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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, 2000 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
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on which registered American Stock Exchange
Common Stock, Par Value $.0001
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 16, 2001 of $45 per share) was $96,760,440. (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 2,821,666
as of March 16, 2001.
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DOCUMENTS INCORPORATED BY REFERENCE:
Part III: Certain portions of Registrant's Proxy Statement for the 2001 Annual
Meeting of Shareholders.
FORWARD LOOKING INFORMATION
This Form 10-K contains certain forward looking information, including without
limitation, a "harvesting" initiative (pg. 2), Item 1-I.A "Regulatory
Environment" and possible changes thereto and "Competition," Item 1.-I.B "Cable
Television," Item 1-I.C "Personal Communications and other Wireless Services',"
including without limitation the risks described, Item 1-II. Morgan "Growth
Strategy," "Independent Owner-Operators" Fuel Cost), "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, and Notes to
Financial Statements (Item 14(a) below). It should be recognized that such
information are estimates or forecasts based upon various assumptions, including
the matters, risks, and cautionary statements referred to therein, as well as
meeting the Registrant's internal performance assumptions regarding expected
operating performance and the expected performance of the economy and financial
markets as it impacts Registrant's businesses. As a result, such information is
subject to uncertainties, risks and inaccuracies, which could be material.
PART I
ITEM 1. BUSINESS
Lynch Interactive Corporation ("Interactive" or the "Company") was incorporated
in 1996 under the laws of the State of Delaware. On September 1, 1999,
Interactive was spun-off by Lynch Corporation to its shareholders (the "Spin
Off") and became a public company. Prior to the Spin Off, Interactive had no
significant assets, liabilities or operations. As a successor to certain
businesses of Lynch Corporation, Interactive became a diversified holding
company with subsidiaries primarily engaged in multimedia and transportation
services. Interactive's executive offices are located at 401 Theodore Fremd
Avenue, Rye, New York 10580-1430. Its telephone number is 914-921-8821.
Interactive's business development strategy is to expand its existing operations
through internal growth and acquisitions. It may also, from time to time,
consider the acquisition of other assets or businesses that are not related to
its present businesses. For the year ended December 31, 2000, multimedia
operations provided 114.2% of the EBITDA (before corporate allocation) and 38.2%
of the Company's consolidated revenues, and services operation lost $0.9 million
before interest, taxes, depreciation and amortization and provided 61.7% of the
Company's consolidated revenues. EBITDA is presented because it is a widely
accepted financial indicator of value and ability to incur and service debt.
EBITDA is not a substitute for operating income or cash flows from operating
activities in accordance with generally accepted accounting principles. As used
herein, Interactive includes subsidiaries.
Interactive maintains an ongoing "harvesting" initiative, i.e., an effort to
monetize certain assets, including considering selling all or portions of
certain operating entities. These may include Interactive's minority interests
in network affiliated television stations, and certain Interactive telephone
operations where competitive local exchange carrier opportunities are not
readily apparent. As part of this initiative, Interactive sold in December 1998
its DirectTV franchise serving certain counties in New Mexico for approximately
$3.1 million. Interactive intends to continue this initiative. There is no
assurance that any transaction can be consummated on terms favorable or
acceptable to Interactive.
I. MULTIMEDIA
A. Telecommunications
Operations. Interactive conducts its telecommunications operations through
subsidiary 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 2000,
Interactive has acquired eleven telephone companies, four of which have indirect
minority ownership of 2% to 20%, whose operations range in size from
approximately 500 to over 10,000 access lines. The Company's telephone
operations are located in Iowa, Kansas, Michigan, New Hampshire, New Mexico, New
York, North Dakota and Wisconsin. As of December 31, 2000, total access lines
were approximately 46,312, 100% of which are served by digital switches.
In October 2000, Interactive signed an agreement to acquire Central Utah
Telephone Inc. located in Fairview, Utah. Central Utah and its subsidiaries,
Skyline Telecom and Bear Lake Communication, Inc., serve approximately 4,100
access lines. In addition, Central Utah has a contract to acquire certain
telephone exchanges from Qwest Corporation involving approximately 3,300
additional access lines. Interactive has also signed an agreement to acquire
Central Telecom Services, LLC, a related entity which has certain Personal
Communications Services ("PCS") and Multichannel Multipoint Distribution
Service-Video ("MMDS") interests and Internet, long distance, and telephone
equipment businesses in Utah. The aggregate purchase price, including debt
assumed, is roughly comparable to Interactive's most recent telephone
acquisition. These transactions are subject to regulatory approval, and there is
no assurance that such approval will be obtained or obtained on satisfactory
terms.
These subsidiaries' principal business is providing telecommunications services.
These services fall into four major categories: local network, network access,
long distance and other non-regulated telecommunications services. Toll service
to areas outside franchised telephone service territory is furnished through
switched and special access connections with intrastate and interstate long
distance networks.
Interactive holds franchises, licenses, and permits adequate for the conduct of
its business in the territories, which it serves.
Future growth in telephone operations is expected to be derived from the
acquisition of additional telephone companies, from providing service to new
customers or additional services to existing customers, from upgrading existing
customers to higher grades of service, and from additional service offerings.
The following table summarizes certain information regarding Interactive's
multimedia operations:
Years Ended December 31,
1998 1999 2000
---------- --------- --------
Telecommunications Operations
Access lines* .................................................. 37,604 45,126 46,312
% Residential ................................................ 75% 75% 75%
% Business ................................................... 25% 25% 25%
Internet Subscribers ........................................... 7,977 15,524 19,535
Cable Subscribers .............................................. 4,709 4,642 4,515
Total Multimedia Revenues
Telecommunications Operations
Local Service ................................................. 13% 16% 15%
Network Access & Long Distance ................................ 67% 64% 61%
Non-Regulated & Other** ....................................... 17% 17% 21%
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Total Telecommunications Operations ........................... 97% 97% 97%
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Cable Operations ............................................... 3% 3% 3%
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Total Multimedia Revenues ...................................... 100% 100% 100%
======== ======== =========
($ in 000)
Total Revenues ................................................. $ 54,622 $ 59,011 $ 66,983
EBITDA+ ........................................................ 29,389 31,443 34,699
Depreciation & Amortization .................................... 12,995 14,115 15,781
Capital Expenditures ........................................... 11,028 11,742 17,196
Total Assets ................................................... $195,010 $211,622 $210,961
- -------
* An "access line" is a telecommunications circuit between the customer's
establishment and the central switching office.
** Non-regulated and other revenues include Internet, PCS, CLEC, Direct
Broadcast Satellite (for 1998) and other non-regulated revenues.
+ EBITDA is earnings before interest, taxes, depreciation and amortization,
and corporate overhead allocation.
Telephone Acquisitions. Interactive pursues an active program of acquiring
operating telephone companies. From January 1, 1989 through December 31, 2000
(excluding Central Utah Telephone Company), Interactive has acquired eleven
telephone companies serving a total of approximately 38,600 access lines, at the
time of these acquisitions, for an aggregate consideration totaling
approximately $138.0 million. Such acquisitions are summarized in the following
table:
ACQUISITION HISTORY
Number of Number of Annual
Year of Access Lines Access Lines Revenues Ownership
Company Acquisition Yr. of Acq. 12/31/00 12/31/00 Percentage
- ------- ----------- ----------- -------- -------- ----------
($ in 000)
Western New Mexico Telephone Co. 1989 4,200 6,700 18,337 83.1
Inter-Community Telephone Co. (a) 1991 2,550 2,648 3,810 100.0
Cuba City Telephone Co. &
Belmont Telephone Co. ....... 1991 2,200 2,762 2,076 81.0
Bretton Woods Telephone Co. ..... 1993 250 758 748 100.0
JBN Telephone Co. (b) ........... 1993 2,300 2,790 5,234 98.0
Haviland Telephone Co. .......... 1994 3,800 4,099 4,486 100.0
Dunkirk&Fredonia Telephone Co. ..
& Cassadaga Telephone Co. ... 1996 11,100 13,058 15,074 100.0
Upper Peninsula Telephone Co. ... 1997 6,200 7,196 10,263 100.0
Central Scott Telephone Co. ..... 1999 6,000 6,301 4,943 100.0
Central Utah Telephone Co. (c) . 2001 -- 4,133 -- 100.0
(a) Includes 1,350 access lines acquired in 1996.
(b) Includes 354 access lines acquired in 1996.
(c) Interactive currently has agreements to acquire Central Utah Telephone
Company, Inc. and Central Telephone Services LLC, which is subject to
regulatory approval. There is no assurance that such approval will be
obtained or obtained on acceptable terms.
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. See "harvesting" initiative at page 2 above.
Related Services and Investments Interactive also provides non-regulated
telephone related services, including internet access service and long distance
resale service, in certain of its telephone service (and adjacent) areas.
Interactive also 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 eight of Interactive's telephone companies now offer
Internet access service. At December 31, 2000, Internet access customers totaled
approximately 19,535 compared to approximately 15,524 at December 31, 1999.
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 began providing CLEC
service on a resale basis in neighboring Dunkirk, NY in the second quarter of
1999. In March 2000, they expanded CLEC operations into the Buffalo market as
well as two other Western New York counties. Facilities based services are being
evaluated for the Dunkirk Service area. Affiliates of Inter-Community Telephone
Company in North Dakota, and Western New Mexico Telephone Company in New Mexico
have filed with the state regulatory commissions to provide CLEC services in
those states. Final plans to offer CLEC service in areas adjacent to
Interactive's telephone operations in those states have not been completed. In
December 1998, Interactive also acquired a 10 MHZ personal communications
service (PCS) license for the Basic Trading Area (BTA) covering the Las Cruces,
New Mexico market and is considering how to utilize that license. BTAs are used
by the FCC to designate the geographic area covered by a PCS License. BTAs are
based on materials copyright to the Rand McNally 1992 Commercial Atlas &
Marketing Guide and divide the United States into 493 separate geographic areas.
The Las Cruces BTA covers a population of approximately 197,166 (as of the 1990
census), and Las Cruces is the principal city in the BTA. The company is
currently developing plans to utilize this license. In addition, Central Scott
has a 10 MHz PCS License for its wireline territory covering a population of
11,470.
At December 31, 2000, 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. The company accounted for its net investments under the
equity method. 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, 2000 of 68,960, of
which Interactive's proportionate share is 9,852.
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 its intrastate telephone services and the
Federal Communications Commission ("FCC") with respect to its interstate
telephone service and, with the enactment of the Telecommunications Act of 1996
(the "1996 Act"), certain other matters relating principally to fostering local
and intrastate competition.
Interactive's telephone subsidiaries participate in the National Exchange
Carrier Association ("NECA") common line and traffic sensitive tariffs and
participate in the access revenue pools administered by NECA for interstate
services. Where applicable, Interactive's subsidiaries also participate in
similar pooling arrangements approved by state regulatory authorities for
intrastate services. Such interstate and intrastate arrangements are intended to
compensate local exchange carriers ("LEC's"), such as Interactive's operating
telephone companies, for the costs, including a fair rate of return, of
facilities furnished in originating and terminating interstate and intrastate
long distance services.
In addition to access pool participation, certain of Interactive's subsidiaries
are compensated for their intrastate costs through billing and keeping access
charge revenues (without participating in an access pool). The intrastate access
charge revenues are developed based on intrastate access rates filed with the
state regulatory agency.
In addition, a 1989 FCC decision provided for price cap regulation for certain
interstate services. The price cap approach differs from traditional
rate-of-return regulation by focusing primarily on the prices of communications
services rather than the telephone companies' costs. This allows for the sharing
with its customers of profits achieved by increasing productivity. Alternatives
to rate-of-return regulation have also been adopted or proposed in some states
as well. Inter-Community Telephone Company is an example of one such subsidiary,
which has elected a price cap limitation on intrastate access charges. However,
management does not believe that this agreement will have a material effect on
the Company's results. In certain states, regulators have ordered the
restructuring of local service areas to eliminate nearby long distance calls and
substitute extended calling areas.
Various aspects of federal and state telephone regulation have in recent years
been subject to re-examination and on-going modification. In February 1996, the
1996 Act, which is the most substantial revision of communication law since the
1930's, became law. The 1996 Act is intended generally to allow telephone,
cable, broadcast and other telecommunications providers to compete in each
other's businesses, while loosening regulation of those businesses. Among other
things, the Act (i) would allow major long distance telephone companies and
cable television companies to provide local exchange telephone service; (ii)
would allow new local telephone service providers to connect into existing local
telephone exchange networks and purchase services at wholesale rates for resale;
(iii) would provide for a commitment to universal service for high-cost, rural
areas and authorizes state regulatory commissions to consider their status on
certain competition issues; (iv) would allow the Regional Bell Operating
Companies to offer long distance telephone service and enter the alarm services
and electronic publishing businesses; (v) would remove rate regulation over
non-basic cable service in three years; and (vi) would increase the number of
television stations that can be owned by one party.
Although the FCC has completed numerous regulatory proceedings required to
implement the 1996 Act, the FCC is still in the process of promulgating new
regulations covering these and related matters. For certain issues, the FCC
bifurcated the proceedings between price cap and rate-of-return companies or in
the case of the Universal Service Fund (USF) between rural and non-rural
companies. In several cases, the regulations for the price-cap (or non-rural)
local exchange carriers (LECs) have been or are being determined first, followed
by separate proceedings for rate-of-return (or rural) companies. Since all of
Interactive's telephone subsidiaries are rural, rate-of-return companies for the
interstate jurisdiction, many of the issues are yet to be resolved by the FCC
for Interactive's subsidiaries. Current or anticipated proceedings, which could
have significant revenue impacts for rural, rate-of-return companies, include
changes in access charge regulations, jurisdictional separations rules (which
allocate costs between interstate and intrastate services), reevaluation of the
interstate rate-of-return and permanent USF procedures.
The USF is intended, among other things, to provide special support funds to
high cost rural LECs so that they can provide affordable services to their
customers notwithstanding their high cost due to low population density. In May
1997, the FCC adopted interim USF procedures effective January 1, 1998, which
continue to use actual embedded costs for rural companies. The interim
procedures transferred the Weighted DEM (which is a subsidy related to central
office switching equipment) and Long-Term Support (LTS) to the USF and required
all telecommunications companies (including Interactive's telephone
subsidiaries) to contribute to the fund. In addition, a cap was implemented on
the amount of corporate expense allowable for the computation of USF. The
interim rules are expected to be in effect until January 1, 2001. This is the
earliest date that a transition to a new universal service support mechanism may
begin. Furthermore, the interim plan would remain in place until the FCC ordered
a new USF plan, after receiving a recommendation from the Rural Task Force
("RTF") and the Federal-State Joint Board on Universal Service ("Joint Board").
The RTF was appointed by the Joint board on July 1, 1998 to address changes to
the universal service support mechanisms for rural carriers. All of
Interactive's telephone companies are designated as rural carriers for USF
support purposes.
On September 29, 2000, the RTF issued its report to the Joint Board regarding
recommended changes to the current universal service support mechanism for rural
carriers. The RTF did not adopt use of a Forward-Looking Economic Cost (FLEC)
model, such as the one adopted for non-rural carriers, but rather recommended
continued use of the three embedded cost mechanisms that were part of the
interim USF procedure. The RTF recommended an increase of $118.5 million of USF
support to the indexed cap on the High Cost Loop Fund (HCLF) and reindexing of
the corporate cap. The Joint Board received comments and reply comments to the
RTF's recommendation. On December 22, 2000, the Joint Board released its
recommendation to the FCC, which essentially referred the RTF's recommendation
unchanged in its entirety to the FCC. The FCC is currently in the process of
receiving comments and reply comments on the RTF recommendation.
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 will receive at least as much Federal USF as they had been
receiving under the previous system. The held-harmless support is being
gradually phased out for non-rural carriers.
In addition to the changes to universal service, the FCC also has open dockets
related to access charges, jurisdictional separations and rate-of-return
reevaluation. The FCC made several changes to access charges for price cap
companies in May 1997. The FCC issued a proposal for similar changes to access
charges for rate-of-return carriers in June 1998. In October 1997, the FCC
initiated a proceeding where companies provided comments to the FCC regarding
how costs should be allocated between the intrastate and interstate
jurisdictions. In October 1998, the FCC requested comments regarding whether the
interstate rate-of-return was at the appropriate rate. No final decision
regarding proposed changes for rate-of-return carriers related to access
charges, jurisdictional separations or rate-of-return reevaluation has been
issued by the FCC.
On October 20, 2000, the Incumbent Local Exchange Carrier industry introduced a
Multi-Association Plan (MAG), which is comprehensive plan to address universal
service, access charges, jurisdictional separations and rate-of-return. The FCC
is also in the process of receiving comments and reply comments on the MAG plan.
While portions of the MAG plan overlap the RTF's recommendation, the MAG plan
encompasses far more than the RTF recommendation discussed. Since interstate
revenues constituted approximately [50%] of the regulated revenues of the
Registrant's telephone companies in 2000, modifications to access charges,
separations, rate-of-returns, and/or USF could have a material effect.
Interested parties to both the RTF and MAG plans have widely differing
positions, which could substantially impact any plan or plans adopted by the
FCC. Thus, it is not possible at this time to determine the terms of any plans,
which will be adopted, by the FCC or the impact of any potential adoption of
some or all portions of either the RTF recommendation and/or the MAG plan on
Registrant's telephone companies.
Interactive cannot predict the effect of the 1996 Act, state initiatives and new
proposed Federal and state regulations. Interactive's local exchange carrier
telephone operations do not have significant wireline competition at the present
time. Because of the rural nature of their operations and related low population
density, they are primarily high cost operations, which receive substantial
Federal and state subsidies. The regulatory environment for LEC operations has
begun to change. A principal purpose of the 1996 Act was to encourage
competition in local telephone services. Though the 1996 Act reaffirmed Federal
policy of universal telephony service at fair and reasonable rates, the 1996 Act
and related proceedings will also change the method of subsidizing high cost
rural LECs such as Interactive's and the new methods have not yet been finally
determined. Similar regulatory changes have also been initiated in many of the
states in which Interactive operates. Because of its low population density and
high cost operations, Interactive believes that competition will be slower in
coming to most of its service areas than to larger urban areas. Interactive also
believes that a satisfactory subsidization mechanism will be developed to
compensate Interactive's LECs for their high cost service areas; however, these
are very significant issues to Interactive and there can be no assurance as to
how such issues will ultimately be determined.
Competition. All of Interactive's current telephone companies are currently
monopoly wireline providers in their respective area of local telephone exchange
service, except to a very limited extent in Iowa; although there can be no
assurance that this will continue. However, as a result of the 1996 Act, FCC and
state regulatory authority initiatives and judicial decisions, competition has
been introduced into certain areas of the toll network wherein certain providers
are attempting to bypass local exchange facilities to connect directly with
high-volume toll customers. For example, in the last few years the States of New
Mexico, New York, Michigan, Wisconsin and Kansas passed or amended
telecommunications bills intended to introduce more competition among providers
of local services and reduce regulation. Regulatory authorities in certain
states, including New York, have taken steps to promote competition in local
telephone exchange service, by requiring certain companies to offer wholesale
rates to resellers. A substantial impact is yet to be seen on Interactive's
telephone companies. Interactive's subsidiaries do not expect bypass to pose a
significant near-term competitive threat due to a limited number of high-volume
customers they serve. In addition, cellular radio or similar radio-based
wireless services, including personal communication services ("PCS"), and cable
television and internet based services could provide an alternative local
telephone exchange service as well as possible competition from electric
companies.
Interactive's telephone companies, in the aggregate, own approximately 10,000
miles of cable and 1,000 miles of fiber optic cable. Substantially all of the
telephone companies' properties are encumbered under mortgages and security
interests, principally to the Rural Utilities Services ("RUS"). 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. The following table sets forth Interactive's cable interests:
Number of
Subscribers Annual
Year of Cost of at Revenues Ownership
Company Acquisition Acquisition Acquisition 2000 Percentage
- -------------------------- ----------- ----------- ----------- ---------- -----------
Haviland Telephone Company 1994 200,000(1) 176 $ 44,000 100%
CLR Video (2) ............ 1995 5,200,000 4,489 $1,712,000 60%
(1) Allocated portion of total purchase price.
(2) Pursuant to an agreement in principal to settle certain litigation, the
40% minority owners of CLR would receive systems with approximately
1,500 subscribers in exchange for their minority interest in CLR. This
would result in CLR being 100% owned by Registrant with approximately
2,800 subscribers.
Broadcasting
See the "harvesting" initiative at page 2 above concerning the television
operations.
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.
Other
See the "harvesting" initiative at page 2 as to the sale of Interactive's
DirectTV franchise in certain parts of New Mexico. In December 1998, Interactive
sold for approximately $3.1 million its right to market direct broadcasting TV
services via satellite in New Mexico. Financial results for the operation had
not been material.
C. Personal Communications and Other Wireless Services.
A subsidiary of Interactive was a 49.9% limited partner in Fortunet
Communications, L.P. ("Fortunet"), the successor to five partnerships that won
30-megahertz personal communications services ("PCS") licenses in the FCC's
C-Block auction (restricted to small businesses and certain other qualifying
bidders), which concluded in 1996. Fortunet won 31 licenses in 17 states
covering a population of approximately 7 million people. The licenses had an
aggregate purchase price of $216 million after a 25% bidding credit.
Under FCC rules, Fortunet made a down payment equal to 10% of the cost (net of
bidding credits) of the licenses ($21.6 million). The Government provided
10-year installment financing, interest only for the first six years at an
interest rate of 7% per annum. Interactive's subsidiary has loaned Fortunet an
aggregate of approximately $24.0 million to fund the down payments and the first
interest payment on the licenses. The 50.1% general partner has no obligation to
provide loans or additional funds to Fortunet.
Certain C-Block licensees, including Fortunet, experienced substantial financial
problems in connection with servicing the FCC installment debt and/or building
out the licenses. The three largest C-Block licensees filed for protection under
the Federal Bankruptcy Act. As a result, the FCC in March 1997, suspended
interest payments on the FCC installment debt while it examined the situation.
In September 1997, the FCC gave C-Block licensees four alternatives with respect
to their licenses. In the third quarter of 1997, Interactive provided a reserve
of 30% of its subsidiary's investment in Fortunet ($4.6 million after-tax).
In June 1998, Fortunet, pursuant to the FCC restructuring program, elected to
give up all of its PCS licenses, except for 15 MHZ licenses in Tallahassee,
Panama City and Ocala, Florida. It used the FCC credits from the returned
licenses to pay the remaining purchase prices for the retained Florida licenses.
Fortunet also received back $3.9 million from the FCC, which was used to pay
down a portion of Fortunet's loan from Interactive's subsidiary. On April 15,
1999, the FCC completed a reauction of all the "C Block" licenses that were
returned to it subsequent to the original auction, including the 15 MHZ licenses
that Fortunet returned on June 8, 1998, in the basic trading areas of
Tallahassee, Panama City, and Ocala, Florida. In that reauction, the successful
bidders paid a total of $2.7 million for the three licenses as compared to the
$18.7 million carrying amount of Interactive's investment in Fortunet. In the
quarter ended March 31, 1999, Interactive recorded a reserve of $15.4 million to
write down its investment in Fortunet to reflect the amount bid for similar
licenses in the reauction, plus an additional $0.7 million of capitalized
expenses, to leave a net carrying value of $3.4 million at December 31, 2000.
In February 2001, Sunshine PCS Corporation succeeded by merger to the assets and
liabilities of Fortunet with Registrant receiving all of the Class A Common
Stock of Sunshine which constituted 49.9% of the common stock. Immediately
thereafter, Interactive spun-off that stock to its shareholders. Interactive
currently holds $16.1 million of 9% (payable in kind) subordinated debt of
Sunshine, 10,000 shares of 7% preferred stock (payable in kind through February
2006, and in cash thereafter) with a liquidation value of $10.0 million and
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. These securities had a carrying value of
$250,000 at the time of the spin-off. If the holder of a $10 million convertible
note of Interactive converts that note into common stock of Interactive,
Sunshine will issue additional (i) shares of Class A Common Stock to the holder,
(ii) additional shares of Class B Common Stock to the Class B stockholders, and
(iii) additional warrants to Interactive. Sunshine is subject to substantial
risks, including an FCC requirement to build out its licenses by September 2001
to provide service to one quarter of the population or make a showing of
substantial service in those areas, or risk losing the licenses and the
imposition of fines and/or sanctions. There is no assurance that Sunshine will
meet the build out requirements or that Interactive will ultimately be able to
realize the full or even any value on these securities. For description of
Sunshine's risks, reference is made to its Prospectus dated February 14, 2001.
Another subsidiary of Interactive, Lynch PCS Corporation F ("LPCSF"), was a
49.9% limited partner in Aer Force Communications B, L.P. ("Aer Force"). In the
FCC's F-Block Auction (restricted to small businesses and certain other
qualifying bidders) of 10 megahertz PCS licenses, Aer Force won five licenses in
four states covering a population of approximately 20 million people. The
licenses had an aggregate purchase price of $19 million after a 25% bidding
credit. In December 1997, East/West Communications, Inc. ("East/West") succeeded
to the assets and liabilities of Aer Force, with LPCSF receiving 49.9% of the
common stock of East/West. Immediately thereafter, Lynch spun-off 39.9% of the
common stock of East/West to Lynch Corporation shareholders and transferred 10%
of East/West stock to Gabelli Funds, Inc. ("GFI") in satisfaction of an
obligations to pay it 10% of the net profits of Aer Force (after an assumed cost
of capital). Interactive then owned 7,800 shares ($7,800,000 par and liquidation
value) of 5% payment-in-kind preferred stock of East/West with a carrying value
of $4.8 million at December 31, 1999. In February 2000, East/West was merged
into Omnipoint Corporation and Interactive received approximately $8.7 million
for its preferred stock interest, representing the liquidation value plus
accrued and unpaid dividends.
Another subsidiary of Interactive, Lynch PCS Corporation G ("LPCSG") had an
agreement with Rivgam Communications L.L.C. ("Rivgam"), a subsidiary of GFI,
which won licenses in the FCC's D and E Block PCS Auctions for 10 megahertz PCS
licenses, to receive a fee equal to 10% of the realized net profits of Rivgam
(after an assumed cost of capital) in return for providing bidding and certain
other services. Rivgam won 12 licenses in seven states covering a population of
33 million, with an aggregate cost of $85.1 million. In December 1998, Rivgam
settled its obligation under said agreement by transferring to LPCSG its 10 MHZ
PCS license for the Las Cruces, New Mexico market.
LPCSG also has an agreement with Bal/Rivgam LLC (in which GFI has a 49.9% equity
interest), which won licenses in FCC's Wireless Communications Services ("WCS")
Auction in 1997, to receive a fee equal to 5% of the realized net profits of
Bal/Rivgam (after an assumed cost of capital), in return for providing bidding
and certain other services to Bal/Rivgam. Bal/Rivgam won 5 WCS licenses covering
a population of approximately 42 million with an aggregate cost of $0.7 million.
LPCSG also has an agreement 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. LPCSG has a 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).
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 license 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 of such license cost and to receive a 5%
realized net profits fee (after an assumed cost of capital).
Registrant 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). Sunshine has not begun any build out of their
licenses, which must be accomplished by September 17, 2001 unless an extension
is granted by the FCC, which is highly uncertain. 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,
with Registrant's subsidiaries recovering their debt and equity investments.
II. SERVICES
The Morgan Group, Inc.
The Morgan Group Inc. (including subsidiaries, "Morgan") is Interactive's only
service subsidiary. On July 22, 1993, Morgan completed an initial public
offering ("IPO") of 1,100,000 shares of its Class A common stock, $.015 par
value, at $9.00 per share. As a result of this offering, Interactive's equity
ownership in Morgan was reduced from 90% to 47%, represented by its ownership of
1,200,000 shares of Class B common stock. In December 1995, Interactive acquired
from Morgan 150,000 shares of Class A common stock (plus $1.3 million in cash
plus accrued dividends) in exchange for its 1,493,942 shares of Series A
Preferred Stock of Morgan. As of March 19, 1999, Morgan repurchased 102,528
shares of its Class A common stock at $9.00 per share in a "Dutch Auction." At
March 15, 2001, Interactive's equity ownership in Morgan was approximately
55.6%. Because the Class B common stock is entitled to two votes per share,
Interactive's voting interest in Morgan exceeds 50% and, therefore, it continues
to consolidate Morgan's results in its financial statements. Interactive is in
the preliminary stages of evaluating whether its continued ownership of Morgan
fits into Interactive's long-term business strategy. Morgan Class A common stock
is listed on the American Stock Exchange under the symbol "MG."
Morgan is the nation's largest publicly owned service company in managing the
delivery of manufactured housing, commercial vehicles and specialized equipment
in the United States, and through its wholly owned subsidiary, Morgan Drive
Away, Inc. has been operating since 1936. Morgan provides outsourcing
transportation services through a national network of approximately 1,023
independent owner-operators and approximately 1,410 other drivers. Morgan
dispatches its drivers from 74 locations in 28 states. Morgan's largest
customers include Oakwood Homes Corporation, Fleetwood Enterprises, Inc.,
Champion Enterprises, Inc., Winnebago Industries, Inc. Cavalier Homes, Inc.,
Clayton Homes, Four Seasons Housing, Inc., Thor Industries, Inc., Holiday
Rambler and Damon Corporation. Morgan also provides certain insurance and
financing services to its owner-operators through its subsidiaries, Interstate
Indemnity Company ("Interstate") and Morgan Finance, Inc. ("Finance").
Growth Strategy. Morgan's strategy is to focus on its core transportation
services. Morgan will also look for opportunities to grow through expansion in
the niche businesses already being serviced, along with pursuing acquisitions or
joint ventures in related industries. In addition, Morgan will look to expand
insurance product offerings to drivers through its Interstate subsidiary. There
can be no assurance that any future acquisitions will be effected or, if
effected, that they can be successfully integrated with Morgan's business. To
enhance profitability, Morgan is continuing the process of reducing overhead
costs.
Industry Information. Morgan's business is substantially dependent upon the
manufactured housing industry. Morgan's operations are affected by, among other
things, fluctuations in interest rates and availability of credit of purchasers
of manufactured homes and motor homes, and the availability and price of motor
fuels. This industry has been subject to broad productions cycles. In 2000, for
the second year, the manufactured housing industry experienced a decline in
shipments and production, which is having an adverse impact on Morgan's
operating revenues and profitability. Morgan in 2000 reduced administrative
staff by approximately 25% and is instituting other cost cutting measures.
Competition. All of Morgan's activities are highly competitive. In addition to
fleets operated by manufacturers, Morgan competes with several large national
interstate carriers, many of whom have substantially greater resources than
Morgan, and numerous small regional or local interstate and intrastate carriers.
Morgan's principal competitors in the manufactured housing and specialized
outsourcing services marketplaces are privately owned. No assurance can be given
that Morgan will be able to maintain its competitive position in the future.
Competition among carriers is based on the rate charged for services, quality of
service, financial strength and insurance coverage. The availability of tractor
equipment and the possession of appropriate registration approvals permitting
shipments between points required by the customer may also be influential.
Lines of Business. Morgan operates in these lines of businesses: Manufactured
Housing, Driver Outsourcing, Specialized Outsourcing Services, and Insurance and
Finance.
The largest portion of Morgan's operating revenues is derived from
transportation of manufactured housing, primarily new manufactured homes. A
manufactured home is an affordable housing alternative. During 1999 and 2000,
the manufactured housing industry experienced a decline in shipments and
production. The manufactured housing industry continues to suffer from the
combined impact of tightened consumer credit standards, increased industry
repossessions and excess inventory. However, Morgan believes the manufactured
housing industry production over the long-term should continue to grow along
with the general economy, especially when employment statistics and consumer
confidence remain strong. There is no assurance, however, that manufactured
housing production will increase in 2001. Unit shipments by the manufactured
housing industry (considering double-wide homes as two shipments) in the United
States decreased by approximately 26% from 574,000 in 1999 to 426,000 in 2000,
after a 5% decrease in 1999 from 1998.
Manufactured Housing provides specialized transportation to companies, which
produce new manufactured homes, modular homes, and office trailers. In addition,
Manufactured Housing transports used manufactured homes and offices for
individuals, businesses, and the U.S. Government. Based on industry shipment
data available from the MHI, and Morgan's knowledge of the industry and its
principal competitors, Morgan believes that it is the largest transporter of
manufactured homes in the United States. Manufactured Housing ships products
through approximately 749 independent owner-operators (down 26% in 2000
primarily due to the decrease in shipments) who drive specially modified
semi-tractors, referred to as "toters," used in manufactured housing
transportation to reduce combined vehicle length. Makers of manufactured housing
generally ship their products no more than a few hundred miles from their
production facilities. Therefore, to serve the regional structure of this
industry, Morgan positions its dispatch offices close to the production
facilities it is serving. Morgan reduced its number of manufactured housing
dispatch offices in 2000 by 18 locations, primarily due to plant closures and
internal consolidations.
Morgan's Driver Outsourcing line of business provides outsourcing transportation
services primarily to manufacturers of recreational vehicles, commercial trucks,
and other specialized vehicles through a network of service centers in nine
states. Driver outsourcing engages the services of approximately 1,410 drivers
who are outsourced to customers to deliver the vehicles. In 2000, driver
outsourcing delivered approximately 36,900 units, while the number of deliveries
decreased, operating revenue per unit delivered increased.
Morgan's Specialized Outsourcing Services line of business consists of large
trailer ("Towaway") delivery, travel and other small trailer delivery ("pick
up"). In 2000, the Towaway operation moved approximately 8,250 large trailers,
compared to 14,600 large trailers in 1999, primarily the result of a shortage in
owner-operator availability. As of December 31, 2000, Towaway had contracts with
approximately 85 independent owner-operators who drive semi-tractors compared to
144 in 1999. As of December 31, 2000, travel and other small trailers are
delivered by 183 independent owner-operators utilizing pickup trucks compared to
161 in 1999.
Morgan's insurance and finance line of business provides insurance and financing
to Morgan's drivers and independent owner-operators. This line also administers
the cargo, bodily injury and property damage insurance program.
Selected Operating and Industry Participation Information. The following table
sets forth certain operating and industry participation information for each of
the five years ended December 31, 2000.
Manufactured Housing
Operating Information: .................. 1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
New Home Shipments ........................ 121,136 154,389 161,543 148,019 102,463
Other Shipments (3) ....................... 23,465 24,144 17,330 11,871 13,031
-------- -------- -------- -------- --------
Total Shipments ........................... 144,601 178,533 178,873 159,890 115,494
Linehaul Revenues in (000's) (1) .......... $ 72,616 $ 93,092 $ 94,158 $ 88,396 $ 62,526
Manufactured Housing
Industry Participation: .................. 1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
Industry Production (2) ................... 553,133 558,435 601,678 573,629 425,919
New Home Shipments (3) .................... 121,136 154,389 161,543 148,019 102,463
Share of Unites Shipped ................... 21.9% 27.6% 26.8% 25.8% 24.1%
Driver Outsourcing
Operating Information: ................... 1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
Shipments ................................. 58,368 45,446 44,177 49,892 36,883
Linehaul Revenues in (000's)(1) ........... $ 23,090 $ 19,706 $ 19,979 $ 23,748 $ 21,336
Specialized Outsourcing Services
Operating Information: ................... 1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
Shipments ................................. 41,255 34,867 38,167 32,967 29,215
Linehaul Revenues in (000's)(1) ........... $ 26,169 $ 19,630 $ 23,015 $ 21,115 $ 15,304
(1) Linehaul revenue is derived by multiplying the miles of a given shipment by
the stated mileage rate.
(2) Based on reports of Manufactured Housing Institute. To calculate share of
homes shipped, Morgan assumes two units shipped for each multi-section
home.
(3) Morgan's new home shipments decreased 31% during 2000 as compared to
overall industry reduction of 26%. Morgan believes that it lost market
share primarily because of lower pricing by its competitors.
Customers and Marketing. Morgan's operating revenues are comprised primarily of
linehaul revenues derived by multiplying the miles of a given shipment by the
stated mileage rate. Operating revenues also include charges for permits,
insurance, escorts and other items. A substantial portion of Morgan's operating
revenues are generated under one, two, or three year contracts with producers of
manufactured homes, recreational vehicles, and the other products. In these
contracts, the manufacturers agree that a specific percentage (up to 100%) of
their transportation service requirements from a particular location will be
performed by Morgan on the basis of a prescribed rate schedule, subject to
certain adjustments to accommodate increases in Morgan's transportation costs.
Linehaul revenues generated under customer contracts in 1998, 1999 and 2000 were
64%, 71% and 69% of total linehaul revenues, respectively. Morgan's ten largest
customers have been served for at least three years and accounted for
approximately 69%, 68%, and 67% of its linehaul revenues in 1998, 1999 and 2000,
respectively. Oakwood Homes Corporation accounted for over 20% of linehaul
revenues in 2000. Fleetwood Enterprises, Inc. accounted for over 15% of linehaul
revenues in 2000. The Fleetwood manufactured housing contract is continuous
except that it may be terminated by either party upon 30 day written notice if
the other party has repeatedly failed to perform, persistently disregarded
applicable laws or regulation or otherwise committed a substantial violation of
the contract. The Oakwood manufacturing housing contract is renewable annually.
Morgan has been servicing Oakwood for ten years and Fleetwood for over 25 years.
Most contracts provide for scheduled rate increases based upon increases in fuel
prices, which increases are generally passed on to the independent
owner-operators who purchases fuel. A number of Morgan's major customers are
experiencing financial difficulty as a result of softness in the manufacturing
housing and recreational vehicle markets. There is no assurance the customers
will agree to renew their contracts on acceptable terms or on terms as favorable
as those currently in force. The loss of one or more significant customer could
adversely affect Morgan's results of operations.
Independent Owner-Operators. The shipment of product by Manufactured Housing and
certain Specialized Outsourcing Services is conducted by contracting for the use
of the equipment of independent owner-operators. Recruitment and retention of
qualified drivers and independent owners-operators is highly competitive.
Morgan's contracts with independent owner-operators are terminable by either
party on ten days' notice. There is no assurance that Morgan's drivers will
continue to maintain their contracts in force or that Morgan will be able to
recruit a sufficient number of new drivers on terms similar to those presently
in force. Morgan may not be able to engage a sufficient number of new drivers to
meet customer shipment demands from time to time resulting in loss of operating
revenues that might otherwise be available to Morgan.
Owner-operators are independent contractors who own totters, tractors or pickup
trucks, which they contract to and operate for, Morgan. Independent
owner-operators are not generally approved to transport commodities on their own
in interstate or intrastate commerce. Morgan, however, possesses such approvals
and/or authorities (see "Regulation"), and provides marketing, insurance,
communications, administrative, and other support required for such
transportation.
Independent owner-operators are generally compensated for each trip on a per
mile basis. Independent owner-operators are responsible for operating expenses,
including fuel, maintenance, lodging, meals, and certain insurance coverage.
Morgan provides required permits, cargo and liability insurance (coverage while
transporting goods for Morgan), and communications, sales, and administrative
services. Independent owner-operators, except for owners of certain pick-up
trucks, are required to possess a commercial drivers license and to meet and
maintain compliance with requirements of the U.S. Department of Transportation
and standards established by Morgan.
From time to time, tax authorities have sought to assert that independent
contractors in the transportation service industry are employees, rather then
independent contractors. Under existing interpretations of federal and state tax
laws as well as Morgan's current method of operations, Morgan believes that its
independent contractors are not employees. There can be no assurance that tax
authorities will not challenge this position, or that such tax laws or
interpretations thereof will not change. If the independent contractors were
determined to be employees, such determination could materially increase
Morgan's payroll tax and workers' compensation insurance costs.
Agents and Employees. Morgan has approximately 83 terminal managers and
assistant managers who are involved directly with the management of equipment
and drivers. Of these, approximately 67 are full time employees and the
remainder are independent contractors who earn a commission. In addition to
terminal personnel, Morgan employs approximately 190 full-time employees, and 16
fulltime drivers.
Fuel Cost. The transportation industry is dependent upon the availability and
cost of fuel. Although fuel costs are paid by Morgan's independent
owner/operators, increases in fuel prices may have significant adverse effects
on Morgan's operations for various reasons. Since fuel costs vary between
regions, drivers may become more selective as to which regions they will
transport goods, resulting in diminished driver availability. Also, Morgan would
experience adverse effects during the time period from when fuel costs begin to
increase until the time when scheduled rate increases to customers are enacted.
Increases in fuel prices may also affect the sale of recreational vehicles by
making the purchase less attractive to consumers. A decrease in the sale of
recreational vehicles would be accompanied by a decrease in the transportation
of recreational vehicles and a decrease in the need for Driver Outsourcing
Services.
Impairment of Assets
Morgan periodically assesses the net realizable value of its long-lived assets
and evaluates such assets for impairment whenever events or changes in
circumstances indicate the carrying amount of an asset may not be recoverable.
For assets to be held and used, 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 the carrying amount.
Seasonality. Shipments of manufactured homes tend to decline in the winter
months in areas where poor weather conditions inhibit transport. This usually
reduces operating revenues in the first and fourth quarters of the year.
Morgan's operating revenues, therefore, tend to be stronger in the second and
third quarter.
Risk Management, Safety and Insurance. The risk of substantial losses arising
from traffic accidents is inherent in any transportation business. Morgan
carries insurance with a deductible of up to $250,000 per occurrence for
personal injury and property damage. Morgan has obtained, but has not activated
a self-insurance authority of up to $1 million. The frequency and severity of
claims under Morgan's liability insurance affect the cost, and potentially the
availability, of such insurance. Morgan maintains cargo damage insurance with a
deductible of $1 million. If Morgan is required to pay substantially greater
insurance premiums, or incurs substantial losses above its insurance coverage or
substantial losses below its deductibles, its results could be materially
adversely affected. Morgan continues to review its insurance program,
self-insurance limits and excess policy provisions. Morgan believes that its
current insurance coverage is adequate to cover its liability risks. Morgan's
excess and primary insurance arrangements are up for renewal in 2001. While
Morgan expects such arrangements to be renewed, it is difficult to predict the
terms of such renewed arrangements, which may result in a significant increase
in premium expense and/or the assumption of additional risk. There can be no
assurance that Morgan can continue to maintain its present coverage on
acceptable terms.
The following table sets forth information with respect to bodily injury,
property damage, cargo claims, and automotive physical damage reserves for the
years ended December 31, 1998, 1999, and 2000, respectively.
Claims Reserve History
Years Ended December 31,
(In Thousands)
1998 1999 2000
------- ------- -------
Beginning Reserve Balance $ 5,323 $ 8,108 $ 8,418
Provision for Claims .... 7,698 8,633 7,518
Payments, net ........... (4,913) (8,323) (7,590)
------- ------- -------
------- ------- -------
Ending Reserve Balance .. $ 8,108 $ 8,418 8,346
======= ======= =======
While Morgan's management has devoted substantial attention to controlling claim
costs, there is no assurance that claims and insurance costs will not in the
future substantially affect profitability.
Interstate makes available physical damage insurance coverage for the Company's
owner-operators. Interstate also writes performance surety bonds for Morgan
Drive Away, Inc.
Regulation. Morgan's interstate operations are subject to regulation by the
Federal Highway Administration, which is an agency of the United States
Department of Transportation ("D.O.T."). Effective August 26, 1994, essentially
all motor common carriers were no longer required to file individually
determined rates, classifications, rules or practices with the Interstate
Commerce Commission ("I.C.C.") Effective January 1, 1995, the economic
regulation of certain intrastate operations by various state agencies was
preempted by federal law. The states continue to have jurisdiction primarily to
insure that carriers providing intrastate transportation services maintain
required insurance coverage, comply with all applicable safety regulations, and
conform to regulations governing size and weight of shipments on state highways.
Most states have adopted D.O.T. safety regulations and conform to regulations
governing size and weight of shipments on state highway, and actively enforce
them in conjunction with D.O.T. personnel.
Carriers normally are required to obtain authority from the I.C.C. or its
successor as well as various state agencies. Morgan is approved to provide
transportation from, to, and between all points in the continental United
States.
Federal regulations govern not only operating authority and registration, but
also such matters as the content of agreements with owner-operators, required
procedures for processing of cargo loss and damage claims, and financial
reporting. Morgan believes that it is in substantial compliance with all
material regulations applicable to its operations.
The D.O.T. regulates safety matters with respect to the interstate operations of
Morgan. Among other things, the D.O.T. regulates commercial driver
qualifications and licensing; sets minimum levels of carrier liability
insurance; requires carriers to enforce limitations on drivers' hours of
service; prescribes parts, accessories and maintenance procedures for safe
operation of freight vehicles; establishes noise emission and employee health
and safety standards for commercial motor vehicle operators; and utilizes
audits, roadside inspections and other enforcement procedures to monitor
compliance with all such regulations. In 1997, the D.O.T. established
regulations, which mandate random, periodic, pre-employment, post-accident and
reasonable cause drug testing for commercial drivers. The D.O.T. has also
established similar regulations for alcohol testing. Morgan believes that it is
in substantial compliance with all material D.O.T. requirements applicable to
its operations.
Most manufactured homes, when being transported by trailer, exceed the maximum
dimensions allowed on state highways without a special permit. Morgan obtains
these permits for its independent contractor owner-operators from each state,
which allows Morgan to transport their manufactured homes on state highways. The
states have special requirements for over-dimensional loads detailing permitted
routes, timing required, signage, escorts, warning lights and similar matters.
Most states and provinces also require operators to pay fuel taxes, comply with
a variety of other state tax and/or registration requirements, and keep evidence
of such compliance in their vehicles while in transit. Morgan coordinates
compliance with these requirement by its drivers and independent contractor
owner-operators, and monitors their compliance with all applicable safety
regulations.
From time to time, tax authorities have sought to assert that owner operators in
the trucking industry are employees, rather than independent contractors. No
such tax claim has been successfully made with respect to Morgan. Under existing
industry practice and interpretations of federal and state tax laws, as well as
Morgan's current method of operation, Morgan, based on the advice of counsel,
maintains that its owner operators are not employees. Whether an owner operator
is an independent contractor or employee is, however, generally a fact-sensitive
determination and the laws and their interpretations can vary from state to
state. There can be no assurance that tax authorities will not successfully
challenge this position, or that such tax laws or interpretations thereof will
not change. If the owner operators were determined to be employees, such
determination could materially increase Morgan's payroll tax and workers'
compensation insurance costs.
Interstate, Morgan's insurance subsidiary, is a captive insurance company
incorporated under Vermont law. It is required to report annually to the Vermont
Department of Banking, Insurance & Securities and must submit to an examination
by this Department on a triennial basis. Vermont regulations require Interstate
to be audited annually and to have its loss reserves certified by an approved
actuary. Morgan believes Interstate is in substantial compliance with Vermont
insurance regulations.
Morgan's finance subsidiary is subject to Indiana's Equal Credit Opportunity
Laws and other state and federal laws relating generally to fair financing
practices.
For additional information on Morgan, reference is made to Morgan's Form 10-K
and other filings with the Securities and Exchange Commission.
III. SPINNAKER STOCK
Interactive owns 1,000,000 shares of Common Stock of Spinnaker Industries, Inc.
(AMEX:SKK), which constitutes 26.5% of the class and 13.6% of the total
outstanding shares of Spinnaker. Interactive intends to sell such shares from
time to time to fund its acquisition program. On February 27, 2001, the closing
price in limited trading of Spinnaker Common Stock on the AMEX was $3.75 per
share.
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. In July and August 1999, Spinnaker sold its two
industrial tape business units to Intertape Polymer Group, Inc. (AMEX-ITP;
Toronto), Montreal, Quebec, Canada, for approximately U.S. $105 million and
300,000 five-year warrants to purchase Intertape common shares at a price of
U.S. $29.50 each. The sales are part of a plan to seek strategic alternatives,
which Spinnaker announced in November 1998. In addition to the risks of
Spinnaker's business, because of Interactive's large position and the limited
trading in Spinnaker Common Stock, it may be difficult for Interactive to sell
such stock and realize its value if and when it wants to. For further
information on Spinnaker, reference is made to its Form 10-K and other filings
with the Securities and Exchange Commission.
IV. OTHER INFORMATION
While Interactive holds licenses of various types, Interactive does not believe
they are critical to its overall operations, except for (1) the
television-broadcasting licenses of WHBF-TV and WOI-TV; (2) Interactive's
telephone subsidiaries' franchise certificates to provide local-exchange
telephone service within 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,
as well as the licenses for Las Cruces, New Mexico and portions of Iowa held by
Interactive.
The capital expenditures, earnings and competitive position of Interactive have
not been materially affected by compliance with current federal, state, and
local laws and regulations relating to the protection of the environment;
however, Interactive cannot predict the effect of future laws and regulations.
Interactive has not experienced difficulties relative to fuel or energy
shortages but substantial increases in fuel costs or fuel shortages could
adversely affect the operations of Morgan.
Interactive is a party to certain lawsuits in the ordinary course of business,
primarily at Morgan. See "Business of Interactive - II. Services - The Morgan
Group, Inc. - Risk Management, Safety and Insurance" for information on claims,
lawsuits and insurance relating to Morgan.
No portion of the business of Interactive is regarded as seasonal, except that,
in the case of Morgan, fewer shipments are scheduled during the winter months in
those parts of the country where weather conditions limit highway use.
There were no customers in 1999 or 2000 that represents 10% or more of
consolidated revenues, except for Oakwood Homes Corporation (14% in 1999 and 13%
in 2000) and Fleetwood Enterprises, Inc. (12% in 1999 and 10% in 2000).
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 including AT&T.
Excluding the following for Morgan: approximately 1,023 independent
owner-operators and 1,410 other drivers, Interactive had a total of
approximately 553 employees at December 31, 2000, compared to approximately 642
employees at December 31, 1999.
Additional information with respect to each of Interactive's segments is
included in Note 14Segment Information to the Consolidated Financial Statements
included herein.
V. EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction G (3) of Form 10-K, the following list of
executive officers of the Registrant is included in Part 1 of this Annual Report
on Form 10-K in lieu of being included in the Proxy Statement for the 2000
Annual Meeting of Shareholders. Such list sets forth the names and ages of all
executive officers of Registrant indicating all positions and offices with the
Registrant held by each such person and each such person's principal occupations
or employment during the past five years.
Name Offices and Positions Held Age
---- -------------------------- ---
Mario J. Gabelli ............. Chairman and Chief Executive Officer (since September 58
1999); Chairman (since 1986) and Chief Executive Officer
1986-2000) of Lynch Corporation; Chairman and Chief
Executive Officer (since March 1980) of Gabelli Funds Inc.
a private company which makes investments for its own
account; and Chairman and Chief Executive Officer of
Gabelli Asset Management, Inc. (since 1999), a New York
Stock Exchange listed holding company for subsidiaries
engaged in various aspects of the securities business
Robert E. Dolan .............. Chief Financial Officer and Controller (since September 49
1999); Chief Financial Officer (1992-2000) and Controller
(1990-2000) of Lynch Corporation
The executive officers of the Registrant are elected annually by the Board of
Directors at its organizational meeting in May and hold office until the
organizational meeting in the next subsequent year and until their respective
successors are chosen and qualified.
ITEM 2. PROPERTIES
Interactive leases space from an affiliate of its Chairman, containing
approximately 4,000 square feet for its executive offices in Rye, New York.
Morgan owns approximately 24 acres of land with improvements in Elkhart,
Indiana. The improvements include a 23,000 square foot office building used as
Morgan's principal office, a 7,000 square foot leased building containing
additional offices, and a 9,000 square foot building used for Morgan's safety
and driver service departments and also for storage. Most of Morgan's 74
locations are situated on leased property. Morgan also owns and leases property
for storage at various locations throughout the United States, usually in
proximity to manufacturers of products moved by Morgan. The property leases have
lease term commitments of a minimum of thirty days and a maximum of three years,
at monthly rentals ranging from $10 to $6,500. The Elkhart facility is currently
mortgaged to one of Morgan's lenders. In total, Morgan owns 65 acres of land
throughout the United States, including the Elkhart facilities.
Western New Mexico Telephone Company owns a total of 16.9 acres at fourteen
sites located in southwestern New Mexico. Its principal operating facilities are
located in Silver City, where Western owns a building comprising a total of
6,480 square feet housing its administrative offices and certain storage
facilities. In Cliff, Western owns five buildings with a total of 14,055 square
feet in which are located additional offices and storage facilities as well as a
vehicle shop, a wood shop, and central office switching equipment. Smaller
facilities, used mainly for storage and for housing central office switching
equipment, with a total of 8,384 square feet, are located in Lordsburg, Reserve,
Magdalena and five other localities. In addition, Western leases 1.28 acres on
which it has constructed four microwave towers and a 120 square-foot equipment
building. Western has the use of 38 other sites under permits or easements at
which it has installed various equipment either in small company-owned buildings
(totaling 2,403 square feet) or under protective cover. Western also owns 3,317
miles of copper cable and 421 miles of fiber optic cable running through
rights-of-way within its 15,000 square mile service area. All Western's
properties described herein are encumbered under mortgages held by the Rural
Utilities Service ("RUS") and CoBank.
Inter-Community Telephone Company owns 12 acres of land at 10 sites. Its main
office at Nome, ND, contains 4,326 square feet of office and storage space. In
addition, it has 4,400 square feet of garage space and 5,035 square feet
utilized for its switching facilities. Inter-Community has 1,756 miles of copper
cable and 202 miles of fiber optic cable. All of Inter-Community's properties
described herein are encumbered under mortgages held by the National Bank for
Co-Operatives ("Co-Bank").
Cuba City Telephone Company is located in a 3,800 square foot brick building on
0.4 of an acre of land. The building serves as the central office, commercial
office, and garage for vehicle and material storage. The company also owns a
cement block storage building of 800 square feet on 0.1 of an acre. In Madison,
Wisconsin, Cuba City leases 900 square feet for administrative headquarters and
financial functions. Belmont Telephone Company is located in a cement block
building of 800 square feet on .5 acre of land in Belmont, Wisconsin. The
building houses the central office equipment for Belmont. The companies own a
combined total of 221 miles of copper cable and 28 miles of fiber optic cable.
All of Cuba City and Belmont's property described herein are encumbered under
mortgages held by the RUS and Rural Telephone Bank, respectively.
J.B.N. Telephone Company owns a total of approximately 2.25 acres at fifteen
sites located in northeast Kansas. Its administrative and commercial office
consisting of 7,000 square feet 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 1,316 miles of copper cable and 61 miles of
fiber optic cable. All properties described herein are encumbered under a
mortgage held by the RUS.
Dunkirk & Fredonia Telephone Company (including its subsidiaries) owns a total
of approximately 16.4 acres at 5 sites located in western New York. Its host
central office switching equipment, administrative and commercial offices
consisting of 18,297 square feet is located in Fredonia, New York. In addition,
Dunkirk & Fredonia owns 4 other smaller facilities housing garage, warehouse and
central office switching equipment and over 362 miles of copper cable and 36
miles of fiber optic cable. All properties described herein are encumbered under
a mortgage held by RUS.
Upper Peninsula Telephone Company owns a total of approximately 25 acres at 19
sites located principally in the Upper Peninsula of Michigan. Its host central
office switching equipment, administrative and commercial offices consisting of
11,200 square feet is located in Carney, Michigan. In addition, Upper Peninsula
owns 25 other smaller facilities housing garage, warehouse and central office
switching equipment and over 2,098 miles of copper cable and 93 miles of fiber
optic cable. All properties described herein are encumbered under mortgages held
by the RUS and Co-Bank.
Central Scott Telephone Company owns 3.5 acres of land at 6 sites. Its main
office in Eldridge, Iowa contains 3,104 square feet of office and 341 square
feet of storage space. In addition, it has 3,360 square feet of garage space and
2,183 square feet utilized for its switching facilities. Central Scott has
351.96 miles of copper cable and 18.18 miles of fiber optic cable. All of
Central Scott's properties described herein are encumbered under mortgages held
the First National Bank of Omaha.
CLR Video has its headquarters in Holton, Kansas, leased from J.B.N. Telephone
Company. It also owns one small parcel of land and leases 22 small sites, which
it uses for its cable receiving and transmission equipment. All properties
described herein are encumbered under a mortgage to Co-Bank. Also, see under
Item 1.1.B. Cable Television.
It is Registrant's opinion that the facilities referred to above are in good
operating condition and suitable and adequate for present uses.
ITEM 3. LEGAL PROCEEDINGS
Registrant is a party to certain lawsuits in the ordinary course of business
primarily at Morgan. See "Business of Interactive- II Services - The Morgan
Group, Inc. - Risk Management, Safety and Insurance."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Common Stock of Lynch Interactive Corporation is traded on the American
Stock Exchange under the symbol "LIC." The market price high and lows in
consolidated trading of the Common Stock since Registrant became a public
company on September 1, 1999 are as follows adjusted for the two-for-one stock
split which occurred on September 11, 2001:
2000
Three Months Ended
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
High 66 64 56 57
Low 49 46 45 43
1999
Three Months Ended
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
N/A N/A
High -- -- 38 60
Low -- -- 21 26
At March 15, 2001, the Company had 858 shareholders of record.
Neither Interactive nor Lynch Corporation 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. Future financings may
limit or prohibit the payment of dividends.
ITEM 6. SELECTED FINANCIAL DATA
LYNCH INTERACTIVE CORPORATION
FIVE-YEAR SUMMARY
SELECTED FINANCIAL DATA
(In Thousands, Except Per Share Data)
Years Ended December 31, (a)
-----------------------------------------------------------------
1996 1997 1998 1999 2000
------------- ------------ ------------ ------------ ------------
Revenues .................................... $ 160,816 $ 194,062 $ 205,076 $ 204,640 $ 175,007
Operating Profit (b) ........................ 1,940 11,288 16,657 12,849 13,293
Net Financing Activities (c) ................ (4,024) (7,908) (8,201) (8,070) (8,949)
Reserve for Impairment of Investment in PCS
license holders (d) ....................... -- (7,024) -- (15,406) --
Gain on Sale of Subsidiary Stock and Other
Assets (e) ................................ 74 260 2,709 -- 4,187
--------- --------- --------- --------- ---------
Income (Loss) Before Income taxes, Minority
Interests, and Extraordinary Item ......... (2,010) (3,384) 11,165 (10,627) 8,531
(Provision) Benefit for Income Taxes ........ 445 736 (5,012) 2,285 (7,422)
Minority Interests .......................... 747 (631) (1,224) (714) 1,256
--------- --------- --------- --------- ---------
Income (Loss) Before Extraordinary Item ... (818) (3,279) 4,929 (9,056) 2,365
Extraordinary Item (f) ..................... -- -- -- (160) --
--------- --------- --------- --------- ---------
Net Income (Loss) ......................... $ (818) $ (3.279) $ 4,929 $ (9,216) $ 2,365
========= ========= ========= ========= =========
Basic and Diluted Earnings
Per Common Share (g) (h)
Income (Loss) Before Extraordinary Item ... $ (0.30) $ (1.16) $ 1.74 $ (3.21) $ 0.84
Net Income (Loss) ......................... $ (0.30) $ (1.16) $ 1.74 $ (3.27) $ 0.84
Cash, Securities and Short-Term Investments . $ 25,541 $ 28,043 $ 27,988 $ 32,941 $ 28,992
Total Assets ................................ $ 248,651 $ 253,032 $ 246,092 $ 253,969 $ 240,410
Long-Term Debt .............................. $ 123,002 $ 134,200 $ 127,663 $ 165,701 $ 162,592
Shareholders' Equity (i) .................... $ 45,068 $ 32,995 $ 39,314 $ 26,911 $ 23,399
(a) Includes results of Dunkirk and Fredonia Telephone Company from November
26, 1996, Transit Homes of America from December 30, 1996, Upper Peninsula
Telephone Company from March 18, 1997, and Central Scott Telephone Company
from July 16, 1999.
(b) Operating Profit is sales and revenues less operating expenses, which
excludes investment income, interest expense, equity in earnings of
affiliated companies, reserve for impairment in PCS license holders, gains
on sales of subsidiary stock and other assets, minority interests and
taxes.
(c) Consists of investment income, interest expense and equity in earnings of
affiliated companies.
(d) See Note 3 "Wireless Communications Services" in the Company's consolidated
financial statements.
(e) See Note 2 "Acquisitions and Dispositions - Dispositions" and Note 3
"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 - restated to
conform to SFAS #128 in 1996.
(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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
YEAR 2000 COMPARED TO 1999
This discussion should be read together with Consolidated Financial Statements
of Interactive and the notes thereto included herein.
Overview
Effective with the Spin off of Interactive by Lynch Corporation 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.
YEAR 2000 TO 1999
Revenues
2000 total revenues were $175.0 million, a decrease of $29.6 million, or 14.5%,
from the $204.6 million recorded in 1999. Within the operating segments:
multimedia revenues increased $8.0 million, or 13.5% from the previous year
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. Service revenues decreased by $37.6 million, or 25.8%. This decline is
primarily attributed to the continued decline in production of manufactured
housing, which began in 1999. Industrial production of new manufactured homes
decreased approximately 26% in 2000. Morgan is highly dependent upon the
manufactured housing industry generally and on certain major customers within
that industry. Some of Morgan's customers are financially stressed by continued
weakness in the industry. Morgan's unit deliveries in manufactured housing
declined by 31% in 2000, indicating a loss of market share due primarily to
competitive pricing pressures. Morgan's management believes that demand for
manufactured housing in the near term will continue to be slow. Morgan was also
affected by the decline in activity in other markets that Morgan serves, namely
recreational vehicles and large trailers.
Of note, shipments of manufactured homes tend to decline in the winter months in
areas where poor weather conditions inhibit transport. This usually reduces
operating revenues in the first and fourth quarters of the year. Morgan's
operating revenues, therefore, tend to be stronger in the second and third
quarters.
EBITDA
Earnings before interest, taxes, depreciation and amortization ("EBITDA")
decreased to $30.2 million in 2000 from $31.1 million in 1999, a decrease of
$0.9 million, or 1.8%. 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, ($11.9 millin and $18.7 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 9.2%
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). EBITDA at The
Morgan Group decreased by $2.7 million from $1.8 million in earnings in 1999 to
$0.9 million in losses in 2000. To combat a severe decline in revenues, Morgan,
in March 2000, instituted significant cost reduction initiatives in all areas
with primary focus on staff reduction and consolidation of facilities. The
effect of these initiatives was savings of $1.8 million in 2000. It is estimated
that the effects of these initiatives will continue with approximate savings of
$3.2 million in 2001. In spite of these significant efforts, operating costs of
Morgan as a percentage of their revenues were 102% for the year ended December
31, 2000, compared to 99% in the prior year, resulting in a loss from operations
of $2.0 million.
The transportation industry is dependent on the availability and cost of fuel.
Although fuel costs are paid by Morgan's owner-operators, increases in fuel
prices may have significant adverse effects on Morgan's operations for various
reasons. Since fuel costs vary between regions, drivers may become more
selective as to regions in which they will transport goods resulting in
diminished driver availability. Also, Morgan would experience adverse effects
during the time period from when fuel costs begin to increase until the time
when scheduled rate increases to customers are enacted. Increases in fuel prices
may also affect the sale of recreational vehicles by making the purchase less
attractive to consumers. A decrease in the sale of recreational vehicles would
be accompanied by a decrease in the transportation of recreational vehicles and
a decrease in the need for driver outsourcing services.
Morgan's excess and primary insurance arrangements are to be renewed in 2001.
While Morgan expects such arrangements to be renewed, the terms of such renewed
arrangements are difficult to predict and may result in a significant increase
in premium expense or the assumption of additional risks. The annual premium for
the excess insurance arrangements is expected to increase by $500,000 to
$600,000. Such renewed arrangements may also require Morgan to increase letters
of credit in respect to its first loss exposure under such arrangements. The
terms of the present credit facility may not be sufficient to provide for such
additional letters of credit, and depending on Morgan's performance, the lender
may not agree to expand the facility to provide such letters of credit. In that
event, it is management's current expectation that it would negotiate with its
carriers to accept lower letter of credit requirements in exchange for higher
premiums. Morgan plans to seek to pass through additional premium costs to
customers. To the extent it is unable to do so, additional premium costs will
increase working capital requirements and reduce profitability.
Operating Profit
Operating profits for 2000 increased to $13.3 million from $12.9 million
reported for 1999, an increase of $0.4 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, offset a negative swing in operating results of $2.5
million from the services segment due to lower revenues, offset, to some extent,
by cost savings.
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 $3.4 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 $2.9 million to $14.0 million in 2000 compared to
$11.1 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 ($2.7
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 $4.3 million includes federal, state and local taxes
and represents an effective rate of 87.0% versus 21.5% effective tax benefit of
$2.3 million in 1999. During 2000, the Company recorded a $3.2 million valuation
allowance for deferred tax assets at Morgan. Other 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
contribution to earnings of $1.3 million in 2000. Net losses at Morgan,
including the deferred tax valuation reserve noted above, offset by increased
net income at telephone operations in which there is a minority ownership was
the cause of the variance between years.
Net Income
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.
YEAR 1999 COMPARED TO 1998
Revenues
1999 total revenues were $204.6 million, a $0.5 million or 0.2% decrease from
the $205.1 million in 1998. Within the operating segments: multimedia revenues
increased $4.4 million, or 8% from the previous year, primarily due to the
acquisition of Central Scott Telephone Company ($1.9 million effect) and
partially due to growth in both telecommunications services as well as the
provision of non-traditional revenue services as: Internet, long distance
service and competitive local exchange carrier. Service revenues decreased by
$4.8 million or 3%. This decline is primarily attributed to the decline in
shipments of manufactured housing, which was evidenced in lower shipments by
some of the Company's major customers. The Company believes that this depressed
level of unit shipments in Manufactured Housing will continue through the first
half of 2000 and possibly moderating in the second half of the year. Despite the
current conditions, the Company believes that manufactured housing industry
production over the long term should continue to grow along with the general
economy.
Shipments of manufactured homes tend to decline in the winter months in areas
where poor weather conditions inhibit transport. This usually reduces operating
revenues in the first and fourth quarters of the year. Morgan's operating
revenues, therefore, tend to be stronger in the second and third quarter.
EBITDA
Earnings before interest, taxes, depreciation and amortization (EBITDA)
decreased to $28.2 million in 1999 from $30.9 million in 1998, a $2.7 million,
or 9% decrease. For purposes of this presentation, EBITDA does not include SARs
expense (see above). 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 ($18.7 million and $19.7 million for the years ended December 31,
1999 and 1998, respectively) in accordance with generally accepted accounting
principles. EBITDA for the telecommunications segment increased by $2.0 million,
or 7% to $31.4 million from $29.4 million in 1998. $1.1 million of this increase
was due to the acquisition of Central Scott Telephone Company. The remaining
increase was due to the growth in regulated and deregulated operations. EBITDA
at The Morgan Group decreased by $1.4 million, or 44%, from $3.3 million in
1998. The decrease is primarily attributable to a decline in shipments of
manufactured homes, reduced operating revenues and profitability in the
specialized outsourcing services business and a continued increase in insurance
and claims costs.
Operating Profit
Operating profits for 1999 decreased to $12.8 million from $16.7 million
reported for 1998, a decrease of $3.9 million. This decline in operating profits
is principally attributable to SAR expense of $2.9 million (as discussed above)
coupled with a decrease in operating results of $1.5 million from the services
segment due to lower revenues, which offset the increase of $0.3 million from
the telecommunications segment resulting from the acquisition of Central Scott
Telephone Company, net of goodwill amortization.
Other Income (Expense)
Investment income was approximately $2.0 million, or 7.9% increase compared to
1998. This increase is due to unrealized gains on trading securities.
Interest expense increased by $0.7 million to $11.1 million in 1999 compared to
$10.4 million in 1998. The increase is due primarily to the acquisition of
Central Scott Telephone Company on July 16, 1999 ($0.6 million) and the
Company's decision, effective January 1, 1999, to cease capitalizing interest on
its investment in PCS license holders ($1.6 million) offset by lower level of
borrowings at certain of the Company's subsidiaries.
As noted in the above discussion, during the first quarter of 1999, Interactive
recorded a write-down of its investment in PCS license holders of $15.4 million.
During 1999, the Company recorded approximately $1.0 million of equity in
earnings of affiliated entities primarily due to operating income form its New
Mexico cellular RSA interests.
Tax Provision
The 1999 tax benefit of $2.3 million includes federal, state and local taxes and
represents an effective rate of 21.5% versus 45% effective tax benefit in 1998.
The difference in the effective rates is primarily due to the effects of the
amortization of non-taxable goodwill and state tax effect on losses of certain
subsidiaries.
Minority Interest
Minority interest declined from $1.2 million in 1998 to $0.7 million in 1999 due
to lower earnings at Morgan.
Net Income
Net loss for year ended December 31, 1999 was $(9.2) million, or $(3.27) per
share, as compared to net income of $4.9 million, or $1.74 per share for the
year ended December 31, 1998. The impairment charge associated with Fortunet was
the primary item affecting the net loss in1999.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2000, Lynch Interactive Corporation had current assets of
$51.7 million and current liabilities of $44.9 million. Working capital was
therefore $6.8 million as compared to $12.1 million at December 31, 1999.
Investments in Interactive wireless ventures was the primary cause of the
decrease.
Capital Expenditures were $17.3 million in 2000 and $12.6 million in 1999 due to
the significant capital upgrade program at one of the Company's Kansas telephone
operation.
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 counsel
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 principal amount sold plus accrued and unpaid
interest. As a condition to modifying and extending the option to sell, the
Company entered into an agreement in December 2000, with its Chairman whereby it
will pay for and acquire, on the same terms and conditions, any portion of the
note sold by Cascade under this option. During January 2001, Cascade exercised
this option with regard to the $15 million of the notes and on February 14,
2001, the Company transferred $15.9 million to Cascade, including the 5% premium
plus accrued and unpaid interest in exchange for $15.0 million of the note held
by Cascade.
The option to sell the remaining $10 million is secured by a collateralized
letter of credit in which the collateral is provided by an affiliate of the
Chairman. The Company has agreed to pay all legal fees, letter of credit fees
and a 10% per annum collateral fee on the amount of collateral provided, $10.5
million. The Company can replace the collateral at any time and the collateral
fee would be eliminated from thereafter.
At December 31, 2000, total debt was $166.9 million, a decrease of $2.0 million
from December 31, 1999. At December 31, 2000 there was $143.0 million of fixed
interest rate debt outstanding averaging 6.793% and $23.9 million of variable
interest rate debt averaging 8.485%. January 2001, a subsidiary of the Company
borrowed $27.0 million 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 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 repayment in December
2000. In December 2000, a subsidiary of the Registrant amended the acquisition
facility used to acquire Upper Peninsula Telephone Company, and borrowed an
additional $6.0 million. The proceeds of the loan were used to pay down a
portion of the Western New Mexico Telephone Company acquisition facility.
The parent company of Interactive has a short-term line of credit facility,
which expires August 31, 2001, with maximum availability totaling $10.0 million
none of which was outstanding at December 31, 2000. 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.
At December 31, 2000, Morgan had a $7.7 million revolving credit facility
("Credit Facility") with a $6.7 million letter of credit sub-limit. The Credit
Facility bears interest at Morgan's option, on ether the applicable Eurodollar
Rate Margin or the applicable Base Rate Margin, all of which are adjusted over
the term of the Credit Facility. Total borrowings and outstanding letter of
credit are limited to qualified trade accounts receivable, qualified in-transit
amounts, contractor loans, and qualified investments. The Credit Facility
contains financial covenants, the most restrictive of which are a cash flow
coverage ratio, interest expense coverage ratio, and minimum net income. At
December 31, 2000, Morgan has no outstanding debt under its Credit Facility, and
$6.6 million of letters of credit were outstanding under the Credit Facility.
Letters of credit are required for self-insurance retention reserves and other
corporate needs.
The Credit Facility matured on January 28, 2001, at which time Morgan had no
outstanding debt and $6.6 million outstanding letter of credit. Morgan was in
default of the financial covenants, resulting in the bank failing to renew the
Credit Facility. As a result of the Credit Facility not being renewed, Morgan
has a payment default and the financial institution has the right to demand cash
to meet outstanding obligations under the letter of credit. The bank has
discretion as to whether to make any loans or issue additional letters of credit
for Morgan.
Interactive owns 55.6% of the equity of Morgan and 70.2% of the vote. For the
year ended December 31, 2000, Morgan represented 61.6% of Interactive
consolidated revenues and had an operating loss of $2.0 million, as compared to
Interactive's consolidated operating profits of $13.3 million. At December 31,
2000, Morgan represented 9.7% of Interactive's total assets and Interactive had
a net $4.0 million investment in Morgan. Morgan is actively seeking alternative
financial institutions to replace its existing Credit Facility as well as
additional capital resources, up to $3.0 million. Interactive is expecting to,
subject to final terms to be negotiated, provide a portion of the capital to be
raised. Interactive is in the preliminary stages of evaluating whether its
continued ownership in Morgan fits into Interactive's long-term strategy.
Both Morgan and Interactive management believe that an alternative credit
facility can be ultimately obtained, but attainment is not assured at this time.
Should a facility not be obtained, Interactive's investment in Morgan of $4.0
million may become impaired.
Interactive is in the preliminary stages of evaluating whether its continued
ownership in Morgan fits into Interactive's long-term strategy.
On February 22, 1999, The Morgan Group, Inc. filed a Schedule 13E4, that invited
its shareholders to tender up to 100,000 shares of Class A common stock, to
Morgan at prices not less than $8.50 nor greater than $10.00 per share. The
tender offer expired March 19, 1999, whereby Morgan purchased 103,000 shares at
$9 per share. Interactive did not tender any shares in response to this offer.
Subsequent to the spin-off by Lynch Corporation, the Board of Directors of Lynch
Interactive Corporation authorized the purchase of up to 100,000 shares of
common stock. Through December 31, 2000, 3,100 shares had been purchased at an
average cost of $49.01 per share.
Neither Interactive nor Lynch Corporation 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. Future financings may
limit or prohibit the payment of dividends.
Interactive has a high degree of financial leverage. As of December 31, 2000,
the ratio of total debt to equity was 6.6 to 1. Certain subsidiaries also have
high debt to equity ratios. In addition, the debt at subsidiary companies
contains restrictions on the amount of readily available funds that can be
transferred to the respective parent of the subsidiaries.
The Company has a need for resources to fund future growth as well as the
ongoing operations of the parent company. Interactive is currently considering
various alternative long and short-term financing arrangements. One alternative
is the equity offering of Interactive stock. Other alternatives, either in
addition to or in lieu of an Interactive equity offering, include a sale of
shares of Spinnaker stock or a sale of a portion or all of certain investment in
operating entities (see "harvesting" initiative discussed below), either
directly or through an exchangeable debt instrument. While management expects to
obtain adequate financing resources to enable the Company to meet its
obligations, there is no assurance that such can be readily obtained or at
reasonable costs.
The Company continues a harvesting program that was initiated when it was part
of Lynch Corporation. This program is a concentrated effort to monetize certain
of the Company's assets, including selling a portion or all of certain
investments in Company's operating entities. These may include the Company's
minority interest in network affiliated television stations and certain
telephone operations where competitive local exchange carrier opportunities are
not readily apparent. The Company's approximately 13.6% ownership interest in
Spinnaker may also be sold in order to fund future growth initiatives. There is
no assurance that all or any part of this program can be affected on acceptable
terms.
Morgan periodically assesses the net realizable value of its long-lived assets
and evaluates such assets for impairment whenever events or changes in
circumstances indicate the carrying amount of an asset may not be recoverable.
Morgan continues to assess the recoverability of the goodwill associated with
two recent acquisitions. The total amount under review by Morgan is $4.1
million. Morgan does not believe there is any impairment of long-lived assets,
including goodwill.
MARKET RISK
The Company is exposed to market risk relating to changes in the general level
of U.S. interest rates. Changes in interest rates affect the amounts of interest
earned on the Company's cash equivalents and short-term investments
(approximately $29.0 million at December 31, 2000 and $32.9 million at December
31, 1999). The Company generally finances the debt portion of the acquisition of
long-term assets with fixed rate, long-term debt. The Company generally
maintains the majority of its debt as fixed rate in nature 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, 2000, approximately $23.9 million, or 14% of Interactive's
long-term debt and notes payable bears interest at variable rates. Accordingly,
the Company's earnings and cash flows are affected by changes in interest rates.
Assuming the current level of borrowings for variable rate debt and assuming a
one percentage point change in the 1999 and 2000 average interest rate under
these borrowings, it is estimated that Interactive's 1999 and 2000, interest
expense would have changed by about $0.2 million in each year. In the event of
an adverse change in interest rates, management would likely take actions to
further mitigate its exposure. However, due to the uncertainty of the actions
that would be taken and their possible effects, the analysis assumes no such
actions. Further, the analysis does not consider the effects of the change in
the level of overall economic activity that could exist in such an environment.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The information required by this Item 7A is included under the caption "Market
Risk" in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in Item 7.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 is included under the caption
"Executive Officers of the Registrant" in Item 1 hereof and included under the
captions "Election of Directors" and "Section 16(a) Reporting" in Registrant's
Proxy Statement for its Annual Meeting of Shareholders for 2001, 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 2001,
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 2001, 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
2001, 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:
Balance Sheets - December 31, 1999 and 2000
Statements of Operations - Years ended December 31, 1998, 1999,
and 2000 Statements of Shareholders' Equity - Years ended December
31, 1998, 1999, and 2000 Statements of Cash Flows - Years ended
December 31, 1998, 1999, and 2000 Notes to Financial Statements
(a)(2) Financial Statement Schedules:
Schedule I - Condensed Financial Information of Registrant
Schedule II - Valuation and Qualifying Accounts
(a)(3) Exhibits: See the Exhibit Index on pages 53-54
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: Registrant filed Forms 8-K dated January 16, 2001
and January 19, 2001, relating to the potential repurchase of a $25
million convertible note of the Registrant.
(c) Exhibits: The following Exhibits listed in the Exhibit Index are filed
with this Form 10-K
Annual Report:
10(m) Principal Executive Bonus Plan
21 - Subsidiaries of Registrant
23 - Consents of Independent Auditors
- Ernst & Young LLP
- Siepert & Company LLC (2)
24 - Powers of Attorney
99 - Report of Independent Auditors
- Report of Siepert & Co., L.L.P. of financial statements
of Cuba City Telephone Exchange Company for the year ended
December 31, 2000 and 1999
- Report of Siepert & Co., L.L.P. on the financial statements
of Belmont Telephone Company for the year ended December 31,
2000 and 1999
(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 ("Lynch Interactive Corporation" or the
"Company") as of December 31, 1999 and 2000 and the related consolidated
statements of operations, shareholders' equity, and cash flows for the years
then ended, and the accompanying combined statements of operations, equity,
investments by and advances from Lynch Corporation and cash flows for the year
ended December 31, 1998 (see Note 1). Our audits also included the financial
statement schedules listed in the index at Item 14(a). These financial
statements and schedules are the responsibility of the management of Lynch
Interactive Corporation. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits. We did not audit the
1999 and 2000 financial statements of Cuba City Telephone Exchange Company and
Belmont Telephone Company, indirect wholly-owned subsidiaries of Lynch
Interactive Corporation, which statements reflect total revenues of $2,070,000
and $2,076,000 for the years ended December 31, 1999 and 2000, respectively.
Those statements were audited by other auditors whose reports have been
furnished to us, and our opinion, insofar as it relates to data included for
Cuba City Telephone Exchange Company and Belmont Telephone Company in 1999 and
2000, 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, 1999 and 2000, and the consolidated results of
their operations and their cash flows for the years then ended, and the combined
results of operations, equity, investments by and advances from Lynch
Corporation and cash flows for the year ended December 31, 1998 (see Note 1), in
conformity with accounting principles generally accepted in the United States.
Also, in our opinion, based on our audits and the reports of other auditors, the
related financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all material respects,
the information set forth therein.
/s/ERNST & YOUNG LLP
Stamford, Connecticut
March 30, 2001
LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES
BALANCE SHEETS
December 31,
-------------------------
1999 2000
-------------------------
(In Thousands)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................... $ 31,354 $ 26,926
Marketable securities ....................................... 1,587 2,066
Trade accounts receivable less allowances of $415 in 1999 and
$403 in 2000 ............................................... 16,875 15,147
Deferred income taxes ....................................... 3,404 --
Other current assets ........................................ 7,573 7,562
--------- ---------
TOTAL CURRENT ASSETS .......................................... 60,793 51,701
PROPERTY, PLANT AND EQUIPMENT:
Land ........................................................ 1,347 1,363
Buildings and improvements .................................. 10,522 10,745
Machinery and equipment ..................................... 142,558 153,915
--------- ---------
154,427 166,023
Accumulated Depreciation .................................... (58,497) (66,766)
--------- ---------
95,930 99,257
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS
ACQUIRED, NET ............................................... 62,845 58,949
INVESTMENTS IN AND ADVANCES TO AFFILIATED ENTITIES ............ 9,479 13,284
INVESTMENT IN SPINNAKER INDUSTRIES, INC ....................... 11,875 5,250
OTHER ASSETS .................................................. 13,047 11,969
--------- ---------
TOTAL ASSETS .................................................. $ 253,969 $ 240,410
========= =========
See accompanying notes.
LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES
BALANCE SHEETS
December 31,
--------------------------
1999 2000
--------------------------
(In Thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks ............................ $ 3,271 $ 4,333
Trade accounts payable ............................ 4,465 2,797
Accrued interest payable .......................... 805 2,504
Accrued liabilities ............................... 14,738 13,260
Accrued income taxes............................... 3,942 4,659
Accrued claim payable.............................. 3,071 3,224
Customer advances ................................. 1,974 1,540
Current maturities of long-term debt .............. 16,445 12,582
--------- ---------
TOTAL CURRENT LIABILITIES ...................... 48,711 44,899
--------- ---------
LONG-TERM DEBT ...................................... 149,256 150,010
DEFERRED INCOME TAXES ............................... 13,220 7,746
OTHER LIABILITIES ................................... 5,817 5,624
MINORITY INTEREST ................................... 10,054 8,732
COMMITMENT AND CONTINGENCIES (Note 13)
SHAREHOLDERS' EQUITY
COMMON STOCK, NO PAR VALUE-10,000,000 SHARES
AUTHORIZED: 2,824,766 SHARES ISSUED (at stated
value), 2,821,666 SHARES OUTSTANDING ......... -- --
ADDITIONAL PAID-IN CAPITAL ...................... 21,404 21,404
RETAINED EARNINGS (ACCUMULATED DEFICIT) ......... (1,713) 652
ACCUMULATED OTHER COMPREHENSIVE INCOME .......... 7,240 1,495
TREASURY STOCK, 400 and 3,100 shares, at cost ... (20) (152)
--------- ---------
26,911 23,399
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .......... $ 253,969 $ 240,410
========= =========
See accompanying notes.
LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES
STATEMENTS OF OPERATIONS
Years Ended December 31,
1998 1999 2000
-----------------------------------------
(In Thousands, except share data)
SALES AND REVENUES:
Multimedia ................................................ $ 54,622 $ 59,011 $ 66,983
Services .................................................. 150,454 145,629 108,024
----------- ----------- -----------
205,076 204,640 175,007
----------- ----------- -----------
COSTS AND EXPENSES:
Multimedia ................................................ 38,176 41,671 48,477
Services .................................................. 138,193 134,989 100,619
Selling and administrative ................................ 12,050 15,131 12,618
----------- ----------- -----------
OPERATING PROFIT ............................................ 16,657 12,849 13,293
----------- ----------- -----------
Other income (expense):
Investment income ......................................... 1,865 2,013 3,385
Interest expense .......................................... (10,383) (11,140) (14,003)
Equity in earnings of affiliated companies ................ 317 1,057 1,669
Reserve for impairment of investment in PCS license holders -- (15,406) --
Gain on sales of subsidiary stock and other assets ........ 2,709 -- 4,187
----------- ----------- -----------
(5,492) (23,476) (4,762)
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES, MINORITY
INTERESTS AND EXTRAORDINARY ITEM ......................... 11,165 (10,627) 8,531
(Provision) benefit for income taxes ........................ (5,012) 2,285 (7,422)
Minority interests .......................................... (1,224) (714) 1,256
----------- ----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM ..................... 4,929 (9,056) 2,365
LOSS FROM EARLY EXTINGUISHMENT OF DEBT, NET OF TAX BENEFIT OF
$105......................................................... -- (160) --
----------- ----------- -----------
NET INCOME (LOSS) ........................................... $ 4,929 $ (9,216) $ 2,365
=========== =========== ===========
Basic and diluted weighted average shares outstanding ....... 2,836,000 2,824,000 2,823,000
=========== =========== ===========
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE:
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM ..................... $ 1.74 $ (3.21) $ 0.84
EXTRAORDINARY ITEM .......................................... 0.00 (0.06) 0.00
----------- ----------- -----------
NET INCOME (LOSS) ........................................... $ 1.74 $ (3.27) $ 0.84
=========== =========== ===========
See accompanying notes.
LYNCH INTERACTIVE CORPORATION AND SUBSIDIAIRES
STATEMENTS OF SHAREHOLDERS' EQUITY
(In Thousands, Except Share Data)
Accumulated Investments
Other By and
Common Additional Compre- Advances from
Stock Common Paid-in Retained hensive Treasury Lynch
Out-standing Stock Capital Earnings Income Stock Corporation Total
---------- ---------- ---------- ----------- ---------- --------- --------------- ----------
Balance at January 1, 1998 .... -- -- -- -- -- -- $ 32,955 $ 32,955
Investment by and advances (to)
from Lynch Corporation ...... -- -- -- -- -- -- 2,930 2,930
Net income for the period ..... -- -- -- -- -- -- 4,929 4,929
Unrealized loss on available
for sale securities (net of tax
benefit of $1,086) ............ -- -- -- -- -- -- (1,500) (1,500)
--------
Comprehensive income ........ -- -- -- -- -- -- -- 3,429
---------- -------- --------- --------- -------- --------- -------- --------
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 Corporation 1,412,383 -- $ 21,404 -- $ 7,407 -- (28,811) --
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)
--------
Comprehensive income ........ -- -- -- -- -- -- -- 2,334
Adjustment relating to --------
acquisition cost............... -- -- -- -- (566) -- -- (566)
Reclassification adjustment ... -- -- -- -- (480) -- -- (480)
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
========= ======== ======== ======== ======== ======== ======== =======
LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
Years Ended December 31,
-----------------------------------
1998 1999 2000
-----------------------------------
(In Thousands)
OPERATING ACTIVITIES
Net income (loss) ........................................................ $ 4,929 $ (9,216) $ 2,365
Depreciation and amortization ............................................ 14,243 15,346 16,864
Unrealized (gain) loss on trading securities ............................. 18 (620) (479)
Minority interests ....................................................... 1,224 714 (1,256)
Earnings of affiliates ................................................... (317) (1,057) (1,669)
Reserve for impairment in PCS license holders ............................ -- 15,406 --
Gain on redemption of East/West preferred stock .......................... -- -- (4,125)
Gain on sale of securities ............................................... -- -- (909)
Deferred income taxes .................................................... (1,707) (5,646) 945
Changes in operating assets and liabilities, net of effects of
acquisitions:
Trade accounts receivables ........................................... 54 2,448 1,728
Trade accounts payable and accrued liabilities ....................... 3,173 1,812 (577)
Other ................................................................ 752 (506) 11
Other .................................................................... (2,654) -- (1,034)
-------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES ................................ 19,715 18,681 11,864
-------- ------- -------
INVESTING ACTIVITIES
Acquisitions (total cost less debt assumed and cash equivalents acquired):
Central Scott Telephone Company ....................................... -- (23,985) --
Investment in Personal Communications Services ........................... --
Partnerships, net ..................................................... 3,692 -- (7,988)
Proceeds from redemption of East/West preferred stock .................... -- -- 8,712
Capital expenditures ..................................................... (11,642) (12,553) (17,314)
Proceeds from sales of securities ........................................ -- -- 1,563
Other .................................................................... 272 (1,370) 898
-------- ------- -------
NET CASH USED IN INVESTING ACTIVITIES .................................... (7,678) (37,908) (14,129)
-------- ------- -------
FINANCING ACTIVITIES
Issuance of long-term debt ............................................... 964 51,712 13,489
Payments to reduce long-term debt ........................................ (7,501) (13,674) (16,698)
Net borrowings (payments), lines of credit ............................... (9,812) 2,718 1,062
Purchase of treasury stock ............................................... -- (20) (132)
Advances from (to) Lynch Corporation ..................................... 2,930 (15,987) --
Other .................................................................... 1,345 (1,189) 116
-------- ------- -------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (12,074) 23,560 (2,163)
-------- ------- --------
Net increase (decrease) in cash and cash equivalents ..................... (37) 4,333 (4,428)
Cash and cash equivalents at beginning of year ........................... 27,058 27,021 31,354
-------- ------- -------
Cash and cash equivalents at end of year ................................. $ 27,021 $ 31,354 $ 26,926
========= ======== ========
See accompanying notes.
LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements
December 31, 2000
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. Net assets contributed by Lynch Corporation,
were estimated to be approximately $23 million at the date of the spin-off. Such
amount was subsequently decreased in the fourth quarter of 1999 by $1.6 million
to reflect a revision in the allocation of certain liabilities. Prior to the
Spin-Off, Interactive succeeded to the credit facilities established by Lynch
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.
Basis of Presentation
As of December 31, 1999 and 2000, the year ended December 31, 2000, 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 and, accordingly, certain assumptions were made in preparing such
financial information. Such information, therefore, may not necessarily reflect
the results of operations, financial condition or cash flows of the Company in
the future or what they would have been had the Company been an independent
public company during the reporting periods.
The Company consolidates the operating results of its telephone and cable
television subsidiaries (60-100% owned at December 31, 1999 and 2000) and The
Morgan Group, Inc. ("Morgan"), in which, at December 31, 2000, the Company owned
70.2% of the voting power and 55.6% of common equity. 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 following affiliated
companies on the equity basis of accounting:
Coronet Communications Company (20% owned at December 31, 2000), Capital
Communications Company, Inc. (49% owned at December 31, 2000), Fortunet
Communications, L.L.P. (49.9% owned at December 31, 2000), and the cellular
operations in New Mexico (17% to 21% owned at December 31, 2000).
The shares of Spinnaker Industries, Inc., in which the company owns 2.5% of the
voting power and 13.6% of the common equity, are accounted for in accordance
with Statements of Financial Accounting Standards (SFAS) No. 115 "Investment in
Debt and Equity Securities."
Lynch Corporation had historically provided substantial support services such as
finance, cash management, legal and human resources to its various business
units. Lynch Corporation allocated the cost for these services among the
business units supported based principally on informal estimates of time spent
by the corporate office on both Interactive and Lynch Corporation matters. In
the opinion of management, the method of allocating these costs is reasonable;
however, the costs of these services allocated to the Company are not
necessarily indicative of the costs that would have been incurred by Interactive
on a stand-alone basis.
At the Spin-Off, the employees of the corporate office of Lynch Corporation
became employees of Interactive and Interactive began providing corporate
management services to Lynch Corporation, which is charged a management fee for
these services. This allocation was $178,000 for the period from September 1,
1999 to December 31, 1999. In January 2000, some of such employees ceased to
provide services to Lynch Corporation and for the year ended December 31, 2000
was $265,000.
Interactive and Lynch Corporation have entered into certain agreements governing
various ongoing relationships, including the provision of support services and a
tax sharing agreement. The tax sharing agreement provides for the allocation of
tax attributes to each company as if it had actually filed with the respective
tax authority.
Use of Estimates/Reclassifications
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles in the United States requires
management to make estimates and assumptions that effect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates. Certain amounts in the accompanying consolidated financial
statement have been reclassified to conform with current year presentation.
Cash Equivalents
Cash equivalents consist of highly liquid investment with a maturity of less
than three months when purchased.
At December 31, 1999 and 2000, assets of $21.3 and $18.7 million, which are
classified as cash and cash equivalents, are invested in United States Treasury
money market funds for which affiliates of the Company serve as investment
managers to the respective funds.
Marketable Securities
Marketable securities consist principally of common stocks. At December 31,
1998, 1999 and 2000, respectively, certain marketable securities and United
States Treasury money market funds, classified as cash equivalents, were
classified as trading. Interactive's investment in Spinnaker Industries, Inc.
and certain other equity securities included in other assets with carrying
values of $16.8 million and $7.3 million at December 31, 1999 and 2000,
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 $14.7 million, $12.4 million and $2.6 million for the years ended December
31, 1998, 1999 and 2000, 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 were $382,000, $37,000 and $909,000, and
there were no realized losses included in investment income for the years ended
December 31, 1998, 1999 and 2000, respectively.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost and include expenditures for
additions and major improvements. Maintenance and repairs are charged to
operations as incurred. Depreciation is computed for financial reporting
purposes using the straight-line method over the estimated useful lives of the
assets, which range from 3 to 35 years. For income tax purposes, accelerated
depreciation methods are used.
When a portion of the Company's depreciable property, plant and equipment
relating to its multimedia business is retired, the gross book value of the
assets, including cost of disposal and net of any salvage value, is charged to
accumulated depreciation.
Excess of Cost Over Fair Value of Net Assets of Companies Acquired, Net
Excess of cost over fair value of net assets of companies acquired (goodwill) is
being amortized on a straight-line basis over periods ranging from twenty to
forty years. The Company periodically reviews goodwill to assess recoverability,
and impairments would be recognized in operating results if a permanent
diminution in value were to occur. The Company measures the potential impairment
of recorded goodwill by the undiscounted value of expected future cash flows in
relation to its net capital investment in the subsidiary. Based on its review,
the Company does not believe that an impairment of its goodwill has occurred.
Excess of cost over fair value of net assets of companies acquired of $62.8
million and $58.9 million are net of accumulated amortization of $14.2 million
and $17.3 at December 31, 1999 and 2000, 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.
Multimedia
Multimedia revenues include local and intrastate telephone company service
revenues, which are subject to review and approval by state public utility
commissions, and long distance network revenues, which are based upon charges to
long distance carriers through a tariff filed by the National Exchange Carriers
Association with the Federal Communications Commission. Revenues are based on
cost studies for the Company's exchanges, and have been estimated pending
completion of final cost studies. Estimated revenue is adjusted to actual upon
the completion of the cost studies.
Services
Service revenues and related costs of transportation are recognized when
transportation of product is completed. Other operating expenses are recognized
when incurred.
Earnings Per Share
Basic earnings per common share amounts are based on the average number of
common shares outstanding during each period, excluding the dilutive effects of
options, warrants, and convertible securities. Diluted earnings per share
reflect the effect, where dilutive of option, warrants and convertible
securities, using the treasury stock and if converted methods as applicable.
Comprehensive Income
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, which prior to adoption were reported separately
in shareholders' equity to be included 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. The adoption of SFAS No. 131 did not affect results
of operations or financial position, but did affect the disclosure of segment
information.
Impairments
The Company accounts for its long-lived assets in accordance with the provision
of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of. The Company periodically assesses the net
realizable value of its long-lived assets and evaluates such assets for
impairment whenever events or changes in circumstances indicate the carrying
amount of an asset may not be recoverable. For assets to be held, impairment is
determined to exist if estimated undiscounted future cash flows are less than
the carrying amount. For assets to be disposed of, impairment is determined to
exist if the estimated net realizable value if less than carrying amount.
Stock Based Compensation
The Company applies the provision of SFAS No. 123, Accounting for Stock Based
Compensation. SFAS No. 123 establishes a fair value method of accounting and
reporting standards for stock based compensation plans. However, as permitted by
SFAS No. 123, the Company elected to continue to apply the provision of
Accounting Principles Board Opinion ("APB") No. 25, Accounting for Stock Issued
to Employees and related interpretations. Under APB No. 25, if the exercise
price of the Company's employee stock options was not less than the market price
of the underlying stock on the date of grant, no compensation expense is
recognized. The Company is required to disclose the pro forma net income (loss)
and net income (loss) per share as if the fair value method defined in SFAS No.
123 had been applied to all grants (see Note 9).
Fair Value of Financial Instruments
Cash and cash equivalents, trade accounts receivable, short-term borrowings,
trade accounts payable and accrued liabilities are carried at cost which
approximates fair value due to the short-term maturity of these instruments. The
carrying amount of the Company's borrowings under its revolving line of credit
approximates fair value, as the obligations bear interest at a floating rate.
The fair value of other long-term obligations approximates cost based on
borrowing rates for similar instruments.
Issuance of Stock by Subsidiary and Investees
Changes in the Company's equity in a subsidiary or an investee caused by
issuances of the subsidiary's or investees' stock are accounted for as gains or
losses where such issuance is not part of a broader reorganization.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standard Board issued SFAS No. 133 as
amended by SFAS Nos. 137 and 138, Accounting for Derivative Instruments and
Hedging Activities. SFAS No. 133 is required to be adopted in years beginning
after June 15, 2000. SFAS No. 133 requires the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in fair value are either offset
against the changes in fair value of assets and liabilities through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings. Management does not anticipate the adoption of SFAS No. 133 will have
a significant effect on Interactive's earnings or financial position.
2. Acquisitions and Dispositions
Acquisitions
On July 16, 1999, Lynch Telephone Corporation IX, a subsidiary of Interactive,
acquired by merger, all of the stock of Central Scott Telephone Company for
approximately $28.1 million in cash. As a result of this transaction, the
Company recorded approximately $17.9 million in goodwill, which is being
amortized over 25 years. The Company 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.)
The above acquisition was accounted for as purchase, and accordingly, the assets
acquired and liabilities assumed were recorded at their estimated fair market
values on the date of acquisition. The operating results of the acquired company
are included in the Statements of Operations from its acquisition date.
Disposition
As of December 9, 1998, WNM Communications, Inc., a Lynch Telephone Corporation
subsidiary, sold the assets of its direct broadcast satellite business serving
portions of New Mexico for approximately $3.1 million (the "DBS Disposition").
As a result of the transaction, a pre-tax gain on the sale of the assets of
approximately $2.7 million was recognized and classified as gain on sale of
subsidiary stock and other operating assets in the Consolidated Statements of
Operations.
The following unaudited consolidated pro forma information shows the results of
the Company's operations presented as if the Central Scott Acquisition was made
at the beginning of 1998 and DBS Disposition was made at the beginning of 1998.
The unaudited pro forma information is not necessarily indicative of the results
of operations that would have occurred had the transaction been made at that
date nor is it necessarily indicative of future results of operations.
Years Ended December 31,
---------- ---------- ----------
1998 1999 2000
---------- ---------- ----------
Sales ..................................... $ 208,676 $ 207,482 $ 175,007
Net income (loss) before extraordinary item $ 2,439 $ (10,147) $ 2,365
Basic and diluted earnings per share ...... $ 0.86 $ (3.60) $ 0.84
3. 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 debt. The face value
of the restructured debt is $16.1 million and the carrying value is $3.4 million
at December 31, 2000. In addition, in exchange for a cash infusion of $250,000,
Lynch Interactive acquired (1) shares of preferred stock in Sunshine with a
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. At the time,
Interactive's obligation to make further loans was terminated.
During 1998, Rivgam Communicators, LLC ("Rivgam"), a subsidiary of GFI,
transferred to Lynch PCS Corporation G ("Lynch PCS G") a subsidiary of
Interactive, its 10 MHZ PCS license covering the Rand-McNally basic trading area
of Las Cruces, New Mexico. This transfer was in full settlement of an agreement
between Lynch PCS G and Rivgam. This agreement provided that Lynch PCS G would
be compensated for certain bidding and administrative services it provided to
Rivgam in the PCS D and E Block Auctions by receiving a 10% net profit interest
(after capital charges) in any PCS licenses acquired by Rivgam. The transfer was
accounted for as a non-monetary transaction and resulted in Lynch Interactive
recognizing management service income of $1.0 million in 1998 based upon the
estimated fair value of the license. Lynch PCS G has similar arrangements with
two separate entities in which GFI has minority interests in which Lynch PCS G
is entitled to receive a 5% net profit interest (after capital charges) in
licenses acquired in the WCS and LMDS Auctions.
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 subsequent to December 31, 2000,
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, 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 $4.1 million in the first quarter of 2000.
4. 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, 1999 and 2000, LENCO's investment in Coronet was carried at a
negative $1,037,000 and a negative $867,000, respectively, due to LENCO's
guarantee of $3.8 million of Coronet's third party debt. Long-term debt of
Coronet, at December 31, 2000, totaled $10.7 million due to a third party lender
which is due quarterly through December 31, 2005.
At December 31, 1999 and 2000, LENCO II's investment in Capital is carried at
zero as its share of net losses recognized to date have exceeded its net
investment. LENCO II also owns $10,000 of Preferred Stock B of Capital, which is
convertible at any time into the Common Stock of Capital in a sufficient amount
to bring LENCO II's ownership to 50%.
Subsidiaries of Lynch Telephone Corporation own minority positions in three
partnerships providing cellular service to three Rural Service Areas ("RSAs") in
New Mexico. Adjusting for the minority positions in non-wholly owned and
wholly-owned subsidiaries, Lynch Telephone Corporation's net equity interest in
the three RSA's is as follows: RSA #1 - 20.8%, RSA #3 - 21.1%, and RSA #5 -
17.0%. Lynch Telephone Corporation's net investment in these partnerships is
$1.5 million at December 31, 1999 and $1.8 million at December 31, 2000.
Summarized financial information for companies accounted for by the equity
method is as follows:
Consolidated Information
1998(a) 1999(a) 2000
------- -------- --------
(In Thousands)
Current assets ................................. $ 7,868 $ 9,176 $ 10,830
Property, plant & equipment, intangibles & other 26,007 26,072 41,899
Total Assets ................................... 33,875 35,248 52,729
Current liabilities ............................ 7,838 7,904 6,637
Long term liabilities .......................... 26,719 24,507 36,628
Minority interest .............................. (74) 1,211 1,819
Equity ......................................... (608) 1,626 7,645
Total liabilities & equity ..................... 33,875 35,248 52,729
Revenues ....................................... 27,078 27,344 37,281
Gross profit ................................... 10,863 10,429 11,222
Net income ..................................... 4,744 4,399 4,569
(a) Prior years have been restated to conform with current year presentation.
5. Notes Payable and Long-term Debt
Long-term debt represents borrowings by specific entities, which are
subsidiaries of Interactive.
December 31,
1999 2000
-----------------------------------
(In Thousands)
Long-term debt consists of (all interest rates are at December 31, 2000):
Rural Electrification Administration (REA) and Rural Telephone Bank (RTB) notes
payable in equal quarterly installments through 2027 at fixed interest rates
ranging from 2% to 7.5% (4.8% weighted average), secured by
assets of the telephone companies of $121.0 million $48,892 $52,188
Bank credit facilities utilized by certain telephone and telephone holding
companies through 2009, $35.2 million at fixed interest rates averaging
7.9% and $19.6 million at variable interest rates averaging 9.5% 60,740 54,799
Unsecured notes issued in connection with acquisitions through 2006, all at
fixed interest rates averaging 10% 27,654 27,259
Convertible subordinated note due in December, 2004 at fixed interest rate
of 6% 25,000 25,000
Other 3,415 3,346
-----------------------------------
165,701 162,592
Current maturities (16,445) (12,582)
-----------------------------------
$149,256 150,010
===================================
REA debt of $10.8 million bearing interest at 2% has been reduced by a purchase
price allocation of $2.1 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 2001. There were no borrowings under
this line at December 31, 2000.
At December 31, 2000, Morgan had a $7.7 million revolving credit facility
("Credit Facility") with a $6.7 million letter of credit sub-limit. The Credit
Facility bears interest at Morgan's option, on ether the applicable Eurodollar
Rate Margin or the applicable Base Rate Margin, all of which are adjusted over
the term of the Credit Facility. Total borrowings and outstanding letter of
credit are limited to qualified trade accounts receivable, qualified in-transit
amounts, contractor loans, and qualified investments. The Credit Facility
contains financial covenants, the most restrictive of which are a cash flow
coverage ratio, interest expense coverage ratio, and minimum net income. At
December 31, 2000, Morgan has no outstanding debt under its Credit Facility, and
$6.6 million of letters of credit were outstanding under the Credit Facility.
Letters of credit are required for self-insurance retention reserves and other
corporate needs.
The Credit Facility matured on January 28, 2001, at which time Morgan had no
outstanding debt and $6.6 million outstanding letter of credit. Morgan was in
default of the financial covenants, resulting in the bank failing to renew the
Credit Facility. As a result of the Credit Facility not being renewed, Morgan
has a payment default and the financial institution has the right to demand cash
to meet outstanding obligations under the letter of credit. The bank has
discretion as to whether to make any loans or issue additional letters of credit
for Morgan.
Additionally, at December 31, 2000, long-term debt of $5.7 million at one of the
Company's subsidiaries was in violation of certain covenants. Management expects
that this debt will be renegotiated.
In general, the long-term debt facilities are secured by substantially all of
the Company's property, plant and equipment, receivables and common stock of
certain subsidiaries and contain certain covenants restricting distributions to
Lynch Interactive. At December 31, 1999 and 2000, 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 price 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 million of the note held by Cascade.
The option to sell the remaining $10 million is secured by a collateralized
letter of credit in which the collateral is provided by an affiliate of the
Chairman. The company has agreed to pay all legal fees, letter of credit fees
and a 10% per annum collateral fee on the amount of collateral provided, $10.5
million. The Company can replace the collateral at any time and the fees would
be eliminated thereafter.
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. Accordingly, the $15.0 million Cascade Note that was
repurchased on February 14, 2001, is classified as long-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.
Cash payments for interest were $10.1 million, $10.8 million and $15.4 million
for the years ended December 31, 1998, 1999 and 2000, respectively.
Aggregate principal maturities of long-term debt at December 31, 2000 for each
of the next five years are as follows: 2001--$12.6 million, 2002--$11.5 million,
2003--$15.0 million, 2004--$33.6 million and 2005--$7.8 million.
6. Default on Morgan Line of Credit
As noted above, at December 31, 2000, The Morgan Group, Inc. was in default
under its Credit Facility. At that time, Morgan had no borrowings under this
agreement but the Lender had issued $6.6 million of lines of credit securing
certain insurance claims. As of the date of these financial statements, the
default has not yet been cured.
Interactive owns all of the Class B common stock of The Morgan Group, Inc. and
161,100 shares of Morgan's Class A common stock, which in the aggregate
represents 70.2% of the consolidated voting power of the combined classes of
Morgan's common stock and 55.6% of the economic equity ownership. The Class B
Morgan common stock is entitled to two votes per common share.
For the year ended December 31, 2000, Morgan represented 61.6% of Lynch
Interactive consolidated revenues and had an operating loss of $2.0 million, as
compared to Interactive's consolidated operating profits of $13.3 million. At
December 31, 2000, Morgan represented 9.7% of Interactive's total assets and
Interactive had a net $4.0 million investment in Morgan. Morgan is actively
seeking alternative financial institutions to replace its existing Credit
Facility as well as additional capital resources, up to $3.0 million.
Interactive is expecting to, subject to final terms to be negotiated, provide a
portion of the capital to be raised.
Both Morgan and Interactive management believe that an alternative credit
facility can be ultimately obtained, but attainment is not assured at this time.
Should a facility not be obtained, Interactive's investment in Morgan of $4.0
million may become impaired.
7. Related Party Transaction
Interactive was added to a lease in 1999 for its corporate headquarters for an
annual payment of $90,000 with an affiliate of its Chairman and Chief Executive
Officer.
8. Shareholders Equity
Subsequent to the spin-off by Lynch, the Board of Directors of Lynch Interactive
authorized the purchase of up to 100,000 share of its common stock. Through
December 31, 2000, 3,100 shares have been purchased at an average cost of $49.01
per share. All shares and per share amounts have been adjusted to reflect the
split.
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.
9. Stock Option Plans
At the Interactive Annual Meeting on May 11, 2000, the shareholders approved a
stock option plan, which provides for the granting of incentive or
non-qualifying stock options to purchase up to 83,000 shares of common stock to
all employees and consultants of Interactive. No incentive stock options may
have an exercise price less than 100% of the fair market value at the time of
the grant. The exercise price of the non-qualifying stock options will be
determined at the time of the grant. Although the exercise period is determined
when the options are granted, no option shall be exercised later than ten years
after its granted. Subject to limit exceptions, options are forfeited upon
termination of employment or services. No options have been granted to date.
On February 29, 1996, Lynch Corporation adopted a Stock Appreciation Rights
program for certain employees. Through September 1, 1999, 43,000 of Stock
Appreciation Rights ("SAR") had been granted at prices ranging from $63 to $85
per share. Upon the exercise of a SAR, the holder is entitled to receive an
amount equal to the amount by which the market value of the Lynch Corporation
common stock on the exercise date exceeds the grant price of the SAR. Effective
September 30, 1998, Lynch Corporation amended the SAR program so that the SARs
became exercisable only if the market price for the Lynch Corporation's shares
exceed 200% of the SAR exercise price within five years from the original grant
date. This amendment eliminated the recording of the profit and loss effect of
the SARs for changes in the market price in the Company's common stock until it
becomes probable that the SARs will become exercisable. At the spin-off, these
SARs were allocated to Lynch and Interactive. Lynch Corporation and Interactive
offered to the SAR holders an option of turning in their SARs in exchange for a
payment based upon the combined market prices of Lynch Corporation and Lynch
Interactive Corporation and, in the case of SARs issued prior to December 5,
1997, East/West Communications, Inc. East/West Communications was spun off from
Lynch Corporation on December 5, 1997 on a share for share basis. All SAR
holders accepted this proposal thereby terminating the plan and the total
payments of $3.8 million were allocated to Lynch ($0.8 million) and Interactive
(3.0 million) on the basis of the relative market value of December 31, 1999.
The net income (expense) relating to this program that was either allocated to
Interactive prior to the time of the amendment or recorded by Interactive was
$2.9 million in 1999 and $0.1 million in income in 1998.
Morgan has an incentive stock option plan, which provides for the granting of
incentive or non-qualified stock options to purchase up to 200,000 shares of
Class A Common Stock to officers, including members of Morgan's Board of
Directors, and other key employees. No options may be granted under this plan at
less than the fair market value of the Common stock at the date of the grant,
except for certain non-employee directors. Although the exercise period is
determined when options are actually granted, an option shall not be exercised
later than 10 years and one day after it is granted. Stock options granted will
terminate if the grantee's employment terminates prior to exercise for reasons
other than retirement, death, or disability. Stock options vest over a four-year
period pursuant to the terms of the plan, except for stock options granted to a
non-employee director, which are immediately vested. The pro forma effect of
accounting for Morgan' stock options under the fair value method would have
reduced net income, or increased the net loss, by less than $0.1 million for
each period presented. For the purposes of these computations, the fair value of
the stock options at the date of the grant was estimated using a Black-Scholes
option pricing model with the following weighted average assumptions for all
periods presented: risk-free interest rate - 6.5% for 2000, 5% for 1999 and 6%
for 1998, dividend yield - .1%, volatility factor of Morgan's Class A common
stock - .596 in 2000, expected life of stock option - 10 years.
Employees and non-employee directors of Morgan have been granted non-qualified
stock options to purchase 96,375 and 32,000 shares, respectively, of Morgan's
Class A common stock, net of cancellations and shares exercised. There are
63,250 options reserved for future issuances.
In January 2000, the President and Chief Executive Officer of Morgan entered
into a special stock option plan and agreement with the Company which provides
for the granting of options to purchase 120,000 share of Class A Common Stock in
three separate installments. The first installment is for 40,000 shares at an
exercise price of $5.625, exercisable six months from the date of the agreement.
The second installment is for 40,000 shares at an exercise price of $7.625,
exercisable 18 months after the date of the agreement. The third installment is
for 40,000 shares at an exercise price of $9.625, exercisable 30 months after
the date of the agreement. The options granted under this stock option plan and
agreement are not granted pursuant to the Incentive Stock Option Plan described
above; but they are subject to the same general terms and conditions of the
Incentive Stock Option Plan.
A summary of Morgan's stock option activity, other than options issued Morgan's
President and CEO, and related information follows:
Years Ended December 31,
------------------------- ------------------------- --------------------------
1998 1999 2000
------------ ------------ ------------ ------------ ------------- ------------
Weighted Weighted Weighted
Average Average Average
Options Exercise Options Exercise Options Exercise
(000) Price (000) Price (000) Price
------------ ------------ ------------ ------------ ------------- ------------
Outstanding at beginning of year 167 $8.32 170 $8.28 181 $8.23
Granted 23 8.11 11 7.52 -- --
Exercised (7) 8.25 -- --
Canceled (13) 8.59 -- -- (53) 7.79
------------ ------------ ------------ ------------ ------------- ------------
Outstanding at end of year 170 $8.28 181 $8.23 128 8.42
Exercisable at end of year 124 $8.42 149 $8.31 124 8.41
Exercise prices for options outstanding as of December 31, 2000, ranged from
$6.80 to $10.19. The weighted-average remaining contractual life of those
options is 4.6 years. The weighted-average fair value of options granted during
each year was immaterial.
10. Income Taxes
Lynch Corporation filed consolidated federal and state income tax returns, which
include all eligible subsidiaries, including Interactive through the date of the
spin-off. The provisions (benefits) for income taxes in the statements of
operations for all periods presented 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 1999 and 2000 are provided for the temporary
differences between the financial reporting basis and the tax basis of the
Company's assets and liabilities. Cumulative temporary differences at December
31, 1999 and 2000 are as follows:
Dec. 31, 1999 Dec. 31, 2000
Deferred Tax Deferred Tax
Asset Liability Asset Liability
----------------------------------------------
(In Thousands)
Fixed assets revalued under purchase
Accounting and tax over book depreciation ..... $ -- $ 8,874 -- $ 6,279
Discount on long-term debt ....................... -- 986 -- 826
Basis difference in subsidiary and affiliate stock -- 1,795 -- 2,568
Unrealized gains on marketable securities ........ -- 5,819 -- 1,869
Partnership tax losses in excess of book losses .. -- (4,165) -- (4,547)
Other reserves and accruals ...................... 3,227 -- 2,243 456
Other ............................................ 177 (89) 945 295
-------- -------- -------- --------
$ 3,404 $ 13,220 $ 3,188 $ 7,746
Valuation allowance .............................. -- -- (3,188) --
-------- -------- -------- --------
Total deferred income taxes .................. $ 3,404 $ 13,220 -- $ 7,746
======== ======== ======== ========
The provision (benefit) for income taxes before extraordinary item is summarized
as follows:
1998 1999 2000
----------------------------
(In Thousands)
Current payable taxes:
Federal ............ $ 2,887 $ 2,582 $ 5,133
State and local..... 418 779 1,344
------- ------- -------
3,305 3,361 6,477
Deferred taxes:
Federal ............. 1,704 (5,734) 667
State and local ..... 3 88 278
------- ------- -------
1,707 (5,646) 945
------- ------- -------
$ 5,012 $(2,285) $ 7,422
======= ======= =======
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:
1998 1999 2000
--------------------------------
(In Thousands)
Tax at statutory rate ....................... $ 3,796 $(3,613) $ 2,901
Increases (decreases):
State and local taxes, net of federal benefit 558 542 735
Amortization of goodwill .................... 387 556 880
Valuation allowance for deferred tax assets . -- -- 3,188
Operating losses of subsidiaries ............ 313 -- --
Other ....................................... (42) 230 (282)
------- ------- -------
$ 5,012 $(2,285) $ 7,422
======= ======= =======
Net cash payments for income taxes were $5.6 million, $3.0 million and $4.9
million for the years ended December 31, 1998, 1999 and 2000, respectively.
11. Comprehensive Income
Effective January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 established standards for reporting and
display of comprehensive income and its components; however, the adoption of
SFAS No. 130 had no impact on the Company's net income. SFAS No. 130 requires
unrealized gains or losses on the Company's available-for-sale securities, which
prior to adoption were reported separately in shareholders' equity to be
included in other comprehensive income.
Balances of accumulated other comprehensive income, net of tax, which consists
of unrealized gains (losses) on available for sale of securities at December 31,
1999 and 2000 are as follows (in thousands):
Unrealized Gain
(Loss) Tax Effect Net
-------- --------- ---------
Balance at December 31, 1999 ................ $ 12,435 $ (5,195) $ 7,240
Adjustment relating to acquisition accounting (959) 393 (566)
Reclassification adjustment ................. (814) 334 (480)
Current year unrealized losses .............. (8,086) 3,387 (4,699)
-------- -------- --------
Balance at December 31, 2000 .............. $ 2,576 $ (1,081) $ 1,495
======== ======== ========
12. Employee Benefit Plans
Interactive maintains several defined contribution plans at its telephone
subsidiaries, Morgan 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, 1998, 1999 and 2000 was $0.7
million, $0.8 million and $1.0 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 year December 31, 2000.
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, 2000.
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 2005. Certain leases have renewal options
and escalation clauses. Rental expense under operating leases were $2.6 million,
$2.3 million and $2.1 million for years ended December 31, 1998, 1999 and 2000,
respectively. The table below shows minimum lease payments due under
non-cancelable operating leases at December 31, 2000. Such payments total $2.2
million.
Years Ended
--------------------------------------
(In millions)
2001 2002 2003 2004 2005
----- ----- ----- ----- -----
Operating leases $0.99 $0.50 $0.31 $0.21 $0.18
14. Segment Information
Interactive is engaged in two business segments: multimedia and services. All
businesses are located domestically, and substantially all revenues are
domestic. The multimedia segment includes local telephone companies, the
investment in PCS entities and investments in two network-affiliated television
stations. The services segment includes transportation and related services.
Services provided by Morgan to Oakwood Homes Corporation accounted for
approximately $31.8 million, $28.8 million and $22.5 million of net sales in
1998, 1999 and 2000, respectively. In addition, another Morgan customer,
Fleetwood Enterprises, Inc. accounted for approximately $26.0 million, $23.9
million and $16.9 million of linehaul revenues in 1998, 1999 and 2000,
respectively. $10.4 million and $7.9 at 1999 and 2000, respectively, of
Interactive's accounts receivable are related to the services segment and are
principally due from companies in the mobile home and recreational vehicle
industry located throughout the United States. Interactive believes that its
telecommunications businesses are not dependent on any single customer.
EBITDA (before corporate allocation) for operating segments is equal to
operating profit before interest, taxes, depreciation, amortization and
allocated corporate expenses. EBITDA is presented because it is a widely
accepted financial indicator of value and ability to incur and service debt.
EBITDA is not a substitute for operating income or cash flows from operating
activities in accordance with accounting principles generally accepted in the
United States.
Operating profit (loss) is equal to revenues less operating expenses, excluding
unallocated general corporate expenses, interest and income taxes. Interactive
allocates a portion of its general corporate expenses to its operating segments.
Such allocation to the subsidiaries were $0.6 million, $1.3 million and $1.3
million during the years ended December 31, 1998, 1999 and 2000, respectively.
Identifiable assets of each industry segment are the assets used by the segment
in its operations excluding general corporate assets. General corporate assets
are principally cash and cash equivalents, short-term investments and certain
other investments and receivables.
Years Ended December 31,
----------- ---------- -----------
1998 1999 2000
----------- ---------- -----------
(In thousands)
Revenues
Multimedia ....................... $ 54,622 $ 59,011 $ 66,983
Services ......................... 150,454 145,629 108,024
--------- --------- ---------
Consolidated total ............... $ 205,076 $ 204,640 $175,007
========= ========= =========
EBITDA (before corporate allocation)
Multimedia ....................... $ 29,389 $ 31,443 $ 34,699
Services ......................... 3,337 1,865 (871)
Unallocated corporate expense .... (1,826) (5,113) (3,671)
--------- --------- ---------
Consolidated total ............... $ 30,900 $ 28,195 $ 30,157
========= ========= =========
Operating Profit
Multimedia ....................... $ 15,757 $ 16,057 $ 17,531
Services ......................... 2,007 550 (2,038)
Unallocated corporate expense .... (1,107) (3,758) (2,200)
--------- --------- ---------
Consolidated total ............... $ 16,657 $ 12,849 $ 13,293
========= ========= =========
Depreciation and amortization
Multimedia ....................... $ 12,995 $ 14,115 $ 15,781
Services ......................... 1,230 1,215 1,067
All other ........................ 18 16 16
--------- --------- ---------
Consolidated total ............... $ 14,243 $ 15,346 $ 16,864
========= ========= =========
Capital expenditures
Multimedia ....................... $ 11,028 $ 11,742 $ 17,196
Services ......................... 566 811 106
General corporate ................ 48 -- 12
--------- --------- ---------
Consolidated total ............... $ 11,642 $ 12,553 $ 17, 314
========= ========= =========
Total assets
Multimedia ....................... $ 195,010 $ 211,622 $ 210,961
Services ......................... 33,590 32,264 23,269
General corporate ................ 17,492 10,083 5,180
--------- --------- ---------
Consolidated total ............... $ 246,092 $ 253,969 $ 240,410
========= ========= =========
Total operating profit for
reportable segments $ 16,657 $ 12,849 $ 13,293
Other profit or loss:
Investment income 1,865 2,013 3,385
Interest expense (10,383) (11,140) (14,003)
Equity in earnings of
affiliated companies 317 1,057 1,669
Reserve for impairment of
investment in PCS license holders -- (15,406) --
Gain on sales of subsidiary and
affiliate stock and other assets 2,709 -- 4,187
--------- --------- ----------
Income (loss) before income taxes,
minority interest and
extraordinary item $ 11,165 $(10,627) $ 8,531
========= ========= =========
Quarterly Results of Operations (Unaudited)
2000-Three Months Ended(a)
March 31(b) June 30 September 30 December 31
-----------------------------------------------
(In thousands)
Sales and revenues ................ $ 43,438 $ 45,980 $ 46,063 $ 39,526
Operating profit .................. 2,838 3,763 4,880 1,812
Net income (loss) ................. 2,281 913 977 (1,806)
Basic and diluted earnings
per share:
Net income (loss) ................. 0.81 0.32 0.35 (0.64)
1999-Three Months Ended
March 31 June 30 September 30 December 31(d)
------------------------------------------
(In thousands)
Sales and revenues .................... $ 48,712 $ 54,225 $ 52,825 $ 48,878
Operating profit ...................... 3,567 4,257 4,569 456
Income (loss) before extraordinary item (9,305) 948 1,070 (1,769)
Net income (loss) ..................... (9,465) 948 1,070 (1,769)
Basic and diluted earnings per share:
Income before extraordinary item (b)... (3.28) 0.33 0.38 (0.63)
Extraordinary item .................... (0.06) -- -- --
Net income (loss) ..................... (3.34) 0.33 0.38 (0.63)
(a) Quarterly results of operations for the three months ended March 31,
2000, June 30, 2000, and September 30, 2000, have been restated to
reflect the recording of $1.25 million (pre-tax) in interest expenses
associated with the 5% premium included in Cascade's option to sell to
the Chairman and CEO of Interactive (see Note 5). Accordingly, the net
income was reduced as follows: for the quarter ending March 31, 2000
by $271,000, or $0.09 per share; for the quarter ending June 30, 2000
by $220,000, or $0.08 per share; and for the quarter ending September
30, 2000 by $223,000, or $0.08 per share.
(b) Earnings per share 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) December 31, 1999, includes $2.9 million of expenses for termination
of the SAR program (see Note 9).
(e) During the fourth quarter of 2000, Morgan recorded a valuation
allowance of $3.2 million to reduce its deferred tax asset. This
charge reduced Interactive's results by $1.8 million, net of minority
interest effects.
16. Earnings Per Share
For the year ended December 1998 and for the period through September 1, 1999
(Spin- Off), 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 all periods are the same as the shares outstanding for
Lynch Corporation. Subsequent to the September 1, 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 is convertible into 588,000 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.
Years Ended December 31,
1998 1999 2000
Basic and diluted earnings per share ----------- ----------- -------------
Numerators:
Income (loss) before extraordinary item $ 4,929,000 $(9,056,000) $ 2,365,000
Extraordinary item .................... -- (160,000) --
----------- ----------- -------------
Net income (loss) ..................... $ 4,929,000 $(9,216,000) $ 2,365,000
----------- ----------- -------------
Denominator:
Weighted average shares outstanding ... 2,836,000 2,824,000 2,823,000
Earnings (loss) per share:
Income (loss) before extraordinary item $ 1.74 $ (3.21) $ 0.84
Extraordinary item .................... -- (.06) --
----------- ----------- ------------
Net income (loss) ..................... $ 1.74 $ (3.27) $ 0.84
=========== =========== ============
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
LYNCH INTERACTIVE CORPORATION
CONDENSED STATEMENT OF OPERATIONS
Years Ended December 31,
-------- --------- ----------
1998 1999 2000
--------------------------------
(In Thousands)
Interest, Dividends & Gains on Sale of Marketable Securities $ 43 $ 86 $ 278
Interest & Other Income from Securities .................... 35 49 280
------- ------- -------
TOTAL INCOME .......................................... 78 135 558
Cost and Expenses:
Unallocated Corporate Administrative Expense ............. 1,089 3,414 2,248
Interest Expense ......................................... 2,224 2,134 4,115
------- ------- -------
TOTAL COST AND EXPENSES .............................. 3,313 5,548 6,363
LOSS BEFORE INCOME TAXES, EQUITY IN
INCOME (LOSS) OF SUBSIDIARIES LOSS ......................... (3,235) (5,413) (5,805)
Income Tax Benefit ......................................... 1,100 1,840 1,974
Equity in Income (Loss) of Subsidiaries .................... 7,064 (5,643) 6,196
------- ------- -------
NET INCOME (LOSS) .......................................... $ 4,929 $(9,216) $ 2,365
======= ======= =======
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 $6.7 million at a fixed interest
rate of 6% per annum, due in 2001. The note is convertible at the
subsidiary's option into common stock of Lynch Corporation and
Interactive with a combined exercise price of $120 per share (this
amount has not been adjusted for the 2 for 1 stock split of Interactive
on September 11, 2000).
NOTE D - SEE NOTES TO 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,
------------------------
1999 2000
------------------------
(In Thousands)
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents ........................................ $ 2,924 $ 2,451
Deferred Income Taxes ............................................ 600 804
Other current assets ............................................. 528 444
------- -------
OFFICE EQUIPMENT (Net) .............................................. 4,052 3,699
OTHER ASSETS (Principally Investment in and Advances to Subsidiaries) 71,139 71,682
------- -------
TOTAL ASSETS ........................................................ $75,227 $75,412
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES ................................................. $ 7,124 $ 5,910
LONG TERM DEBT ...................................................... 38,996 41,437
DEFERRED INCOME TAX LIABILITIES ..................................... -- 2,453
DEFERRED CREDITS .................................................... 2,196 2,213
TOTAL SHAREHOLDERS' EQUITY .......................................... 26,911 23,399
------- -------
Total Liabilities and Shareholders' Equity .......................... $75,227 $75,412
======= =======
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
LYNCH INTERACTIVE CORPORATION
CONDENSED STATEMENT OF CASH FLOWS
Years Ended December 31,
---------------------------------
1998 1999 2000
---------------------------------
(In Thousands)
Cash Provided by (Used In) Operating Activities ..... $ 1,119 $ 639 $ (1,355)
-------- -------- --------
INVESTING ACTIVITIES:
Investment and Advances to Brighton Communications 3,692 (5,858) 843
Other ............................................ (176) -- --
-------- -------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES . 3,516 (5,858) 843
-------- -------- --------
FINANCING ACTIVITIES:
Net Borrowings Under:
Lines of Credit ................................. (7,564) (15,150) --
Issuance of Long Term Debt ...................... -- 25,000 171
Advances (To) From Lynch Corporation ............ 2,930 (1,980) --
Other ........................................... -- (18) (132)
-------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (4,634) 7,852 39
-------- -------- --------
TOTAL INCREASE (DECREASED) CASH
AND CASH EQUIVALENTS ............................. 1 2,633 (473)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ...... 290 291 2,924
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR ............ $ 291 $ 2,924 $ 2,451
======== ======== ========
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
LYNCH INTERACTIVE CORPORATION
YEARS ENDED DECEMBER 31, 1998, 1999, AND 2000
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
ADDITIONS
BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS BALANCE AT
BEGINNING COSTS AND OTHER ACCOUNTS DESCRIBE END OF PERIOD
OF PERIOD EXPENSES DESCRIBE
---------------------------------------------------------------
Year Ended December 31, 2000
Allowance for Uncollectible Accounts $415,000 $ 372,000 $ 0 $ 384,000(A) $ 403,000
Year Ended December 31, 1999
Allowance for Uncollectible Accounts $320,000 $ 470,000 $ 0 $ 375,000(A) $ 415,000
Year Ended December 31, 1998
Allowance for Uncollectible Accounts $286,000 $ 409,000 $ 0 $ 375,000(A) $ 320,000
(A) UNCOLLECTIBLE ACCOUNTS WRITTEN OFF ARE NET OF RECOVERIES.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
LYNCH 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 30, 2001
- -------------------
MARIO J. GABELLI Directors and Chief Executive
Officer (Principal Executive Officer)
* PAUL J. EVANSON Director March 30, 2001
- ------------------
PAUL J. EVANSON
* JOHN C. FERRARA Director March 30, 2001
- -----------------
JOHN C. FERRARA
* DANIEL R. LEE Director March 30, 2001
- -------------------
DANIEL R. LEE
* DAVID C. MITCHELL Director March 30, 2001
- -------------------
DAVID C. MITCHELL
* SALVATORE MUOIO Director March 30, 2001
- -----------------
SALVATORE MUOIO
* RALPH R. PAPITTO Director March 30, 2001
- ------------------
RALPH R. PAPITTO
* VINCENT TESE Director March 30, 2001
- ------------------
VINCENT TESE
s/ROBERT E. DOLAN Chief Financial Officer March 30, 2001
- ------------------
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.
21 Subsidiaries of Registrant+
23 Consents of Independent Auditors+
- Ernst & Young LLP
- Siepert & Company LLC (2)+
24 Powers of Attorney+
99 Report of Independent Auditors+
- Report of Siepert & Co., L.L.P. of financial statements of Cuba City
Telephone Exchange Company for the year ended December 31, 1999+
- Report of Siepert & Co., L.L.P. on the financial statements of Belmont
Telephone Company for the year ended December 31, 1999+
- Report of McGladrey & Pullen, LLP on the financial statements of
Capital Communications Company for the year ended December 31, 1997+
- Report of McGladrey & Pullen, LLP on the financial statements of
Coronet Communications Company for the year ended December 31, 1997+
- Report of Frederick & Warinner on the financial statements of CLR
Video, L.L.C. for the year ended December 31, 1997+
+ Filed with this Form 10-K
++ Filed as same Exhibit number with Form 10
** Filed as same Exhibit number with Form 10A-1
+++ Filed as the same Exhibit number to Registrant's Form 8-K dated
December 10, 1999
* Employee compensation document
The Exhibits listed above have been filed separately with the Securities and
Exchange Commission in conjunction with this Annual Report on Form 10-K or have
been incorporated by reference into this Annual Report on Form 10-K. Lynch
Interactive Corporation will furnish to each of its shareholders a copy of any
such Exhibit for a fee equal to Lynch Interactive Corporation's cost in
furnishing such Exhibit. Requests should be addressed to the Office of the
Secretary, Lynch Interactive Corporation, 401 Theodore Fremd Avenue, Rye, New
York 10580.