 Report of Independent Auditors
- Report of Siepert & Co., L.L.P. on the
financial statements of Cuba City
Telephone Exchange Company for the year
ended December 31, 2000 and 2001+
- Report of Siepert & Co., L.L.P. on the
financial statements of Belmont Telephone
Company for the year ended December 31,
2000 and 2001+
- Report of Siepert & Co., L.L.P. on the
financial statements of Lynch Michigan
Telephone Holding Corporation for the
year ended December 31, 2001
+ 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.