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WASHINGTON, D.C. 20549
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FORM 10 A-1
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR (g) OF
the securities exchange act of 1934
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LYNCH INTERACTIVE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 06-1458056
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(State or other jurisdiction) (I.R.S. Employer
of incorporation or organization) Identification Number)
401 Theodore Fremd Avenue
Rye, New York 10580
- ------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(914) 921-7601
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Securities to be registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
Common Stock, American Stock Exchange
par value $.0001 per share
Securities to be registered pursuant to Section 12(g) of the Act:
None
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LYNCH INTERACTIVE CORPORATION
I. INFORMATION INCLUDED IN INFORMATION STATEMENT
AND INCORPORATED IN FORM 10 BY REFERENCE
CROSS-REFERENCE SHEET BETWEEN INFORMATION STATEMENT
AND ITEMS OF FORM 10
<PAGE>
ITEM NO. IN
INFORMATION STATEMENT CAPTION
1. Business. . . . . . . . . ."Summary"; "Interactive"; "Risk Factors";
"Business of Interactive"; and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
2. Financial Information. . . "Summary"; "Selected Financial Data"; and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
3. Properties. . . . . . . . . . . . "Business of Interactive."
4. Security Ownership of Certain Beneficial Owners and Management. . . . . . .
. . . . "Principal Stockholders of Interactive."
5. Directors and Executive Officers. . . . . . . . . . . . . ."Executive
Officers and Directors of Interactive."
6. Executive Compensation. . . "Summary"; "Relationship Between Lynch and
Interactive After the Spin Off"; Executive Officers and Directors of
Interactive"; and "Corporate Expense."
7. Certain Relationships and Related Transactions. . . . . "Summary";
"Relationship Between Lynch and Interactive After the Spin Off"; "Corporate
Expense"; and "Transactions With Certain Affiliated Persons."
8. Legal Proceedings. . . . . . . "Business of Interactive."
9. Market Price of and Dividends on the Registrant's Common Equity and Related
Stock- holder Matters. . . . . . . . . . ."Summary"; and "Listing and
Trading of Interactive Stock."
11. Description of Registrant's Securities to be Registered. . "Summary";
"Listing and Trading of Interactive Common Stock"; and "Description of the
Capital Stock of Interactive."
12. Indemnification of Directors and Officers. . . . . . . . . . . ."Executive
Officers and Directors of Interactive."
13. Financial Statements and Supplementary Data.. . . . . . . "Summary";
"Selected Financial Data"; and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." 15. Financial Statements
and Exhibits . . . . . . . . . . . . . "Selected Financial Data"; "Index to
Combined Financial Statements"; and "Financial Statements."
<PAGE>
II. INFORMATION NOT INCLUDED IN INFORMATION STATEMENT
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
Lynch Interactive Corporation was incorporated in 1996 under the laws of the
State of Delaware and issued 2 shares of its Common Stock to Lynch at that tine.
Immediately prior to the Spin Off, it will issuance 1,412,381 shares of its
Common Stock to Lynch. Such issuances were exempt from registration under the
Securities Act of 1933, as amended, pursuant to Section 4(2) thereof because
such issuance did not involve any public offering of securities.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts Lynch
Interactive Corporation for the Six Months Ended June 30, 1999
and Years Ended December 31, 1998, 1997 and 1996.
(b) Exhibits:
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.**
<PAGE>
4.5 Restated Mortgage, Security Agreement and Financing Statement
between Western New Mexico Telephone Company, Inc. and the
United States of America.**
Registrant, by signing this Form 10, agrees to furnish to the
Securities and Exchange Commission a copy of any long-term
debt instrument where the amount of the securities authorized
thereunder does not exceed 10% of the total assets of the
Registrant on a consolidated basis.
10(a) Partnership Agreement, dated March 11, 1987, between Lombardo
Communications, Inc. and Lynch Entertainment Corporation
(incorporated by reference to Exhibit 10(e) of the Lynch
Corporation ("Lynch")'s Annual Report on Form 10-K for the
year ended December 31, 1987).
*10(b) Lynch Corporation 401(k) Savings Plan (incorporated by
reference to Exhibit 10(b) to Lynch's Report Form 10-K for the
year ended December 31, 1995).
10(c) Shareholders Agreement among Capital Communications Company,
Inc., Lombardo 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 10Q 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) Employment Agreement, dated February 2, 1998, between
Registrant and Mark Feldman (incorporated by reference to
Exhibit 10(z) to Lynch's Form 10-K for the year ended December
31, 1997.
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).
<PAGE>
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.
21 List of Subsidiaries of Interactive**
27 Financial Data Schedule **
99.1 Interactive Information Statement dated August 19, 1999**
99.2 Report of McGladrey & Pullen, L.L.P. on the Financial
Statements of Capital Communications Company, Inc. for the
year ended December 31, 1997.++
99.3 Report of McGladrey & Pullen, L.L.P. on the Financial
Statements of Coronet Communications Company for the year
ended December 31, 1997.++
99.4 Report of Frederick & Warinner on the Financial Statement of
CLR Video, L.L.C. for the years ended December 31, 1997
and 1996.++
99.5 Report of McGladrey & Pullen, L.L.P. on the Financial
Statements of Capital Communications Company, Inc. for the
years ended December 31, 1996 and 1995.**
99.6 Report of McGladrey & Pullen L.L.P. on the Financial
Statements of Coronet communications Company for the years
ended December 31, 1996 and 1995.**
99.7 Report of Jackson Mackowiak Moore & Myott, LLP on the
Financial Statements of Dunkirk and Fredonia Telephone Company
for the period from November 26, 1996 through December 31,
1996.**
99.8 Report of Ernst & Young LLP on the Combined Financial
Statements and Schedule of Lynch Interactive Corporation for
the three years ended December 31, 1998.**
++ Filed with Form 10
** Filed herewith
* Employee compensation document.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant has duly caused this amendment to the registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized.
Lynch Interactive Corporation
(Registrant)
By: /s/ Robert E. Dolan
Name: Robert E. Dolan
Date: August 18, 1999 Title: President
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
LYNCH INTERACTIVE CORPORATION
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
ADDITIONS
CHARGED CHARGED
BALANCE TO COSTS OTHER BALANCE
BEGINNING AND ACCOUNTS DEDUCTIONS END OF
OF PERIOD EXEPNSES DESCRIBE - DESCRIBE PERIOD
--------- --------- -------- --------- --------
SIX MONTHS ENDED JUNE 30,
1999 ALLOWANCE FOR
<S> <C> <C> <C> <C> <C>
UNCOLLECTIBLE ACCOUNTS .. $320,000 $178,000 $ 0 $210,000(B) $288,000
YEAR ENDED DECEMBER 31,
1998 ALLOWANCE FOR
UNCOLLECTIBLE ACCOUNTS .. $286,000 $409,000 $ 0 $375,000(B) $320,000
YEARS ENDED DECEMBER 31,
1997 ALLOWANCE FOR
UNCOLLECTIBLE ACCOUNTS .. $182,000 $436,000 $ 0 $332,000(B) $286,000
YEAR ENDED DECEMBER 31,
1996 ALLOWANCE FOR
UNCOLLECTIBLE ACCOUNTS .. $177,000 $283,000 $ 75,000(A) $353,000(B) $182,000
<FN>
(A) ALLOCATION OF PURCHASE PRICE OF ACQUIRED COMPANY
(B) UNCOLLECTIBLE ACCOUNTS WRITTEN OFF ARE NET OF RECOVERIES
</FN>
</TABLE>
<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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EXHIBITS TO
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
UNDER
THE SECURITIES EXCHANGE ACT OF 1934
- - - - - - - -
Lynch Interactive Corporation
(Exact name of registrant as specified in its charter)
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EXHIBIT NO. DESCRIPTION
(b) Exhibits:
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.**
Registrant, by signing this Form 10, agrees to furnish to the
Securities and Exchange Commission a copy of any long-term
debt instrument where the amount of the securities authorized
thereunder does not exceed 10% of the total assets of the
Registrant on a consolidated basis.
<PAGE>
10(a) Partnership Agreement, dated March 11, 1987, between Lombardo
Communications, Inc. and Lynch Entertainment Corporation
(incorporated by reference to Exhibit 10(e) of the Lynch
Corporation ("Lynch")'s Annual Report on Form 10-K for the
year ended December 31, 1987).
*10(b) Lynch Corporation 401(k) Savings Plan (incorporated by
reference to Exhibit 10(b) to Lynch's Report Form 10-K for the
year ended December 31, 1995).
10(c) Shareholders Agreement among Capital Communications Company,
Inc., Lombardo 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 10Q 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) Employment Agreement, dated February 2, 1998, between
Registrant and Mark Feldman (incorporated by reference to
Exhibit 10(z) to Lynch's Form 10-K for the year ended December
31, 1997.
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 by
Schedule 10(c)(c) to Lynch's Form 10-K for the year ended
December 31, 1998).
10(k) Separation Agreement (filed as Exhibit 2 hereto)**
<PAGE>
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.
21 List of Subsidiaries of Interactive**
27 Financial Data Schedule**
99.1 Interactive Information Statement dated August 19, 1999**
99.2 Report of McGladrey & Pullen, L.L.P. on the Financial
Statements of Capital Communications Company, Inc. for the
year ended December 31, 1997.++
99.3 Report of McGladrey & Pullen, L.L.P. on the Financial
Statements of Coronet Communications Company for the year
ended December 31, 1997.++
99.4 Report of Frederick & Warinner on the Financial Statement of
CLR Video, L.L.C. for the years ended December 31, 1997
and 1996.++
99.5 Report of McGladrey & Pullen, L.L.P. on the Financial
Statements of Capital Communications Company, Inc. for the
years ended December 31, 1996 and 1995.**
99.6 Report of McGladrey & Pullen L.L.P. on the Financial
Statements of Coronet Communications Company for the years
ended December 31, 1996 and 1995.**
99.7 Report of Jackson Mackowiak Moore & Myott, LLP on the
Financial Statements of Dunkirk and Fredonia Telephone Company
for the period from November 26, 1996 through December 31,
1996.**
99.8 Report of Ernst & Young LLP on the Combined Financial
Statements and Schedule of Lynch Interactive Corporation for
the three years ended December 31, 1998.**
+ To be filed by amendment.
++ Filed with Form 10
** Filed herewith
* Employee compensation document.
SEPARATION AGREEMENT
Separation Agreement (the "Agreement") dated as of August 31, 1999
between Lynch Corporation ("Lynch") and Lynch Interactive Corporation
("Interactive").
WHEREAS Lynch is distributing all of the stock of Interactive to its
shareholders (the "Spin-Off") pursuant to Section 355 of the Code;
WHEREAS, Lynch and Interactive want to set forth certain matters
concerning the relationship between the parties after the Spin-Off.
NOW, THEREFORE, the parties agree as follows:
ARTICLE I
Definitions
1.1 Definitions. As used in this Agreement, the following terms shall
have the following respective meanings:
"Affiliate" of any Person shall mean another Person that directly or
indirectly through one or more intermediaries, controls, is controlled by or is
under common control with, such
<PAGE>
first Person; provided however, that for the purposes of this Agreement from and
after the Time of Distribution, no Lynch Company shall be deemed to be an
Affiliate of any Interactive Company, and no Interactive Company shall be deemed
to be an Affiliate of any Lynch Company.
"Code" shall mean the Internal Revenue Code of 1986, as
amended.
"Distribution" shall mean the Spin-Off referred to in the
Recitals hereto.
"Former Employees" shall mean all employees of Lynch other than its
employee at the Time of Distribution.
"Interactive Assets" shall mean all assets of Interactive and
its Subsidiaries at the Time of Distribution.
"Interactive Businesses" shall mean all of the businesses
<PAGE>
conducted at or at any time prior to the Distribution by the Interactive and
persons which are Subsidiaries of Interactive at the Time of the Distribution.
"Interactive Companies" shall mean Interactive and its Subsidiaries
(determined after giving effect to the Distribution).
"Interactive Liabilities" shall mean (i) all Liabilities or portions of
Liabilities arising primarily out of or in connection with the Interactive
Assets or Interactive Businesses; (ii) all Liabilities under contracts included
in the Interactive Assets, whether such Liabilities arise before, upon or after
the transactions contemplated by this Agreement and including any Liabilities
under such contracts resulting from the consummation of the transactions
contemplated by this Agreement (including actions, claims or proceedings
relating thereto); (iii) all Liabilities of Interactive and its Subsidiaries
pursuant to this Agreement; and (iv) all Liabilities for payment of outstanding
drafts and checks of Interactive Businesses existing as of the Time of
Distribution.
"Information" of a party shall mean any and all information
that such party or any of its Representatives whether furnished
<PAGE>
orally or in writing or by any other means or gathered by inspection and
regardless of whether the same is specifically marked or designated as
"confidential" or "proprietary," together with any and all notes, memoranda,
analyses, compilations, studies or other documents (whether in hard copy or
electronic media) prepared by the receiving party of any of its Representatives
which contain or otherwise reflect such Information, together with any and all
copies, extracts or other reproductions of any of the same; provided however,
that for the purposes hereof all information relating to the Lynch Companies and
the Lynch Businesses in the possession of any Interactive Company at the Time of
Distribution shall be deemed to have been furnished by the Lynch Companies and
all information relating to the Interactive Companies and the Interactive
Businesses in the possession of any Lynch Company at the Time of Distribution
shall be deemed to have been furnished by the Interactive Companies; and further
provided that the term "Information" does not include information that:
(a) is or becomes generally available to the public
through no wrongful act of the receiving party or its
Representatives;
<PAGE>
(b) is or becomes available to the receiving party on a
non-confidential basis from a source other than the providing party or its
Representatives, provided that such source is not known by the receiving party
to be subject to a confidentiality agreement with the providing party; or
(c) has been independently acquired or developed by the
receiving party without violation of any of the obligations of the receiving
party or its Representatives under this Agreement.
"IRS" shall mean the United States Internal Revenue Service.
"Liabilities" shall mean any and all debts, liabilities, commitments
and obligations, whether fixed, contingent or absolute, matured or unmatured,
liquidated or unliquidated, accrued or not accrued, known or unknown, whenever
or however arising and whether or not the same would be required by generally
accepted accounting principles to be reflected in financial statements or
disclosed in the notes thereto.
"Lynch Businesses" shall mean all of the businesses conducted
at any time prior to the Distribution by Lynch or its Subsidiaries
<PAGE>
which are not Interactive Businesses.
"Lynch Companies" shall mean Lynch and its Subsidiaries (after giving
effect to the Distribution.
"Lynch Liabilities" shall mean (i) all Liabilities or portions of
Liabilities arising primarily out of or in connection with the Lynch Assets or
Lynch Businesses; (ii) all Liabilities under contracts included in the Lynch
Assets, whether such Liabilities arise before, upon or after the transactions
contemplated by this Agreement and including any Liabilities under such
contracts resulting from the consummation of the transactions contemplated by
this Agreement (including actions, claims or proceedings relating thereto);
(iii) all Liabilities of Lynch and its Subsidiaries pursuant to this Agreement;
and (iv) all Liabilities for payment of outstanding drafts and checks of Lynch
Businesses existing as of the Time of Distribution.
"Person" shall mean any natural person, corporation, general or limited
partnership, limited liability company, joint venture, trust, association or
entity of any kind.
<PAGE>
"Representatives" of a party shall mean such party's officers,
directors, employees, accountants, counsel, investment bankers, financial
advisors, consultants and other representatives.
"Subsidiary" shall mean, with respect to any Person, any corporation or
other organization, whether incorporated or unincorporated, of which (i) such
Person or any other Subsidiary of such Person is a general partner or (ii) at
least 50% of the securities or other interests having by their terms ordinary
voting power to elect a majority of the board of directors or others performing
similar functions with respect to such corporation or other organization or at
least 50% of the value of the outstanding equity is directly or indirectly owned
or controlled by such Person or by any one or more of its Subsidiaries, or by
such Person and one or more of its Subsidiaries.
"Taxes" shall mean any federal, state, county, local or foreign taxes,
charges, fees, levies or other assessments, including all net income, gross
income, sales and use, ad valorem, transfer, gains, profits, excise, franchise,
real and personal property, gross receipt, capital stock, share, production,
business and occupation, disability, employment, payroll, license,
<PAGE>
estimated, stamp, custom duties, severance or withholding taxes or charges
imposed by any governmental entity, and includes any interest and penalties
(civil or criminal) on or additions to any such taxes.
"Tax Return" shall mean any report, return or other information
required to be supplied to a governmental entity with respect to Taxes.
"Time of Distribution" shall mean the time as of which the
Spin-Off is effective.
ARTICLE II
Tax Matters
2.1 Assumption and Indemnification of Tax Liabilities. The respective
Tax Liabilities of Lynch and its Subsidiaries (other than Interactive and its
Subsidiaries) and of Interactive and its Subsidiaries, whether arising before,
at or after the Time of Distribution, will continue to be the Tax liabilities of
each such party, and each party hereto agrees to save, indemnify, defend and
<PAGE>
hold harmless the other, its Subsidiaries and each of their respective
directors, officers, employees, agents, successors and assigns from and against
all such Tax liabilities.
2.2 Distribution Taxes. (a) "Distribution Taxes" means Taxes of any
member of the Lynch affiliated group (as in existence prior to the Distribution)
resulting from, or arising in connection with, the failure of the Distribution
to be tax-free to such member under Code Sections 355 and 368(a)(1)(D)
(including without limitation by reason of the application of Code Sections
355(d) or (e)).
(b) The members of the Lynch Companies shall be liable for any
Distribution Taxes that are primarily attributable to one or more of the
following:
(i) any inaccurate statement or representation of fact or
intent (or omission to state a material fact) with respect to the Lynch
Companies (excluding members of the Interactive Companies) in the
Representations;
(ii) any action or omission by the Lynch Companies after the
Time of the Distribution, including without limitation, a
<PAGE>
cessation, transfer to affiliates or disposition of its active trades or
businesses, or an issuance of stock, stock buyback or payment of an
extraordinary dividend by any member of the Lynch Companies following the Time
of the Distribution;
(iii) any acquisition of any stock or assets of any member of
the Lynch Companies by one or more other persons prior to or following the Time
of the Distribution; or
(iv) any issuance of stock by the Lynch Companies or change in
ownership of stock in the Lynch Companies, that causes Code Sections 355(d) or
355(e) to apply to the Time of the Distribution.
(c) The members of the Interactive Companies shall be liable for any
Distribution Taxes that are primarily attributable to one or more of the
following
(i) any inaccurate statement or representation of fact or
intent (or omission to state a material fact) in the Representations that
relates to the Interactive Companies.
<PAGE>
(ii) any action or omission by the Interactive Companies after
the date of the Distribution, including without limitation, a cessation,
transfer to affiliates or disposition of its active trades or businesses, or an
issuance of stock, stock buyback or payment of an extraordinary dividend by any
member of the Interactive Companies following the Distribution;
(iii) any acquisition of any stock or assets of any member of
the Interactive Companies by one or more other persons following the
Distribution; or
(iv) any issuance of stock by Interactive Companies, or change
in ownership of stock in Interactive Companies, that causes Code Sections 355(d)
or 355(e) to apply to the Distribution.
(d) The Lynch Companies and the Interactive Companies will each bear
their respective share1 of any Distribution Taxes not allocated in Section
2.2(b) or (c).
(d) The provisions of this Section 2.2 shall apply
- --------
1What does this mean?
<PAGE>
notwithstanding any other provisions of this Agreement.
2.3 Tax Returns/Cooperation. (a) Lynch will be responsible for the
preparation and filing of all Tax Returns with respect to all periods ending on
or before the Time of Distribution. Interactive and its Subsidiaries will be
responsible for the preparation and filing of all other Tax Returns relating to
them or their assets or the Interactive Businesses which are required to be
filed after the Time of Distribution and for the payment of all Taxes shown on
those Tax Returns to be due and all related estimated Taxes payable after the
Time of Distribution.
(b) Each of Lynch and Interactive will, and will cause their respective
personnel to, cooperate fully with each other of them in connection with the
preparation and review of Tax Returns and in connection with any examinations of
any Tax Returns filed by either of them or their respective Subsidiaries.
2.4 Indemnification Procedures. (a) Any claim for indemnification under
this Article II shall be made by written notice from the party seeking to be
indemnified (the "Tax Indemnitee") to the party from which indemnification is
sought (the "Tax Indemnifying
<PAGE>
Party"). If a Tax Indemnitee becomes aware during an examination of a Tax Return
that the tax authority conducting the examination is considering asserting a Tax
subject to indemnification, the Tax Indemnitee will (i) promptly notify the Tax
Indemnifying Party of this fact, (ii) to the extent reasonably practicable,
segregate the issue from any other issues being examined, (iii) permit the Tax
Indemnifying Party to control the Tax examination insofar as it relates to that
issue and any administrative or judicial appeals relating to the issue
(including whether to settle the issue or to appeal from an adverse
determination with regard to the issue) and (iv) cooperate with the Tax
Indemnifying Party in all reasonable respects to establish that such Tax is not
due and payable.
(b) Upon a determination that a Tax Indemnifying Party is liable for a
payment of Taxes to a Tax Indemnitee, the Tax Indemnifying Party shall pay the
Tax Indemnitee such Taxes. Such payment will be made on an after-Tax basis
promptly following the submission by the Tax Indemnitee of written evidence of
the payment of indemnified Tax.
13
<PAGE>
ARTICLE III
Payment of Liabilities
3.1 Payment of Liabilities. From and after the Time of Distribution, (i)
Interactive shall indemnify Lynch and its Representatives with respect to any
claims relating to Interactive Businesses, Interactive Companies or Interactive
Liabilities, and (ii) Lynch shall indemnify Interactive and its Representatives
with respect to any claims relating to Lynch Businesses, Lynch Companies or
Lynch Liabilities.
ARTICLE IV
Other Agreements
4.1 Use of Names. Interactive shall have all rights in and use of the
name Lynch Interactive Corporation, Lynch Telephone Corporation, Lynch
Multimedia Corporation, Lynch Capital Corporation and all derivatives thereof
and Lynch shall have all rights in and use of the name Lynch Corporation, Lynch
Manufacturing Corporation, Lynch Display Technology, Inc., Lynch Systems, Inc.
and all derivatives thereof.
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4.2 Books and Records. Prior to or as promptly as practicable after the
Time of Distribution, Lynch shall deliver to Interactive all corporate books and
records of the Interactive Companies in the possession of Lynch and the relevant
portions (or copies thereof) of all corporate books and records of Lynch
relating directly and primarily to the Interactive Companies, the Interactive
Businesses or the Interactive Liabilities, including, in each case, all
agreements, litigation files and government filings. From and after the Time of
Distribution, all such books, records and copies shall be the property of
Interactive. Lynch may retain copies of all such corporate books and records.
4.3 Access to Information. Upon reasonable notice, each party shall,
and shall cause its Subsidiaries to, afford to Representatives of the other
reasonable access, during normal business hours throughout the period prior to
and following the Time of Distribution, to all of its properties, books,
contracts, commitments and records (including, but not limited to, Tax Returns)
and, during such period, each party shall, and hall cause its Subsidiaries to,
furnish promptly to the other (i) access to each report, schedule and other
document filed or received by it or any of its Subsidiaries pursuant to the
requirements of federal or
<PAGE>
state securities laws or filed with or sent to the United States Securities and
Exchange Commission or any other federal or state regulatory agency or
commission and (ii) access to all information concerning themselves, their
Subsidiaries, directors, officers and stockholders and such other matters as may
be reasonably requested by the other party in connection with any filings,
applications or approvals required or contemplated by this Agreement or for any
other reason related to the transactions contemplated by this Agreement;
provided, however, that the foregoing shall apply to Interactive and the
Interactive Companies only with respect to information and access necessary to
or required by Lynch in preparation of Tax Returns. Nothing in this Section 4.3
shall require the parties to take any action or furnish any access or
information which would cause or could reasonably be expected to cause the
waiver of any applicable attorney client privilege. In addition, nothing herein
shall require the parties to provide information other than with respect to
itself and its Subsidiaries, or the conduct of their businesses. Each of Lynch
and Interactive shall provide to the other copies of all documents filed with
the Securities and Exchange Commission pursuant to the periodic and interim
reporting requirement of the Securities Exchange Act of 1934, as amended.
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4.4 Retention of Records. If any information relating to the
businesses, assets or liabilities of a Lynch Company or Interactive Company is
retained by a Interactive Company or Lynch Company, respectively, each of the
Lynch and Interactive shall, and shall cause the other Lynch Companies and
Interactive Companies, respectively, to retain all such information in the Lynch
Companies' or Interactive Companies' possession or under its control until such
information is at least ten years old except that if, prior to the expiration of
such period, any Lynch Company or Interactive Company wishes to destroy or
dispose of any such information that is at least three years old, prior to
destroying or disposing of any of such information, (a) Lynch or Interactive, on
behalf of the Lynch Company or the Interactive Company that is proposing to
dispose of or destroy any such information, shall provide no less than 45 days'
prior written notice to the other party, specifying the information proposed to
be destroyed or disposed of, and (b) if, prior to the scheduled date of such
destruction or disposal, the other party requests in writing that any of the
information proposed to be destroyed or disposed of be delivered to such other
party, Lynch or Interactive, as applicable, promptly shall arrange for the
delivery of the requested information to a location specified by, and at the
expense of, the
<PAGE>
requesting party.
4.5 Confidentiality. (a) Each party hereto shall keep, and shall cause
its Representatives to keep, the other party's Information strictly confidential
and will disclose such Information only to such of its Representatives who need
to know such Information and who agree to be bound by this Section 4.5 and not
to disclose such Information to any other Person. Without the prior written
consent of the other party, neither party nor any of their respective
Representatives shall disclose the other party's Information to any Person or
entity except as may be required by law or judicial process and in accordance
with this Section 4.5.
(b) In the event that either party or any of its Representatives
receives a request or is required by law or judicial process to disclose to a
court or other tribunal all or any part of the other party's Information, the
receiving party or its Representatives shall promptly notify the other party of
the request in writing, and consult with and assist the other party in seeking a
protective order or request for other appropriate remedy. In the event that such
protective order or other remedy is not obtained or the other party waives
compliance with the terms
<PAGE>
hereof, such receiving party or its Representatives, as the case may be, shall
disclose only that portion of the Information or facts which, in the written
opinion of the receiving party's outside counsel, is legally required to be
disclosed, and will exercise its respective reasonable best efforts to assure
that confidential treatment will be accorded such Information or facts by the
Persons or entities receiving the same. The providing party will be given an
opportunity to review the Information or facts prior to disclosure.
4.6 Further Assurances. Each of the parties hereto, at its own cost and
expense, promptly shall, or shall cause its Subsidiaries to, execute such
documents (the "Transaction Documents") and take such further actions as may be
reasonably required or desirable to carry out the provisions hereof and to
consummate the transactions contemplated hereby.
4.7 Cooperation. The parties shall cooperate with each other in all
reasonable respects to ensure that the transactions contemplated herein are
carried out in accordance with their terms.
4.8 No Representations as to Interactive Assets. INTERACTIVE
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AGREES THAT THE TRANSFER BY LYNCH TO INTERACTIVE OF THE INTERACTIVE ASSETS AND
THE INTERACTIVE BUSINESSES IS ON AN "AS IS, WHERE IS" BASIS, AND NO
REPRESENTATIONS OR WARRANTIES ARE BEING MADE BY LYNCH WITH RESPECT THERETO.
4.9 Rent, Furniture, Equipment, etc. Interactive shall be added with
Lynch to the lease for the premises at 401 Theodore Fremd Avenue, Rye, NY and,
to the extent feasible, substituted on any leased office equipment. Interactive
shall bear the cost of such leases, which costs may be deemed to be General
Overhead Expenses under Article VII. All furniture, office equipment and
supplies and related property owned by Lynch at the Time of Distribution and
located at the Rye, NY premises, shall become the property of Interactive
without payment to Lynch.
4.10 Spinnaker Stock. If Interactive wants to make a public offering of
its Spinnaker Industries, Inc. stock, Lynch will use reasonable efforts to cause
Spinnaker to register one time, at Interactive's expense, all or a portion of
such stock in a timely manner under the Securities Act and any related state
securities laws. In addition, Lynch will use reasonable efforts to permit
Interactive, without cost to Interactive, to piggy-back on any
<PAGE>
other registration statements filed by Spinnaker (including for continuous
offering), provided, in Spinnaker's opinion, such piggyback rights do not
interfere with the other offering.
4.11 Transaction Expenses. Except as otherwise agreed between the
parties, all out-of-pocket expenses related to the Spin-Off shall be divided
equally between Lynch and Interactive.
ARTICLE V
Indemnification and Releases
5.1 Mutual Release. Effective as of the Time of Distribution and except
as otherwise specifically set forth in this Agreement, each of Lynch, on the one
hand, and Interactive, on the other hand, releases and forever discharges the
other and its affiliates, and its and their directors, officers, employees and
agents of and from all debts, demands, actions, causes of action, suits,
accounts, covenants, contracts, agreements, damages, and any and all claims,
demands and liabilities whatsoever of every name and nature, both in law and in
equity, against such other party or any of its assigns, which the releasing
party has or ever had, which arise out
<PAGE>
of or relate to events, circumstances or actions taken by such other party prior
to the Time of Distribution; provided, however, that the foregoing general
release shall not apply to this Agreement, or the transactions contemplated
hereby and shall not affect either party's right to enforce this Agreement or
any other agreement contemplated hereby in accordance with its terms. Each party
understands and agrees that, except as otherwise specifically provided herein,
neither the other party nor any of its Subsidiaries is, in this Agreement or any
other agreement or document, representing or warranting to such party in any way
as to the assets, business or Liabilities transferred or assumed as contemplated
hereby or thereby or as to any consents or approvals required in connection with
the consummation of the transactions contemplated by this Agreement.
5.2 Indemnification by Lynch. Lynch shall indemnify, defend and hold
harmless Interactive and any of its Subsidiaries, and each of their respective
directors, officers, employees, agents and Affiliates, and each of the heirs,
executors, successors and assigns of any of the foregoing (the Interactive
Indemnities") from and against the Lynch Liabilities and any and all losses,
Liabilities and damages, including the costs and expenses of any
<PAGE>
and all actions, threatened actions, demands, assessments, judgments,
settlements and compromises relating thereto and attorneys' fees and any and all
expenses whatsoever reasonably incurred in investigating, preparing or defending
against any such actions or threatened actions (collectively, "Interactive
Indemnifiable Losses" ad, individually, a "Interactive Indemnifiable Loss") of
the Interactive Indemnitees arising out of or due to the failure or alleged
failure of Lynch or any of its Subsidiaries to pay, perform or otherwise
discharge in due course any of the Lynch Liabilities.
5.3 Indemnification by Interactive. Interactive shall indemnify, defend
and hold harmless Lynch and each of its Subsidiaries, and each of their
directors, officers, employees, agents and Liabilities and each of the heirs,
executors, successors and assigns of any of the foregoing (the "Lynch
Indemnitees") from and against the Interactive Liabilities and any and all
losses, Liabilities and damages, including the costs and expenses of any and all
actions, threatened actions, demands, assessments, judgments, settlements and
compromises relating thereto and attorneys' fees and any and all expenses
whatsoever reasonably incurred in investigating, preparing or defending against
any such
<PAGE>
actions or threatened actions (collectively, "Lynch Indemnifiable Losses" and,
individually, a Lynch Indemnifiable Loss") of the Lynch Indemnitees arising out
of or due to the failure or alleged failure of Interactive or any of its
Affiliates to pay, perform or otherwise discharge in due course any of the
Interactive Liabilities. The "Interactive Indemnifiable Losses" and the Lynch
Indemnifiable Losses" are collectively referred to as the "Indemnifiable
Losses."
5.4 Insurance Proceeds, Tax Benefits; Mitigation. The amount which any
party (an "Indemnifying Party") is or may be required to pay to any other Person
(an "Intemnitee") pursuant to Sections 5.2 or 5.3 shall be reduced (including
retroactively) by (i) any insurance proceeds or other amounts actually recovered
by or on behalf of such Indemnitee in reduction of the related Indemnifiable
Loss and (ii) any Tax benefits realized or realizable by such Indemnitee based
on the present value thereof by reason of such loss and shall be increased by
any Tax liability incurred by such Indemnitee based on such indemnity payment.
If an Indemnitee shall have received the payment required by this Agreement from
an Indemnifying Party in respect of an Indemnifiable Loss and shall subsequently
actually receive insurance proceeds, Tax benefits or
<PAGE>
other amounts in respect of such Indemnifiable Loss as specified above, then
such Indemnitee shall pay to such Indemnifying Party a sum equal to the amount
of such insurance proceeds, Tax benefits or other amounts actually received. The
Indemnitee shall take all reasonable steps to mitigate all Losses, including
availing itself of any defenses, limitations, rights of contribution, claims
against third parties and other rights at law (it being understood that any
out-of-pocket costs paid to third parties in connection with such mitigation
shall constitute Losses), and shall provide such evidence and documentation of
the nature and extent of any Loss as may be reasonably requested by the
Indemnifying Party.
5.5 Procedure for Indemnification.
(a) If an Indemnitee shall receive notice or otherwise learn of the
assertion by a person (including any governmental entity) who is not a party to
this Agreement or to any of the Transaction Documents of any claim or of the
commencement by any such Person of any action (a "Third-Party Claim") with
respect to which an Indemnifying Party may be obligated to provide
indemnification pursuant to this Agreement, such Idemnitee shall give such
Indemnifying party written notice thereof promptly after becoming
<PAGE>
aware of such Third-Party Claim; provided, however, that the failure of any
Indemnitee to give notice as required by this Section 5.5 shall not relieve the
Indemnifying Party of its obligations under this Article V, except to the extent
that such Indemnifying Party is prejudiced by such failure to give notice. Such
notice shall describe the Third-Party Claim in reasonable detail, and shall
indicate the amount (estimated if necessary) of the Indemnifiable Loss that has
been or may be sustained by such Indemnitee.
(b) An Indemnifying Party may elect to defend or to seek to settle or
compromise, at such Indemnifying Party's own expense and by such Indemnifying
Party's own counsel reasonably acceptable to the Indemnitee, any Third-Party
Claim, provided that the Indemnifying Party must confirm in writing that it
agrees that the Indemnitee is entitled to indemnification hereunder in respect
of such Third-Party Claim. Within 30 days of the receipt of notice from an
Indemnitee in accordance with Section 5.5(a) (or sooner, if the nature of such
Third-Party Claim so requires), the Indemnifying Party shall notify the
Indemnitee of its election whether to assume responsibility for such Third-Party
Claim (provided that if the Indemnifying Party does not so notify the Indemnitee
of its
<PAGE>
election within 30 days after receipt of such notice from the Indemnitee, the
Indemnifying Party shall be deemed to have elected not to assume responsibility
for such Third-Party Claim), and such Indemnitee shall cooperate in the defense
or settlement or compromise of such Third-Party Claim. After notice from an
Indemnifying Party to an Indemnitee of its election to assume responsibility for
a Third-Party Claim, such Indemnifying Party shall not be liable to such
Indemnitee under this Article V for any legal or other expenses (except expenses
approved in advance by the Indemnifying Party) subsequently incurred by such
Indemnitee in connection with the defense thereof; provided, however, that if
the defendants in any such claim include both the Indemnifying Party and one or
more Indemnitees and in such Indemnitees' reasonable judgment there exists a
conflict of interest between such Indemnitees and the Indemnifying Party such
Indenmitees shall have the right to employ separate counsel and in that event
the reasonable fees and expenses of such separate counsel (but not more than one
separate counsel reasonably satisfactory to the Indemnifying Party) shall be
paid by such Indemnifying Party. If an Indemnifying Party elects not to assume
responsibility for a Third-Party Claim (which election may be made only in the
event of a good faith dispute that a claim was inappropriately tendered
<PAGE>
under Section 5.2 or 5.3, as the case may be) such Indemnitee may defend or
(subject to the following sentence) seek to compromise or settle such
Third-Party Claim without prior written notice to the Indemnifying Party, which
shall have the option within fifteen days following the receipt of such notice
(i) to disapprove the settlement and assume all past and future responsibility
for the claim, including reimbursing the Indemnitee for prior expenditures in
connection with the claim, or (ii) to disapprove the settlement and continue to
refrain from participation in the defense of the claim, in which event the
Indemnifying Party shall have no further right to contest the amount or
reasonableness of the settlement if the Indemnitee elects to proceed therewith,
or (iii) to approve the amount of the settlement, reserving the Indemnifying
Party's right to contest the Indemnitee's right to indemnity, or (iv) to approve
and agree to pay the settlement. In the vent the Indemnifying Party makes no
response to such written notice from the Indemnitee, the Indemnifying Party
shall be deemed to have elected option (ii).
(c) If an Indemnifying Party chooses to defend or to seek to compromise
any Third-Party Claim, the Indemnitee shall make available to such Indemnifying
Party any personnel and any books, records or other documents within its control
or which it otherwise
<PAGE>
has the ability to make available that are necessary or appropriate
for such defense.
(d) Notwithstanding anything else in this Section 5.5 to the contrary,
an Indemnifying Party shall not settle or compromise any Third-Party Claim
unless (i) such settlement or compromise contemplates as an unconditional term
thereof the giving by such claimant or plaintiff to the Indemnitee of a written
release from all liability in respect of such Third-Party Claim and (ii) such
settlement does not provide for any non-monetary relief by Indemnitee unless
Indemnitee consents thereto. In the event the Indemnitee shall notify the
Indemnifying Party in writing that such Indemnitee declines to accept any such
settlement or compromise, such Indemnitee may continue to contest such
Third-Party Claim free of any participation by such Indemnifying Party, at such
Indemnitee's sole expense. In such event, the obligation of such Indemnifying
Party to such Indemnitee with respect to such ThirdParty Claim shall be equal to
(i) the costs and expenses of such Indemnitee prior to the date such
Indemnifying Party notifies such Indemnitee of such offer of settlement or
compromise (to the extent such costs and expenses are otherwise indemnifiable
hereunder) plus (ii) the less of (A) the amount of any offer of settlement or
<PAGE>
compromise which such Indemnitee declined to accept and (B) the actual
out-of-pocket amount such Indemnitee is obligated to pay subsequent to such date
as a result of such Indemnitee's continuing to pursue such Third-Party Claim.
(e) Any claim on account of an Indemnifiable Loss which does not result
from a Third-Party Claim shall be asserted by written notice given by the
Indemnitee to the applicable Indemnifying Party. Such Indemnifying Party shall
have a period of 30 days after the receipt of such notice within such 30-day
period, such Indemnifying Party shall be deemed to have refused to accept
responsibility to make payment. If such Indemnifying Party does not respond
within such 30-day period or rejects such claim in whole or in part, such
Indemnitee shall be free to pursue such remedies as may be available to such
party under applicable law or under this Agreement, the Merger Agreement or the
Indemnification Agreement.
(f) In addition to any adjustments required pursuant to Section 5.4, if
the amount of any Indemnifiable Loss shall, at any time subsequent to the
payment required by this Agreement, be reduced by recovery, settlement or
otherwise, the amount of such
<PAGE>
reduction, less any expenses incurred in connection therewith, shall promptly be
repaid by the Indemnitee to the Indemnifying Party.
(g) In the event of payment by an Indemnifying Party to any Indemnitee
in connection with any Third-Party Claim, such Indemnifying Party shall be
subrogated to and shall stand in the place of such Indemnitee as to any events
or circumstances in respect of which such Indemnitee may have any right or claim
relating to such third-Party Claim against any claimant or plaintiff asserting
such Third-Party Claim. Such Indemnitee shall cooperate with such Indemnifying
Party in a reasonable manner, and at the cost and expense of such Indemnifying
Party, in prosecuting any subrogated right or claim.
5.6 Remedies Cumulative. The remedies provided in this Article V shall
be cumulative and shall not preclude assertion by any Indemnitee of any other
rights or the seeking of any and all other remedies against any Indemnifying
Party.
5.7 Survival of Indemnities. The obligations of each of Interactive and
Lynch under this Article V shall survive the sale
<PAGE>
or other transfer by it of any assets or businesses or the assignment by it of
any Liabilities, with respect to any Indemnifiable Loss of the other related to
such assets, businesses or Liabilities.
5.8 Tax Matters. Notwithstanding anything to the contrary in this
Article V, any claim for indemnification with respect to any Liabilities which
are Tax liabilities of Lynch and Interactive shall be governed by the terms and
provisions of Article II hereof.
ARTICLE VI
Employee Matters
6.1 Employees. Immediately prior to, and subject to, the Distribution,
Lynch shall transfer to Interactive all of the employees of Lynch, so that no
such employee who becomes employed by Interactive experiences any termination or
other interruption in employment. The employees who become employees of
Interactive upon the Distribution shall not be employees of Lynch or any
Subsidiary of Lynch after the Time of Distribution, except as otherwise agreed
to in writing by the parties. Nothing contained in this Section
<PAGE>
6.1 shall confer on any Lynch or any Interactive employee any right to continued
employment after the Time of Distribution, and such employees shall continue to
be employed "at-will." At and from the Time of Distribution, except as set forth
in this Article VI, (i) Interactive shall assume all obligations relating to all
employees transferred thereto arising on or after the Time of Distribution (with
Lynch retaining all obligations relating to all employees transferred to
Interactive arising prior to the Time of Distribution except as contemplated
herein), including all obligations or liabilities relating to employee benefits,
health insurance and severance, if any, and (ii) Lynch shall retain all
obligations relating to Former Employees, including all obligations or
liabilities relating to employee benefits or health insurance.
6.2 Employee Benefits. Without limiting the generality of
Section 6.1 above:
(a) Accrued Vacation. Lynch and Interactive agree that all accrued
vacation for Lynch Employees on and after the Time of Distribution shall be
Interactive's obligation.
(b) 401(k) Plan. The Lynch Corporation 401(k) Plan (the
<PAGE>
"401(k) Plan") shall remain the plan and obligation of Lynch after the
Distribution. After the Distribution, Interactive shall be a participating
employer in the 401(k) Plan, and Interactive employees shall remain participants
in the 401(k) Plan until such time as Interactive determines otherwise. If and
when Interactive wants to remove its employees from the 401(k) Plan, the parties
will cooperate to accomplish that.
(c) Welfare Plans. Immediately prior to, and subject to, the
Distribution, Interactive shall assume all Lynch employee benefit plans that are
employee welfare benefit plans, as defined in Section 3(1) of ERISA (the
"Existing Welfare Plans") but Lynch shall reimburse Interactive for the costs of
any Former Employees, if any.
(d) Phantom Stock Plan. With respect to the 43,000 units outstanding
under Lynch's Phantom Stock Plan, each representing one share of Lynch stock
outstanding at the Time of the Distribution, the units will be divided into two
units, one representing one share of Interactive stock and one representing one
share of Lynch stock. The original unit grant price will be divided between the
two new units based upon the average relative market price of
<PAGE>
Interactive stock versus Lynch stock for the five trading days beginning on the
eleventh trading day after the Time of the Distribution. Each of Interactive and
Lynch will bear its own cost of the divided units.
(e) 1999 Bonus Plan. Bonuses for corporate headquarters employees in
1999 are expected to be determined under Lynch's bonus plans as if the
Distribution had not occurred, and Interactive is expected to bear its
appropriate share of the cost based upon relative profitability, accomplishments
and other factors. Beginning in 2000, each of Interactive and Lynch will
determine their own bonuses for corporate office staff and bear the cost
thereof.
ARTICLE VII
Provision of Management Services to Lynch
7.1 Provision of Services. Commencing at the Time of the Distribution,
Interactive shall provide general corporate management services (the "Services")
to Lynch, which may include, but not be limited to, operations, supervision of
operating
<PAGE>
subsidiaries, strategic planning, acquisition analysis, investment banking and
financial advisory services, supervision of the preparation of corporate tax
returns, and supervision of financial reporting and other regulatory matters
applicable to a public company. In providing the Services, Interactive may
employ consultants and other advisers at its discretion, in addition to
utilizing its own employees. Such Services are intended to be generally
comparable in type and quantity to that which the transferred employees provided
to Lynch prior to the Time of the Distribution. Either party may terminate for
any reason such Services upon 30 days written notice by Lynch to Interactive or
60 days written notice from Interactive to Lynch. Provision of Services
hereunder shall terminate no later than the third anniversary of the Time of
Distribution.
7.2 Payment. All out-of-pocket expenses related specifically to the
provision of services to Lynch, including without limitation outside counsel,
auditors, and tax advisors expenses, shall be charged to and paid promptly by
Lynch. In addition, Lynch shall pay to Interactive initially 25% of the General
Overhead Expense (employee expense (other than bonus and phantom stock plan
expense), rent, general airplane expense, business equipment and
<PAGE>
supplies and other non-specifically chargeable expenses)2. Such amounts shall be
paid monthly. Either party may change the percentage of the General Overhead
Expense to be borne by Lynch to reflect changing time estimates or other factors
determined to be relevant at the time, by 60 days written notice to the other,
or such shorter period as both parties shall agree to.
7.3 (a) DISCLAIMER OF WARRANTIES. INTERACTIVE DISCLAIMS ALL WARRANTIES,
EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT TO THE
SERVICES. INTERACTIVE MAKES NO REPRESENTATIONS OR WARRANTIES AS TO THE QUALITY,
SUITABILITY OR ADEQUACY OF THE SERVICES FOR ANY PURPOSE OR USE.
(b) Limitations of Liability/Indemnification of Lynch.
Interactive shall have no Liability to Lynch with respect to its furnishing any
of the Services hereunder except for liabilities arising out of willful
misconduct occurring after the Time of Distribution of Interactive. Interactive
will indemnify, defend and hold harmless Lynch's Indemnities in respect of all
liabilities
- --------
2Is this a good definition?
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related to, arising from, asserted against or associated with such willful
misconduct. Such indemnification obligation shall be a liability of Interactive
and the provisions of Article with respect to indemnification shall govern with
respect thereto. In no event shall Interactive have any liability for any
incidental, indirect, special or consequential damages, whether or not caused by
or resulting from negligence or breach of obligations hereunder and whether or
not endorsed of the possibility of the existence of such damages.
(c) Limitation of Liability; Indemnification of Interactive.
Lynch shall indemnify and hold harmless Interactive Indemnities in respect of
all liabilities related to, arising from, asserted against or associated with
Interactive's furnishing or failing to furnish the Services provided for in this
Agreement, other than liabilities arising out of the willful misconduct of
Interactive following the Closing Date of Interactive. Such indemnification
obligation shall be a liability of Lynch, and the provisions of Article V with
respect to indemnification shall govern with respect thereto. In no event shall
Lynch have any liability for any incidental, indirect, special or consequential
damages, whether or not caused by or resulting from negligence or
<PAGE>
breach of obligations hereunder and whether or not informed of the
possibility of the existence of such damages.
(d) Subrogation of Rights Vis-A-Vis Third Party Contractors.
In the event any liability arises from the performance of Services hereunder by
a third party contractor, Lynch shall be subrogated to such rights, if any, as
Interactive may have against such third party contractor with respect to the
Services provided by such third party contractor to or on behalf of Lynch.
(e) Taxes. Lynch shall bear all taxes, duties and other
similar charges (and any related interest and penalties), imposed as a result of
its receipt of Services under this Agreement, including any tax which Lynch is
required to withhold or deduct from payments to Interactive, except (a) any tax
allowable at a credit against the U.S. Federal income tax of Interactive, and
(b) any net income tax imposed upon Interactive by the country of its
incorporation or any governmental entity within its country of incorporation. To
assist Interactive in obtaining the credit identified is subsection (b) of this
Section (v), Lynch shall furnish Interactive with such evidence as may be
required by the
<PAGE>
relevant taxing authorities to establish that any such tax has been
paid.
(f) Laws and Governmental Regulations. Lynch shall be
responsible for (i) compliance with all laws and governmental regulations
effecting its business and (ii) any use Lynch may make of the Services to assist
it in complying with such laws and governmental regulations.
(g) Relationship of Parties. Nothing in this Agreement shall
be deemed or construed by the parties or any third party as creating the
relationship of principal and agent, partnership or joint venture between the
parties, it being understood and agreed that no provision contained herein, and
no actions of the parties, shall be deemed to create any relationship between
the parties other than the relationship of independent contractor nor be deemed
to vest any rights, interest or claims in any third parties.
ARTICLE VIII
Miscellaneous and General
<PAGE>
8.1 Non-Arms Length. EACH OF THE PARTIES HERETO RECOGNIZES AND AGREES
THAT THIS AGREEMENT AND CERTAIN DECISIONS AND/OR ACTIONS WHICH MAY BE MADE OR
TAKEN PURSUANT TO OR IN CONNECTION WITH THIS AGREEMENT AND/OR OTHER AGREEMENTS,
ARRANGEMENTS OR RELATIONS HAVE NOT BEEN OR MAY NOT IN THE FUTURE BE THE RESULT
OF ARMS-LENGTH NEGOTIATIONS, AND AS A RESULT MAY BE MORE OR LESS FAVORABLE TO
ONE PARTY OR THE OTHER THAN MIGHT OTHERWISE RESULT.
8.2 Modification or Amendment. The parties hereto may modify or amend
this Agreement by written agreement executed ad delivered by authorized officers
of the respective parties.
8.3 Counterparts. For the convenience of the parties hereto, this
Agreement may be executed in separate counterparts, each such counterpart being
deemed to be an original instrument, ad which counterparts shall together
constitute the same agreement.
8.4 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York, without reference to its
conflicts of law principles.
8.5 Notices. Any notice, request, instruction or other
<PAGE>
document to be given hereunder by any party to the other shall be in writing and
shall be deemed to have been duly given (i) on the date of delivery if delivered
by facsimile (upon confirmation of receipt) or personally, (ii) on the first
business day following the date of dispatch if delivered by Federal Express or
other next-day courier service, or (iii) on the third business day following the
date of mailing if delivered by registered or certified mail, return receipt
requested, postage prepaid. All notices hereunder shall be delivered as set
forth below, or pursuant to such other instructions as may be designated in
writing by the party to receive such notice:
If to Lynch:
Lynch Manufacturing Corporation
401 Theodore Fremd Avenue
Rye, NY 10580
Attn: Chief Financial Officer
Telecopy: (914) 921-6410
Telephone: (914) 921-7601
If to Interactive to:
Lynch Interactive Corporation
401 Theodore Fremd Avenue
Rye, NY 10580
Attn: Chief Financial Officer
Telecopy: (914) 921-6410
Telephone: (914) 921-7601
<PAGE>
8.6 Captions. All Article, Section and paragraph captions herein are
for convenience of reference only, do not constitute part of this Agreement and
shall not be deemed to limit or otherwise affect any of the provisions hereof.
8.7 No Third Party Beneficiary. This Agreement is for the purpose of
defining the respective rights and obligations of the parties hereto and is not
for the benefit of any employee, creditor or other third party, except as may be
expressly set forth herein.
8.8 Successors and Assigns. No party to this Agreement shall convey,
assign or otherwise transfer any of its rights or obligations under this
Agreement without the express written consent of the other party hereto in its
sole and absolute discretion. Any such conveyance, assignment or transfer
without the express written consent of the other party shall be void ab initio.
No assignment of this Agreement or any rights hereunder shall relieve the
assigning party of its obligations hereunder. Any successor by merger to a party
to this Agreement shall be substituted for such party as a party to this
Agreement, and all obligations, duties and liabilities of the substituted party
under this Agreement shall continue in full force and effect as
<PAGE>
obligations, duties and liabilities of the substituting party, enforceable
against the substituting party as a principal, as though no substitution had
been made.
8.9 Certain Obligations. Whenever this Agreement requires any of the
Subsidiaries of any party to take any action, this Agreement will be deemed to
include an undertaking on the part of such party to cause such Subsidiary to
take such action.
8.10 Specific Performance. In the event of any actual or threatened
default in, or breach of, any of the terms, conditions and provisions of this
Agreement, the party or parties who are or are to be thereby aggrieved shall
have the right of specific performance and injunctive relief giving effect to
its or their rights under this Agreement, in addition to any and all other
rights and remedies at law or in equity, and all such rights and remedies shall
be cumulative. The parties agree that the remedies at law for any breach or
threatened breach, including monetary damages, are inadequate compensation for
any loss and that any defense in any action for specific performance that a
remedy at law would be adequate is waived.
<PAGE>
8.11 Severability. If any provision of this Agreement or the
application thereof to any Person or circumstance is determined to be invalid,
void or unenforceable, the remaining provisions hereof, or the application of
such provision to Persons or circumstances other than those remaining provisions
hereof, or the application of such provision to Persons or circumstances other
than those as to which it has been held invalid or unenforceable, shall remain
in full force and effect and shall in no way be affected, impaired or
invalidated thereby, so long as the economic or legal substance of the
transactions contemplated hereby is not affected in any manner adverse to any
party. Upon any such determination, the parties shall negotiate in good faith in
an effort to agree upon a suitable and equitable substitute provision to effect
the original intent of the parties.
8.12 Arbitration. any dispute with respect to this Agreement shall be
arbitrated in New York City or Westchester County, NY in accordance with the
rules of the American Arbitration Association.
IN WITNESS WHEREOF, this Agreement has been duly executed and
delivered by the duly authorized officers of the parties hereto as of the date
first above written.
<PAGE>
LYNCH CORPORATION
By:
Name:
Title:
LYNCH INTERACTIVE CORPORATION
By:
Name:
Title
RESTATED CERTIFICATE OF INCORPORATION
OF
LYNCH INTERACTIVE CORPORATION
Lynch Interactive Corporation (the "Corporation"), a corporation
organized and existing under the laws of the State of Delaware, hereby certifies
as follows:
1. The name of the Corporation is Lynch Interactive Corporation. The
date of filing of its original Certificate of Incorporation with the Secretary
of State was August 16, 1996.
2. This Restated Certificate of Incorporation restates, integrates and
further amends the Certificate of Incorporation of the Corporation to read as
herein set forth in full:
FIRST: The name of the Corporation is Lynch Interactive Corporation.
SECOND: The address of the Corporation's registered office in the State of
Delaware is Corporation Trust Center, 1209 Orange Street in the City of
Wilmington, County of New Castle, Delaware 19801. The name of its registered
agent at such address is The Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware.
FOURTH: The Corporation shall have the authority to issue 10,000,000 shares
of Common Stock, par value $0.0001 per share.
FIFTH: A director of this Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for the breach of any
fiduciary duty as a director, except in the case of (a) any breach of the
director's duty of loyalty to the Corporation or its stockholders, (b) acts or
omissions not in good faith or that involve intentional misconduct or a knowing
violation of law, (c) under section 174 of the General Corporation Law of the
State of Delaware or (d) for any transaction from which the director derives an
improper personal benefit. Any repeal or modification of this Article by the
stockholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such repeal
or modification with respect to acts or omissions occurring prior to such repeal
or modification.
SIXTH: Unless, and except to the extent that, the by-laws of the
corporation shall so require, the election of directors of the Corporation need
not be by written ballot.
SEVENTH: The Corporation hereby confers the power to adopt, amend or repeal
by-laws of the Corporation upon the directors.
<PAGE>
EIGHTH: The Corporation reserves the right to amend, alter, change, or
repeal any provision contained in this Restated Certificate of Incorporation, in
the manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation.
NINTH: Each share of common stock (whether Class A or Class B) of the
Corporation outstanding at the time this Restated Certificate of Incorporation
is filed with the Secretary of State of the State of Delaware shall
automatically become one share of common stock, par value $0.0001 per share, of
the Corporation at the tine this Restated Certificate of Incorporation is so
filed.
The Restated Certificate of Incorporation was duly adopted by unanimous
written consent of the stockholders in accordance with the applicable provisions
of Sections 228, 242 and 245 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, Lynch Interactive Corporation has caused this
certificate to be signed by Robert E. Dolan, its President, and attested to by
Robert A. Hurwich, its Secretary, this day of July, 1999.
ATTEST: LYNCH INTERACTIVE CORPORATION
By: By:
Robert A. Hurwich Robert E. Dolan
Secretary President
BY-LAWS
OF
LYNCH INTERACTIVE CORPORATION
1. MEETINGS OF STOCKHOLDERS.
1.1 Annual Meeting. The annual meeting of stockholders shall be held on
the first Thursday of May in each year, or as soon thereafter as practicable,
and shall be held at a place and time determined by the board of directors (the
"Board").
1.2 Special Meetings. Special meetings of the stockholders may be
called by resolution of the Board or the chairman and shall be called by the
president or secretary upon the written request (stating the purpose or purposes
of the meeting) of a majority of the directors then in office or of the holders
of a majority of the outstanding shares entitled to vote. Only business related
to the purposes set forth in the notice of the meeting may be transacted at a
special meeting.
1.3 Place and Time of Meetings. Meetings of the stockholders may be
held in or outside Delaware at the place and time specified by the Board or the
officers or stockholders requesting the meeting.
1.4 Notice of Meetings: Waiver of Notice. Written notice of each
meeting of stockholders shall be given to each stockholder entitled to vote at
the meeting, except that (a) it shall not be necessary to give notice to any
stockholder who submits a signed waiver of notice before or after the meeting,
and (b) no notice of an adjourned meeting need be given, except when required
under section 1.5 below or by law. Each notice of a meeting shall be
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<PAGE>
given, personally or by mail, not fewer than 10 nor more than 60 days before the
meeting and shall state the time and place of the meeting, and, unless it is the
annual meeting, shall state at whose direction or request the meeting is called
and the purposes for which it is called. If mailed, notice shall be considered
given when mailed to a stockholder at his address on the corporation's records.
The attendance of any stockholder at a meeting, without protesting at the
beginning of the meeting that the meeting is not lawfully called or convened,
shall constitute a waiver of notice by him.
1.5 Quorum. At any meeting of stockholders, the presence in person or
by proxy of the holders of a majority of the shares entitled to vote shall
constitute a quorum for the transaction of any business. In the absence of a
quorum, a majority in voting interest of those present or, if no stockholders
are present, any officer entitled to preside at or to act as secretary of the
meeting, may adjourn the meeting until a quorum is present. At any adjourned
meeting at which a quorum is present, any action may be
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<PAGE>
taken that might have been taken at the meeting as originally called. No notice
of an adjourned meeting need be given, if the time and place are announced at
the meeting at which the adjournment is taken, except that, if adjournment is
for more than 30 days or if, after the adjournment, a new record date is fixed
for the meeting, notice of the adjourned meeting shall be given pursuant to
section 1.4.
1.6 Voting; Proxies. Each stockholder of record shall be entitled to
one vote for each share registered in his name. Corporate action to be taken by
stockholder vote, other than the election of directors, shall be authorized by a
majority of the votes cast at a meeting of stockholders, except as otherwise
provided by law or by section 1.8. Directors shall be elected in the manner
provided in section 2. 1. Voting need not be by ballot, unless requested by a
majority of the stockholders entitled to vote at the meeting or ordered by the
chairman of the meeting. Each stockholder entitled to vote at any meeting of
stockholders or to express consent to or dissent from corporate action in
writing without a meeting may authorize another person to act for him by proxy.
No proxy shall be valid after three years from its date, unless it provides
otherwise.
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<PAGE>
1.7 List of Stockholders. Not fewer than 10 days prior to the date of any
meeting of stockholders, the secretary of the corporation shall prepare a
complete list of stockholders entitled to vote at the meeting, arranged in
alphabetical order and showing the address of each stockholder and the number of
shares registered in his name. For a period of not fewer than 10 days prior to
the meeting, the list shall be available during ordinary business hours for
inspection by any stockholder for any purpose germane to the meeting. During
this period, the list shall be kept either (a) at a place within the city where
the meeting is to be held, if that place shall have been specified in the notice
of the meeting, or (b) if not so specified, at the place where the meeting is to
be held. The list shall also be available for inspection by stockholders at the
time and place of the meeting. 1.8 Action by Consent Without a Meeting. Any
action required or permitted to be taken at any meeting of stockholders may be
taken without a meeting, without prior notice and without a vote, if a consent
in writing, setting forth the action so taken, shall be signed by the holders of
outstanding stock having not fewer than the minimum number of votes that would
be necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voting. Prompt notice of the taking of
any such action shall be given to those stockholders who did not consent in
writing.
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<PAGE>
2. BOARD OF DIRECTORS.
2.1 Number. Qualification. Election and Tenn of Directors. The business
of the corporation shall be managed by the entire Board, which initially shall
consist of two directors. The number of directors may be changed by resolution
of a majority of the Board or by the holders of a majority of the shares
entitled to vote, but no decrease may shorten the term of any incumbent
director. Directors shall be elected at each annual meeting of stockholders by a
plurality of the votes cast and shall hold office until the next annual meeting
of stockholders and until the election and qualification of their respective
successors, subject to the provisions of section 2.9. As used in these by-laws,
the term "entire Board" means the total number of directors the corporation
would have, if there were no vacancies on the Board.
2.2 Quorum and Manner of Acting. A majority of the entire Board shall
constitute a quorum for the transaction of business at any meeting, except as
provided in section 2.10. Action of the Board shall be authorized by the vote of
the majority of the directors present at the time of the vote, if there is a
quorum, unless otherwise provided by law or these by-laws. In the absence of a
quorum, a majority of the directors present may adjourn any
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<PAGE>
meeting from time to time until a quorum is present.
2.3 Place of Meeting. Meetings of the Board may be held in
or outside Delaware.
2.4 Annual and Regular Meeting. Annual meetings of the Board, for the
election of officers and consideration of other matters, shall be held either
(a) without notice immediately after the annual meeting of stockholders and at
the same place, or (b) as soon as practicable after the annual meeting of
stockholders, on notice as provided in section 2.6. Regular meetings of the
Board may be held without notice at such times and places as the Board
determines. If the day fixed for a regular meeting is a legal holiday, the
meeting shall be held on the next business day.
2.5 Special Meetings. Special meetings of the Board may be
called by the chairman or by a majority of the directors.
2.6 Notice of Meetings: Waiver of Notice. Notice of the time and place
of each special meeting of the Board, and of each annual meeting not held
immediately after the annual meeting of stockholders and at the same place,
shall be given to each director by mailing it to him at his residence or usual
place of business at least three days before the meeting, or by delivering or
telephoning or telegraphing it to him at least two days before the meeting.
Notice of a special meeting also shall state the purpose
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<PAGE>
or purposes for which the meeting is called. Notice need not be given to any
director who submits a signed waiver of notice before or after the meeting or
who attends the meeting without protesting at the beginning of the meeting the
transaction of any business because the meeting was not lawfully called or
convened. Notice of any adjourned meeting need not be given, other than by
announcement at the meeting at which the adjournment is taken.
2.7 Board or Committee Action Without a Meeting. Any action required or
permitted to be taken by the Board or by any committee of the Board may be taken
without a meeting, if all the members of the Board or the committee consent in
writing to the adoption of a resolution authorizing the action. The resolution
and the written consents by the members of the Board or the committee shall be
filed with the minutes of the proceedings of the Board or the committee.
2.8 Participation in Board or Committee Meetings by Conference
Telephone. Any or all members of the Board or any committee of the Board may
participate in a meeting of the Board or the committee by means of a conference
telephone or similar communications equipment allowing all persons participating
in the meeting to hear each other at the same time. Participation by such means
shall constitute presence in person at the meeting.
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<PAGE>
2.9 Resignation and Removal of Directors. Any director may resign at
any time by delivering his resignation in writing to the chairman, president or
secretary of the corporation, to take effect at the time specified in the
resignation; the acceptance of a resignation, unless required by its terms,
shall not be necessary to -make it effective. Any or all of the directors may be
removed at any time, either with or without cause, by vote of the stockholders.
2. 10 Vacancies. Any vacancy in the Board, including one created by an
increase in the number of directors, may be filled for the unexpired term by a
majority vote of the remaining directors, though less than a quorum.
2.11 Compensation. Directors shall receive such compensation as the
Board determines, together with reimbursement of their reasonable expenses in
connection with the performance of their duties. A director also may be paid for
serving the corporation or its affiliates or subsidiaries in other capacities.
3.COMMITTEES.
3.1 Executive Committee. The Board, by resolution adopted by a majority
of the entire Board, may designate an executive committee of one or more
directors, which shall have all the powers and authority of the Board, except as
otherwise provided in the
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<PAGE>
resolution, section 141(c) of the General Corporation Law of Delaware or any
other applicable law. The members of the executive committee shall serve at the
pleasure of the Board. All action of the executive committee shall be reported
to the Board at its next meeting.
3.2 Other Committees. The Board, by resolution adopted by a majority of
the entire Board, may designate other committees of one or more directors, which
shall serve at the Board's pleasure and have such powers and duties as the Board
determines.
3.3 Rules Applicable to Committees. The Board may designate one or more
directors as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee. In case of the absence or
disqualification of any member of a committee, the member or members present at
a meeting of the committee and not disqualified, whether or not a quorum, may
unanimously appoint another director to act at the meeting in place of the
absent or disqualified member. All action of a committee shall be reported to
the Board at its next meeting. Each committee shall adopt rules of procedure and
shall meet as provided by those rules or by resolutions of the Board. 4.
OFFICERS.
4.1 Number; Security. The executive officers of the
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<PAGE>
corporation shall be the chairman, a chief executive officer, a president, one
or more vice presidents (including an executive vice president, if the Board so
determines), a secretary and a treasurer. Any two or more offices may be held by
the same person. The board may require any officer, agent or employee to give
security for the faithful performance of his duties.
4.2 Election, Term of Office. The executive officers of the corporation
shall be elected annually by the Board, and each such officer shall hold office
until the next annual meeting of the Board and until the election of his
successor, subject to the provisions of section 4.4.
4.3 Subordinate Officers. The Board may appoint subordinate officers
(including assistant secretaries and assistant treasurers), agents or employees,
each of whom shall hold office for such period and have such powers and duties
as the Board determines. The Board may delegate to any executive officer or
committee the power to appoint and define the powers and duties of any
subordinate officers, agents or employees.
4.4 Resignation and Removal of Officers. Any officer may resign at any
time by delivering his resignation in writing to the chairman, president or
secretary of the corporation, to take effect at the time specified in the
resignation; the acceptance of a
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<PAGE>
resignation, unless required by its terms, shall not be necessary to make it
effective. Any officer elected or appointed by the Board or appointed by an
executive officer or by a committee may be removed by the Board either with or
without cause, and in the case of an officer appointed by an executive officer
or by a committee, by the officer or committee that appointed him or by the
chairman.
4.5 Vacancies. A vacancy in any office may be filled for the unexpired
in the manner prescribed in sections 4.2 and 4.3 for election or appointment to
the office.
4.6 The Chairman. The Chairman of the Board shall preside over all
meeting of the board at which he is present, and shall have such other powers
and duties as chairmen of the boards of corporations usually have or the Board
assigns to him.
4.7 The Chief Executive Officer. Subject to the control of the Board,
the chief executive officer of the corporation shall manage and direct the daily
business and affairs of the corporation and shall communicate to the Board and
any Committee thereof reports, proposals and recommendations for their
respective consideration or action. He may do and perform all acts on behalf of
the Corporation and shall preside at all meetings of the stockholders if present
thereat, and in the absence of the Chairman of the Board of Directors have such
powers and perform such duties
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<PAGE>
as the Board or the chairman may from time to time prescribe or as may be
prescribed in these By-laws, and in the event of the absence, incapacity or
inability to act of the chairman, then the chief executive officer shall perform
the duties and exercise the powers of the chairman.
4.8 President. The president shall have such powers and perform such
duties as the Board or the chairman may from time to time prescribe or as may be
prescribed in these By-laws.
4.9 Vice President. Each vice president shall have such power the Board
or the chairman assigns to him.
4.10 The Treasurer. The treasurer shall be the chief financial officer
of the corporation and shall be in charge of the corporation's books and
accounts. Subject to the control of the Board, he shall have such other powers
and duties as the Board or the president assigns to him.
4.11 The Secretary. The secretary shall be the secretary of, and keep
the minutes of, all meetings of the Board and the stockholders, shall be
responsible for giving notice of all meetings of stockholders and the Board, and
shall keep the seal and, when authorized by the Board, apply it to any
instrument requiring it. Subject to the control of the Board, he shall have such
powers and duties as the Board or the president assigns to
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him. In the absence of the secretary from any meeting, the minutes shall be kept
by the person appointed for that purpose by the presiding officer.
4.12 Salaries. The Board may fix the officers salaries, if any, or it
may authorize the chairman to fix the salary of any other officer. 5.SHARES.
5.1 Certificates. The corporation's shares shall be represented by
certificates in the form approved by the Board. Each certificate shall be signed
by the chairman, chief executive officer, president, chief financial officer, or
a vice president, and by the secretary or an assistant secretary or the
treasurer or an assistant treasurer, and shall be sealed with the corporation's
seal or a facsimile of the seal. Any or all of the signatures on the certificate
may be a facsimile.
5.2 Transfers. Shares shall be transferable only on the corporation's
books, upon surrender of the certificate for the shares, properly endorsed. The
Board may require satisfactory surety before issuing a new certificate to
replace a certificate claimed to have been lost or destroyed.
5.3 Determination of Stockholders of Record. The Board may
fix, in advance a date as the record date for the determination of
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<PAGE>
stockholders entitled to notice of or to vote at any meeting of the
stockholders, or to express consent to or dissent from any proposal without a
meeting, or to receive payment of any dividend or the allotment of any rights,
or for the purpose of any other action. The record date may not be more than 60
or fewer than 10 days before the date of the meeting or more than 60 days before
any other action. 6. INDEMNIFICATION AND INSURANCE.
6.1 Right to Indemnification. Each person who was or is a party or is
threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative (a
"proceeding"), by reason of the fact that he, or a person of whom he is the
legal representative, is or was a director or officer of the corporation or is
or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation or of a partnership, joint venture,
trust or other enterprise, including service with respect to employee benefit
plans, whether the basis of such proceeding is alleged action or inaction in an
official capacity or in any other capacity while serving as director, officer,
employee or agent, shall be indemnified and held harmless by the corporation to
the fullest extent permitted by the General Corporation Law of
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<PAGE>
Delaware, as amended from time to time, against all costs, charges, expenses,
liabilities and losses (including attorneys' fees, judgments, fines, ERISA
excise taxes or penalties and amounts paid or to be paid in settlement)
reasonably incurred or suffered by such person in connection therewith, and that
indemnification shall continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of his heirs,
executors and administrators; provided, however, that, except as provided in
section 6.2, the corporation shall indemnify any such person seeking
indemnification in connection with a proceeding (or part thereof) initiated by
that person, only if that proceeding (or part thereof) was authorized by the
Board. The right to indemnification conferred in these bylaws shall be a
contract right and shall include the right to be paid by the corporation the
expenses incurred in defending any such proceeding in advance of its final
disposition; provided, however, that, if the General Corporation Law of
Delaware, as amended from time to time, requires, the payment of such expenses
incurred by a director or officer in his capacity as a director or officer (and
not in any other capacity in which service was or is rendered by that person
while a director or officer, including, without limitation, service to an
employee benefit plan) in advance of the final disposition of
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a proceeding shall be made only upon delivery to the corporation of an
undertaking, by or on behalf of such director or officer, to repay all amounts
so advanced, if it shall ultimately be determined that such director or officer
is not entitled to be indemnified under these by-laws or otherwise. The
corporation may, by action of its Board, provide indemnification to employees
and agents of the corporation with the same scope and effect as the foregoing
indemnification of directors and officers.
6.2 Right of Claimant to Bring Suite. If a claim under section 6.1 is
not paid in ftill by the corporation within 30 days after a written claim has
been received by the corporation, the claimant may at any time thereafter bring
suit against the corporation to recover the unpaid amount of the claim and, if
successful in whole or in part, the claimant also shall be entitled to be paid
the expense of prosecuting that claim. It shall be a defense to any such action
(other than an action brought to enforce a claim for expenses incurred in
defending any proceeding in advance of its final disposition, where the required
undertaking, if any, is required and has been tendered to the corporation) that
the claimant has failed to meet a standard of conduct that makes it permissible
under Delaware law for the corporation to indemnify the claimant for the amount
claimed. Neither the failure of the
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corporation (including its Board, its independent legal counsel or its
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is permissible in the circumstances
because he has met that standard of conduct, nor an actual determination by the
corporation (including its Board, its independent counsel or its stockholders)
that the claimant has not met that standard of conduct, shall be a defense to
the action or create a presumption that the claimant has failed to meet that
standard of conduct.
6.3 Non-Exclusivity of Right. The right to indemnification and the
payment of expenses incurred in defending a proceeding in advance of its final
disposition conferred in this section 6 shall not be exclusive of any other
right any person may have or hereafter acquire under any statute, provision of
the certificate of incorporation, by-law, agreement, vote of stockholders or
disinterested directors or otherwise.
6.4 Insurance. The corporation may maintain insurance, at its expense,
to protect itself and any director, officer, employee or agent of the
corporation or another corporation, partnership, joint venture, trust or other
enterprise against any such expense, liability or loss, whether or not the
corporation would have the power to indemnify such person against that expense,
liability or
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loss under Delaware law.
6.5 Expenses as a Witness. To the extent any director, officer,
employee or agent of the corporation is by reason of such position, or a
position with another entity at the request of the corporation, a witness in any
action, suit or proceeding, he shall be indemnified against all costs and
expenses actually and reasonably incurred by him or on his behalf in connection
therewith.
6.6 Indemni1y Agreement. The corporation may enter into agreement with
any director, officer, employee or agent of the corporation providing for
indemnification to the fullest extent permitted by Delaware law.
7.MISCELLANEOUS.
7.1 Seal. The Board shall adopt a corporate seal, which shall be in the
form of a circle and shall bear the corporation's name and the year and state in
which it was incorporated.
7.2 Fiscal Year. The Board may determine the corporation's fiscal year.
Until changed by the Board, the last day of the corporation's fiscal year shall
be December 31.
7.3 Voting of Shares in Other Corporations. Shares in other
corporations held by the corporation may be represented and voted
by an officer of this corporation or by a proxy or proxies
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appointed by one of them. The Board may, however, appoint some
other person to vote the shares.
7.4 Amendments. By-laws may be amended, repealed or adopted by the
stockholders.
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COMMON STOCK COMMON STOCK
Number Shares
LIC
LYNCH INTERACTIVE CORPORATION
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
SEE REVERSE FOR CERTAIN DEFINITIONS
CUSIP 551146 10 3
THIS CERTIFIES THAT
is the owner of
FULLY PAID AND NON-ACCESSIBLE SHARES OF THE COMMON
STOCK, $.0001 PAR VALUE PER SHARE OF
LYNCH INTERACTIVE CORPORATION, transferable on the books of the Corporation by
the holder hereof in person or by duly authorized attorney upon surrender of
this Certificate properly endorsed. This certificate is not valid unless
countersigned by the Transfer Agent and registered by the Registrar.
Witness the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
/s/ Robert A. Hurwich /s/ Mario J. Gabelli
Secretary Chairman of the Board
(Authorized Signature) (Authorized Signature)
Corporate Seal of
Lynch Interactive Corporation
Delaware
COUNTERSIGNED AND REGISTERED: CHASEMELLON SHAREHOLDER SERVICES,
L.L.C., TRANSFER AGENT AND REGISTRAR
<PAGE>
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common TEN ENT - as tenants by the entireties JT TEN -
as joint tenants with right of
survivorship and not as tenants
in common
UNIF GIFT MIN ACT - Custodian
(Cust) (Minor)
under Uniform Gifts to Minors
Act
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVE, hereby sell,
assign and transfer unto
Please insert social security or other
identifying number of assignee
(Please print or typewrite name and address, including zip code,
of assignee)
Shares of the
Capital Stock represented by the within Certificate, and do hereby irrevocably
constitute and appoint to transfer the said stock on the books of the
within-named Corporation with full power of substitution in the premises.
Dated:
Notice: The signature(s) to this Assignment must correspond
with the name(s) as written upon the face of the certificate
in every particular, without alteration of enlargement or any
change whatever.
<PAGE>
Signature(s) Guaranteed
By
The signature(s) must be guaranteed by an eligible guarantor institution (banks,
stockbrokers, savings and loan associations and credit unions with membership in
an approved signature guarantee medallion program), pursuant to S.E.C. Rule
17Ad-15.
MORTGAGE, SECURITY AGREEMENT AND FINANCING STATEMENT dated as of August
3, 1998, made by and among HAVILAND TELEPHONE COMPANY, INC. (hereinafter called
the "Mortgagor"), a corporation existing under the laws of the State of
1,ans-as, as mortgagor and debtor, and UNITED STATES OF AMERICA (hereinafter
called the "Government"), acting through the Administrator of the Rural
Utilities Service (hereinafter called "RUS"), and RURAL TELEPHONE BANK
(hereinafter called the "Bank"), a corporation existing under the laws of the
United States of America, as mortgagees and secured parties (the Government and
the Bank being hereinafter sometimes collectively called the "Mortgagees").
WHEREAS, the Mortgagor has determined at this time to borrow
funds from the Government and the Bank pursuant to the Rural Electrification Act
of 1936, as amended (7 U.S.C. 901 et seq., hereinafter called the "Act"), and
pursuant to the Telephone Loan Contract identified in the eighth recital hereof
(hereinafter called the "Instruments Recital"), and has accordingly duly
authorized and executed, and delivered to the Government, its mortgage note
(identified in the Instruments Recital as and hereinafter called the "First RUS
Note") to be secured by this mortgage of the property hereinafter described; and
RUS PROJECT DESIGNATION: KANSAS 506-L13 HAVILAND
THIS INSTRUMENT GRANTS A SECURITY INTEREST IN A TRANSMITTING UTILITY.
AFTER-ACQUIRED PROPERTY IS COVERED BY THIS INSTRUMENT.
Identified as form of document presented to and approved by the Board of
Directors Trustees of the above named Corporation at a meeting hold , 19
Secretary of Meeting
No. A
Generated: July 14, 1998
<PAGE>
WHEREAS, the Mortgagor has determined at this time to borrow
funds from the Federal Financing Bank (hereinafter called "FFB") and has
accordingly duly authorized, executed and delivered its mortgage note
(identified in the Instruments Recital and hereinafter called the "First FFB
Note") to be secured by this mortgage of the property hereinafter described; and
WHEREAS, the repayment of the First FFB Note by the Mortgagor
is guaranteed by the Government pursuant to the Act, in accordance with an
agreement, by and between FFB and the Administrator (such agreement, as it may
be amended from time to time, being hereinafter called the "Contract of
Guarantee", and together with the Telephone Loan Contract, as it may be from
time to time amended or supplemented, consolidated or restated, and together
with any agreements, among the Mortgagor, the Government and a third party
lender, whose loans to the Mortgagor are Guaranteed by the Government, acting
through the Administrator, pursuant to the Act, hereinafter called the
"Consolidated Loan Agreement"); and
WHEREAS, the Mortgagor has determined to reimburse the
Government, acting through the Administrator, for certain amounts paid by the
Government, acting through the Administrator, from time to time pursuant to the
Contract of Guarantee and has accordingly duly authorized, executed and
delivered its mortgage note (identified in the Instruments Recital and
hereinafter called the "First Reimbursement Note") to be secured by this
mortgage of the property hereinafter described; and
WHEREAS, it is contemplated that the First RUS Note, the First
FFB Note and the First Reimbursement Note shall be secured by this Mortgage,
Security Agreement and Financing Statement (hereinafter called "the Mortgage"),
as well as additional notes and refunding, renewal and substitute notes
(hereinafter collectively called the "Additional RUS Notes") which may from time
to time be executed and delivered by the Mortgagor to the Government as
hereinafter provided, shall be secured hereby (the First RUS Note, the First FFB
Note and the First Reimbursement Note and any Additional RUS Notes being
hereinafter collectively called the "RUS Notes"; and
WHEREAS, the Mortgagor has determined at this time to borrow
funds from the Bank pursuant to the Act and the Telephone Loan Contract and has
accordingly duly authorized and executed, and delivered to the Bank, its
mortgage note (identified in the Instruments Recital as and hereinafter called
the "First Bank Note"); and
WHEREAS, it is contemplated that the First Bank Note shall be
secured hereby, as well as additional notes and
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<PAGE>
refunding, renewal and substitute notes (hereinafter collectively called the
"Additional Bank Notes" and, together with the Additional RUS Notes, the
"Additional Notes") which may from time to time be executed and delivered by the
Mortgagor to the Bank as hereinafter provided, shall be secured hereby (the
First Bank Note and any Additional Bank Notes being hereinafter collectively
called the "Bank Notes", and the RUS Notes and the Bank Notes, collectively,
being hereinafter called the "notes") ; and
WHEREAS, the instruments referred to in the preceding recitals
are as follows:
INSTRUMENTS RECITAL
"Telephone Loan Contract" dated as of April 27, 1998.
"Contract of Guarantee", Note Purchase Commitment and Servicing Agreement,
between the Federal Financing Bank and the Administrator of RUS dated as of
January 1, 1992, as amended.
"First FFB Note": (Of even date herewith):
Interest Rate Final Payment
Principal Amount (per annum) Date
$4,362,000 Determined December 31, 2016
by Advance
"First Reimbursement Note":
Principal Amount Final Payment Date
Determined when advance made On demand
"First RUS Note": (Of even date herewith):
Interest Rate Final Payment
Principal Amount (per annum) Date
$12,560,000 Determined August 3, 2016
by Advance
"First Bank Note": (Of even date herewith):
Interest Rate Final Payment
Principal Amount (per annum) Date
$7,325,850 Determined by Advance August 3, 2016
WHEREAS, the Government and the Bank are authorized to enter into
this Mortgage; and
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<PAGE>
WHEREAS, the Mortgagor now owns a telephone system and other
facilities identified in the Property Schedule contained in the Granting Clause
hereof (hereinafter called the "Existing Facilities"); and
WHEREAS, to the extent that any of the property described or
referred to in this Mortgage is governed by the provisions of the Uniform
Commercial Code of any State (hereinafter called the "Uniform Commercial Code"),
the parties hereto desire that this Mortgage be regarded as a "security
agreement" and as a "financing statement" for said security agreement under the
Uniform Commercial Code.
NOW, THEREFORE, this Mortgage
WITNESSETH:
GRANTING CLAUSE
That, in order to secure the payment of the principal of and
interest on the notes, according to their tenor and effect, and further to
secure the due performance of the covenants, agreements and provisions contained
in this Mortgage and the Consolidated Loan Agreement and to declare the terms
and conditions upon which the notes are to be secured, the Mortgagor, in
consideration of the premises, has executed and delivered this Mortgage, and has
granted, bargained, sold, conveyed, warranted, assigned, transferred, mortgaged,
pledged, and set over, and by these presents does hereby grant, bargain, sell,
convey, warrant, assign, transfer, mortgage, pledge and set over, unto the
Mortgagees, and their respective assigns, all and singular the
following-described property (hereinafter sometimes called the "Mortgaged
Property")
I
All right, title and interest of the Mortgagor in and to the
Existing Facilities and buildings, plants, works, improvements, structures,
estates, grants, franchises, easements, rights, privileges and properties real,
personal and mixed, tangible or intangible, of every kind or description, now
owned or leased by the Mortgagor or which may hereafter be owned or leased,
constructed or acquired by the Mortgagor, wherever located, and in and to all
extensions and improvements thereof and additions thereto, including all
buildings, plants, works, structures, improvements, fixtures, apparatus,
materials, supplies, machinery, tools, implements, poles, posts, crossarms,
conduits, ducts, lines, whether underground or overhead or otherwise, wires,
cables, exchanges, switches including, without limitation, host switches and
remote switches, desks, testboards, frames, racks, motors, generators, batteries
and other items of central office equipment, pay stations, protectors,
instruments,
Page 4
<PAGE>
connections and appliances, office furniture and equipment, work equipment and
any and all other property of every kind, nature and description, used, useful
or acquired for use by the Mortgagor in connection therewith and including,
without limitation, the property described in the following property schedule:
PROPERTY SCHEDULE
(a) The Existing Facilities are located in the Counties
of Barber, Comanche, Ford, Harper, Kinsman, Kiowa, Pratt, Sedgwick, and Sumner
in the State of Kansas.
(b) The property referred to in the last line of paragraph 1
of the Granting Clause includes the real estate described on Exhibit A attached
hereto, and by this reference made a part hereof, as if fully set forth at
length at this point.
(c) If the real estate described in Exhibit A is by reference
to deeds, grantor(s), grantee, etc., then the description of each of the
properties conveyed by and through such deeds is by reference made a part of
Exhibit A as though fully set forth at length therein.
(d) The real estate described in Exhibit A shall also include
all plants, works, structures, erections, reservoirs, dams, buildings, fixtures
and improvements now or hereafter located on such real estate, and all
tenements, hereditaments and appurtenances now or hereafter thereunto belonging
or in any wise appertaining.
II
All right, title and interest of the Mortgagor in, to and
under any and all grants, privileges, rights of way and easements now owned,
held, leased, enjoyed or exercised, or which may hereafter be owned, held,
leased, acquired, enjoyed or exercised, by the Mortgagor for the purposes of, or
in connection with, the construction or operation by or on behalf of the
Mortgagor of telephone properties, facilities, systems or businesses, whether
underground or overhead or otherwise, wherever located;
III
All right, title and interest of the Mortgagor in, to and
under any and all licenses, franchises, ordinances, privileges and permits
heretofore granted, issued or executed, or which may hereafter be granted,
issued or executed, to it or to its assignors by the United States of
America,.or by any state, or by any county, township, municipality, village or
other
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<PAGE>
political subdivision thereof, or by any agency, board, commission or department
of any of the foregoing, authorizing the construction, acquisition, or operation
of telephone properties, facilities, systems or businesses, insofar as the same
may by law be assigned, granted, bargained, sold, conveyed, transferred,
mortgaged, or pledged;
IV
All right, title and interest of the Mortgagor in, to and
under any and all contracts heretofore or hereafter executed by and between the
Mortgagor and any person, firm, or corporation relating to the Mortgaged
Property together with any and all other accounts, contract rights and general
intangibles (as such terms are defined in the applicable Uniform Commercial
Code), and all stock, bonds, notes, debentures, commercial paper, subordinated
capital certificates, securities, obligations of or beneficial interests or
investments in any corporation, association, partnership, joint venture, trust,
United States of America or any agency or department thereof, or any other
entity of any kind, heretofore or hereafter acquired by the Mortgagor;
V
Also, all right, title and interest of the Mortgagor in and to
all other property, real or personal, tangible or intangible, of every kind,
nature and description, and wheresoever situated, now owned or leased or
hereafter acquired by the Mortgagor, it being the intention hereof that all such
property now owned or leased but not specifically described herein or acquired
or held by the Mortgagor after the date hereof shall be as fully embraced within
and subjected to the lien hereof as if the same were now owned by the Mortgagor
and were specifically described herein to the extent only, however, that the
subjection of such property to the lien hereof shall not be contrary to law;
Together with all rents, income, revenues, proceeds, profits
and benefits at any time derived, received or had from any and all of the
above-described property of the Mortgagor.
Provided, however, that except as hereinafter provided in
section 12(b) of article II hereof, no automobiles, trucks, trailers, tractors
or other vehicles (including without limitation aircraft or ships, if any) owned
or used by the Mortgagor shall be included in the Mortgaged Property.
TO HAVE AND TO HOLD all and singular the Mortgaged Property
unto the Mortgagees and their respective assigns forever, to secure equally and
ratably the payment of the principal of and interest on the notes, according to
their tenor and effect, without preference, priority or distinction as to
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<PAGE>
interest or principal (except as otherwise specifically provided herein) or as
to lien or otherwise of any note over any other note by reason of the priority
in time of the execution, delivery or maturity thereof or of the assignment or
negotiation thereof, or otherwise, and to secure the due performance of the
covenants, agreements and provisions herein and in the Consolidated Loan
Agreement contained, and for the uses and purposes and upon the terms,
conditions, provisos and agreements hereinafter expressed and declared.
ARTICLE I
ADDITIONAL NOTES
SECTION 1 The Mortgagor, when authorized by resolution or resolutions of
its board of directors, may from time to time (1) execute and deliver to the
Government one or more Additional RUS Notes to evidence loans made or guaranteed
by the Government to the Mortgagor pursuant to the Act, or to evidence
indebtedness of the Mortgagor incurred by the assumption by the Mortgagor of the
indebtedness of a third party or parties to the Government created by a loan or
loans theretofore made or guaranteed by the Government to such third party or
parties pursuant to the Act, and (2) execute and deliver to the Bank one or more
Additional Bank Notes to evidence loans made by the Bank to the Mortgagor
pursuant to the Act, or to evidence indebtedness of the Mortgagor incurred by
the assumption by the Mortgagor of the indebtedness of a third party or parties
to the Bank created by a loan or loans theretofore made by the Bank to such
third party or parties pursuant to the Act. The Mortgagor, when authorized by
resolution or resolutions of its board of directors, may also from time to time
execute and deliver one or more Additional Notes to refund any note or notes at
the time outstanding and secured hereby, or in renewal of, or in substitution
for, any such outstanding note or notes. Additional Notes shall contain such
provisions and shall be executed and delivered upon such terms and conditions as
the board of directors of the Mortgagor in the resolution or resolutions
authorizing the execution and delivery thereof and the relevant lender shall
prescribe; provided, however, that the outstanding principal balances owing on
the notes shall not at any one time exceed fifty million dollars ($50,000,000),
and no note shall mature more than fifty (50) years after the date hereof.
Additional Notes, including refunding, renewal and substitute notes, when and as
executed and delivered, shall be secured by this Mortgage, equally and ratably
with all other notes at the time outstanding, without preference, priority, or
distinction of any of the notes over any other of the notes by reason of the
priority of the time of the execution, delivery or maturity
Page 7
<PAGE>
thereof or of the assignment or negotiation thereof. As used in this Mortgage,
the term "directors" includes trustees.
SECTION 2The Mortgagor, when authorized by resolution or resolutions of
its board of directors, may from time to time execute, acknowledge, deliver,
record and file mortgages supplemental to this Mortgage which thereafter shall
form a part hereof, for the purpose of formally confirming this Mortgage as
security for the notes. Nothing herein contained shall require the execution and
delivery by the Mortgagor of a supplemental mortgage in connection with the
issuance hereunder or the securing hereby of notes except as hereinafter
provided in section 12 of article II hereof.
ARTICLE II
PARTICULAR COVENANTS OF THE MORTGAGOR
The Mortgagor covenants with the Mortgagees and the holders of notes
secured hereby (hereinafter sometimes collectively called the "noteholders") and
each of them as follows:
SECTION 1. The Mortgagor is duly authorized under its articles of
incorporation and bylaws and the laws of the State of its incorporation and all
other applicable provisions of law to execute and deliver the First RUS Note,
the First Bank Note, the First FFB Note, the First Reimbursement Note and this
Mortgage and to execute and deliver Additional Notes; and all corporate action
on its part for the execution and delivery of the First RUS Note, the First Bank
Note, the First FFB Note, the First Reimbursement Note and this Mortgage has
been duly and effectively taken; and the First RUS Note, the First Bank Note,
the First FFB Note, the First Reimbursement Note and this' Mortgage are, or when
executed and delivered will be, the valid and enforceable obligations of the
Mortgagor in accordance with their respective terms.
SECTION 2.The Mortgagor warrants that it has good right and lawful
authority to mortgage the property described in the granting clauses of this
Mortgage for the purposes herein expressed, and that the said property is free
and clear of any deed of trust, mortgage, lien, charge or encumbrance thereon or
affecting the title thereto, except (i) the lien of this Mortgage and taxes or
assessments not yet due; (ii) deposits or pledges to secure payment of workmen's
compensation, unemployment insurance, old age pensions or other social security;
and (iii) deposits or pledges to secure performance of bids, tenders, contracts
(other than contracts for the payment of borrowed money), leases, public or
statutory obligations, surety or appeal bonds, or other
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<PAGE>
deposits or pledges for purposes of like general nature in the ordinary course
of business.
The Mortgagor will, so long as any of the notes shall be outstanding,
maintain a.-.d preserve the lien of this Mortgage superior to all other liens
affecting the Mortgaged Property, and will forever warrant and defend the title
to the property described as being mortgaged hereby to the Mortgagees against
any and all claims and demands whatsoever. The Mortgagor will promptly pay or
discharge any and all obligations for or on account of which any such lien or
charge might exist or could be created and any and all lawful taxes, rates,
levies, assessments, liens, claims or other charges imposed upon or accruing
upon any of the Mortgagor's property (whether taxed to the Mortgagor or to any
noteholder), or the franchises, earnings or business of the Mortgagor, as and
when the same shall become due and payable; and whenever called upon so to do
the Mortgagor will furnish to the Mortgagees or to any noteholder adequate proof
of such payment or discharge.
SECTION 3. The Mortgagor will duly and punctually pay the principal of and
interest on the notes at the dates and places and in the manner provided
therein, according to the true intent and meaning thereof, and all other sums
becoming due hereunder.
SECTION 4. (a) The Mortgagor will at all times, so long as any of the notes
shall be outstanding, take or cause to be taken all such action as from time to
time may be necessary to preserve its corporate existence and to preserve and
renew all franchises, rights of way, easements, permits and licenses now or
hereafter to it granted or upon it conferred, and will comply with all valid
laws, ordinances, regulations and requirements applicable to it or its property.
The Mortgagor will not, without the approval in writing of the holder or holders
of not less than a majority in principal amount of the RUS Notes at the time
outstanding (hereinafter called the "majority RUS noteholders") and of the
holder or holders of not less than a majority in principal amount of the Bank
Notes at the time outstanding (hereinafter called the "majority Bank
noteholders"), take or suffer to be taken any steps to reorganize, or to
consolidate with or merge into any other corporation, or to sell lease or
transfer (or make any agreement therefor) the Mortgaged Property, or any part
thereof.
(b) Nothing herein contained shall prevent any such reorganization,
consolidation or merger provided that the lien and security of this Mortgage and
the rights or powers of the Mortgagees and the noteholders hereunder shall not
thereby be impaired or adversely affected, and provided that upon such
reorganization, consolidation or merger, the due and punctual payment of the
principal of and interest on the notes
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according to their tenor and the due and punctual performance of all covenants
and conditions of this Mortgage shall be assumed by the corporation formed by
such reorganization, consolidation or merger, and the lien of this Mortgage
shall remain a superior lien upon the property owned by the Mortgagor at the
time of such reorganization, consolidation or merger and upon any improvements
or additions to such property, either prior to or subsequent to such
reorganization, consolidation or merger.
(c) The Mortgagor may, however, without obtaining the approval of the
holder or holders of any of the notes at the time outstanding, at any time or
from time to time so long as the Mortgagor is not in default hereunder, sell or
otherwise dispose of, free from the lien hereof, any of its property which is
neither necessary to nor useful for the operation of the Mortgagor's business,
or which has become obsolete, worn out or damaged or otherwise unsuitable for
the purposes of the Mortgagor; provided, however, that the Mortgagor shall: (1)
to the extent necessary, replace the same by, or substitute therefor, other
property of the same kind and nature, which shall be subject to the lien hereof,
free and clear of all prior liens, and apply any proceeds derived from such sale
or other disposition of such property and not needed for the replacement thereof
to the payment of the indebtedness evidenced by the RUS Notes and the Bank Notes
in the proportions which the aggregate principal balances then owing on the RUS
Notes and the aggregate principal balances then owing on the Bank Notes,
respectively, bear to the aggregate principal balances then owing on the RUS
Notes and the Bank Notes, collectively, and shall be applied to such notes and
installments thereof as may be designated by the respective noteholders at the
time of any such receipt; or (2) immediately upon the receipt of the proceeds of
any sale or other disposition of said property, apply the entire amount of such
proceeds to the payment of the indebtedness evidenced by the RUS Notes and the
Bank Notes in the proportions and in the manner provided for in (1) above; or
(3) deposit all or such part of the proceeds derived from the sale or other
disposition of said property as-the majority RUS noteholders and the majority
Bank noteholders shall specify in such restricted bank accounts as such holder
or holders shall designate, and shall use the same only for such additions to or
improvements of the Mortgaged Property and on such terms and conditions as such
holder or holders shall specify.
SECTION 5. The Mortgagor will at all times maintain and preserve the
Mortgaged Property in good repair, working order and condition, and will from
time to time make all needful and proper repairsandenewals, and replacements,
useful and proper alterations, additions, betterments and improvements, and
will, subject to contingencies beyond its reasonable control, at all times keep
its plant and properties in continuous operation and use all reasonable
diligence to furnish the subscribers served by
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it through the Mortgaged Property with adequate telephone service.
SECTION 6. Except as specifically authorized in writing in advance by the
majority RUS noteholders and the majority Bank noteholders, the Mortgagor will
purchase all materials, equipment, supplies and replacements to be incorporated
in or used in connection with the Mortgaged Property outright, and not subject
to any conditional sales agreement, chattel mortgage, bailment lease, or other
agreement reserving to the seller any right, title or lien.
SECTION 7. (a) The Mortgagor will take out, as the respective risks are
incurred, and maintain the following classes and amounts of insurance: (1)
fidelity bonds covering each officer and employee of the Mortgagor in not less
than the following amounts, based on the estimated annual gross revenues
(including gross toll collected) of the Mortgaged Property:
<TABLE>
<CAPTION>
Annual Gross Revenue Amount of Coverage
-------------------- ------------------
<S> <C> <C>
Less than $ 200,000 ..................... $ 50,000
From 200,001 to 400,000 .......... 100,000
400,001 to 600,000 ........... 250,000
600,001 to 800,000 ........... 300,000
800,001 to 1,000,000 ......... 400,000
over 1,000,000 ............... 500,000
</TABLE>
and each collection agent of the Mortgagor shall be included in such fidelity
bonds for not less than $2,500, or 10 percent of the highest amount collected
annually by any one collection agent, whichever is greater; (2) workmen's
compensation and employer's liability insurance covering all employees of the
Mortgagor, in such amounts as may be required by law, or if ti)e Mortgage or
any of its employees are not subject to the workmen's compensation laws of the
State or States in which the Mortgagor conducts its operations, then its
workmen's compensation policy shall provide voluntary compensation coverage to
the same extent as though the Mortgagor and such employees were subject to such
laws; and including occupational disease liability coverage, employer's
liability insurance and "additional medical" coverage of not less than $10,000
in States where full medical coverage is not required by law; (3) public
liability and property damage insurance, covering ownership liability, and all
operations of the Mortgagor, with limits for bodily injury or death of not less
than $1,000,000 for one person and $1,000,000 for each accident and with limits
for property damages of not less than $1,000,000 for each accident and
$1,000,000 aggregate for the policy period; (4) liability insurance on all
motor vehicles, trailers, semitrailers, and aircraft used in the conduct of the
Mortgagor's business, whether owned, non-owned or hired by the Mortgagor, with
bodily injury
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limits of not less than $1,000,000 for one person and $1,000,000 for each
accident, and with property damage limits of $1,000,000 for each accident; in
connection with aircraft liability, also passenger bodily injury limits of
$1,000,000 per person and $1,000,000 for each accident; (5) comprehensive, or
separate fire, theft and windstorm insurance covering loss of or damage to all
owned motor vehicles, trailers, and aircraft of the Mortgagor, having a unit
value in excess of $1,000, in an amount not less than the actual cash value of
the property insured; and (6) fire and extended coverage insurance, designating
the Government and the Bank as mortgagees in the policy, on each building, each
building and its contents, and materials, supplbys, poles and crossarms, owned
the Mortgagor, having a value at any one location in excess of $5,000, or in
excess of one percent of the total plant value, whichever is larger, and in an
amount not less than 80 percent of the current cost to replace the property
new, less actual depreciation.
The Mortgagor will also, from time to time, increase or supplement the
classes and amounts of insurance specified above to the extent requested by the
Administrator of RUS or the Governor of the Bank or required to conform to the
accepted practice of the telephone industry for companies of the size and
character of the Mortgagor. The Mortgagor will, upon request of the majority RUS
noteholders and the majority Bank noteholders, submit to the noteholder or
noteholders designated in such request a schedule of its insurance in effect on
the date specified in such request. If the Mortgagor shall at any time fail or
refuse to take out or maintain insurance or to make changes in respect thereof
upon appropriate request by such noteholder or noteholders, such noteholder or
noteholders may take out such insurance on behalf and in the name of the
Mortgagor, and the Mcrtgagor will pay the cost thereof.
(b) In the event of damage to or the destruction or loss of any portion of
the Mortgaged Property which shall be covered by insurance, unless the majority
RUS noteholders and the majority Bank noteholders shall otherwise agree, the
Mortgagor shall replace or restore such damaged, destroyed or lost portion so
that the Mortgaged Property shall be in substantially the same condition as it
was in prior to such damage, destruction or loss, and shall deposit the proceeds
of the insurance in the Special Construction Account required by the
Consolidated Loan Agreement to be applied for that purpose. The Mortgagor shall
replace the loss or shall commence such restoration promptly after such damage,
destruction or loss shall have occurred and shall complete such replacement or
restoration as expeditiously as practicable, and shall pay or cause to be paid
out of the proceeds of such insurance all costs and expenses in connection
therewith so that such replacement or restoration shall be so completed that the
portion of the Mortgaged Property
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so replaced or restored shall be free and clear of all mechanics' liens and
other claims.
(c) Sums recovered under any fidelity bond by the Mortgagor for a loss of
funds advanced under the notes or recovered by the Mortgagees for any loss under
such bond shall, unless otherwise directed by the Mortgagees, be applied to the
prepayment of the notes, pro rata according to the unpaid principal amounts
thereof (such prepayments to be applied to such installments thereof as may be
designated by the respective noteholders at the time of such prepayments) or to
construct or acquire facilities approved by the Mortgagees, which will become
part of the Mortgaged Property.
(d) The foregoing insurance coverage shall be obtained by means of bond and
policy forms approved by regulatory authorities, including standard RUS
endorsements and riders used by the insurance industry to provide coverage for
RUS borrowers. Each policy or other contract for such insurance shall contain an
agreement by the insurer that, not withstanding any right or cancellation
reserved to such insurer, such policy or contract shall continue in force for at
least ten (10) days after written notice to the Mortgagees of cancellation.
SECTION 8. In the event of the failure of the Mortgagor in any respect to
comply with the covenants and conditions herein contained with respect to the
procuring of insurance, the payment of taxes, assessments and other charges, the
keeping of the Mortgaged Property in repair and free of liens and other claims
or to comply withany other covenant contained in this Mortgage, any noteholder
or noteholders shall have the right (without prejudice to any other rights
arising by reason of such default) to advance or expend moneys for the purpose
of procuring such insurance, or for the payment of insurance premiums, taxes,
assessments or other charges, or to save the Mortgaged Property from sale or
forfeiture for any unpaid tax or assessment, or otherwise, or to redeem the same
from any tax or other sale, or to purchase any tax title thereon, or to remove
or purchase any mechanics' liens or other encumbrance thereon, or to make
repairs thereon or to comply with any other covenant herein contained or to
prosecute or defend any suit in relation to the Mortgaged Property or in any
manner to protect the Mortgaged Property and the title thereto, and all sums so
advanced for any of the aforesaid purposes with interest thereon at the highest
legal rate but not in excess of twelve per centum (12%) per annum shall be
deemed a charge upon the Mortgaged Property in the same manner as the notes at
the time outstanding are secured and shall be forthwith paid to the noteholder
or noteholders making such advance or advances upon demand. It shall not be
obligatory for any noteholder in making any such advances or expenditures to
inquire into the validity of any such tax title, or of any of
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such taxes or assessments or sales therefor, or of any such mechanics' liens or
other encumbrance.
SECTION 9. The Mortgagor will not, without the approval in writing of the
majority RUS noteholders and the majority Bank noteholders: (a) enter into any
contract or contacts for the operation or maintenance of all or any part of its
property, for the use by others of any of the Mortgaged Property, or for toll
traffic, operator assistance, extended scope or switching services to be
furnished by or for connecting or other companies; provided, however, that such
approval shall not be required for any toll traffic or operator assistance
contract which in form and substance conforms with contracts in general use in
the telephone industry; or (b) deposit any of its funds, regardless of the
source thereof, in any bank, institution or other depository which is not
insured by the Federal Government.
SECTION 10. Salaries, wages and other compensation paid by the Mortgagor
for services, and directors' or trustees' fees, shall be reasonable and in
conformity with the usual practice of corporations of the size and nature of the
Mortgagor. Except as specifically authorized in writing in advance by the
majority RUS noteholders and the majority Bank noteholders, the Mortgagor will
make no advance payments or loans, or in any manner extend its credit, either
directly or indirectly, with or without interest, to any of its directors,
trustees, officers, employees, stockholders, members or affiliated companies,
provided, however, the Mortgagor may make an investment for any purpose
described in section 607(c)-(2) of the Rural Development Act of 1972 (including
any investment in, or extension of credit, guarantee or advance made to, an
affiliated company of the Mortgagor that is used by such company for such
purpose) to the extent that, immediately after such investment, (1) the
aggregate of such investments does not exceed one-third of the net worth
(defined in Exhibit One hereto) of the Mortgagor and (2) the Mortgagor's net
worth is at least twenty percent of its total assets (defined in Exhibit One
hereto). As used in this section, the term "affiliated companies" shall have the
meaning prescribed for this term by the Federal Communications Commission in its
prevailing uniform system of accounts for Class A telephone companies.
SECTION 11. The Mortgagor will at all times keep, and safely preserve,
proper books, records and accounts in which full and true entries will be made
of all of the dealings, business and affairs of the Mortgagor, in accordance
with the methods and principles of accounting then prescribed by the state
regulatory body having jurisdiction over the Mortgagor, or in the absence of
such regulatory body or such prescription, by the Federal Communications
Commission in its uniform system of accounts for telecommunications companies,
as those methods and TMAG-00-14-001-KA
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principles of accounting may be supplemented, from time to time, by RUS. The
Mortgagor will prepare and furnish each noteholder not later than the thirtieth
day of January in each year, or at such more or less frequent intervals when
specified by the majority RUS noteholders and the majority Bank noteholders,
financial and statistical reports on its condition and operations. Such reports
shall be in such form and include such information as may be specified by the
majority RUS noteholders and the majority Bank noteholders, including without
limitation an analysis of the Mortgagor's revenues, expenses, and subscriber
accounts. The Mortgagor will cause to be prepared and furnished to each
noteholder at least once during each twelve (12)-month period during the term
hereof, full and complete reports of its financial condition and cash flow as of
a date (hereinafter called the Fiscal Date"), and a full and complete report of
its operations of the twelve (12)-month period ended on the Fiscal Date, all in
form and substance satisfactory to the majority RUS noteholders and the majority
Bank noteholders, and will cause such reports to be furnished to each noteholder
within 120 days of the Fiscal Date, such reports having been audited and
certified by independent certified public accountants satisfactory to said
noteholders and accompanied by such reports of such audit in form and substance
satisfactory to said noteholders. The majority RUS noteholders and the majority
Bank noteholders, through their representatives, shall at all times during
reasonable business hours have access to, and the right to inspect and make
copies of, any or all books, records and accounts, and any or all invoices,
contracts, leases, payrolls, canceled checks, statements and other documents and
papers of every kind belonging to or in possession of the Mortgagor and in
anywise pertaining to its property or business. The Mortgagor shall enter into
an audit agreement with an independent certified public accountant in form and
substance satisfactory to the majority RUS noteholders and the majority Bank
noteholders.
SECTION 12. (a)The Mortgagor will from time to time upon written demand of
the majority RUS noteholders or the majority Bank noteholders make, execute,
acknowledge and deliver or cause to be made, executed, acknowledged and
delivered all such further and supplemental indentures of mortgage, deeds of
trust, mortgages, financing statements, continuation statements, security
agreements, instruments and conveyances as may reasonably be requested by the
majority RUS noteholders or the majority Bank noteholders and take or cause to
be taken all such further action as may reasonably be requested by the majority
RUS noteholders or the majority Bank noteholders to effectuate the intention of
these presents and to provide for the securing and payment of the principal of
and interest on the notes according to the terms thereof and for the purpose of
fully conveying, transferring and confirming unto the Mortgagees the property
hereby conveyed, mortgaged and pledged, or intended so to be, whether now owned
by the Mortgagor or hereafter acquired by it
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and to reflect the assignment of the rights or interests of either of the
Mortgagees or of any noteholder hereunder or under any note. The Mortgagor will
cause this Mortgage and any and all supplemental indentures of mortgage,
mortgages and deeds of trust and every security agreement, financing statement,
contract-on statement and every additional instrument which shall be executed
pursuant to the foregoing provisions forthwith upon execution to be recorded and
filed and rerecorded and refiled as conveyances and mortgages and deeds of trust
of and security interests in real and personal property in such manner and in
such places as may be required by law or reasonably requested by the majority
RUS noteholders or the majority Bank noteholders in order fully to preserve the
security for the notes and to perfect and maintain t1re superior lien of this
Mortgage and all supplemental indentures cf mortgage, mortgages and deeds of
trust and the rights and remedies of the Mortgagees and the noteholders.
(b) In the event that the Mortgagor ha's had or suffers a deficit in net
income or net margins, as determined in accordance with methods of accounting
prescribed in section 11 of article II hereof, for any of the five fiscal years
immediately preceding the date hereof or for any fiscal year while any of the
notes are outstanding, the Mortgagor will at any time or times upon written
demand of the majority RUS noteholders or the majority Bank noteholders, make,
execute, acknowledge and deliver or cause to be made, executed, acknowledged and
delivered all such further and supplemental indentures of mortgage, mortgages,
security agreements, financing statements, instruments and conveyances, and take
or cause to be taken all such further action, as may reasonably be requested by
the majority RUS noteholders or the majority Bank noteholders in order to
include in this Mortgage, as Mortgaged Property, and to subject to all the terms
and conditions of this Mortgage, all right, title and interest of the Mortgagor
in and to, all and singular, the automobiles, trucks, trailers, tractors,
aircraft, ships and other vehicles then owned by the Mortgagor, or which may
thereafter be owned or acquired by the Mortgagor. From and after the time of
such written demand of the majority RUS noteholders or the majority Bank
noteholders, such vehicles shall be deemed to be part of the Mortgaged Property
for all purposes hereof.
SECTION 13. Any noteholder may, at any time or times in succession without
notice to or the consent of the Mortgagor or any other noteholder and upon such
terms as such noteholder may prescribe, grant to any person, firm or corporation
who shall have become obligated to pay all or any part of the principal of or
interest on any note held by or indebtedness owed to such noteholder or who may
be affected by the lien hereby created, an extension of the time for the payment
of such principal or interest, and after any such extension the Mortgagor will
remain liable for the payment of such note or indebtedness to the same
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extent as though it had at the time of such extension consented thereto in
writing.
SECTION 14. The Mortgagor, subject to applicable laws and rules, and
regulations and orders of regulatory bodies, will charge for telephone service
furnished by it rates which shall yield revenues at least sufficient to enable
the Mortgagor to pay and discharge ail taxes and expenses when due, and also to
make any payment in respect of principal of and interest on the notes when and
as the same shall become due.
SECTION 15. (a) The Mortgagor may make a distribution (hereinafter called a
"distribution"), in the nature of an investment, guarantee, extension of credit,
advance, loan, non-affiliated company joint venture, affiliated company
investment, or dividend or capital credit distribution only if the majority RUS
noteholders and the majority Bank noteholders have given prior written approval
to the distribution or if, after such distribution,
(1) the Mortgagor's net worth is equal to at least one percent of
its total assets and the amount of all such distributions
during the calendar year does not exceed twenty-five percent
of the Mortgagor's net income or net margins for the prior
calendar year;
(2) the Mortgagor's net worth is equal to at least twenty percent
of its total assets and the amount of all such distributions
during the calendar year does not exceed fifty percent of the
Mortgagor's earnings or margins for the prior calendar year;
(3) the Mortgagor's net worth is equal to at least thirty percent
of its total assets and the amount of al such distributions
during the calendar year does not exceed seventy-five percent
of its net income or net margins for the prior calendar year;
or
(4) the Mortgagor's net worth is equal to at least forty percent
of its total assets, regardless of the aggregate amount of
such distributions.
The terms "net worth", "total assets", and "net income or net margins" are
determined in accordance with Exhibit One.
(b) In addition to the distributions authorized under the preceding
subsection 15(a), the Mortgagor may make any distribution or investment provided
in 7 CLR 1744 Subpart D.
SECTION 16. In the event that the Mortgaged Property, or any part thereof,
shall be taken under the power of eminent domain, all proceeds and avails
therefrom, except to the
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extent that all noteholders shall consent to other use and application thereof
by the Mortgagor, shall forthwith be applied by the Mortgagor: first, to the
ratable payment of any indebtedness by this Mortgage secured other than
principal of or interest on the notes; second, to the ratable payment of
interest which shall have accrued on the notes and be unpaid; third, to the
ratable payment of or on account of the unpaid principal of the notes and to
such installments thereof as may be designated by the respective noteholders at
the time of any such payment, and fourth, the balance shall be paid to whosoever
shall be entitled thereto.
SECTION 17. The Mortgagor will well and truly observe and perform all of
the covenants, agreements, terms and conditions contained in the Consolidated
Loan Agreement, on its part to be observed or performed.
SECTION 18. If all the RUS Notes have been paid and discharged while any of
the Bank Notes are still outstanding, all rights and powers of the Government
and the holders of the RUS Notes under this Mortgage shall immediately vest in
the Bank and the holders of the Bank Notes, respectively, and, correspondingly,
if all the Bank Notes have been paid and discharged while any of the RUS Notes
are still outstanding, all rights and powers of the Bank and the holders of the
Bank Notes under this Mortgage shall immediately vest in the Government and the
holders of the RUS Notes, respectively. The Bank, the Government, the Mortgagor
and the noteholders shall execute and deliver such instruments, assignments,
releases or other documents as shall be reasonably required to carry out the
intention of this section.
SECTION 19. At all times when any note is held by the Government, or in the
event the Government shall assign a note without having insured the payment of
such note, this Mortgage shall secure payment of such note for the benefit of
the Government or such uninsured holder thereof, as the case may be. Whenever
any note may be sold to an insured purchaser, it shall continue to be considered
a "note" as defined herein, but as to any such insured note the Government, and
not such insured purchaser, shall be considered to be, and shall have the rights
of, the noteholder for purposes of this Mortgage. Notice of the rights of the
Government under the preceding sentence shall be set forth in all such insured
notes. As to any note which evidences a loan made by a third party lender to the
Mortgagor and guaranteed by the Government, acting through the Administrator,
pursuant to the Act, the Government and not such third party lender shall be
considered to be, and shall have the rights of the noteholder for purposes of
this Mortgage. SECTION 20. (a) The Mortgagor, subject to applicable laws and
rules and orders of regulatory bodies, shall
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design its rates for telephone service and other services furnished by it with a
view to paying and discharging all taxes, maintenance expenses and operating
expenses of its telephone system, and also to making all payments in respect of
principal of and interest on the notes when and as the same shall become due, to
providing and maintaining reasonable working capital for the Mortgagor and to
maintaining an Average TIER on all of it outstanding indebtedness to the
Government, the Bank, and all other lenders of not less than 1.00 commencing
with the date hereof and ending December 31, 2001 (hereinafter called the
"Forecast Period"), and the TIER the Mortgagor is required to maintain after the
Forecast Period shall be 1.5.
(b) For purposes of this section 20, Average TIER shall be determined as of
January 1 of each year during which any obligation secured by this Mortgage
remains unsatisfied and shall mean the average of the two highest TIER ratios
achieved by the Mortgagor during each of the three calendar years last preceding
the various dates of its determination.
(c) As used in this section 20, TIER means the Mortgagor's net income or
net margins (determined in accordance with Exhibit One hereto) plus interest
expense (determined in accordance with Exhibit One hereto) divided by interest
expense.
SECTION 21. (a) Net worth, net income or net margins, interest expense, and
total assets, as used in sections 10, 15 or 20 of article II of this Mortgage,
are defined in Exhibit One hereto. Net Plant and secured debt, if referred to in
this Mortgage, are also determined in accordance with Exhibit One hereto.
(b) Accounting terms used in this Mortgage shall also apply to accounts or
groups of accounts of the Mortgagor, regardless of the account title or the
system of accounts used, if such accounts have substantially the same meaning as
those prescribed by the Federal Communications Commission in its prevailing
uniform system of accounts for telecommunications companies (47 CLR Part 32).
SECTION 22. Exhibit One is attached hereto and by reference is made a part
of this Mortgage.
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ARTICLE III
REMEDIES OF THE MORTGAGEES AND NOTEHOLDERS
SECTION 1. If one or more of the following events (hereinafter
called "events of default") shall happen, that is to say:
(a) default shall be made in the payment of any installment of or on
account of interest on or principal of any note or notes when and as the same
shall be required to be made and such default shall continue for thirty (30)
days;
(b) default shall be made in the due observance or performance of any
other of the representations, warranties, covenants, conditions or agreements on
the part of the Mortgagor in any of the notes or in this Mortgage or in the
Consolidated Loan Agreement contained; and such default shall continue for a
period of thirty (30) days after written notice specifying such default and
requiring the same to be remedied shall have been given to the Mortgagor by any
noteholder;
(c) the Mortgagor shall file a petition in bankruptcy or be
adjudicated a bankrupt or insolvent, or shall make an assignment for the benefit
of its creditors, or shall consent to the appointment of a receiver of itself or
of it property, or shall institute proceedings for its reorganization or
proceedings instituted by others for its reorganization shall not be dismissed
within thirty (30) days after the institution thereof;
(d) a receiver or liquidator of the Mortgagor or of any substantial
portion of its property shall be appointed and the order appointing such
receiver or liquidator shall not be vacated within thirty (30) days after the
entry thereof;
(e) the Mortgagor shall forfeit or otherwise be deprived of its
corporate charter or franchises, permits or licenses required to carry on any
material portion of its business;
(f) a final judgment shall be entered against the Mortgagor and shall
remain unsatisfied or without a stay in respect thereof for a period of thirty
(30) days; then in each and every such case any noteholder may, by notice in
writing to the Mortgagor and delivery of a copy thereof to the other
noteholders, declare all unpaid principal of and accrued
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interest on any or all notes held by such noteholder to be due and payable
immediately; and upon any such declaration all such unpaid principal and accrued
interest so declared to be due and payable shall become and be due and payable,
immediately, anything contained herein or in any note or notes to be the
contrary notwithstanding; provided, however, that if at any time after the
unpaid principal of and accrued interest on any of the notes shall have been so
declared to be due and payable, all payments in respect of principal and
interest which shall have become due and payable by the terms of such note or
notes shall be paid to the respective noteholders, and all other defaults
hereunder and under the notes shall have been made good or secured to the
satisfaction of all of the noteholders, then and in every such case, the
noteholder or noteholders who shall have declared the principal of and interest
on notes held by such noteholder or noteholders to be due and payable may, by
written notice to the Mortgagor and delivery of a copy thereof to the other
noteholders, annul such declaration or declarations and waive such default or
defaults and the consequences thereof, but no such waiver shall extend to or
affect any subsequent default or impair any right consequent thereon.
SECTION 2. If one or more of the events of default shall happen, the holder
or holders of not less than a majority in principal amount of the notes at the
time outstanding (hereinafter called the "majority noteholders"), for itself or
themselves, and as the agent or agents of the other noteholders, personally or
by attorney, in its or their discretion, may, insofar as not prohibited by law:
(a) take immediate possession of the Mortgaged Property, collect and
receive all credits, outstanding accounts and bills receivable of the Mortgagor
and all rents, income, revenues and profits pertaining to or arising from the
Mortgaged Property, or any part thereof, and issue binding receipts therefor;
and manage, control and operate the Mortgaged Property as fully as the Mortgagor
might do if in possession thereof, including, without limitation, the making of
all repairs or replacements deemed necessary or advisable;
(b) proceed to protect and enforce the rights of the Mortgagees and the
rights of the noteholder or noteholders under this Mortgage by suits or actions
in equity or at law in any court or courts of competent jurisdiction, whether
for specific performance of any covenant or any agreement contained herein or in
aid of the execution of any power herein granted or for the foreclosure hereof
or hereunder or for the sale of the Mortgaged Property, or any part thereof, or
to collect the debts hereby secured or for the enforcement of such other or
additional appropriate legal or equitable remedies as may be deemed most
effectual to
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protect and enforce the rights and remedies herein granted or conferred, and in
the event of the institution of any such action or suit the noteholder or
noteholders instituting such action or suit shall have the right to have
appointed a receiver of the Mortgaged Property and of all rents, income,
revenues and profits pertaining thereto or arising therefrom derived, received
or had from the time of the commencement of such suit or action, and such
receiver shall have all the usual powers and duties of receivers, in like and
similar cases, to the fullest extent permitted by law, and if application shall
be made for the appointment of a receiver the Mortgagor hereby expressly
consents that the court to which such application shall be made may make said
appointment; and
(c) sell or cause to be sold all and singular the Mortgaged Property or any
part thereof, and all right, title, interest, claim and demand of the Mortgagor
therein or thereto, at public auction at such place in any county in which the
property to be sold, or any part thereof is located, at such time and upon such
terms as may be specified in a notice of sale, which shall state the time when
and the place where the sale is to be held, shall contain a brief general
description of the property to be sold, and shall be given by mailing a copy
thereof to the Mortgagor at least fifteen (15) days prior to the date fixed for
such sale and by publishing the same once in each week for two successive
calendar weeks prior to the date of such sale in a newspaper of general
circulation published in said county, or if no such newspaper is published in
such county, in a newspaper of general circulation in such county, the first
such publication to be not less than fifteen (15) days nor more than thirty (30)
days prior to the date fixed for such sale. Any sale to be made under this
subparagraph 2(c) may be adjourned from time to time by announcement at the time
and place appointed for such sale or for such adjourned sale or sales, and
without further notice or publication the sale may be had at the time and place
to which the same shall be adjourned, provided, however, that in the event
another or different notice of sale or another or different manner of conducting
the same shall be required by law the notice of sale shall be given or the sale
shall be conducted, as the case may be, in accordance with the applicable
provisions of law.
SECTION 3. If, within thirty (30) days after the majority noteholders shall
have had knowledge of the happening of an event or events of default, the
majority noteholders shall not have proceeded to exercise the rights and enforce
each of the remedies herein or by law conferred upon or reserved to the
Mortgagees or to said majority noteholders, then, and only then, any noteholder
for itself and as the agent of all the other
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noteholders, including the majority noteholders, may proceed to exercise any
such right or rights and remedy or remedies not being enforced by the majority
noteholders. Nothing contained in this Mortgage shall affect or impair the
right, which is absolute and unconditional, of any holder of any note which may
be secured hereby to enforce the payment of the principal of or interest on such
note on the date or dates any such interest or principal shall become due and
payable in accordance with the terms of such note.
SECTION 4 At any sale hereunder any noteholder or noteholders shall have
the right to bid for and purchase the Mortgaged Property, or such part thereof
as shall be offered for sale, and any noteholder or noteholders may apply in
settlement of the purchase price of the property so purchased the portion of the
net proceeds of such sale which would be applicable to the payment on account of
the principal of and interest on the note or notes held by such noteholder or
noteholders, and such amount so applied shall be credited as a payment on
account of principal of and interest on the note or notes held by such
noteholder or noteholders.
SECTION 5. Any proceeds or funds arising from the exercise of any rights or
the enforcement of any remedies herein provided after the payment or provision
for the payment of any and all costs and expenses in connection with the
exercise of such rights or the enforcement of such remedies shall be applied
first, to the payment of indebtedness hereby secured other than the principal of
or interest on the notes; second, to the ratable payment of interest which shall
have accrued on the notes and which shall be unpaid; third, to the ratable
payment of or on account of the unpaid principal of the notes, and the balance,
if any, shall be paid to whosoever shall be entitled thereto.
SECTION 6. The Mortgagor covenants that it will give immediate written
notice to both of the Mortgagees and to all of the noteholders of the occurrence
of an event of default or in the event that any right or remedy described in
clauses 2(a) through 2(c) of this article III is exercised or enforced, or of
any action taken to exercise or enforce any such right or remedy.
SECTION 7. Every right or remedy herein conferred upon or reserved to the
Mortgagees or to the noteholders shall be cumulative and shall be in addition to
every other right and remedy given hereunder or now or hereafter existing at
law, or in equity, or by statute. The pursuit of any right or remedy shall not
be construed as an election.
SECTION 8. The Mortgagor, for itself and all who may claim through or under
it, covenants that it will not at any time insist upon or plead, or in any
manner whatever claim, or
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take the benefit or advantage of, any appraisement, valuation, stay, extension
or redemption laws now or hereafter in force in any locality where any of the
Mortgaged Property may be situated, in order to prevent, delay or hinder the
enforcement or foreclosure of this Mortgage, or the absolute sale of the
Mortgaged Property, or any part thereof, or the final and absolute putting into
possession thereof, immediately after such sale, of the purchaser or purchasers
thereat, and the Mortgagor, for itself and all who may claim through or under
it, hereby waives the benefit of all such laws unless such waiver shall be
forbidden by law.
ARTICLE IV
POSSESSION UNTIL DEFAULT-DEFEASANCE CLAUSE
SECTION 1. Until some one or more of the events of default shall have
happened, the Mortgagor shall be suffered and permitted to retain actual
possession of the Mortgaged Property, and to manage, operate and use the same
and any part thereof, with the rights and franchises appertaining thereto, and
to collect, receive, take, use and enjoy the rents, revenues, issues, earnings,
income, products and profits thereof or therefrom, subject to the provisions of
this Mortgage.
SECTION 2. If the Mortgagor shall well and truly pay or cause to be paid
the whole amount of the principal of and interest on the notes at the time and
in the manner therein provided, according to the true intent and meaning
thereof, and shall also pay or cause to be paid all other sums payable hereunder
by the Mortgagor and shall well and truly keep and perform according to --he
true intent and meaning of this Mortgage, all covenants herein required to be
kept and performed by it, then and in that case, all property, rights and
interests hereby conveyed or assigned or pledged shall revert to the Mortgagor
and the estate, right, title and interest of the Mortgagees and the noteholders
shall thereupon cease, determine and become void and the Mortgagees and the
noteholders, in such case, on written demand of the Mortgagor but at the
Mortgagor's cost and expense, shall enter satisfaction of this Mortgage upon the
record. In any event, each noteholder, upon payment in full to him by the
Mortgagor of all principal of and interest on any note held by him and the
payment and discharge by the Mortgagor of all charges due to such noteholder
hereunder, shall execute and deliver to the Mortgagor such instrument of
satisfaction, discharge or release as shall be required by law in the
circumstances.
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ARTICLE V
MISCELLANEOUS
SECTION 1. It is hereby declared to be the intention of the Mortgagor that
all lines, or systems, embraced in the Mortgaged Property, including, without
limitation, all rights of way and easements granted or given to the Mortgagor or
obtained by it to use real property in connection with the construction,
operation or maintenance of such lines, or systems, and all service and
connecting lines, poles, posts, crossarms, wires, cables, conduits, ducts,
connections and fixtures forming part of, or used in connection with, such
lines, or systems, and ail other property physically attached to any of the
foregoing-described property, shall be deemed to be real property.
SECTION 2. All acts and obligations of the Mortgagor hereunder shall be
subject to all applicable orders, rules and regulations, now or hereafter in
effect, of all regulatory bodies having jurisdiction in the premises, to the end
that no act or omission to act on the part of the Mortgagor shall constitute a
default hereunder insofar as such act or omission shall have been required by
reason of any order, rule or regulation of any such regulatory body.
SECTION 3. All of the covenants, stipulations, promises, undertakings and
agreements herein contained by or on behalf of the Mortgagor shall bind its
successors and assigns, whether so specified or not, and all titles, rights and
remedies hereby granted to or conferred upon the Mortgagees shall pass to and
inure to the benefit of the successors and assigns of the Mortgagees and shall
be deemed to be granted or conferred for the ratable benefit and security of all
who shall from time to time be the holders of notes executed and delivered as
herein provided.
SECTION 4. The descriptive headings of the various articles of this
Mortgage were formulated and inserted for convenience only and shall not be
deemed to affect the meaning or construction of any of the provisions hereof.
SECTION 5. All demands, notices, reports, approvals, designations, or
directions required or permitted to be given hereunder shall be in writing and
shall be deemed to be properly given if mailed by registered mail addressed to
the proper party or parties at the following addresses:
As to the Mortgagor: As stated in the testimonium clause hereof
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As to the Mortgagees: The Bank:
Rural Telephone Bank
c/o Rural Utilities Service
Washington, D. C. 20250-1500
The Government:
Rural Utilities Service
Washington, D. C.20250-1500
and as to any other person, firm, corporation or governmental body or agency
having an interest herein by reason of being the holder of any note or
otherwise, at the last address designated by such person, firm, corporation,
governmental body or agency to the Mortgagor and the Mortgagees. The Mortgagor
or the Mortgagees may from time to time designate to one another a new address
to which demands, notices, reports, approvals, designations or directions may be
addressed and from and after any such designation the address designated shall
be deemed to be the address of such party in lieu of the address hereinabove
given. The Mortgagor will promptly notify the Mortgagees in writing of any
change in location of its chief place of business or the office where its
records concerning accounts and contract rights are kept.
SECTION 6. To the extent that any of the property described or referred to
in this Mortgage is governed by the provisions of the Uniform Commercial Code,
this Mortgage is hereby deemed a "security agreement" under the Uniform
Commercial Code and a "financing statement" under the Uniform Commercial Code
for said security agreement. The mailing address of the Mortgagor, as debtor,
and of the Mortgagees as secured parties, are as set forth in section 5 of this
article V.
SECTION 7. The invalidity of any one or more phrases, clauses, sentences,
paragraphs or provisions shall not affect the remaining portions of this
Mortgage, nor shall any such invalidity as to one Mortgagee or as to any holder
of notes hereunder affect the rights hereunder of the other Mortgagee or any
other holder of notes.
SECTION 8. This Mortgage may be simultaneously executed in any number of
counterparts, and all said counterparts executed and delivered, each as an
original, shall constitute but one and the same instrument.
IN WITNESS WHEREOF, HAVILAND TELEPHONE COMPANY, INC., 106 North Main Street,
Haviland, Kansas 67059, as Mortgagor, has caused this Mortgage to be signed in
its name and its corporate seal to be hereunto affixed and attested by its
officers thereunto duly authorized, RURAL TELEPHONE BANK, as Mortgagee, has
caused this Mortgage to be signed in its name and its corporate seal to be
Page 26
<PAGE>
hereunto affixed and attested by its officers thereunto duly authorized and
UNITED STATES OF AMERICA, as Mortgagee, has caused this Mortgage to be duly
executed in its behalf, all as of the day and year first above written.
HAVILAND TELEPHONE COMPANY, INC.
by
President
(Seal)
Attest:
Secretary
Executed by the Mortgagor in the presence of:
Witnesses
Page 27
<PAGE>
UNITED STATES OF AMERICA, and
RURAL TELEPHONE BANK, respectively
by as
Acting Assistant Administrator
Telecommunications Program
of the
Rural Utilities Service
and as Acting Assistant Governor
of the
Rural Telephone Bank
(Seal)
Attest:
Assistant Secretary
of the
Rural Telephone Bank
Executed by United States of America, Mortgagee, and Rural Telephone Bank,
Mortgagee, in the presence of:
Witnesses
Page 28
<PAGE>
STATE OF KANSAS
COUNTY OF
SS
This instrument was acknowledged before me on
, 19 , by
as President of HAVILAND TELEPHONE COMPANY, INC.,
a Kansas corporation.
Notary Public
(Notarial Seal)
My appointment expires:
Page 29
<PAGE>
DISTRICT OF COLUMBIA
SS
This instrument was acknowledged before me on r 19 . by Acting Assistant
Administrator - Telecommunications-program of the Rural Utilities Service of the
United States of America and as Acting Assistant Governor of the Rural Telephone
Bank.
Notary Public
(Notarial Seal)
My commission expires:
Page 30
<PAGE>
Exhibit One (Exhibit to Mortgage)
UNIFORM SYSTEM OF ACCOUNTS
ACCOUNT NUMBERS USED IN CERTAIN PROVISIONS
THIS EXHIBIT CONSISTS OF 2 PAGES
All references regarding account numbers are to 47 CLR Part 32 and supplementary
accounts required by RUS.
<TABLE>
<CAPTION>
ACCOUNT NUMBERS
ACCOUNT NAMES CLASS A CLASS B
INTEREST EXPENSE: the sum of the balances of the following accounts of the
Mortgagor:
<S> <C> <C>
Interest and Related Items ......................... 7500** 7500
Interest on Funded Debt ............................ 7510
Interest Expense - Capital Leases .................. 7520
Amortization of Debt Issuance Expense .............. 7530
Other Interest Deductions .......................... 7540
LESS: Allowance for Funds Used
During construction ....................... 7340 7300.4
NET INCOME OR NET MARGINS: the sum of the balances of the
following accounts of the Mortgagor:
Local Network Services Revenues )
Network Access Services Revenues )
Long Distance Network Services Revenues ) 5000 thru 5300
Miscellaneous Revenues )
LESS: Uncollectible Revenues )
</TABLE>
<TABLE>
<S> <C> <C>
Other Operating Income and Expense ............... 7100** 7100
Nonoperating Income and Expense .................. 7300 7300
Income Effect of Jurisdictional
Rate-making Difference - Net ................... 7910 7910
Nonregulated Net Income .......................... 7990
Other Nonregulated Revenues ...................... 7991 7991
LESS balances of the following accounts:
Plant Specific Operations Expense
Plant Nonspecific Operations Expense ............. 6100 thru 6700s
Customer Operations
Corporate Operations
Operating Taxes ................................ 7200** 7200
Nonoperating Taxes ............................. 7400** 7400
Interest and Related Items .............. 7500 7500
Extraordinary Items ..................... 7600 7600
</TABLE>
**Summary Accounts
<PAGE>
<TABLE>
<CAPTION>
NET WORTH: the sum of the balances of the following accounts of the Mortgagor:
<S> <C> <C>
Capital Stock ................................... 4510 4510
Additional Paid-In Capital ...................... 4520 452C,
Treasury Stock .................................. 4530 4530
Other Capital ................................... 4540 4540
Retained Earnings ............................... 4550 4550
</TABLE>
NOTE: FOR NONPROFIT ORGANIZATIONS (OWNERS' EQUITY SHALL
BE SHOWN IN SUBACCOUNTS OF 4540 AND 4550)
<TABLE>
<CAPTION>
TOTAL ASSETS: the sum of the balances of the following accounts of the
Mortgagor:
<S> <C> <C>
Current Assets ....................................... 1100s thru 1300s
Noncurrent Assets .................................... 1400s thru 1500s
Total Telecommunications Plant ....................... 2001 thru 2007
LESS: Accumulated Depreciation ....................... 3100 thru 3300s
LESS: Accumulated Amortization ....................... 3400 thru 3600s
</TABLE>
<PAGE>
EXHIBIT "At'
Lots 23 & 24, Block 11, Original Town of Argonia, Sumner County, Kansas Lots 5,
6 & 7, Block 27, Original Town of Conway Springs, Sumner County, Kansas Lots 27
& 28, Block 3, Osterhauts Addition to the City of Conway Springs, Sumner County,
Kansas Lots 19 thru 24, Block 23, Original Town of Conway Springs, Sumner
County, Kansas East 40'of Lots I & 2, Block 3, Riverdale, Sumner County, Kansas
West 40'of Lot 3, Block 8, Original Town of Coats, Pratt County, Kansas Lot 5,
Block 23, North Cullison Addition to the City of Cullison, Pratt County, Kansas
East 25' Lots 11 & 12, Block 5, Original Town of Sawyer, Pratt County, Kansas
West 8'of East 40'of Lot 6, Block 6, Original Town of Haviland, Kiowa County,
Kansas East 32'of Lot 6, Block 6, Original Town of Haviland, Kiowa County,
Kansas Lots 5 & 6, Block 1, Glover's I st Addition, to the City of Mullinville,
Kiowa County, Kansas Lot 15, Block 2, City of Nashville, Kinsman County, Kansas
East 30' of Lot 18, Block 18, City of Norwich, Kinsman County, Kansas Lots 7 &
8, Block I except the West 70 feet of each lot, Fisher's Addition to the Town of
Wilmore, Comanche County, Kansas Lot 18, Block 3, Town of Isabel, Barber County,
Kansas Lots Eight (8) and Nine (9) in Block One (1) of Reed's Addition to the
Town of Haviland, Kiowa County, Kansas. That portion of Reed's Reserve in the
City of Haviland, Kiowa County, Kansas, described as follows: Beginning at
Southeast comer of Reed's Reserve; running thence North on the West line of Main
Street in the City of Haviland a distance of Fifty (50) feet to the Southeast
comer of Lot Nine (9) of Block One (1) of Reed's Addition; thence West along the
South line of said Lot Nine (9) a distance of One Hundred Fifty (150) feet to
the Southwest comer of said Lot Nine (9); thence due South to the South line of
Reed's Reserve; thence Easterly along the South line of Reed's Reserve to the
place of beginning; and, a part of Reed's Reserve in Block One (1) in Reed's
Addition to the town of Haviland, Kansas, described as follows: Beginning at a
point One Hundred Twenty-five (125) feet south and Seventy (70) feet East of the
Northwest comer of Lot Five (5) of County Clerk's Plat of a part of Reed's
Reserve; running thence East a distance of Seventy (70) feet to a point; running
thence South to the North line of Maple Street in the City of Haviland; running
thence Westerly along the North line of Maple Street a distance of Seventy (70)
feet to a point; running thence North to the place of beginning.
That part of Reed's Reserve in Block One (1), in Reed's Addition to the Town of
Haviland, Kiowa County, Kansas, described as follows: Beginning at a point 125
feet South of the Northwest comer of Lot Five (5) of the County Clerk's Plat of
a part of Reed's Reserve, thence running East 70 feet; thence running South to
the North line of Maple Street in the said Town; thence running Westerly along
the North line of said Maple Street to the
<PAGE>
Southwest comer of said Reed's Reserve; thence running North along the East line
of Lawrence Avenue in said Town to the place of beginning.
A tract of land located in the Northwest Quarter (NW/4) of Section Seventeen
(17), Township Twenty-Eight (28) South, Range Sixteen (16) West, described as
follows, to-wit: Commencing at the NW comer of said NW/4, thence East along the
North line of said NW/4 a distance of 719 feet to a point; thence South a
distance of 71 feet to a point, being the place of beginning; thence
Northeasterly (North 35' East) a distance of 375.84 feet to a point, thence
South a distance of 412 feet to a point on the Northerly right-of-way line of
U.S. Highway 54, as presently located; thence Southwesterly along said Northerly
right-of-way line of U.S. Highway 54, a distance of 384.3 feet to a point;
thence North a distance of 464 feet to the place of beginning, containing 3.82
acres, more or less, subject to mineral reservations and easements of record.
Restated Mortgage - Telephone
100% REA Loan No Prior Bank Loan
(RES-REA.NPB) 9/91
I
RESTATED MORTGAGE, SECURITY AGREEMENT AND FINANCING STATEMENT, dated as
of 19 , made by and between WESTERN NEW MEXICO TELEPHONE COMPANY, INC.
(hereinafter called the "Mortgagor"), a corporation existing under the laws of
the State of New Mexico, as mortgagor and debtor, and UNITED STATES OF AMERICA
(hereinafter sometimes called the "Mortgagee" and sometimes called the
"Government"), acting through the Administrator of the Rural Electrification
Administration (hereinafter called "REA"), as mortgagee and secured party.
WHEREAS, the Mortgagor has heretofore borrowed funds from the
Government, acting through the Administrator of REA, pursuant to a certain
Telephone Loan Contract identified in the fifth recital hereof (hereinafter
called the "Instruments Recital") by and between the Mortgagor and the
Government (said Telephone Loan Contract, as it may have heretofore been, and as
it may hereafter be, amended or supplemented, being hereinafter called the
"Consolidated Loan Agreement"); and
WHEREAS, the Mortgagor, for value received, has heretofore
duly authorized and executed, and has delivered to the Mortgagee, or has assumed
the payment of, certain mortgage notes all payable to the order of the
Mortgagee, in installments, of which the mortgage notes (hereinafter
collectively called the "Outstanding Notes") identified In the Instruments
Recital are now outstanding and held by the Mortgagee, all of which Outstanding
Notes evidence loans made or guaranteed by the Government to the Mortgagor or to
a third party or parties to finance telephone exchanges, lines and related
facilities; and
WHEREAS, the Outstanding Notes are secured by the security
instruments (hereinafter collectively called the "Underlying Mortgage")
identified in the Instruments Recital made by the Mortgagor to the Mortgagee;
and
WHEREAS, the Mortgagor has determined to borrow additional
funds from the Government pursuant to the Rural Electrification Act of 1936, as
amended (7 U.S.C. 901 et seq., hereinafter called the "Act"), and pursuant to
the Consolidated Loan Agreement, and has accordingly duly authorized and
executed, and has delivered to the Mortgagee, its mortgage note (identified in
the Instruments Recital as and hereinafter called the "Current Note") to be
secured by the Underlying Mortgage, as amended, supplemented, consolidated and
restated hereby; and
WHEREAS, the instruments referred to in the preceding
recitals, the Maximum Debt Limit referred to in Article I, Section 1 hereof, the
subdivision or subdivisions of Article II hereof made applicable by this
recital, and certain data referred to in Article II, Section 15 and in Article
II, Section 20(a) hereof, are as follows:
<PAGE>
Restated Mortgage - Telephone
100% REA Loan No Prior Bank Loan
(RES-REA.NPB) 9/91
INSTRUMENTS RECITAL
The instruments referred to in the preceding recitals are as follows:
"Telephone Loan Contract" dated as of May 14, 1979.
"Telephone Loan Contract Amendment" dated as of July 28, 1993.
"Outstanding Notes":
Six (6) certain mortgage notes in an aggregate principal amount of $27,112,bOO,
all of which will mature on or before June 23, 2015.
"Underlying Mortgage"
Instrument
Mortgage and Security Agreement Supplemental Mortgage
"Current Note" (Of even date herewith):
Principal Amount
$10,750,000
Dated as of
August 9, 1979 March 9, 1984
Interest Rate
(per annual five percentum (50/6)
Trustee, if any
Final Payment Date
Sixteen (16) years after the date thereof
<PAGE>
Restated Mortgage - Telephone
100% REA Loan No Prior Bank Loan
(RES-REA.NPB) 9/91
2. "Maximum Debt Limit" for purposes of Article I, Section I hereof, shall
be fifty-five million dollars ($55,000,000).
3. The following subdivision(s) of Article II hereof Is(are) hereby made
applicable: Section 4(b).
4. The date referred to in Section 15(a)(3) of Article II hereof Is hereby
established as December 31, 1978.
5. The Forecast Period referred to in Article 11, Section 20(a) of this
Mortgage shall be the period commencing with the date hereof and ending December
31, 1997. Also in Article II, Section 20(a), the TIER the Mortgagor is required
to maintain after the end of the Forecast Period shall be 1.5.
WHEREAS, the Underlying Mortgage provides that the Mortgagor
shall, upon the request in writing of the holder or holders of not less than a
majority in principal amount of the notes secured by the Underlying Mortgage at
the time outstanding, duly authorize, execute, and deliver and record and file
all such supplemental mortgages and conveyances as may reasonably be requested
by such holder or holders to effectuate the Intention of the Underlying Mortgage
and to provide for the conveying, mortgaging and pledging of the property of the
Mortgagor intended to be conveyed, mortgaged or pledged by the Underlying
Mortgage to secure the payment of the principal of and interest on notes
executed and delivered thereunder and pursuant thereto, or otherwise secured
thereby, and the Mortgagee, as the holder of all such notes, has in writing
requested the execution and delivery of such a supplemental mortgage pursuant to
such provisions; and
WHEREAS, it is Intended by the Mortgagor, at the request and
with the consent of the Mortgagee, as the holder of all of the outstanding
Notes, to amend and supplement the Underlying Mortgage in the respects
hereinafter set forth; and
WHEREAS, the changes in the Underlying Mortgage which the
Mortgagor and the Mortgagee, as the holder of all of the Outstanding Notes,
desire now to effect make advisable the consolidating and restating of each the
instruments constituting the Underlying Mortgage in its entirety; and
<PAGE>
Restated Mortgage - Telephone
100% REA Loan No Prior Bank Loan
(RES-REA.NPB) 9/91
WHEREAS, all acts, things, and conditions prescribed by law and by
Mortgage; and
the articles of incorporation and bylaws of the Mortgagor have been duly
performed and complied with to authorize the execution and delivery of this
Restated Mortgage, Security Agreement and Financing Statement (hereinafter
called "this Restated Mortgage"), and to make this Restated Mortgage an
amendment and supplement to, and a consolidation and restatement of, the
Underlying Mortgage; and
WHEREAS, the Mortgagee is authorized to enter into this Restated
WHEREAS, it is contemplated that the outstanding Notes and the
Current Note shall be secured by this Restated Mortgage, and also that any
additional notes and refunding, renewal and substitute notes (hereinafter
collectively called the "Additional Notes") which may from time to time be
executed by the Mortgagor and delivered to the Mortgagee as hereinafter
provided, shall be secured by this Restated Mortgage (the Outstanding Notes, the
Current Note and any Additional Notes being hereinafter collectively called the
" notes"): and
WHEREAS, the Mortgagor now owns a telephone system and other
facilities identified in the Property Schedule contained in the Granting Clause
hereof (hereinafter called the "Existing Facilities"); and
WHEREAS, to the extent that any of the property described or
referred to herein and in the Underlying Mortgage is governed by the provisions
of the Uniform Commercial Code of any state (hereinafter called the "Uniform
Commercial Code"), the parties hereto desire that the Underlying Mortgage and
this Restated Mortgage, collectively, be regarded as a "security agreement"
under the Uniform Commercial Code and that this Restated Mortgage be regarded as
a "financing statement" under the Uniform Commercial Code for said security
agreement.
NOW, THEREFORE, this Restated Mortgage
WITNESSETH
That each of the instruments constituting the Underlying
Mortgage is hereby amended, supplemented, consolidated and restated to read in
its entirety from and after the date of execution of this Restated Mortgage (the
Underlying Mortgage, as amended, supplemented, consolidated and restated by this
Restated Mortgage, being herein called "this Mortgage") as follows:
<PAGE>
Restated Mortgage - Telephone
100% REA Loan No Prior Bar
(RES-REA.NPB) 9/91
GRANTING CLAUSE
In order to secure the payment of the principal of and
interest on the notes, according to their tenor and effect, and further to
secure the due performance of the covenants, agreements and provisions contained
in this Mortgage and the Consolidated Loan Agreement and to declare the terms
and conditions upon which the notes are to be secured, the Mortgagor, in
consideration of the premises, has executed and delivered this Mortgage, and has
granted, bargained, sold, conveyed, warranted, assigned, transferred, mortgaged,
pledged, and set over, and by these presents does hereby grant, bargain, sell,
convey, warrant, assign, transfer, mortgage, pledge and set over, unto the
Mortgagee, and assigns, all and singular the following- described property
(hereinafter sometimes called the "Mortgaged Property"):
All right, title and Interest of the Mortgagor in and to the
Existing Facilities and buildings, plants, works, Improvements, structures,
estates, grants, franchises, easements, rights, privileges and properties real,
personal and mixed, tangible or intangible, of every kind or description, now
owned or leased by the Mortgagor or which may hereafter be owned or leased,
constructed or acquired by the Mortgagor, wherever located, and in and to all
extensions and improvements thereof and additions thereto, including all
buildings, plants, works, structures, improvements, fixtures, apparatus,
materials, supplies, machinery, tools, implements, poles, posts, crossarms,
conduits, ducts, lines, whether underground or overhead or otherwise, wires,
cables, exchanges, switches including, without limitation. host switches and
remote switches, desks. testboards, frames, racks, motors, generators, batteries
and other items of central office equipment, paystations, protectors,
instruments, connection and appliances, office furniture and equipment, work
equipment and any and all other property of every kind, nature and description,
used, useful or acquired for use by the Mortgagor in connection therewith and
including, without limitation, the property described in the following property
schedule:
PROPERTY SCHEDULE
(a) The Existing Facilities are located in the following
Counties: Catron, Grant, Hidalgo and Socorro, in the State of New Mexico.
(b) The property referred to in the last line of paragraph I
of the Granting Clause includes the following described real estate:
<PAGE>
Restated Mortgage - Telephone
100% REA Loan No Prior Bank Loan
(RES-REA.NPB) 9/91
A certain tract of land described in a certain Warranty Deed dated June 25,
1979, by the Village of Reserve, New Mexico, a municipal corporation, as
Grantor, to Western New Mexico Telephone Company, Inc. as Grantee, and recorded
on September 4, 1979, in the office of the Catron County Clerk, in the State of
New Mexico, in Volume 6 of Deeds at page 324.
A certain tract of land described in a certain Warranty Deed dated October 15,
1979, by George L. McFarland, Elizabeth F. McFarland, George L. McFarland
Trustee for George L. McFarland and Elizabeth F. McFarland under deed of trust
dated May 5, 1975, and George L. McFarland Trustee for Scott Alan Sage, James I.
McFarland and Gwendolyn R. McFarland under Deed of Trust dated March 1, 1970, as
Grantors, to Western New Mexico Telephone Company, Inc. as Grantee, and recorded
October 22, 1979, in the office of the County Clerk of Catron County, in the
State of New Mexico, in Volume 6 of Deeds at page 378.
A certain tract of land described in a certain Warranty Deed dated November 9,
1979, by Patrick R. Peralta and Connie D. Peralta, as Grantor, to Western New
Mexico Telephone Company, Inc. as Grantee, and recorded on November 27., 1979,
in the office of the County Clerk of Catron County, in the State of New Mexico,
in Volume 6 of Deeds at page 416.
A certain tract of land described in a certain Warranty Deed dated May 2, 1980,
by The Mountain States Telephone and Telegraph Company, a Colorado corporation,
as Grantor, to Western New Mexico Telephone Company, Inc. as Grantee, and
recorded on July 24, 1980, in the office of the Catron County Clerk, in the
State of New Mexico, in Volume 6 of Deeds at page 703.
A certain tract of land described in a certain Warranty Deed dated May 2, 1980,
by The Mountain States Telephone and Telegraph Company, a Colorado corporation,
as Grantor, to Western New Mexico Telephone Company, Inc. as Grantee, and
recorded on July 24, 1980, in the office of the Catron County Clerk, in the
State of New Mexico, in Volume 6 of Deeds at page 704.
A certain tract of land described in a certain Warranty Deed dated May 7, 1980,
by William M. Roberts and Emma Roberts, husband and wife, Russell Roberts, Grant
Roberts and Howard Glenn Roberts, as their sole and separate property, as
Grantors, to Western New Mexico Telephone Company, Inc. as Grantee, and recorded
on May 7, 1980, in the office of the Catron County Clerk, in the State of New
Mexico, in Volume 6 of Deeds at pages 614-616.
<PAGE>
Restated Mortgage - Telephone
100% REA Loan No Prior Bank Loan
(RES-REA.NPB) 9/91
A certain tract of land described in a certain Warranty Deed dated June 12,
1980, by Neita M. Porter, a widow, as Grantor, to Western New Mexico Telephone
Company, Inc. as Grantee, and recorded on June 13, 1980, in the office of the
County Clerk of Catron County, in the State of New Mexico, in Volume 6 of Deeds
at page 657.
A certain tract of land described in a certain Statutory Warranty Deed dated
October 9, 1981, by Jimmy J. Lehew and Judy E. Lehew, husband and wife, as
Grantor, to Western New Mexico Telephone Company, as Grantee, and recorded on
August 12, 1982, in the office of the County Clerk of Catron County, in the
State of New Mexico, in Volume 7 of Deeds at pages 896-897.
A certain tract of land described in a certain Warranty Deed dated April 5,
1985, by Walter J. Burk-head and Virginia C. Burkhead, Husband and Wife, as
Grantors, to Western New Mexico Telephone Company, Inc. as Grantee, and recorded
on May 13, 1985, in the office of the Catron County Clerk, in the State of New
Mexico, in Volume 9 of Deeds at page 107.
A certain tract of land described in a certain Warranty Deed dated October 4,
1985, by Emma Roberts, Russell Grant Roberts and Howard Glenn Roberts, as their
separate property, as Grantors, to Western New Telephone Company, Inc. as
Grantee, and recorded on 8, 1985, in the office of the Catron County Clerk,
State of New Mexico, in Volume 9 of Deeds at pages Roberts, sole and Mexico
October in the 301-303.
A certain tract of land described in a certain Lease Agreement dated September
15, 1980, by Daniel L. Morgan and Katherine L. Morgan, his wife, as Lessor, to
Western New Mexico Telephone Company, C71S Lessee, and recorded on May 25, 1983
in tht- ()Fficnof- the Countv Clerk of Catron County, in the State of New
Mexico, in Volume 68 of Miscellaneous Records at pages 675-682.
2
<PAGE>
Restated Mortgage - Telephone
100% REA Loan No Prior Bank Loan
(RES-REA.NPB) 9/91
A certain tract of land described in a certain Statutory Warranty Deed dated
August 14, 1980, by George R. Jackson and Dorothy E. Jackson, husband and wife,
as Grantors, to Western New Mexico Telephone Company, Inc. as Grantee, and
recorded on August 18, 1980, in the office of the County Clerk of Grant County,
in the State of New Mexico, in Book 215 of Deeds at page 44.
A certain tract of land described in a certain Statutory Warranty Deed dated
September 11, 1981, by George R. Jackson and Dorothy E. Jackson, husband and
wife, as Grantors, to Western New Mexico Telephone Company, as Grantee, and
recorded on September 16, 1981, in the office of the County Clerk of Grant
County, in the State of New Mexico, in Book 219 of Deeds at page 937.
A certain tract of land described in a certain Statutory Warranty Deed dated
March 18, 1982, by Gerald E. McKinney and Emily McKinney, his wife, as Grantor,
to Western New Mexico Telephone Company, Inc. as Grantee, and recorded on March
25, 1982, in the office of the County Clerk of Grant County, in the State of New
Mexico, in Book 223 of Deeds at page 752.
A certain tract of land described in a certain Statutory Warranty Deed dated
April 14, 1982, by Sam M. Scarbrough and Annabell Scarbrough, husband and wife,
as Grantor, to Western New Mexico Telephone Company, Inc. as Grantee, and
recorded on May 21, 1982, in the office of the County Clerk of Grant County, in
the State of New Mexico, in Book 223 of Deeds at page 1011.
A certain tract of land described in a certain Statutory Warranty Deed dated
November 11, 1983, by the Swanson Revocable Trust, Edith Louise Swanson,
Trustee, as Grantor, to Western New Mexico Telephone Company, Inc. as Grantee,
and recorded on November 22, 1983, in the office of the County Clerk of Grant
County, in the State of New Mexico, in Book 226 of Deeds at pages 2224-25.
A certain tract of land described in a certain Statutory Warranty Deed dated
February 8, 1984, by Larry D. Duncan and Maureen L. Duncan, husband and wife, as
Grantor, to Western New Mexico Telephone Company, Inc. as Grantee, and recorded
on February 8, 1984, in the office of the County Clerk of Grant County, in the
State of New Mexico, in Book 226 of Deeds at page 2528.
A certain tract of land described in a certain Statutory Warranty Deed dated
April, 19, 1984, by Gerald E. McKinney and Emily McKinney, his wife, as Grantor,
to Western New Mexico Telephone Company, Inc. as Grantee, and recorded on April
27, 1984, in the office of the County Clerk of Grant County, in the State of New
Mexico, in Book 226 of Deeds at page 2814.
3
<PAGE>
Restated Mortgage - Telephone
100% REA Loan No Prior Bank Loan
(RES-REA.NPB) 9/91
A certain tract of land described in a certain Statutory Warranty Deed dated
January 21, 1985, by Harry 0. Sontag and Alline Sontag, Co-Personal
Representatives of the Estate of Paul Thomas Sontag, as Grantors to Western New
Mexico Telephone Company, Inc. as Grantee, and recorded on January 21, 1985, in
the office of the County Clerk of Grant County, in the State of New Mexico, in
Book 226 of Deeds at pages 3788-90.
Except for A certain tract of land described in a certain Statutory Warranty
Deed dated November 14, 1991, by Western New Mexico Telephone Company, Inc. as
Grantor to Tris Germain, as Grantee, and recorded on November 14, 1991, in the
office of the County Clerk of Grant County, in the State of New Mexico, in Book
226 of Deeds at pages 6452-3.
A certain tract of land described in a certain Statutory Warranty Deed dated
March 14, 1985, by Charles M. Baxter, Sr. and Mary Beth Baxter, as Grantors, to
Western New Mexico Telephone Company, Inc., as Grantee, and recorded in on March
18, 1985, in the office of the County Clerk of Grant County, in the State of New
Mexico, in Book 226 of Deeds at page 4006.
A certain tract of land described in a certain Lease Agreement dated December,
1982 by Clint Johnson, Jr. and Dee Johnson, his wife, as Lessor, to Western New
Mexico Telephone Company, Inc. as Lessee, and recorded on May 17, 1983 in the
office of the County Clerk of Grant County, in the State of New Mexico, in Book
227 of Miscellaneous Records at pages 2059-67, and amended on June 7, 1984, and
recorded on June 8, 1984, in the office of the County Clerk of Grant kCounty, in
the State of New Mexico, in Book 227 of Miscellaneous Records at pages 4567-68.
A certain tract of land described in a certain Lease Agreement dated January 1,
1984 by Chino Mines Company, A General Partnership, as Lessor, to Western New
Mexico Telephone Company, as Lessee, and recorded on June 1, 1984 in the office
of the County Clerk of Grant County, in the State of New Mexico, in Book 227 of
Miscellaneous Records at pages 4514-22A, and Amended on the 13th day of March,
1985 and recorded on March 18, 1985, in the office of the County Clerk of Grant
County, in the State of New Mexico, in Book 227 of Miscellaneous Records at
pages 6400-401.
4
<PAGE>
Restated Mortgage - Telephone
100% REA Loan No Prior Bank Loan
(RES-REA.NPB) 9/91
A certain tract of land described in a certain Warranty Deed dated November 7,
1983, by The Mountain States Telephone and Telegraph Company, a Colorado
corporation, as Grantor, to Western New Mexico Telephone Company, Inc. as
Grantee, and recorded on November 21, 1983, in the office of the Hidlago County
Clerk, in the State of New Mexico, in Book 24 of Deeds at page 115.
A certain tract of land described in a certain Statutory Warranty Deed dated
March 8, 1987, by S. H. Strange and Alameda Strange, husband and wife, as
Grantors, to Western New Mexico Telephone Company, Inc. as Grantee, and recorded
on March 17, 1987, in the office of the Hidlago County Clerk, in the State of
New Mexico, in Book 25 of Deeds at page 629.
A certain tract of land described in a certain Statutory Warranty Deed dated
February 28, 1980, by Walter T. Brunson, Jr. and Anne M. Brunson, his wife, as
Grantors, to Western New Mexico Telephone Company, Inc. as Grantee, and recorded
on March 14, 1980, in the office of the Socorro County Clerk, in the State of
New Mexico, in Volume 355 of Deeds at page 940.
A certain tract of land described in a certain Warranty Deed dated May 2, 1980,
by The Mountain States Telephone and Telegraph Company, a Colorado corporation,
as Grantor, to Western New Mexico Telephone Company, Inc. as Grantee, and
recorded on July 24, 1980, in the office of the Socorro County Clerk, in the
State of New Mexico, in Volume 359 of Deeds at page 458.
TOGETHER WITH all plants, works, structures, erections, reservoirs, dams,
buildings, fixtures and improvements now or hereafter located on any of the
properties conveyed by any and all of the aforesaid deeds mentioned above and
all tenements, hereditaments and appurtenances now or hereafter thereunto
belonging or in anywise appertaining.
The description of the property conveyed by and through the provisions of the
aforesaid deed is by reference made a part hereof as though fully set forth at
length herein.
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II
All right, title and Interest of the Mortgagor in, to and under any and all
grants, privileges, rights of way and easements now owned, held, leased, enjoyed
or exercised, or which may hereafter be owned, held, leased. acquired, enjoyed
or exercised. by the Mortgagor for the purposes of, or in connection with, the
construction or operation by or on behalf of the Mortgagor of telephone
properties, facilities, systems or businesses. whether underground or overhead
or otherwise, wherever located;
III
All right, title and interest of the Mortgagor In, to and
under any and all licenses, franchises, ordinances, privileges and permits
heretofore granted, Issued or executed, or which may hereafter be granted,
issued or executed, to it or to Its assignors by the United States of America,
or by any state, or by any county, township, municipality, village or other
political subdivision thereof, or by any agency, board, commission or department
of any of the foregoing. authorizing the construction, acquisition, or operation
of telephone properties. facilities, systems or businesses, Insofar as the same
may by law be assigned, granted, bargained, sold, conveyed, transferred.
mortgaged, or pledged;
IV
All right, title and interest of the Mortgagor in, to and
under any and all contracts heretofore or hereafter executed by and between the
Mortgagor and any person, firm. or corporation relating to the Mortgaged
Property together with any and all other accounts, chattel paper. contract
rights and general intangibles (as such terms are defined in the applicable
Uniform Commercial Code) and all stock, bonds, notes, debentures, commercial
paper, subordinated capital certificates, securities, obligations of or
beneficial interests or investments in any corporation, association,
partnership, joint venture, trust, Government or any agency or department
thereof, or any other entity of any kind, heretofore or hereafter acquired by
the Mortgagor;
V
Also, all right. title and Interest of the Mortgagor in and to
all other property, real or personal, tangible or intangible, of every kind,
nature and description, and wheresoever situated, now owned or leased or
hereafter acquired by the Mortgagor, it being the intention hereof that all such
property now owned or leased but not specifically described herein or acquired
or held by the Mortgagor after the date hereof shall be as fully embraced within
and subjected to the lien hereof as if the same were now owned by the Mortgagor
and were specifically described herein to the extent only, however, that the
subjection of such property to the lien hereof shall not be contrary to Jaw;
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Together with all rents, Income, revenues, profits and
benefits at any time derived, received or. had from any and all of the
above-described property of the Mortgagor.
Provided, however, that except as hereinafter provided in
Section 12(b) of Article II hereof. no automobiles, trucks. trailers, tractors
or other vehicles (including without limitation aircraft or ships, if any) owned
or used by the Mortgagor shall be included In the Mortgaged Property.
TO HAVE AND TO HOLD all -and singular the Mortgaged Property
unto the Mortgagee and its assigns forever, to secure equally and ratably the
payment of the principal of and interest on the notes, according to their tenor
and effect, without preference, priority or distinction as to interest or
principal (except as otherwise specifically provided herein) or as to lien or
otherwise of any note over any other note by reason of the priority in time of
the execution, delivery or maturity thereo or of the assignment or negotiation
thereof, or otherwise, and to secure the due performance of the covenants,
agreements and provisions herein and in the Consolidated Loan Agreement
contained, and for the uses and purposes and upon the terms, conditions,
provisos and agreements hereinafter expressed and declared.
ARTICLE I
ADDITIONAL NOTES
SECTION 1. The Mortgagor, when authorized by resolution or
resolutions of Its board of directors, may from time to time execute and deliver
to the Government one or more Additional Notes to evidence (1) loans made by the
Government to the Mortgagor pursuant to the Ao.t; (2) indebtedness of the
Mortgagor incurred by the assumption by the Mortgagor of the indebtedness of a
third party or parties to the Government created by a loan or loans theretofore
made by the Government to such third party or parties pursuant to the Act; or
(3) obligations of the Mortgagor to the Government on account of a guarantee or
guarantees made by the Government pursuant to the Act of the repayment of a loan
or loans made by a legally organized lending agency or agencies to the
Mortgagor. The Mortgagor, when authorized by resolution or resolutions of Its
board of directors. may also from time to time execute and deliver one or more
Additional Notes to refund any note or notes at the time outstanding and secured
hereby, or in renewal of, or in substitution for, any such outstanding note or
notes. Additional Notes shall contain such provisions and shall be executed and
delivered upon such terms and conditions as the board of directors of the
Mortgagor in the resolution or resolutions authorizing the execution and
delivery thereof and the Government shall prescribe; provided, however, that the
outstanding principal balances owing on the notes shall not at any one time
exceed the amount identified in the Instruments Recital as the Maximum Debt
Limit, and no note shall mature more than fifty (50) years after
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the date hereof. Additional Notes, including refunding, renewal and substitute
notes, when and as executed and delivered, shall be secured by this Mortgage,
equally and ratably with all other notes at the time outstanding. without
preference, priority, or distinction of any of the notes over any other of the
notes by reason of the priority of the time of the execution, delivery or
maturity thereof or of the assignment or negotiation thereof. As used In this
Mortgage, the term "directors" includes trustees
SECTION 2. The Mortgagor. when authorized by resolution or
resolutions of its board of directors, may from time to time execute,
acknowledge, deliver, record and file mortgages supplemental to this Mortgage
which thereafter shall form a part hereof, for the purpose of formally
confirming this Mortgage as security for the notes. Nothing herein contained
shall require the execution and delivery by the Mortgagor of a supplemental
mortgage in connection with the Issuance hereunder or the securing hereby of
notes except as hereinafter provided In Section 12 of Article II hereof.
ARTICLE II
PARTICULAR COVENANTS OF THE MORTGAGOR
The Mortgagor covenants with the Mortgagee and the holders of notes
secured hereby (hereinafter sometimes collectively called the "noteholders") and
each of them as follows:
SECTION 1. The Mortgagor is duly authorized under Its articles
of incorporation and by-laws and the laws of the State of Its incorporation and
all other applicable provisions of law to execute and deliver the Outstanding
Notes the Current Note and this Mortgage and to execute and deliver Additional
Notes; all corporate action on its part for the execution and delivery of the
Outstanding Notes, the Current Note and this Mortgage has been duly and
effectively taken; and the Outstanding Notes, the Current Note and this Mortgage
are the valid and enforceable obligations of the Mortgagor In accordance with
their respective terms.
SECTION 2. The Mortgagor warrants that it has good right and
lawful authority to mortgage the property described In the Granting Clause of
this Mortgage for the purposes herein expressed, and that the said property is
free and clear of any deed of trust, mortgage, lien, charge or encumbrance
thereon or affecting the title thereto, except (I) the lien of this Mortgage and
taxes or assessments not yet due; 00 deposits or pledges to secure payment of
workmen's compensation, unemployment insurance, old age pensions or other social
security; and (Ili) deposits or pledges to secure performance of bids, tenders,
contracts (other than contracts for the payment of borrowed money). leases,
public or statutory obligations, surety or appeal bonds, or other deposits
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or pledges for purposes of like general nature in the ordinary course of
business.
The Mortgagor-will. so long as any of the notes shall be
outstanding, maintain and preserve the lien of this Mortgage superior to all
other Dens affecting the Mortgaged Property, and will forever warrant and
defend-the title to the property described as being mortgaged hereby to the
Mortgagee against any and all claims and demands whatsoever.- The Mortgagor will
promptly pay or discharge any and all obligations for or on account of which any
such lien or charge might exist or could be created and any and all lawful
taxes, rates, levies, assessments, liens, claims or other charges imposed upon
or accruing upon any of the Mortgagor's property (whether taxed to the Mortgagor
or to any noteholder), or the franchises, earnings or business of the Mortgagor,
as and when the same shall become due and payable; and whenever called upon so
to do the Mortgagor will furnish to the Mortgagee or to any noteholder adequate
proof of such payment or discharge.
SECTION 3. The Mortgagor will duly and punctually pay the
principal of and Interest on the notes at the dates and places and In the manner
provided therein, according to the true intent and meaning thereof, and all
other sums becoming due hereunder.
SECTION 4. (a) The Mortgagor will at all times, so long as any
of the notes shall be outstanding, take or cause to be taken all such action as
from time to time may be necessary to preserve its corporate existence and to
preserve and renew all franchises, rights of way, easements, permits and
licenses now or hereafter to it granted or upon it conferred, and will comply
with all valid laws, ordinances, regulations and requirements applicable to It
or Its property. The Mortgagor will not, without the approval in writing of the
bolder or holders of not less than a majority in principal amount of the notes
at the time outstanding (hereinafter called the "majority noteholders"), take or
suffer to be taken any steps to reorganize, or to consolidate with or merge into
any other corporation, or to sell, lease or transfer (or make any agreement
therefor) the Mortgaged Property, or any part thereof.
(b) If this subsection is made applicable by the Instruments Recital. then
nothing herein contained shall prevent any such reorganization, consolidation or
merger provided that the lien and security of this Mortgage and the rights or
powers of the Mortgagee and the noteholders hereunder shall not thereby be
impaired or adversely affected, and provided that upon such reorganization.
consolidation or merger, the due and punctual payment of the principal of and
Interest on the notes according to their tenor and the due and punctual
performance of all covenants and conditions of this Mortgage shall be assumed by
the corporation formed by such reorganization, consolidation or merger, and the
lien of this Mortgage shall remain a superior lien upon the property owned by
the Mortgagor at the time of such reorganization. consolidation or merger and
upon any improvements or additions
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to such property, either prior to or subsequent to such reorganization.
consolidation or merger.
(c) The Mortgagor may, however, without
obtaining the approval of the holder or holders of any of the notes at the time
outstanding, at any time or from time to time so long as the Mortgagor is not In
default hereunder, sell or otherwise dispose of, free from the lien hereof, any
of Its property which is neither necessary to nor useful for the operation of
the Mortgagor's business, or which has become obsolete, worn out or damaged or
otherwise unsuitable for the purposes of-the Mortgagor; provided, however, that
the Mortgagor shall: (1) to the extent necessary. replace the same by, or
substitute therefor, other property of the same kind and nature, which shall be
subject to the lien hereof, free and clear of all prior liens, and apply any
proceeds derived from such sale or other disposition of such property and not
needed for the replacement thereof to the payment of the indebtedness evidenced
by the notes; or (2) immediately upon the receipt of the proceeds of any sale or
other disposition of said property. apply the entire amount of such proceeds to
the payment of the indebtedness evidenced by the notes-, or (3) deposit all or
such part of the proceeds derived from the sale or other disposition of said
property as the majority noteholders shall specify in such restricted bank
accounts as such holder or holders shall designate, and shall use the same only
for such additions to or improvements of the Mortgaged Property and on such
terms and conditions as such holder or holders shall specify.
SECTION 5. The Mortgagor will at all times maintain and
preserve the Mortgaged Property In good repair, working order and condition, and
will from time to time make all needful and proper repairs, renewals, and
replacements, and useful and proper alterations, additions, betterments and
Improvements, and will. subject to contingencies beyond Its reasonable control,
at all times keep its plant and properties in continuous operation- and use '
all reasonable diligence to furnish the subscribers served by it through the
Mortgaged Property with adequate telephone service.
SECTION 6. Except as specifically authorized in writing In
advance by the majority noteholders, the Mortgagor will purchase all materials,
equipment, supplies and replacements to be Incorporated in or used in connection
with the Mortgaged Property outright, and not subject to any conditional sales
agreement, chattel mortgage, bailment lease, or other agreement reserving to the
seller any right, title or lien.
SECTION 7. (a) The Mortgagor will take out, as the respective
risks are incurred, and maintain the following classes and amounts of insurance:
(1) fidelity bonds covering each offIcer and employee of the Mortgagor in not
less than the following amounts, based on the estimated annual gross revenues
(including gross toll collected) of the Mortgaged Property:
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From
<TABLE>
<CAPTION>
Annual Gross Revenue
<S> <C>
Less than $ 200,000
$200,001 to 400,000
400,001 to 600,000
600,001 to 800,000
800,001 to 1,000,000
over 1,000,000
</TABLE>
<TABLE>
<S> <C>
Amount of Coverage $ 60,000
100,000
250,000
300,000
400,000
500,000
</TABLE>
and each collection agent of the Mortgagor shall be included In such fidelity
bonds for not less than $2,500, or 10 percent of the highest amount collected
annually by any one collection agent, whichever is greater; (2) workmen's
compensation and employer's liability insurance covering all employees of the
Mortgagor. in such amounts as may be required by law, or if the Mortgagor or any
of Its employees are not subject to the workmen's compensation laws of the State
or States In which the Mortgagor conduct its operations, then its workmen's
compensation policy shall provide voluntary compensation, coverage to the same
extent as though the Mortgagor and such employees were subject to such laws; and
including occupational disease liability coverage, employer's liability
insurance, and "additional medical" coverage of not less than $10,000 In States
where full medical coverage is not required by law; (3) public liability and
property damage liability insurance, covering ownership liability, and all
operations of the Mortgagor, with limits for bodily injury or death of not less
than $1,000,000 aggregate for the policy period: (4) liability Insurance on all
motor vehicles, trailers, semitrailers, and aircraft used in the conduct of the
Mortgagor's business. whether owned, non-owned or hired by the Mortgagor, with
bodily injury limits of not less than $1,000,000 for one person and $1,000,000
for each accident, in connection with aircraft liability, also passenger bodily
Injury limits of $1.000,000 per person and $1,000,000 for each accident; (5)
comprehensive, or separate fire, theft and windstorm insurance covering loss of
or damage to all owned motor vehicles, trailers. and aircraft of the Mortgagor,
having a unit value in excess of $1,000, In an amount not less than the actual
cash value of the property insured-, and (6) fire and extended coverage
Insurance, designating the Government as mortgagee In the policy, on each
building, each building and Its contents. and materials, supplies, poles and
crossarms. owned by the Mortgagor, having a value at any one location in excess
of $5,000, or In excess of one percent of the total plant value, whichever is
larger, and In an amount not less than 80 percent of the current cost to replace
the property new. less actual depreciation.
The Mortgagor will also. from time to time, Increase or
supplement the classes and amounts of insurance specified above to the extent
requested by the Administrator or required to conform to the accepted practice
of the telephone industry for companies of the size and character of the
Mortgagor. The Mortgagor will, upon request of the majority noteholders, submit
to the noteholder or noteholders designated in such request a schedule of its
insuranc in effect on the date specified in such request. If the Mortgagor shall
at any time fail or refuse to take out or maintain insurance or to make changes
in
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respect thereof upon appropriate request by such noteholder or noteholders. such
noteholder or noteholders may take out such Insurance on behalf and in the name
of the Mortgagor, and the Mortgagor will pay the cost thereof.
(b) In the event of damage to or the
destruction or loss of any portion of the Mortgaged Property which shall be
covered by Insurance. unless the majority noteholders shall otherwise agree, the
Mortgagor shall replace or restore such damaged, destroyed or lost portion so
that the Mortgaged Property shall be in substantially the same condition as it
was in prior to such damage, destruction or loss, and shall deposit the proceeds
of the Insurance in the Special Construction Account required by the Telephone
Loan Contract to be applied for that purpose. The Mortgagor shall replace the
loss or shall commence such restoration promptly after such damage, destruction
or loss shall have occurred and shall complete such replacement or restoration
as expeditiously as practicable, and shall pay or cause to be paid out of the
proceeds of such insurance all costs and expenses in connection therewith so
that such replacement or restoration shall be so completed that the portion of
the Mortgaged Property so replaced or restored shall be free and clear of all
mechanics' liens and other claims.
(c) Sums recovered under any fidelity
bond by the Mortgagor for a loss of funds advanced under the notes or recovered
by a Mortgagee for any loss under such bond shall, unless otherwise directed by
the Mortgagee, be applied to the prepayment of the notes, p.Lq rata according to
the unpaid principal amounts thereof (such prepayments to be applied to such
installments thereof as may be designated by the respective noteholders at the
time of such prepayments) or to construct or acquire facilities approved by the
Mortgagee, which will become part of the Mortgaged Property.
(d) The foregoing insurance coverage
shall be obtained by means of bond and policy forms approved by regulatory
authorities, including standard REA endorsements and riders used by the
insurance industry to provide coverage for REA borrowers. Each policy or other
contract for such insurance shall contain an agreement by the Insurer that,
notwithstanding any right or cancellation reserved to such insurer. such policy
or contract shall continue in force for at least ten (10) days after written
notice to the Mortgagee of cancellation.
SECTION 8. In the event of the failure of the Mortgagor in any
respect to comply with the covenants and conditions herein contained with
respect to the procuring of insurance, the payment of taxes, assessments and
other charges, the keeping of the Mortgaged Property in repair and free of liens
and other claims or to comply with any other covenant contained in this
Mortgage, any noteholder or noteholders shall have the right (without prejudice
to any other rights arising by reason of such default) to advance or expend
moneys for the purpose of procuring such insurance, or for the payment of
Insurance premiums, taxes. assessments or other charges, or to save the
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Mortgaged Property from sale or forfeiture for any unpaid tax or assessment, or
otherwise. or to redeem the same from any tax or other sale, or to purchase any
tax title thereon, or to remove or purchase any mechanics' liens or other
encumbrance thereon, or to make repairs thereon or to comply with any other
covenant herein contained or to prosecute or defend any suit in relation to the
Mortgaged Property or In any manner to protect the Mortgaged Property and
thetitle thereto, and all sums so advanced for any of the aforesaid purposes
with interest thereon at the highest legal rate but not In excess of twelve per
centum (12%) per annum shall be deemed a charge upon the Mortgaged Property in
the same manner as the notes at the-time outstanding are secured and shall be
forthwith paid to the noteholder or noteholders making-such advance or advances
upon demand. It shall not be obligatory for any noteholder in making any such
advances or expenditures to inquire into the validity of any such tax title. or
of an of such taxes or assessments or sales therefor, or of any such mechanics'
liens or other encumbrance.
SECTION 9. The Mortgagor will not, without the approval in
writing of the majority noteholders: (a) enter into any contract or contracts
for the operation or, maintenance of all or any part of Its property, for the
use by others of any of the Mortgaged Property, or for toll traffic, operator
assistance, extended scope or switching services to be furnished by or for
connecting or other companies; provided, however, that such approval shall not
be required for any toll traffic or operator assistance contract which In form
and substance conforms with contracts in general use in the telephone industry-,
or (b) deposit any of Its funds, regardless of the source thereof, in any bank.
Institution or other depository which is not Insured by the Federal Government.
SECTION 10. (a) If this subsection is made applicable by the
Instruments Recital, the Mortgagor will not pay its directors or trustees, as
such, any salaries for their services, except such as shall have been approved
by the majority noteholders, provided that nothing herein contained shall
preclude any director or trustee from serving the Mortgagor in any other
capacity and receiving compensation therefor.
(b) Salaries, wages and other compensation
paid by the Mortgagor for services, and directors' or trustees' fees, shall be
reasonable and in conformity with the usual practice of corporations of the size
and nature of the Mortgagor. Except as specifically authorized in writing in
advance by the majority noteholders, the Mortgagor will make no advance payments
or loans, or In any manner extend its credit, either directly or indirectly,
with or without interest, to any of Its directors, trustees, officers,
employees, stockholders, members or affiliated companies, provided, however, the
Mortgagor may make an Investment for any purpose described in section 607(c)(2)
of the Rural Development Act of 1972 (including any investment In. or extension
of credit. guarantee or advance made to, an affiliated company of the Mortgagor
that is used by such company for such purpose) to the extent that, immediately
after such investment, (1) the aggregate of such Investments does not excee one
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third of the net worth (defined in Exhibit One) of the Mortgagor and (2) the
Mortgagor's net worth is at least twenty percent of its total assets (defined in
Exhibit One). As used in this section, the term "affiliated * companies" shall
have the meaning prescribed for this term by the Federal Communications
Commission in its prevailing uniform system of accounts for Class A telephone
companies.
SECTION 11. The Mortgagor will at all times keep, and safely
preserve,- proper books, records and accounts in which full and true entries
will be made of all of the dealings business and affairs of the Mortgagor, in
accordance with the methods and principles of accounting then prescribed by the
state regulatory body having jurisdiction over the Mortgagor, or In the absence
of such regulatory body or such prescription, by the Federal Communications
Commission in its uniform system of accounts for telecommunications companies,
as those methods and principles of accounting may be supplemented, from time to
time, by the Administrator. The Mortgagor will prepare and furnish each
noteholder not later than the thirtieth day of January in each year, or at such
more or less frequent Intervals when specified by the majority REA noteholders.
financial and statistical reports on its condition and operations. Such reports
shall be In such form and Include such Information as may be specified by the
majority REA noteholders. including without limitation an analysis of the
Mortgagor's revenues, expenses, and subscriber accounts. The Mortgagor will
cause to be prepared and furnished to each noteholder at least once during each
twelve (12)-month period during the term hereof, full and complete reports of
Its financial condition and cash flow as of a date (hereinafter called the
"Fiscal Date"), and a full and complete report of Its operations of the twelve
(12)month period ended on the Fiscal Date, all In form and substance
satisfactory to the majority REA noteholders, and will cause such reports to be
furnished to each noteholder within 120 days of the Fiscal Date, such reports
having been audited and certified by independent certified public accountants
satisfactory to said noteholders and accompanied by such reports of such audit
in form and substance satisfactory to said noteholders. The majority REA
noteholders. through Its or their representatives, shall at all times during
reasonable business hours have access to, and the right to inspect and make
copies of. any or all books, records and accounts, and any or all invoices,
contracts, leases, payrolls. canceled checks, statements and other documents and
papers of every kind belonging to or in possession of the Mortgagor and in
anywise pertaining to its property or business. The Mortgagor shall enter into
an audit agreement with an independent certified public accountant in form and
substance satisfactory to the majority REA noteholders.
SECTION 12. (a) The Mortgagor will from time to time upon
written demand of the majority noteholders make. execute, acknowledge and
deliver or cause to be made. executed, acknowledged and delivered all such
further and supplemental Indentures of mortgage, deeds of trust, mortgages,
financing statements, continuation statements, security agreements, instruments
and conveyances as may reasonably be requested by the majority noteholders
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and take or cause to be taken all such further action as may reasonably be
requested by the majority noteholders to effectuate the intention of these
presents and to provide for the securing and payment of the principal of and
interest on the notes according to the terms thereof and for the purpose of
fully conveying. transferring and confirming unto the Mortgagee the property
hereby conveyed, mortgaged and pledged. or intended so to be, whether now
owned-by the Mortgagor or hereafter acquired by it and t reflect the assignment
of the rights or Interests of the Mortgagee or of any noteholder hereunder or
under any note. The Mortgagor will cause this Mortgage and any and all
supplemental Indentures of mortgage, mortgages and deeds of trust and every
security agreement, financing statement, continuation statement and every
additional instrument which shall be executed pursuant to the foregoing
provisions forthwith upon execution to be recorded and filed and rerecorded .and
refiled as conveyances and mortgage and deeds of trust of and security interests
In real and personal property in such manner and in such places as may be
required by law or reasonably requested by the majority noteholders in order
fully to preserve the security for the notes and to perfect and maintain the
superior lien of this Mortgage and all supplemental Indentures of mortgage,
mortgages and deeds of trust and the rights and remedies of the Mortgagee and
the noteholders.
(b) In the event that the Mortgagor
has had or suffers a deficit in net income or net margins, as determined in
accordance with methods of accounting prescribed in Section 11 of Article II
hereof, for any of the five fiscal years immediately preceding the date hereof
or for any fiscal year while any of the notes are outstanding, the Mortgagor
will at any time or times upon written demand of the majority noteholders make,
execute, acknowledge and deliver or cause t be made, executed, acknowledged and
delivered all such further and supplemental Indentures of mortgage, mortgages,
security agreements, financing statements, Instruments and conveyances, and take
or cause to be taken all such further action, as may reasonably be requested by
the'majority noteholders in order to include in this Mortgage, as Mortgaged
Property, and to subject to all the terms and conditions of this Mortgage, all
right, title and Interest of the Mortgagor in and to, all and singular, the
automobiles, trucks, trailers, tractors, aircraft, ships and other vehicles then
owned by the Mortgagor. or which may thereafter be owned or acquired by the
Mortgagor. From and after the time of such written demand of the majority
noteholders such vehicles shall be deemed to be part of the Mortgaged Property
for all purposes hereof.
SECTION 13. Any noteholder may. at any time or times in
succession without notice to or the consent of the Mortgagor or any other
noteholder and upon such terms as such noteholder may prescribe, grant to any
person, firm or corporation who shall have become obligated to pay all or any
part of the principal of or interest on any note held by or indebtedness owed to
such noteholder or who may be affected by the lien hereby created, an extension
of the time for the payment of such principal or interest, and after
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any such extension the Mortgagor will remain liable for the payment of such note
or Indebtedness to the same extent as though it had at the time of such
extension consented thereto in writing.
SECTION 14. The Mortgagor, subject to applicable laws and
rules. and regulations and orders of regulatory bodies, will charge for
telephone service furnished by its rates which shall yield revenues at least
sufficient to enable the Mortgagor to pay and discharge all taxes and expenses
when due. and also to make any payment In respect of principal of and interest
on the notes when and as the same shall becorhe due. The Mortgagor will, not
less than ninety (90) days prior to the effective date of any proposed change in
its rate, F.Jve to the holder or holders of the notes at the time outstanding
written notice of such proposed change and a copy of a schedule showing the then
existing rates and the proposed changes therein.
SECTION 15. (a) Except as specifically authorized in writing
in advance by the majority noteholders, the Mortgagor will not declare or pay
any dividends on its capital stock. membership certificates or equity capital
certificates '(other than in shares of such capital stock or in such
certificates). or make any other distribution to its stockholders, members or
subscribers, or purchase, redeem or retire any of Its capital stock. membership
certificates or equity capital certificates, or make any investment in
affiliated companies (except as allowed by subsection (d) below), unless after
such action the Mortgagor's current assets (determined In accordance with
Exhibit One hereto) will equal or exceed Its current liabilities (determined in
accordance with Exhibit One hereto) (exclusive of current liabilities incurred
for additions to plant), and the Mortgagor's adjusted net worth (determined in
accordance with Exhibit One hereto) will be at least forty per centum (40%) of
its adjusted assets (determined in accordance with Exhibit One hereto), or the
sum of the following (whichever is the smaller amount):
(1) ten percentum (10%) of Its adjusted assets, plus
(2) thirty per centum (30%) of Its adjusted net worth, if any, in
excess of the amount represented by the percentage of
adjusted assets set out in the immediately preceding
subparagraph (1), plus
(3) thirty per centum (30%) of the amount of any reduction of Its
adjusted net worth after the date specified in the Instruments Recital,
resulting from the declaration or payment of dividends or
distributions, the purchase. redemption or retirement of its capital
stock, membership certificates or equity capital certificates or
investments In affiliated companies.
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adjusted net worth
(b) During such time or times as the Mortgagor's is less than ten
percentum (10%):
the Mortgagor will make no increase, without prior written approval of the
majority noteholders, in salaries, wages. fees and other compensation paid to
officers, directors, trustees, executives. or supervisors of the Mortgagor, or
to other employees having either a substantial ownership Interest In the
Mortgagor, or a close family relationship with officers, directors, trustees,
executives, supervisors, or holders of substantial ownership interests In the
Mortgagor, and
(2) the Mortgagor will promptly furnish the majority noteholders
with certified copies of the minutes of all meetings of its
stockholders, members, directors or trustees; and
(3) If the operation of the Mortgaged Property for the preceding
calendar year resulted in a decrease in the Mortgagor's retained
earnings (determined In accordance with Exhibit One hereto), the
Mortgagor shall upon the written direction of the majority noteholders,
take all required action to promptly (1) increase its charges for
telephone service or (2) execute a plan for reducing expenses, such
increase in charges and such plan to be submitted to all the
noteholders and to be acceptable to and approved in writing by the
majority noteholders.
(c) During such time or times as the
Mortgagor's adjusted net worth is less lian twenty per centum (20%) of Its
adjusted assets, the Mortgagor will promptly furnish the noteholders with a
detailed report on ownership or transfers of its capital stock, membership
certificates or equity capital certificates whenever requested in writing by the
majority noteholders, or whenever one per centum (1%) or more of its outstanding
ownership interests has been transferred since th last preceding report to such
noteholders on ownership interests or transfers.
(d) If the Mortgagor's net worth (defined In
Exhibit One hereto) is equal to at least 20 percent of its total assets (defined
In Exhibit One). then the term "Investment In affiliated companies" used In
subsection (a) of this section 15 shall not include investments by the Mortgagor
for any purpose described In section 607(c)(2) of the Rural Development Act of
1972 (including any investment in, or extension of credit, guarantee, or advance
made to an affiliated company o the Mortgagor that is used by such company for
such purpose) to the extent that. immediately after such investment. the
aggregate of such investments does not exceed one-third of the net worth of the
borrower.
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SECTION 16. In the event that the Mortgaged Property, or any
part thereof. shall be taken under the power of eminent domain, all proceeds and
avails therefrom, except to the extent that all noteholders shall consent to
other use and application thereof by the Mortgagor, shall forthwith be applied
by the Mortgagor: first, to the ratable payment of any indebtedness by this
Mortgage secured other than principal of or interest on the notes; second, to
the ratable payment of interest which shall have accrued on the notes and be
unpaid; third, to the ratable payment of or on account of the unpaid principal
of the notes: and fourth, the balance shall be paid to whosoever shall be
entitled thereto.
SECTION 17. The Mortgagor will well and truly observe and
perform 911 of the covenants, agreements, terms and conditions contained in. the
Consolidated Loan Agreement, on its part to be observed or performed.
SECTION 18. If this section is made applicable by the
Instruments Recital, then: (a) The Mortgagor will not at any time employ, or
enter into any contract for the employment of. any manager of its telephone
properties, unless such employment or such contract shall first have been
approved by the majority noteholders. (b) If. during such periods as the
Mortgagor shall be in default In the making of a payment or payments of
principal of or interest on one or more of the notes, the majority noteholders
shall give notice to the Mortgagor that In their opinion Its telephone
properties are not being efficiently operated, and shall request the termination
of the employment of any such manager, or shall request the termination of any
operating contract In respect of any such telephone properties, the Mortgagor
will terminate such employment or operating contract within thirty (30) days
after the date of such notice. (c) All contracts In respect of the employment of
any such manager or for the operation of such telephone properties shall contain
provisions to permit compliance with the foregoing covenants.
SECTION' 19. At all times when any note Is held by the
Government, or in the event the Government shall assign a note without having
Insured the payment of such note, this Mortgage shall secure payment of such
note for the benefit of the Government or such uninsured holder thereof, as the
case may be. Whenever any note may be sold to an Insured purchaser, it shall
continue to be considered a "note" as defined herein, but as to any such insured
note, the Government, and not such insured purchaser, shall be considered to be,
and shall have the rights of, the noteholder for purposes of this Mortgage.
Notice of the rights of the Government under the preceding sentence shall be set
forth in all such Insured notes. As to any note which may evidence the
obligations of the Mortgagor to the Government on account of a guarantee or
guarantees made by the Government pursuant to the Act of the repayment of a loan
or loans made by a legally organized lending agency or agencies to the
Mortgagor, the Government, and not such legally organized lending agency or
agencies, shall be considered to be, and shall have the rights of, the
noteholder for purposes of this Mortgage
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SECTION 20. (a) The Mortgagor, subject to applicable laws and
rules and orders of regulatory bodies, shall design its rates for telephone
service and other services furnished by it with a view to paying and discharging
ail taxes, maintenance expenses and operating expenses of its telephone system.
and also to making all payments in respect of principal of and interest on the
notes when and as the same shall become due, to providing and maintaining
reasonable working capital for the Mortgagor and to maintaining an Average TIER
on all of the outstanding indebtedness to the Government and all other lenders
of not less than 1.00 during the Forecast Period described in the Instruments
Recital and the TIER specified in the Instruments Recital after the Forecast
Period.
(b) For purposes of this section 20
Average TIER shall be determined as of January 1 of each year during which any
obligation secured by the Mortgage remains unsatisfied and shall mean the
average of the two highest TIER ratios achieved by the Mortgagor during each of
the three calendar years last preceding the various dates of its determination.
Mortgage.
(c) As used in this section 20,
TIER means the Mortgagor's net income or net margins (determined in accordance
with Exhibit One hereto) plus Interest expenses (determined in accordance with
Exhibit One hereto) divided by Interest expense.
SECTION 21. (a) Current assets, current liabilities, net
worth, adjusted net worth, adjusted assets, retained earnings, net income or net
margins, interest expense, taxes, and total assets, as used in sections 10, 15
or 20 of Article II of this Mortgage, are determined in accordance with Exhibit
One of this Mortgage. Net plant and secured debt, if referred to in this
Mortgage, are also determined in accordance with Exhibit One.
(b) Accounting terms used in this
Mortgage shall also apply to accounts or groups of accounts of the Mortgagor,
regardless of the account title or the system of accounts used, if such accounts
have substantially the same meaning as those prescribed by the Federal
Communications Commission in its prevailing uniform system of accounts for
telecommunications companies (47 CFR Part 32).
SECTION 22. Exhibit One, attached hereto, is made a part of this
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ARTICLE III
REMEDIES OF THE MORTGAGEE AND NOTEHOLDERS
SECTION 1. If one or more of the following events (hereinafter
called "events of default") shall happen, that is to say:
(a) default shall be made in the payment of any installment of or on
account of Interest on or principal of any note or notes when and as the same
shall be required to be made and such default shall continue for thirty (30)
days;
(b) default shall be made in the due observance or performance of any
other of the representations, warranties, covenants, conditions or agreements on
the part of the Mortgagor in any of the notes or in this Mortgage or in the
Consolidated Loan Agreement contained; and such default shall continue for a
period of thirty (30) days after written notice specifying such default and
requiring the same to be remedied shall have been given to the Mortgagor by any
noteholder;
(c) the Mortgagor shall file a petition in bankruptcy or be adjudicated
a bankrupt or Insolvent, or shall make an assignment for the benefit of Its
creditors, or shall consent to the appointment of a receiver of itself or of Its
property, or shall Institute proceedings for its reorganization or proceedings
instituted by others for its reorganization shall not be dismissed within thirty
(30) days after the institution thereof;
(d) a receiver or liquidator of the Mortgagor or of any substantial
portion of Its property shall be appointed and the order appointing such
receiver or liquidator shall not be vacated within thirty (30) days after the
entry thereof;
(e) the Mortgagor shall forfeit or otherwise be deprived of its
corporate charter or franchises, permits or licenses required to carry on any
material portion of its business;
(f) a final judgment shall be entered against the Mortgagor and shall
remain unsatisfied or without a stay in respect thereof for a period of thirty
(30) days; or
then in each and every such case any noteholder may, by notice in writing to the
Mortgagor and delivery of a copy thereof to the other noteholders, declare all
unpaid principal of and accrued Interest on any or all notes held by such
noteholder to be due and payable immediately; and upon any such declaration all
such unpaid principal and accrued interest so declared to be due and payable
shall become and be due and payable. immediately, anything contained
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herein or In any note or notes to be the contrary notwithstanding; provided.
however, that if at any time after the unpaid principal of and accrued interest
on any of the notes shall have been so declared to be due and payable, all
payments in respect of principal and interest which shall have become due and
payable by the terms of such note or notes shall be paid to the respective
noteholders, and all other defaults hereunder and under the notes shall have
been made good or secured to the satisfaction of all of the noteholders, then
and In every such case, the noteholder or noteholders who shall have declared
the principal of and Interest on notes held by such noteholder or noteholders to
be due and payable may, by written-notice to the Mortgagor and delivery of a
copy thereof to the other noteholders, annul such declaration or declarations
and waive such default or defaults and the consequences thereof, but no such
waiver shall extend to or affect any subsequent default or impair any right
.consequent thereon.
SECTION 2. If one or more of the events of default shall
happen. the majority noteholders, for itself or themselves, and as the agent or
agents of the other noteholders, personally or by attorney, In its or their
discretion, may, insofar as not prohibited by law:
(a) take immediate possession of the Mortgaged Property, collect and
receive all credits, outstanding accounts and bills receivable of the Mortgagor
and all rents, Income, revenues and profits pertaining to or arising from the
Mortgaged Property, or any part thereof, and issue binding receipts therefor;
and manage, control and operate the Mortgaged Property as fully as the Mortgagor
might -do if in possession thereof, including, without limitation, the making of
all repairs or replacements deemed necessary or advisable;
(b) proceed to protect and enforce the rights of the Mortgagee and the
rights of the noteholder or noteholders under this Mortgage by suits or actions
in equity or at law in any court or courts of competent jurisdiction. whether
for specific performance of any covenant or any agreement contained herein or In
aid of the execution of any power herein granted or for the foreclosure hereof
or hereunder or for the sale of the Mortgaged Property, or any part thereof, or
to collect the debts hereby secured or for the enforcement of such other or
additional appropriate legal or equitable remedies as may be deemed most
effectual to protect and enforce the rights and remedies herein granted or
conferred, and In the event of the Institution of any such action or suit the
noteholder or noteholders Instituting such action or suit shall have the right
to have appointed a receiver of the Mortgaged Property and of all rents, Income,
revenues and profits pertaining thereto or arising therefrom derived, received
or had from the time of the commencement of such suit or action. and such
receiver shall have ail the usual powers and duties of receivers, in like and
similar cases, to the fullest extent permitted by law, and if application shall
be made for the appointment of a receiver the Mortgagor
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hereby expressly consents that the court to which such application shall be made
may make said appointment; and
(c) sell or cause to be sold all-and singular the Mortgaged Property or
any part thereof, and all right, title. interest-cialm and demand of the
Mortgagor therein or thereto, at public auction at such place in any county in
which the property to be sold, or any part thereof is located, at such time and
upon such terms as may be specified in a notice of sale, which shall state the
time when and the place where the sale Is to be held. shall contain a brief
general description of the property to be sold, and shall be given by mailing a
copy thereof to the Mortgagor at least fifteen (15) days prior to the date fixed
for such sale and by publishing the same once in each week for two successive
calendar weeks prior to the date of such sale In a newspaper of general
circulation published in said county, or if no such newspaper is published in
such county, In a newspaper of general circulation in such county, the first
such publication to be not less than fifteen (15) days nor more than thirty (30)
days prior to the date fixed for such sale. Any sale to be made under this
subparagraph (c) of this section 2 may be adjourned from time to time by
announcement at the time and place appointed for such sale or for such adjourned
sale or sales, and without further notice or publication the sale may be had at
the time and place to which the same shall be adjourned, provided, however, that
in the event another or different notice of sale or another or different manner
of conducting the same shall be required by law the notice of sale shall be
given or the sale shall be conducted, as the case may be. in accordance with the
applicable provisions of law.
SECTION 3. If, within thirty (30) days after the majority
noteholders shall have had knowledge of the happening of an event or events of
default, such noteholder or noteholders shall not have proceeded to exercise the
rights or to enforce the remedies herein or by law conferred upon or reserved to
the Mortgagee or to the noteholders. then, and only then. any noteholder, for
itself and as the agent of the other noteholders, may proceed forthwith to
exercise such rights and to enforce such remedies. Nothing herein contained
shall, however, affect or impair the right, which is absolute and unconditional,
of any holder of any note which may be secured hereby to enforce the payment of
the principal of or interest on such note on the date or dates any such interest
or principal shall become due and payable in accordance with the terms of such
note.
SECTION 4. At any sale hereunder any noteholder or noteholders
shall have the right to bid for and purchase the Mortgaged Property, or such
part thereof as shall be offered for sale, and any noteholder or noteholders may
apply in settlement of the purchase price of the property so purchased the
portion of the net proceeds of such sale which would be applicable to the
payment on account of the principal of and Interest on the note or notes held
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by such noteholder or noteholders, and such amount so applied shall be credited
as a payment on account of principal of and interest on the note or notes held
by such noteholder or noteholders.
SECTION 5. Any proceeds or funds arising from the-exercise of
any rights or the enforcement of any remedies herein provided after the payment
or provision for the payment of any and all costs and expenses in connection
with the exercise of such rights or the enforcement of such remedies shall be
applied first, to the payment of Indebtedness hereby secured other than the
principal of or interest on the notes; second, to the ratable payment of
interest which shall have accrued on the notes and which shall be unpaid, third,
to the ratable payment of or.on account of the unpaid principal of the notes;
and the balance, if any, shall be paid to whosoever shall be entitled thereto.
SECTION 6. The Mortgagor covenants that it will give immediate
written notice to the Mortgagee and to all of the noteholders of the occurrence
of an event of default.
SECTION 7. Every right or remedy herein conferred upon or
reserved to the Mortgagee or to the noteholders shall be cumulative and shall be
in addition to every other right and remedy given hereunder or now or hereafter
existing at law, or in equity, or by statute. The pursuit of any right or remedy
shall not be construed as an election.
SECTION 8. The Mortgagor, for itself and all who may claim
through or under It, covenants that It will not at any time Insist upon or
plead, or in any manner whatever claim, or take the benefit or advantage of, any
appraisement, valuation, stay, extension or redemption laws now or hereafter in
force in any locality where any of the Mortgaged Property may be situated, In
order to prevent, delay or hinder the enforcement or foreclosure of this
Mortgage, or the absolute sale of the Mortgage Property, or any part thereof, or
the final and absolute putting into possession thereof, Immediately after such
sale, of the purchaser or purchasers thereat, and the Mortgagor, for Itself and
all who may claim through or under it, hereby waives the benefit of all such
laws unless such waiver shall be forbidden by law.
ARTICLE IV
POSSESSION UNTIL DEFAULT-DEFEASANCE CLAUSE
SECTION 1. Until some one or more of the events of default
shall have happened, the Mortgagor shall be suffered and permitted to retain
actual possession of the Mortgaged Property, and to manage, operate and use the
same and any part thereof, with the rights and franchises appertaining thereto,
and to collect, receive, take, use and enjoy the rents, revenues, issues,
earnings,
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income, products and profits thereof or therefrom, subject to the provisions of
this Mortgage.
SECTION 2. If the Mortgagor shall well and truly pay or cause
to be paid the whole amount of the principal of and interest on the notes at the
time and In the manner therein provided, according to the true intent and
meaning thereof, and shall also pay or cause to be paid all other sums payable
hereunder by the Mortgagor and shall well and truly keep and perform according
to the true intent and meaning of this Mortgage, all covenants herein required
to be kept and performed by it, then and In that case, all property, rights and
Interests hereby conveyed or assigned or pledged shall revert to the Mortgagor
and the estate, right, title and Interest of the Mortgagee and the noteholders
shall thereupon cease, determine and become void and the Mortgagee and the
noteholders, In such case, on written demand of tne Mortgagor but at the
Mortgagor's cost and expense, shall enter satisfaction of this Mortgage upon the
record. In any event, each noteholder, upon payment in full to him by the
Mortgagor of-all principal of and interest on any note held by him and the
payment and discharge by the Mortgagor of all charges due to such noteholder
hereunder, 'Shall execute and deliver to the Mortgagor such Instrument of
satisfaction, discharge or release as shall be required by law in the
circumstances.
ARTICLE V
MISCELLANEOUS
SECTION 1. It is hereby declared to be the intention of the Mortgagor that
all lines, or systems, embraced in the Mortgaged Property, Includinp, without
limitation, all rights of way and easements granted or given to the Mortgagor or
obtained by it to use real property in connection with the construction,
operation or maintenance of such lines, or systems, and all service and
connecting lines, poles, posts, crossarms, wires, cables, conduits, ducts.
connections and fixtures forming part of. or used In connection with, such
lines, or systems, and all other property physically attached to any of the f
oregoingdescribed property, shall be deemed to be real property.
SECTION 2. To the extent that any property described or referred to in this
Mortgage is governed by the provisions of the Uniform Commercial Code, this
Mortgage is hereby deemed a "security agreement" under the Uniform Commercial
Code, and this Mortgage is also hereby declared to be a "financing statement"
under the Uniform Commercial Code for said security agreement. The mailing
address of the Mortgagor as debtor and the Mortgagee as secured party are as set
forth in Section 6 of this Article V.
SECTION 3. All acts and obligations of the Mortgagor hereunder shall be
subject to all applicable orders, rules and regulations, now or hereafter
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100% REA Loan No Prior Bank Loan
(RES-REA.NPB) 9/91
in effect, of all regulatory bodies having jurisdiction in the premises, to the
end that no act or omission to act on the part of the Mortgagor shall constitute
a default hereunder insofar as such act or omission shall have been required by
reason of any order, rule or regulation of any such regulatory body.
SECTION 4. All of the covenants, stipulations, promises,
undertakings and agreements herein contained by or on behalf of the Mortgagor
shall bind its successors and assigns, whether so specified or not, and all
titles, rights and remedies hereby granted to or conferred upon the Mortgagee
shall pass to and Inure to the benefit of the successors and assigns of the
Mortgagee and shall be deemed to be granted or conferred for the ratable benefit
and security of all who shall from time to tim be the holders of notes executed
and delivered as herein provided.
SECTION 5. The descriptive headings of the various articles of
this Mortgage were formulated and inserted for convenience only and shall not be
deemed to affect the meaning or construction of any of the provisions hereof.
SECTION 6. All demands, notices, reports, approvals,
designations, or directions required or permitted to be given hereunder shall be
in writing and shall be deemed to be properly given if mailed by registered mail
addressed to the proper party or parties at the following addresses:
As to the Mortgagor:
As to the Mortgagee:
Western New Mexico Telephone Company, Inc.
P. 0. Box 3079
Silver City, New Mexico 88062-3079
Rural Electrification Administration
Washington, D. C. 20250-1500
and as to any other person, firm, corporation or governmental body or agency
having an interest herein by reason of being the holder of any note or
otherwise. at the last address designated by such person, firm, corporation,
governmental body or agency to the Mortgagor and the Mortgagee. The Mortgagor or
the Mortgagee may from time to time designate to one another a new address to
which demands, notices, reports, approvals, designations or directions may be
addressed and from and after any such designatio the address designated shall be
deemed to be the address of such party in lieu of the address hereinabove given.
The Mortgagor will promptly notify the Mortgagee in writing of any change in
location of its chief place of business or the office where its records
concerning accounts and contract rights are kept.
SECTION 7. The invalidity of any one or more phrases, clauses,
sentences, paragraphs or provisions shall not affect the remaining portions of
this Mortgage, nor shall any such invalidity as to any holder of notes hereunder
affect the rights hereunder of any other holder of notes.
25
<PAGE>
(Seal)
Attest:
Secretary
Executed by the Mortgagor in the presence of:
Witnesses
Executed by the Mortgagee in the presence of:
Witnesses
Restated Mortgage - Telephone
100% REA Loan No Prior Bank Loan
(RES-REA.NPB) 9/91
SECTION 8. This Mortgage may be simultaneously executed in any
number of counterparts, and all said counterparts executed and delivered, each
as an original, shall constitute but one and the same instrument.
IN WITNESS WHEREOF, WESTERN NEW MEXICO TELEPHONE COMPANY,
INC., as Mortgagor and debtor, has caused this Mortgage to be signed in its name
and its corporate seal to be hereunto affixed and attested by Its officers
thereunto duly authorized, and UNITED STATES OF AMERICA, as Mortgagee and
secured party, has caused this Mortgage to be duly executed in its behalf, all
as of the day and year first above written.
WESTERN NEW MEXICO TELEPHONE COMPANY,INC.
by
President
UNITED STATES
by
26
Administrator of the
Electrification Administration
[GRAPHIC OMITTED]
<PAGE>
STATE OF NEW MEXICO
COUNTY OF
Ss
The foregoing instrument was acknowledged before me this day of
19 , by , President of Western New Mexico
Telephone Company, Inc., a New Mexico corporation, on behalf of said
corporation.
Notary Public
(Notarial Seal)
My commission expires:
DISTRICT OF COLUMBIA
) SS
BEFORE ME, a Notary Public, in and for the District of Columbia,
appeared in person the within named JAM B. HUFF, SR. ,
Administrator
of the Rural Electrification Administration, United States of America, to me
personally known, and known to be the identical person who subscribed the
foregoing instrument in said capacity, and who, after being by me duly sworn,
stated that he is duly authorized to execute the foregoing instrument for and in
the name and behalf of the United States of America, and further stated and
acknowledged that he had executed the foregoing instrument as the free and
voluntary act and deed of the United States of America, for the consideration,
uses and purposes therein mentioned and set forth.
IN TESTIMONY WHEREOF hereunto set my hand and on
seal this day of 19 Notary
(Notarial Seal)
My commission expires:
Exhibit 21
----------
Subsidiaries of the Registrant
- ------------------------------
<TABLE>
<CAPTION>
Owned by
Subsidiary Lynch
- ---------- -----
<S> <C>
Brighton Communications Corporation ............ 100.0%
Lynch Telephone Corporation IV ............... 100.0%
Bretton Woods Telephone Company ............ 100.0%
World Surfer, Inc. ......................... 100.0%
Lynch Kansas Telephone Corporation ........... 100.0%
Lynch Telephone Corporation VI ............. 98.0%
JBN Telephone Company, Inc. .............. 98.0%
JBN Finance Corporation ................ 98.0%
Giant Communications, Inc. ................. 100.0%
Lynch Telephone Corporation VII ............ 100.0%
USTC Kansas, Inc. ........................ 100.0%
Haviland Telephone Company, Inc. ........ 100.0%
Haviland Finance Corporation .......... 100.0%
DFT Communications Corporation ............... 100.0%
Dunkirk & Fredonia Telephone Company ....... 100.0%
Cassadaga Telephone Company .............. 100.0%
Macom, Inc. ............................ 100.0%
Comantel, Inc. ........................... 100.0%
Erie Shore Communications, Inc. ........ 100.0%
D&F Cellular Telephone, Inc. ........... 100.0%
DFT Long Distance Corporation .............. 100.0%
DFT Local Service Corporation .............. 100.0%
LMT Holding Corporation ...................... 100.0%
Lynch Michigan Telephone Holding Corporation 100.0%
Upper Peninsula Telephone Company ........ 100.0%
Alpha Enterprises Limited ................ 100.0%
Upper Peninsula Cellular North, Inc. ... 100.0%
Upper Peninsula Cellular South, Inc. ... 100.0%
Global Television, Inc. ...................... 100.0%
Inter-Community Acquisition Corporation ...... 100.0%
Home Transport Service, Inc. ................. 100.0%
Lynch Capital Corporation .................... 100.0%
Lynch Entertainment, L.L.C ................... 100.0%
Lynch Entertainment Corporation II ........... 100.0%
Lynch Multimedia Corporation ................. 100.0%
CLR Video, L.L.C ........................... 60.0%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Owned by
Subsidiary Lynch
- ---------- -----
<S> <C> <C>
The Morgan Group, Inc. ........................... 70.1%(V)/54.4%(O)
Morgan Drive Away, Inc. ........................ 70.1%(V)/54.4%(O)
Transport Services Unlimited, Inc. ........... 70.1%(V)/54.4%(O)
Interstate Indemnity Company ................... 70.1%(V)/54.4%(O)
Morgan Finance, Inc. ........................... 70.1%(V)/54.4%(O)
TDI, Inc. ...................................... 70.1%(V)/54.4%(O)
Home Transport Corporation ................... 70.1%(V)/54.4%(O)
MDA Corporation .............................. 70.1%(V)/54.4%(O)
Lynch PCS Communications Corporation ........... 100.0%
Lynch PCS Corporation A ...................... 100.0%
Lynch PCS Corporation F ...................... 100.0%
Lynch PCS Corporation G ...................... 100.0%
Lynch PCS Corporation H ...................... 100.0%
Lynch Telephone Corporation .................... 83.1%
Western New Mexico Telephone Company, Inc. ... 83.1%
Interactive Networks Corporation ............. 83.1%
WNM Communications Corporation ............... 83.1%
Wescel Cellular, Inc. ........................ 83.1%
Wescel Cellular of New Mexico, L.P. ........ 42.4%
Wescel Cellular, Inc. II ..................... 83.1%
Northwest New Mexico Cellular, Inc. ........ 40.6%
Northwest New Mexico Cellular of New Mexico, 20.7%
L.P. .............................................
Enchantment Cable Corporation ............ 83.1%
Lynch Telephone II, L.L.C ...................... 100.0%
Inter-Community Telephone Company, L.L.C ..... 100.0%
Inter-Community Telephone Company II, L.L.C 100.0%
Inter-Community Acquisition Corporation
Valley Communications, Inc. .................. 100.0%
Lynch Telephone Corporation III ................ 81.0%
Cuba City Telephone Exchange Company ......... 81.0%
Belmont Telephone Company .................... 81.0%
Lynch Telephone Corporation IX ................. 100.05
Central Scott Telephone Company .............. 100.0%
CST Communications, Inc. ..................... 100.0%
<FN>
Notes: (V)=Percentage voting control; (O)=Percentage of equity ownership
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial informatin extracted from the
Company's Financial Statements as of June 30, 1999 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<CIK> 0001088771
<NAME> LYNCH INTERACTIVE
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLAR
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> JUN-30-1999 DEC-31-1998
<EXCHANGE-RATE> 1 1
<CASH> 17,972 27,021
<SECURITIES> 1,283 967
<RECEIVABLES> 19,660 19,173
<ALLOWANCES> (288) (320)
<INVENTORY> 0 0
<CURRENT-ASSETS> 50,304 58,047
<PP&E> 142,178 140,089
<DEPRECIATION> (53,296) (48,906)
<TOTAL-ASSETS> 215,356 246,092
<CURRENT-LIABILITIES> 45,572 52,390
<BONDS> 116,069 119,024
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 27,064 39,313
<TOTAL-LIABILITY-AND-EQUITY> 215,356 246,092
<SALES> 102,937 205,076
<TOTAL-REVENUES> 102,937 205,076
<CGS> 88,665 176,369
<TOTAL-COSTS> 95,113 188,419
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (5,247) 10,383
<INCOME-PRETAX> (11,692) 11,165
<INCOME-TAX> 3,766 (5,012)
<INCOME-CONTINUING> (8,357) 4,929
<DISCONTINUED> 0 0
<EXTRAORDINARY> (160) 0
<CHANGES> 0 0
<NET-INCOME> (8,517) 4,929
<EPS-BASIC> 0 0
<EPS-DILUTED> 0 0
</TABLE>
August 23, 1999
To Lynch Stockholders:
I am writing to advise you about a spin off of the stock of Lynch Interactive
Corporation, which you will receive shortly through a distribution on your Lynch
common stock.
Lynch Interactive will consist primarily of the multimedia and services
businesses of Lynch Corporation. Upon the spin off, Lynch Corporation will
continue to own the manufacturing businesses of Lynch Corporation.
Lynch Interactive had revenues of $205.1 million for the year ended December 31,
1998 compared to revenues of $309.5 million for Lynch's manufacturing
businesses. At December 31, 1998, the total assets of Lynch Interactive were
$246.1 million compared to assets of $251.6 million for Lynch's manufacturing
businesses.
I believe that the division of Lynch Corporation's businesses into a multimedia
and services company and a manufacturing company is in the best interests of
Lynch Corporation and its shareholders. It is intended to improve management
focus, facilitate and enhance financings and set the stage for future growth. It
could also help surface the underlying values of Lynch Corporation as the
different business segments appeal to differing "value" and "growth" cultures in
the investment community.
For each share of Lynch Common Stock owned by you on August 23, 1999, you will
receive one share of Common Stock of Lynch Interactive. The distribution is
expected to be made on or about September 1, 1999 (or as promptly thereafter as
practicable). Shareholders do not have to take any action to receive their
Interactive shares.
For further information about Lynch Interactive and the spin off, please read
the enclosed Information Statement. As described more fully in the Information
Statement, Lynch has received a private letter ruling from the Internal Revenue
Service that the spin off will not be taxable to the shareholders of Lynch and
Lynch itself.
Mario J. Gabelli
Chairman of the Board and
Chief Executive Officer
1
<PAGE>
LYNCH INTERACTIVE CORPORATION
Information Statement Dated August 19, 1999
Re: Proposed Spin Off of Lynch Interactive Corporation
This Information Statement is being furnished in connection with the spin off
(the "Spin Off") by Lynch Corporation ("Lynch") to holders of its common stock,
no par value per share ("Lynch Common Stock"), of all the outstanding shares of
common stock, par value $.0001 per share ("Interactive Common Stock"), of Lynch
Interactive Corporation, ("Interactive"). Lynch has transferred or will transfer
to Interactive all of the multimedia and services businesses formerly conducted
by Lynch, plus certain other assets. See "Business of Interactive."
Shares of Interactive Common Stock will be distributed to holders of Lynch
Common Stock of record as of the close of business on August 23, 1999 (the
"Record Date"). Each such holder will receive one share of Interactive Common
Stock for each one share of Lynch Common Stock held on the Record Date. The Spin
Off is expected to become effective at 12:01 a.m. on September 1, 1999 (or as
promptly thereafter as practicable). No consideration will be paid by Lynch's
shareholders for shares of Interactive Common Stock. There is no current trading
market for Interactive Common Stock. The Company has applied to list Interactive
Common Stock on the American Stock Exchange.
In reviewing this Information Statement, you should carefully consider the
matters described under the caption "Risk Factors" on pages 7 - 10.
NO SHAREHOLDER APPROVAL OF THE DISTRIBUTION IS REQUIRED OR
SOUGHT. WE ARE NOT ASKING YOU FOR A PROXY AND YOU
ARE REQUESTED NOT TO SEND US A PROXY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS INFORMATION STATEMENT. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Information Statement is being furnished by Lynch solely to provide
information to shareholders of Lynch who will receive Interactive shares in the
Spin Off. It is not, and is not to be construed as, an inducement or
encouragement to buy or sell any securities of Lynch or Interactive. The
information contained in this Information Statement is believed by Lynch and
Interactive to be accurate as of the date set forth on its cover. Changes may
occur after that date, and neither Lynch nor Interactive will update the
information except in the normal course of their respective public disclosure
practices.
2
<PAGE>
<TABLE>
INDEX
Item Page
<S> <C>
Summary .......................................................... 4
Forward Looking Information ...................................... 5
Interactive ...................................................... 5
Listing and Trading of Interactive Common Stock .................. 6
Risk Factors ..................................................... 7
Capitalization of Interactive .................................... 10
Selected Financial Data .......................................... 11
Management Discussion and Analysis of
Financial Condition and Results of Operations ............... 12
Business of Interactive .......................................... 19
I Multimedia .......................................... 19a
II Services ............................................ 28
III Spinnaker Stock ..................................... 32
IV Other Information ................................... 32
Relationship Between Lynch and Interactive After the Spin Off .... 33
Executive Officers and Directors of Interactive .................. 34
Corporate Expense ................................................ 38
Transactions with Certain Affiliated Persons ..................... 39
Principal Stockholders of Interactive ............................ 39
Description of Capital Stock of Interactive ...................... 40
Federal Income Tax Consequences of Spin Off ...................... 41
Available Information ............................................ 43
Index to Combined Financial Statements ........................... F-1
Combined Financial Statements .................................... F-2
</TABLE>
3
<PAGE>
Summary
1. Split Up of Lynch Corporation. Lynch Corporation ("Lynch") intends to split
the Corporation into two parts:
(i) Lynch Interactive Corporation ("Interactive" or the "Company"), which
would at the Spin Off own Lynch's multimedia and services businesses.
In addition, Interactive would own 1 million shares of Common Stock of
Spinnaker Industries, Inc. (representing approximately 13.6% of the
equity and approximately 2.5% of the vote)(AMEX:SKK) ("Spinnaker"),
Lynch's approximately 61% owned manufacturing subsidiary. These shares
could be sold as needed to fund, in part, Lynch Interactive's proposed
growth plans. Interactive had revenues of $205.1 million for the year
ended December 31, 1998 and total assets of $246.1 million at December
31, 1998; and
(ii) Lynch Corporation, which would continue to own Lynch's manufacturing
businesses. Lynch had revenues of $309.5 million for the year ended
December 31, 1998 and total assets of $251.6 million at December 31,
1998.
2. How Effected. The split would be effected by Lynch distributing to its
shareholders, in the form of a stock dividend, one share of Interactive
Common Stock for each outstanding share of Lynch Common Stock. Lynch
shareholders do not have to take any action to receive their
Interactive shares.
3. Purpose. The purpose of the Spin Off is to improve management focus,
facilitate and enhance financings and position the two companies for
future growth. The Spin Off could also help surface the underlying
values of Lynch as the different business segments appeal to differing
"value" and "growth" cultures in the investment community. By
simplifying Lynch, it is expected that each company would be more
easily understood by investors.
4. Timing. Lynch expects to distribute the stock dividend on or about
September 1, 1999 (or as promptly thereafter as practicable), to
shareholders of record as of the close of business on August 23, 1999.
5. Non-Taxable. Lynch has obtained a private letter ruling from the
Internal Revenue Service which holds that the value of the stock
distributed as a dividend in the Spin Off is not taxable to the
recipient.
See "Federal Income Tax Consequences."
6. Stock Exchange Listing. It is expected that Lynch common stock will
remain listed on the American Stock Exchange ("AMEX"). Interactive has
applied for the listing of its common stock on the AMEX.
7. Dividend Policy. Lynch has not paid any cash dividends on its Common
Stock since 1989. Interactive does not expect to pay cash dividends on
its Common Stock in the foreseeable future. Interactive currently
intends to retain its earnings, if any, for use in its business. Future
financings may limit or prohibit the payment of dividends.
8. Relationship with Lynch. Following the Spin Off, Interactive will be
an independent public company, and Lynch will have no continuing stock
ownership interest in Interactive. Six current directors of Lynch will
become the initial directors of Interactive. It is expected that for a
period of no more than three years following the Spin Off, the
executive officers of current Lynch will also be executive officers of
Interactive. At the Spin Off, the employees of the corporate office of
Lynch will become employees of Interactive, and Lynch will be charged
a management fee for corporate services provided by the Interactive
corporate office to Lynch. Lynch will initially have no corporate
office employees of its own. Prior to the Spin Off, Lynch and
Interactive will enter into and execute a Separation Agreement
governing their relationship subsequent to the Spin Off, including the
provision of management services and the allocation of tax and certain
other liabilities and obligations.
4
<PAGE>
FORWARD LOOKING INFORMATION
This Information Statement contains certain forward looking
information, including without limitation "Listing and Trading of Interactive
Common Stock," "Risk Factors," "Business of Interactive - harvesting of assets"
initiative, "Business of Interactive-I. Multimedia" - "Regulatory Environment"
and "Competition" and possible changes thereto, "Business of Interactive- I.
Multimedia -Competition ," "Business of Interactive- Multimedia- Personal
Communications Services ("PCS")," "Business of Interactive-Morgan's Growth
Strategy," "Management's Discussion and Analysis of Financial Condition and
Results of Operations of Interactive" including financing requirement and
alternatives, the harvesting and cost cutting initiatives, quantitative and
qualitative disclosure about market risk, and Year 2000 matters, and "Notes to
Financial Statements of Interactive." It should be recognized that such
information are estimates or forecasts based upon various assumptions, including
the matters referred to therein, as well as meeting Interactive's internal
performance assumptions regarding expected operating performance and the
expected performance of the economy and financial markets as it impacts the
Company's businesses. As a result, such information is subject to uncertainties,
risks and inaccuracies.
Interactive
At the time of the Spin Off, Interactive will hold the multimedia and
services businesses of Lynch.
The multimedia business currently consists of the
(i) ownership of eleven rural telephone companies (with minority
interests of 0% to 20%) in eight states serving approximately
43,600 access lines as of December 31, 1998, and companies
offering related telecommunications services;
(ii) a 20% interest and a 50% interest (after conversion of
preferred stock), respectively, in two network televison
stations, one serving the Rock Island and Moline, Illinois and
Davenport and Bettendorf, Iowa markets and the other serving
the Ames/Des Moines, Iowa market (these interests are
accounted for under the equity basis); and
(iii) minority investments in entities holding personal
communications services ("PCS") licenses.
Interactive's strategy is to grow its telecommunications businesses
through an active acquisition program, providing services to new customers, or
additional services to existing customers, upgrading existing customers to
higher levels of service and by offering related services in its existing
service areas and areas adjacent to existing service areas. In mid-July 1999, an
Interactive subsidiary acquired Central Scott Telephone Company for
approximately $28 million, which is included in clause (i) of the preceding
paragraph.
The services businesses are conducted through Lynch's 55% (as of June
30, 1999) owned subsidiary, The Morgan Group, Inc. (AMEX:MG)("Morgan"). Morgan
is the nations's largest publicly owned service company in managing the delivery
of manufactured homes, commercial vehicles and specialized equipment in the
United States. Morgan provides outsourcing transportation services through a
national network of approximately 1,530 independent owner operators and
approximately 1,810 other drivers. Morgan dispatches its drivers from 108
locations in 32 states. Morgan's largest customers include Oakwood Homes
Corporation, Fleetwood Enterprises, Inc., Champion Enterprises, Inc., Winnebago
Industries, Inc., Clayton Homes, Inc., Cavalier Homes, Inc., Palm Harbor Homes,
Inc. Four Seasons Housing, Inc., Ryder Systems, Inc. and Fairmont Homes, Inc.
Morgan's services also include providing certain insurance and financing
services to its owner operators.
5
<PAGE>
Morgan's strategy is to grow through expansion in the niche businesses
already being serviced with particular emphasis on outsourcing, along with
pursuing acquisitions of niche transportation carriers who are servicing their
customer base with unique service and/or equipment. In addition, Morgan will
look to expand insurance product offerings to drivers through its subsidiary
Interstate Indemnity Company and to broaden its financing activities through
Morgan Finance, Inc.
Interactive will also own 1,000,000 shares of Common Stock of Spinnaker
(13.6% of the total common equity and 2.5% of the total voting power). Spinnaker
is a leading manufacturer of adhesive backed paper label stock for the packaging
industry and a major supplier of stock for pressure sensitive U.S. postage
stamps.
In April 1999, Spinnaker announced that it had entered into contracts to sell
its industrial tape businesses, which were closed on July 30, 1999 and August
10, 1999. See "Business of Interactive - Spinnaker Stock."
Listing and Trading of Interactive Common Stock
There is not currently a public market for Interactive Common Stock.
Interactive has applied for the listing of Interactive Common Stock on the
American Stock Exchange ("AMEX"). Assuming such listing is approved, it is
possible that trading may commence on a "when-issued" basis prior to the Spin
Off. On the first AMEX trading day following the Spin Off, "when-issued" trading
in respect of Interactive Common Stock will end and "regular-way" trading will
begin. The AMEX will not approve any trading in respect of Interactive Common
Stock until the Securities and Exchange Commission (the "SEC") has declared
effective Interactive's Registration Statement on Form 10 (the "Registration
Statement") in respect of the Interactive Common Stock.
There can be no assurance as to the price at which Interactive Common
Stock will trade before, on or after the Spin Off. Until Interactive Common
Stock is fully distributed and an orderly market develops in Interactive Common
Stock, the price at which such stock trades may fluctuate significantly and may
be lower than the price that would be expected for a fully distributed issue.
The price of Interactive Common Stock will be determined in the marketplace and
may be influenced by many factors, including without limitation (i) the depth
and liquidity of the market for Interactive Common Stock, (ii) developments
affecting its businesses generally, (iii) investor perception of Interactive and
the businesses in which Interactive participates and (iv) general economic and
market conditions. In addition, the combined trading prices of Interactive
Common Stock and Lynch Common Stock held by stockholders after the Distribution
may be less than, equal to or greater than the trading price of Lynch Common
Stock prior to the Distribution.
Interactive initially will have approximately 925 stockholders of
record based upon the number of stockholders of record of Lynch as of August 2,
1999.
The shares distributed to Lynch shareholders will be freely
transferable, except for shares received by persons who may be deemed to be
"affiliates" of Interactive under the Securities Act of 1933, as amended (the
"Securities Act"). Persons who may be deemed affiliates of Interactive after the
Spin Off generally include individuals or entities that control, are controlled
by or are under common control with Interactive. Persons who are affiliates of
Interactive will be permitted to sell their Shares only pursuant to an effective
registration statement under the Securities Act or an exemption from the
registration requirements of the Securities Act of 1933, as amended (the
"Securities Act"), such as exemptions afforded by Section 4(2) of the Securities
Act or Rule 144 thereunder.
6
<PAGE>
RISK FACTORS
A. Relating to Interactive's Businesses
Interactive Intends to Grow by Acquisitions/High Leverage
As it has in the past, Interactive intends to grow its
telecommunications and services businesses through acquisitions. Future
acquisitions may be substantially larger than in the past. Accordingly,
Interactive would be subject to all of the risks of an acquisition program,
including being able to find and complete acquisitions at an attractive price
and being able to integrate and operate successfully any acquisitions made.
As a result of acquisitions, Interactive has, on a combined basis, a
relatively high total debt to equity ratio of 5.0 to 1 at June 30, 1999. In
addition, certain subsidiaries also have high debt to equity ratios. Interactive
is also funding the acquisition of Central Scott Telephone Company in mid-July
1999 principally through borrowings, which will increase Interactive's debt to
equity ratio. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business of Interactive - I. Multimedia, A.
Telecommunications - Telephone Acquisitions" below.
Interactive Will Need Funds
An acquisition program would require substantial additional debt and
equity funds. In accordance with its representations to the Internal Revenue
Service in connection with obtaining its tax ruling, Interactive intends to make
at least an approximately $15 million public equity offering of its stock within
a year of the Spin Off. There is no assurance that financial market conditions
will be favorable or that Interactive can raise additional debt and equity funds
or on terms attractive to Interactive. If Interactive cannot raise sufficient
equity funds, its leverage may increase, increasing financial risk. If a major
acquisition were to perform substantially below projections, that could also
increase financial risks. See "Business - Multimedia" and "Management's
Discussion of Financial Condition and Results of Operations."
Interactive Intends to Enter New Related Businesses
Interactive intends to enter into or expand related telecommunications
businesses such as internet service provider, long distance resale and
competitive local exchange carrier ("CLEC") services. Morgan may also initiate
new services or products. 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 businesses, would not be expected to be profitable initially
or for a period of time.
It is also possible that Interactive could determine to acquire
businesses unrelated to its current businesses.
See "Business of Interactive - Multimedia - Related Businesses."
Telecommunications Regulations/Competitive Environment is Changing
Interactive's local exchange carrier ("LEC") 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
7
<PAGE>
Federal Telecommunications Act of 1996 (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
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 LEC's 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. See "Business - Multimedia
Competition and Regulation."
Interactive Has PCS Investments/Losses Relating to PCS
Interactive has substantial investments in two PCS licensees - Fortunet
Communications, L.P., a C- Block licensee ($18.8 million at December 31, 1998),
and East/West Communications, Inc., an F-Block licensee ($4.8 million at
December 31, 1998). Certain C-Block licensees, including Fortunet, have
experienced financial problems, and the three largest original C-Block licensees
have filed for protection under the Bankruptcy Act. Neither Fortunet nor
East/West has determined what they intend to do with their licenses. PCS is
subject to many risks, and there is no assurance that Interactive will receive
back its investments in PCS. 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.
Accordingly, for the quarter ended March 31, 1999, Interactive has provided 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, to leave a net carrying value of
$3.4 million. See "Business - Multimedia - PCS."
Interactive had a substantial net loss in the first six months of 1999
and expects to have a net loss for the year ended December 31, 1999 as a result.
Interactive also had a substantial net loss for the year ended December 31,
1997. These losses were the result of setting up reserves ($15.4 million in 1999
and $7.0 million in 1997, prior to income tax benefit) for the impairment of its
investment in Fortunet. Interactive's remaining investment in Fortunet is
approximately $3.4 million.
Harvesting Initiative Risk
Interactive has indicated that it may attempt to sell all or portions
of certain operating entities, including its television station investments and
certain Interactive telephone operations where competitive local exchange
carrier opportunities are not readily apparent. There can be no assurance that
any such transaction can be consummated on terms favorable or acceptable to
Interactive.
Morgan Depends on Manufactured Housing Industry
Morgan's business is dependent, to a significant extent, on the
manufactured housing industry which is subject to broad production cycles. In
addition to general economic conditions, the manufactured housing industry is
affected by fluctuations in interest rates and the availability of credit to
purchasers of manufactured homes. Morgan believes that demand for manufactured
housing will continue to grow but there can be no assurance. Shipments by the
manufactured housing industry could decline relative to historical levels. See
"Business - Services."
8
<PAGE>
Morgan Claims Costs May Affect Profitability
A principal factor in the profitability of Morgan's business has been
the cost of claims, both for personal injuries resulting from vehicle accidents
and damage to homes and vehicles being transported, and related insurance costs.
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. See "Business - Services - Risk
Management, Safety and Insurance."
Morgan Has Limited Number of Major Customers
Historically, a majority of Morgan's operating revenues have been
derived under contracts with customers. Such contracts generally have one, two,
or three year terms. There is no assurance that customers will agree to renew
their contracts on acceptable terms or on terms as favorable as those currently
in force. Morgan's top ten customers have historically accounted for a majority
of the Company's operating revenues. The loss of one or more of these
significant customers could adversely affect Morgan's results of operations.
See "Business - Services - Customers and Marketing."
Morgan Has to Compete For Qualified Drivers
Recruitment and retention of qualified drivers and independent
owner-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.
Morgan Use of Independent Contractors
From time to time, tax authorities have sought to assert that
independent contractors in the transportation service industry are employees,
rather than independent contractors. Under existing interpretations of federal
and state tax laws, Morgan maintains 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. See "Business - Services - Regulation."
Interactive May Have Difficulty Selling Spinnaker Stock
At the Spin Off Interactive will own 1,000,000 shares of Spinnaker
Common Stock which constitutes 26.5% of the class and 13.6% of the total
outstanding common stock of Spinnaker. 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. In April 1999, Spinnaker
announced that it had entered into contracts to sell its industrial tape units,
which were closed on July 30, 1999 and August 10, 1999. See "Business of
Interactive - Spinnaker Stock."
Year 2000 Matters
Reference is made to Management's Discussion of Financial Condition and
Results of Operations for a discussion of "Year 2000" matters.
9
<PAGE>
B. Control/Management and Transaction Risks
Interactive Depends on Controlling Shareholder
Because of his approximate 22.9% ownership interests in Interactive and
Lynch and his positions as Chairman and Chief Executive Officer of both
Interactive and Lynch, Mario J. Gabelli may be deemed to control both
Interactive and Lynch. As a result, transactions subsequent to the Spin Off
between Interactive and Lynch may not be at arms length. There can also be no
assurance that his interest in Interactive will coincide with the interests of
other shareholders. In addition, since Mr. Gabelli is also Chairman and Chief
Executive Officer of Gabelli Funds, Inc. and Gabelli Asset Management Inc.,
major investment and securities companies, and of Lynch, Mr. Gabelli does not
work for Interactive on a full-time basis. If Mr. Gabelli were to cease to
provide executive services to Interactive, it could have a material adverse
effect on Interactive. See "Necessity to Split Interactive/Lynch Management"
below and "Principal Stockholders."
Part-time Officers/Necessity to Split Interactive/Lynch Management
The corporate executive officers of Interactive will split their
responsibilities between Interactive and Lynch. In addition, Mr. Gabelli is also
an executive officer and employee of Gabelli Asset Management Inc. and Gabelli
Funds, Inc. To the extent that other responsibilities take substantial time, the
executive officers may have less time to devote to Interactive.
After a transition period of up to three years, the principal executive
officers of Interactive, including Mr. Gabelli, can no longer be the principal
executive officers of both Interactive and Lynch, although Mr. Gabelli can
remain Chairman of the Board of the company of which he is not the chief
executive officer. No determination has been made at this time as to which
company the executive officers will continue to serve.
Tax Free Spin Off Ruling/Interactive Stock Offering
In connection with obtaining the rulings from the Internal Revenue
Service ("IRS") as to the tax-free nature of the Spin Off, Lynch made certain
representations to the IRS, which include, among other things, certain
representations as to how Lynch and Interactive intend to conduct their
businesses in the future. Among other representations, Lynch represented that a
principal purpose of the Spin Off was to facilitate a public offering of
Interactive stock to finance Interactive's acquisition program and that
Interactive would make at least an approximately $15 million public offering
within one year of the Spin Off. In addition, Lynch represented that the
principal executive officers of Interactive would remain the principal executive
officers of both Interactive and Lynch only for a transition period of up to
three years from the date of the Spin Off. If Lynch or Interactive should
violate such representations, the IRS could take the position that its rulings
are not binding and that Interactive and/or its shareholders are subject to tax.
It is possible that Interactive's commitment to an equity offering within a year
might weaken its negotiating power with underwriters regarding pricing of the
offering.
CAPITALIZATION OF INTERACTIVE
The following table sets forth the capitalization, on a combined basis,
of Interactive and its subsidiaries at June 30, 1999. This table should be read
in conjunction with the Combined Financial Statements and Notes thereto
appearing elsewhere in this Information Statement.
<TABLE>
<S> <C>
Short-Term Debt ................................................ $ 10,341,000
Long-Term Debt ................................................. $123,917,000
Equity, Investments By and Advances From Lynch Corporation ..... $ 27,064,000
</TABLE>
As part of its request for the tax ruling, Lynch has represented to the
IRS that a principal purpose of the Spin Off was to facilitate an equity
offering of Interactive stock to finance Interactive's acquisition program and
that Interactive would make at least an approximately $15 million public
offering within one year from the date of the Spin Off. There is no assurance
that the financial market conditions will be favorable or that Interactive can
raise additional funds on terms attractive to it.
SELECTED FINANCIAL DATA
Selected Financial Data(e)
(In Thousands, Except for Per Share Amounts)
<TABLE>
<CAPTION>
6 Months Ended
June 30, Year Ended December 31,
--------------------------------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales and revenues (a) .............. $ 102,937 $ 101,818 $ 205,076 $ 194,062 $ 160,816 $ 145,900 $ 122,024
Costs and expenses .................. 95,113 94,134 188,419 182,774 158,876 139,801 114,638
Operating profit (b) ................ 7,824 7,684 16,657 11,288 1,940 6,099 7,386
Net financing activities (c) ........ (4,110) (3,714) (8,201) (7,908) (4,024) (2,587) (3,440)
Reserve for impairment of investment
in PCS license holders ............. (15,406) -- -- (7,024) -- -- --
Gain on sales of subsidiary
and affiliate stock and other
operating assets ................. -- 13 2,709 260 74 59 190
Income (loss) before income
taxes, minority interests and
extraordinary item ................. (11,692) 3,983 11,165 (3,384) (2,010) 3,571 4,136
(Provision) benefit for income taxes 3,766 (1,656) (5,012) 736 445 (1,695) (1,540)
Minority interest ................... (431) (373) (1,224) (631) 747 (1,409) (1,147)
Income (loss) before extraordinary
item ............................. (8,357) 1,954 4,929 (3,279) (818) 467 1,449
Pro forma basic and diluted
earnings (loss) per share
before extraordinary item: ......... $ (5.90) $ 1.38 $ 3.48 $ (2.32) $ (0.59) $ 0.34 $ 1.05
Cash, cash equivalents and
marketable securities .............. $ 19,255 $ 21,543 $ 27,988 $ 28,043 $ 25,541 $ 21,948 $ 29,870
Total assets ........................ 215,356 253,354 246,092 253,032 248,651 157,455 127,597
Long-term debt ...................... 123,917 130,553 127,663 134,200 123,002 75,472 67,094
Equity, investments by and
advances from Lynch Corporation (d) $ 27,064 $ 36,568 $ 39,314 $ 32,995 $ 45,068 $ 29,427 $ 17,597
<FN>
(a) Includes results of Station WOI-TV from March 1, 1994, Haviland Telephone
Company from September 26, 1994, Dunkirk and Fredonia Telephone Company
from November 26, 1996, Transit Homes of America from December 30, 1996,
and Upper Peninsula Telephone Company from March 18, 1997.
(b) Operating Profit is sales and revenues less operating expenses, which
excludes investment income, interest expense, share of operations of
affiliated companies, minority interests and taxes.
(c) Consists of investment income, interest expense and equity in earnings of
affiliated companies.
(d) No cash dividends have been declared over the period. In 1997, for each
share of Lynch Common Stock, shareholders received one share of East/West
Communications, Inc., an F-Block PCS licensee with licenses covering a
population of 20 million. These shares had a net book value of $0.12 per
share.
(e) The data should be read in conjunction with the combined financial
statements, related notes and other financial information included herein.
</FN>
</TABLE>
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion should be read together with Combined Financial
Statements of Interactive and the notes thereto included herein and the Risk
Factors set forth above.
Overview
After the Spin Off, Interactive will own the multimedia and services
businesses previously owned by Lynch. In addition, Interactive will own 1
million shares of Spinnaker. The Spin Off marks the beginning of Interactive's
operations as an independent, publicly-traded company. As such, the combined
Interactive financial statements 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.
FIRST HALF OF 1999 COMPARED TO FIRST HALF 1998
Revenues for the first half of 1999 increased by $1.1 million, or 1%,
to $102.9 million from the first half of 1998. Within the operating segments:
multimedia, whose revenues increased 3.9%, contributed $1.0 million to the
increase and services revenue increased $0.1 million.
Multimedia revenues grew primarily due to growth in both
telecommunications services as well as the provision of non-traditional
telephone services such as Internet. Morgan's revenues grew due to growth in
Specialized Outsourcing Services.
Operating profit for the first half of 1999 increased by $0.1 million
to $7.8 million from the first half of 1998 due to increase in multimedia.
Operating profit in the multimedia segment increased by $0.3 million. Morgan's
operating results decreased by $0.1 million due to a shift in revenue mix to
lower margined business partially offset by cost reductions of $0.7 million. Net
corporate expense was $0.5 million in the first half of 1999 compared to $0.7
million in the first half of 1998. Effective September 30, 1998, Lynch amended
its SAR (stock appreciation rights) Program so that the SARs become exercisable
only in the event the price for Lynch's shares double from the SAR grant price
within five years from the original issuance. This amendment eliminated the
recording of the profit and loss effect from changes in the market price in
Lynch's common stock until it is probable that the SARs will become exercisable.
During the first half of 1998, Lynch allocated $0.3 million SAR expense to
Interactive as compared to no income or expense in 1999. It is expected that
Interactive will adopt a SAR program similar to Lynch's.
Investment income in the first half of 1999 of $1.0 million decreased
by $0.6 million from the first half of 1998 due to change in unrealized gain
(loss) of marketable securities, classified as trading.
Interest expense decreased by $0.2 million to $5.2 million in the first
half of 1999 from $5.4 million in the first half of 1998, as reduced borrowings
were offset by the lower capitalized interest on the Company's investment in PCS
licenses of $0.8 million.
A Lynch subsidiary has loans to and a 49.9% limited partnership
interest in Fortunet Communications, L.P. ("Fortunet"). Fortunet's only assets
consist of three 15MHz personal communications licenses that were acquired in
the C-Block auction held by the Federal Communications Commission ("FCC"). In
that auction, Fortunet acquired 30MHz licenses in these markets, but on June 8,
1998, under FCC restructuring options, it returned 15MHz of the original 30MHz
acquired. On April 15, 1999, the FCC completed the reauction of all the C-Block
licenses that were returned to it since the original C-Block auction, including
the three 15MHz
11
<PAGE>
licenses that Fortunet returned. In that reauction, the successful bidders paid
a total $2.7 million for the three licenses as compared to $18.8 million
carrying amount of Lynch's investment in Fortunet. Accordingly, for the six
months June 30, 1999, Lynch has recorded a write-down of $15.4 million in 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
to leave a net carrying value of $3.4 million.
The income tax provision (benefit) includes federal, as well as state
and local taxes. The tax provision (benefit) for the six months ended June 30,
1999 and 1998, represents effective tax rates of (32%) and 42%, respectively.
The differences from the federal statutory rate are principally due to the
effect of state income taxes and amortization of non-deductible goodwill. Of
note, no state tax benefit has been provided for the reserve for the impairment
of $15.4 million in the investment in PCS license holders.
Minority interest at $0.4 million was the same for both periods. Of
note, the reserve for impairment of PCS operations had no effect on minority
interest.
Net loss for the six months ended June 30, 1999 was ($8.5) million as
compared to a net income of $1.9 million in the previous year's quarter. The
reserve for the impairment of the investment in PCS license holders ($10.2
million net of income tax benefit) was the primary cause for the swing.
RESULTS OF OPERATIONS
YEAR 1998 COMPARED TO 1997
Revenues increased to $205.1 million in 1998 from $194.1 million in
1997, a 6% increase. In the multimedia segment, revenues increased by $6.7
million, or 14% from the previous year, partially due to the acquisition of
Upper Peninsula Telephone Company in which control was acquired on March 18,
1997 ($2.4 million effect), the remainder primarily coming from growth in
regulated and deregulated revenues. In addition, 1998 results include management
service income of $1.0 million related to compensation for bidding and
administrative services provided in certain PCS auctions. For telecommunications
businesses owned for comparable periods in both years, revenues increased by 9%.
At The Morgan Group, Inc., revenues increased by $4.3 million, or 3% due to
gains in Specialized Transport.
Earnings before interest, taxes, depreciation and amortization (EBITDA)
increased to $30.9 million in 1998 from $24.6 million in 1997, a $6.3 million,
or 26% increase. EBITDA is presented because it is a widely accepted financial
indicator of value and ability to incur and service debt. EBITDA is not a
substitute for operating income or cash flows from operating activities in
accordance with generally accepted accounting principles. EBITDA for the
telecommunications segment, which for 1998 represented 93% of combined EBITDA,
increased by $4.7 million, or 20%, from 1997 to 1998. $1.4 million of this
increase was due to the acquisition of Upper Peninsula Telephone Company. The
remaining increase was due to growth in regulated and deregulated operations.
For telecommunications businesses owned for comparable periods in both years,
EBITDA increased by 13%. EBITDA at The Morgan Group, Inc. which represents 10%
of combined EBITDA increased by $1.1 million, or 52% from 1997's EBITDA
primarily due to the absence of special charges in 1998, special charges were
$0.6 million in 1997.
Operating profits for 1998 were $16.7 million, up from $11.3 million in
1997. The telecommunications segment's operating profits grew $3.9 million due
to the inclusion of Upper Peninsula Telephone Company for the full year and
revenue growth. Operating profits in the services segment increased by $1.0
million, or 98%, due to the absence of special charges.
Effective September 30, 1998, Lynch amended its SAR program so that the
SARs become exercisable only in the event the price for Lynch's shares double
from the SAR grant price within five years from the
12
<PAGE>
original issuance. This amendment eliminated the recording of the profit and
loss effect from changes in the market price in Lynch's common stock until it is
probable that the SARs will become exercisable. During 1997, Lynch allocated
$0.4 million SAR expense to Interactive and in 1998, prior to the amendment of
the program, $0.2 million in SAR income.
Investment income was approximately $1.9 million in 1998 compared to
$1.7 million in 1997.
Interest expense increased by $0.6 million in 1998 when compared to
1997. The increase is due primarily to the debt related to the purchase of Upper
Peninsula Telephone Company for the full year in 1998.
As of December 9, 1998, WNM Communications, Inc. a Lynch Telephone
Corporation subsidiary, sold the assets of its direct broadcast satellite
business serving portions of New Mexico for approximately $3.1 million. 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 sales of
subsidiary stock and other operating assets in the combined statements of
operations.
In 1997, Lynch Interactive recorded a write-off of 30% of the
investment in, loans to, and deferred costs associated with its subsidiary's
49.9% equity ownership in Fortunet Communications, L.P. ("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. Such write-off amounted to $7.0 million, or $4.6 million after tax
benefit (see discussion below). No such write-off occurred in 1998. On April 15,
1999, the Federal Communications Commission completed a reauction of all the
C-Block PCS licenses that were returned to it subsequent to the original
auction, including the 15 MHZ licenses that Fortunet returned in June 1998 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. During the first
quarter of 1999, Lynch Interactive recorded an additional write down of $15.4
million. See "First Quarter 1999 compared to 1998."
The 1998 tax provision of $5.0 million, includes federal, state and
local taxes and represents an effective rate of 45% versus 22% effective tax
benefit rate in 1997. The difference in the effective rates is primarily due to
the effects of the amortization of goodwill, state taxes, and losses of
subsidiaries.
During 1998, minority interest was $1.2 million compared with $0.6
million in 1997.
YEAR 1997 COMPARED TO 1996
Revenues increased to $194.1 million in 1997 from $160.8 million in
1996, a 21% increase. Acquisitions made during late 1996 and early 1997 in the
multimedia and service segments were the most significant contributors to this
increase. In the multimedia segment, revenues increased by $19.3 million to
$47.9 million from $28.6 million in the previous year. Dunkirk and Fredonia
Telephone Company, which was acquired on November 26, 1996, contributed $10.3
million compared to $0.9 million in 1996. Upper Peninsula Telephone Company,
control of which was acquired on March 18, 1997, contributed $7.2 million to
this segment's revenue increase. For telecommunications businesses owned for
comparable periods in both years, revenues increased by 10%. In the services
segment, revenues of $21.2 million resulting from the acquisition of Transit
Homes of America, Inc. on December 31, 1996, offset by lower "Truckaway"
revenues, was the primary contributor to the revenue increase at The Morgan
Group, Inc.
EBITDA increased to $24.6 million in 1997 from $12.1 million in 1996, a
$12.5 million, or 103% increase. EBITDA for the multimedia segment, which for
1997 represented 99% of combined EBITDA, increased $8.8 million in 1997, to
$24.7 million from $15.9 million in 1996. The increase is primarily
13
<PAGE>
attributable to the acquisition of Dunkirk & Fredonia Telephone Company in
November 1996 and Upper Peninsula Telephone Company in March 1997 ($4.6
million). For telecommunications businesses owned for comparable periods in both
year, EBITDA increased by 14%. The services segment had EBITDA of $2.2 million
versus negative EBITDA of ($1.7) million in 1996 predominately due to special
charges recorded at Morgan of $3.5 million in 1996 and $0.6 million in 1997.
Operating profits for 1997 were $11.3 million, an increase of $9.4
million compared to 1996. Operating profits in the multimedia and services
segments increased by $5.2 million and $4.3 million, respectively, due to the
same factors impacting EBITDA.
Investment income decreased by $0.5 million to $1.7 million in 1997
versus 1996. The decrease was related to lower dollar investments generating
current income.
Interest expense increased by $3.4 million in 1997 when compared to
1996. The increase is due primarily to the full year effect of financing the
acquisitions of Dunkirk & Fredonia Telephone Company and Upper Peninsula
Telephone Company ($1.6 million).
In 1997, Lynch Interactive provided a reserve of 30% of the investment
in, loans to, and deferred costs associated with its subsidiary's 49.9% equity
ownership in Fortunet Communications, L.P. ("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. Such
write-off amounted to $7.0 million, or $4.6 million after tax benefit.
In May 1996, the FCC concluded the C-Block Auction for 30 MHZ of
broadband spectrum across the United States to be used for PCS. PCS is the
second generation of low-cost digital wireless service utilized for voice, video
and data devices. In the C-Block Auction, certain qualified small businesses
were afforded bidding credits as well as access to long-term government
financing for a substantial portion of the cost of the licenses acquired.
As a result of this auction, Fortunet acquired 31 licenses in 17 states
covering a population ("POP") of 7.0 million. The total cost of these licenses
was $216 million, or $30.76 per POP, after the 25% bidding credit. The U.S.
Government lent licensees 90% of the net cost of the licenses. Events during and
subsequent to the auction, as well as other externally driven technologies and
market forces, have made financing of the Government installment debt and the
development of these 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 relief in terms of (1) resetting the interest rate to the
appropriate rate at the time; (2) further reducing or delaying the required debt
payments in order to afford better access to capital markets; and (3) relaxing
the restrictions with regard to ownership structure and alternative arrangements
in order to afford these small businesses the opportunity to more realistically
restructure and build-out their systems. The response from the FCC which was
announced on September 26, 1997, and modified on March 26,1998, afforded license
holders a choice of four options, one of which was the resumption of current
debt payments which had been suspended earlier in 1997. The ramifications of
choosing the other three courses of action could result in Fortunet ultimately
forfeiting either 30%, 50%, or 100% of its current investment in these licenses.
On July 8, 1998, Fortunet returned 28 of the 31 licenses it was awarded
and returned half of the spectrum of the remaining three licenses. Fortunet
currently is the licensee for 15 MHZ of spectrum in three Florida markets:
Tallahassee, Panama City, and Ocala covering approximately 785,000 POPs at a
cost of $20.09 per 15 MHZ POP (equal to $40.18 per 30 MHZ POP). It used the down
payment from the licenses
14
<PAGE>
returned, after deducting the 30% forfeited, to repay all remaining Government
debt.
The 1997 tax benefit of $0.7 million, includes federal, state and local
taxes and represents an effective rate of 22% versus the 22% effective tax rate
in 1996. The difference in the effective rates is primarily due to the effects
of state income taxes, amortization of goodwill and losses of subsidiaries.
FINANCIAL CONDITION
As of December 31, 1998, the Company had current assets of $58.0
million and current liabilities of $52.4 million. Working capital was therefore
$5.6 million as compared to a negative $0.4 million at December 31, 1997.
As of June 30, 1999, the Company had current assets of $50.3 million
and current liabilities of $43.6 million. Working capital was therefore $6.7
million as compared to $5.6 million at December 31, 1998. The primary reason for
the increase was lower capital expenditures.
Capital expenditures were $11.6 million in 1998 and $11.8 million in
1997. Overall 1999 capital expenditures are expected to be approximately $3.2
million above the 1998 level due to additional expenditures for the Company's
Kansas telephone operations. Capital expenditures were $4.0 million and $4.9
million for the six months ended June 30, 1999 and 1998, respectively.
At June 30, 1999, total debt was $134.3 million, which was $10.6 less
than the $144.9 million at the end of 1998. At June 30, 1999, there was $109.5
million of fixed interest rate debt averaging 6.9% and $24.8 million of variable
interest rate debt averaging 7.1%. Debt at year end 1998 included $110.8 million
of fixed interest rate debt, at an average interest rate of 7.1% and $34.1
million of variable interest rate debt at an average interest rate of 7.6%.
Additionally, the Company had $16.6 million in unused lines of credit at
December 31, 1998, of which $8.7 million was attributable to Morgan. At June 30,
1999, there was $18.3 million in unused lines of credit of which Morgan had $5.6
million available. As of June 30, 1999 and December 31, 1998, Interactive
borrowed $7.3 million and $15.2 million from Lynch under two short-term line of
credit facilities with maximum availability totaling $20.0 million. These
short-term lines of credit expire on August 31, 1999 ($10.0 million) and
December 29, 1999 ($10.0 million). These facilities mirror facilities between
Lynch and third party lenders. It is expected that these facilities will be
transferred to Interactive. Management anticipates that these lines will be
renewed when they expire. Should these lines of credit not be transferred,
Management's contingent plans to fund the operations over the next twelve months
include: establishing new lines of credit with alternative third party lenders,
refinancing an existing long-term facility to provide additional financial
resources, accelerating the timing, if necessary, of the equity offering or
liquidating an investment (see Harvesting below). There are no actual or
anticipated arrangements for Lynch Corporation to provide funding to
Interactive. It is Management's belief that it has or will be able to obtain
adequate resources to fund operations over the next twelve months but there is
no assurance that they will.
On February 22, 1999, The Morgan Group, Inc. filed a Schedule 13E4,
that invited its shareholders to tender up to 100,000 shares of Class A common
stock, to Morgan at prices not less than $8.50 nor greater than $10.00 per
share. The tender offer expired March 19, 1999, whereby Morgan purchased 103,000
shares at $9 per share. Lynch Interactive did not tender any shares in response
to this offer.
Lynch has not paid any cash dividends on its Common Stock since 1989.
Interactive does not expect to pay cash dividends on its Common Stock in the
foreseeable future. Interactive currently intends to retain its earnings, if
any, for use in its business. Future financings may limit or prohibit the
payment of dividends.
Interactive has a high degree of financial leverage. As of June 30,
1999, the ratio of total debt to equity
15
<PAGE>
was 5.0 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. .
In mid-July, an Interactive subsidiary acquired Central Scott Telephone
Company ("Scott") for approximately $28.1 million in cash. Scott has
approximately 6,000 access lines in Scott County, Iowa. Interactive is funding
the acquisition principally through borrowings. Scott had revenues of $4.4
million in 1998. While Scott was profitable in 1998, Scott is not expected to
contribute to Interactive's earnings in 1999 due to interest expense on the
financing debt.
The Company has a significant 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 which
Interactive has a commitment to make pursuant to the representations made to
obtain its private letter tax ruling. 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. As part of the representations made to
the Internal Revenue Service in connection with the private letter ruling,
Interactive has a commitment to enter into a minimum $15 million equity stock
offering within one year of the Spin Off. 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 has recently initiated two programs which may effect future
operations and cash flow.
(a) Cost Cutting - The Company is taking a three step approach to cutting
costs. First is a review to eliminate certain centralized overhead
costs. Second, a review of the Company's overall financial costs is
being undertaken with an objective of achieving savings from
refinancing and restructuring certain debt instruments. Third, the
Company's operating entities will take advantage of cost savings
opportunities without sacrificing quality of service. While the
Company anticipates that such reduction will favorably impact future
profitability and cash flow, the level of the total costs and expenses
are subject to numerous factors which will affect their variability.
For example, the Company does not know whether it will be able to save
on financing costs, in part because savings would depend on interest
rate levels generally.
(b) Harvesting - The second program is a concentrated effort to monetize
the Company's assets, including selling a portion or all of certain
investments in Company's operating entities. These may include the
Company's minority interest in network affiliated television stations
and certain telephone operations where competitive local exchange
carrier opportunities are not readily apparent. The Company's
approximately 14% ownership interest in Spinnaker may also be sold in
order to fund future growth initiatives. There is no assurance that
all or any part of this program can be effected on acceptable terms.
YEAR 2000
The Company has initiated a comprehensive review of its computer
systems to identify the systems that could be affected by the "Year 2000" issue
and is developing and conducting an implementation plan to resolve the issue.
The Year 2000 problem is the result of computer programs being written using two
digits (rather than four) to define the applicable year. Any of the Company's
programs or programs utilized by vendors to the Company that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a major system failure or miscalculation. The
Company's Year
16
<PAGE>
2000 review is being performed primarily by internal staff, and in certain
operations is supplemented by outside consultants. The principal Information
Technology ("IT") systems that may be impacted by the Year 2000 for the
Company's telecommunications operations are central office switching, billing
and accounting. The principal IT systems for the Morgan Group are order entry
dispatch and accounting. The Year 2000 may also impact various non-IT systems,
including among other things security systems, HVAC, elevator systems, and
communications systems. In addition, each of the Company's businesses may be
impacted by the Year 2000 readiness of third party vendors/suppliers.
Due to the integral nature of switching equipment and billing software
to their operations, the telecommunications businesses are most effected by the
Year 2000 issue. The majority of the telephone companies' switching and billing
software is Year 2000 compliant, with the remaining expected to be compliant by
the third quarter of 1999. The telecommunications businesses rely on switching
equipment and software provided by third party vendors. It is the Company's
understanding that the vendors have completed testing of the software and that
no additional action by the Company will be required after installation. The
telecommunications businesses periodically upgrade switching software in order
to remain current with respect to service features. The upgrades provided other
enhanced service features as well as included Year 2000 readiness and have been
capitalized. Other remediation costs, including internal costs have been charged
to expense as incurred. The total cost of Year 2000 remediation for the
telecommunications businesses is estimated to be approximately $0.9 million, of
which approximately $0.4 million has been spent to date. The telecommunications
businesses have not developed a contingency plan and are in the process of
determining the needs for such a plan.
The Morgan Group, Inc. is in the process of remediating the Year 2000
issue, primarily through the replacement of a significant portion of its
operating software. Implementation was completed in July 1999, with final
testing expected to be completed in September 1999. The total cost of Year 2000
remediation is estimated to be approximately $0.4 million, of which
approximately $0.2 million has been spent to date. Costs specifically associated
with modifying internal use software are charged to expense as incurred. Morgan
presently believes that its Year 2000 compliance program will essentially be
completed on a timely basis, posing no significant internal operations problems.
Management, at this time, sees no need for a contingency plan for internal Year
2000 software issues. However, if program modifications are not satisfactorily
tested and implemented by September 7, 1999, Morgan will develop an appropriate
comprehensive contingency plan..
The estimated costs and projected dates of completion for the Company's
Year 2000 program are based on management's estimates and were developed using
numerous assumptions of future events, some of which are beyond the Company's
control. The Company presently believes that with modifications to existing
software and converting to new software, the Year 2000 issue will not pose
significant operational problems for the Company as a whole. The Company
believes it has substantially completed the modifications and conversions
required to be Year 2000 compliant and anticipates to be fully completed in
adequate time. In addition, the Company is in the process of developing
contingency procedures with regard to significant systems. However, if such
modifications and conversions and contingency procedures are not effective, the
Year 2000 issue may materially and adversely impact the Company's financial
condition, results of operations and cash flows.
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 $19.3 million at June 30, 1999 and $28.0 million at
December 31, 1998). The Company generally finances the debt portion of the
acquisition of long-term assets with fixed rate, long-term debt. The Company
generally maintains the majority of its debt as fixed rate in nature either by
17
<PAGE>
borrowing on a fixed long-term basis or, on a limited basis, entering into
interest rate swap agreements. The Company does not use derivative financial
instruments for trading or speculative purposes. Management does not foresee any
significant changes in the strategies used to manage interest rate risk in the
near future, although the strategies may be reevaluated as market conditions
dictate.
At June 30, 1999, approximately $24.8 million, or 18% of the Company's
long-term debt and notes payable bears interest at variable rates. Accordingly,
the Company's earnings and cash flows are affected by changes in interest rates.
Assuming the current level of borrowings for variable rate debt and assuming a
one percentage point change in the 1998 average interest rate under these
borrowings, it is estimated that the Company's 1998 interest expense would have
changed by $0.3 million. In the event of an adverse change in interest rates,
management would likely take actions to further mitigate its exposure. However,
due to the uncertainty of the actions that would be taken and their possible
effects, the analysis assumes no such actions. Further, the analysis does not
consider the effects of the change in the level of overall economic activity
that could exist in such an environment.
BUSINESS OF INTERACTIVE
Interactive was incorporated in 1996 under the laws of the State of
Delaware. Prior to the Spin Off, Interactive has no significant assets,
liabilities or operations. As a successor to certain businesses of Lynch,
Interactive will become a diversified holding company with subsidiaries
primarily engaged in multimedia and transportation services (see Interactive on
p.5). Interactive's executive offices are located at 401 Theodore Fremd Avenue,
Rye, New York 10580-1430. Its telephone number is 914/921-7601.
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, 1998,
multimedia operations provided 27% of the Company's combined revenues, and
services operations provided 73% of the Company's combined revenues. As used
herein, Interactive includes corporations which will be subsidiaries at the Spin
Off.
In November 1998, Lynch announced a "harvesting" initiative, i.e., an
effort to monetize certain assets, including considering selling all or portions
of certain operating entities. These may include Interactive's minority
interests in network affiliated television stations, and certain Interactive
telephone operations where competitive local exchange carrier opportunities are
not readily apparent. As part of this initiative, Interactive sold in December
1998 its DirectTV franchise serving certain counties in New Mexico for
approximately $3.1 million. Interactive intends to continue this initiative.
There is no assurance that any transaction can be consummated on terms favorable
or acceptable to Interactive.
I. MULTIMEDIA
A. Telecommunications
Operations. Interactive is intended to conduct its telecommunications
operations through subsidiary corporations. The telecommunications segment has
been expanded through the selective acquisition of local exchange telephone
companies serving rural areas and by offering additional services such as
Internet service and long distance service. From 1989 through 1998, Interactive
has acquired eleven telephone companies, five 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, 1998, total
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access lines were approximately 37,600, 100% of which are served by digital
switches. Central Scott Telephone Company acquired in mid-July 1999 adds
approximately 6,000 access lines.
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.
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
----------- ---------- ----------
Telecommunications Operations
<S> <C> <C> <C>
Access lines* ...................... 37,604 36,525 28,630
% Residential .................... 75% 75% 74%
% Business ....................... 25% 25% 26%
Internet Subscribers ............... 7,977 3,506 971
Cable Subscribers .................. 4,709 4,660 4,454
Total Multimedia Revenues
Telecommunications Operations
Local Service ..................... 13% 13% 13%
Network Access & Long Distance .... 67% 69% 72%
Non-Regulated & Other** ........... 17% 15% 10%
Total Telecommunications Operations 97% 97% 95%
Cable Operations ................... 3% 3% 5%
-------- -------- --------
Total Multimedia Revenues .......... 100% 100% 100%
($ in 000)
Total Revenues ..................... $ 54,622 $ 47,908 $ 28,608
EBITDA+ ............................ 29,389 24,666 15,863
Depreciation & Amortization ........ 12,995 12,175 8,653
Capital Expenditures ............... 11,028 10,914 11,056
Total Assets ....................... $195,010 $196,285 $178,415
<FN>
* An "access line" is a telecommunications circuit between the customer's
establishment and the central switching office.
** Non-regulated and other revenues include Internet, PCS, Direct Broadcast
Satellite and other non-regulated revenues.
+ EBITDA is earnings before interest, taxes, depreciation and
amortization, and corporate overhead allocation.
</FN>
</TABLE>
Telephone Acquisitions. Interactive pursues an active program of
acquiring operating telephone companies. From January 1, 1988 through December
31, 1998, Lynch has acquired ten telephone companies serving a total of
approximately 30,950 access lines at the time of these acquisitions for an
aggregate consideration totaling approximately $138 million. Such acquisitions
are summarized in the following table:
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ACQUISITION HISTORY
<TABLE>
<CAPTION>
Number of Number of Annual
Year of Cost of Access Lines Access Lines Revenues Ownership
Company Acquisition Acquisition Yr. of Acq. 12/31/98 12/31/98 Percentage
------- --------- --------- --------- -------- -------- --------
($ in 000) ($ in 000)
<S> <C> <C> <C> <C> <C> <C>
Western New Telephone Co. ....... 1989 $44,300 4,200 6,189 $16,587 83.1
Inter-Community Telephone Co. (a) 1991 10,405 2,550 2,609 3,663 100.0
Cuba City Telephone Co. &
Belmont Telephone Co. ....... 1991 7,200 2,200 2,647 1,927 81.0
Bretton Woods Telephone Co. ..... 1993 1,700 250 515 688 100.0
JBN Telephone Co. (b) .......... 1993 7,200 2,300 2,740 4,278 98.0
Haviland Telephone Co. .......... 1994 13,400 3,800 4,140 4,078 100.0
Dunkirk&Fredonia Telephone Co. ..
& Cassadaga Telephone Co. ... 1996 27,700 11,100 11,968 11,292 100.0
Upper Peninsula Telephone Co. ... 1997 26,500 6,200 6,796 9,240 100.0
Central Scott Telephone Co. ..... 1999 28,100 6,000 6,000 4,400 100.0
<FN>
(a) Includes 1,350 access lines acquired in 1996 for approximately $4.7 million.
(b) Includes 354 access lines acquired in 1996 for approximately $.9 million.
</FN>
</TABLE>
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 sought
companies with excellent local management already in place who will remain
active with their company. Recently, certain large telephone companies have
offered certain of their rural telephone exchanges for sale, often on a
state-wide or larger area basis. Interactive has and in the future may, bid on
such groups of exchanges. Telephone holding companies and others actively
compete for the acquisition of telephone companies and such acquisitions are
subject to the consent or approval of regulatory agencies in most states. While
management believes that it will be successful in making additional
acquisitions, there can be no assurance that Interactive will be able to
negotiate additional acquisitions on terms acceptable to it or that regulatory
approvals, where required, will be received.
Related Services and Investments. Interactive also provides
non-regulated telephone related services, including internet access service and
long distance resale service, in certain of its telephone service (and adjacent)
areas. Interactive also intends to provide local telephone and other
telecommunications service outside certain of its franchise areas by
establishing competitive local exchange carrier (CLEC) operations in certain
adjacent areas. Affiliates of seven of Interactive's telephone companies now
offer internet access service. At December 31, 1998, internet access customers
totaled approximately 8,000 compared to approximately 3,500 at December 31,
1997.
In late 1998, an affiliate of Dunkirk & Fredonia Telephone Company
began providing long distance resale service, and affiliates of certain of
Interactive's other telephone companies are considering becoming long distance
resellers.
An affiliate of Dunkirk & Fredonia Telephone Company began providing
(CLEC) service on a resale basis in neighboring Dunkirk, NY in the second
quarter of 1999. 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
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<PAGE>
(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.
Central Scott provided long distance resale service. In addition,
Central Scott has an agreement to acquire, subject to FCC approval, a 10 MHZ PCS
License for its wireline territory. Central Scott is also an approximately 14%
minority owner of an entity that has an agreement, subject to FCC approval, to
acquire a 10 MHZ PCS License for portions of Clinton and Jackson Counties in
Iowa.
At December 31, 1998, Interactive owned minority interests in certain
entities that provide wireless cellular telephone service in several Rural
Service Areas ("RSA's") in New Mexico and North Dakota, covering areas with a
total population of approximately 305,000, of which Interactive's proportionate
interest is approximately 10,000.
The operating results of these services and investments have not been
material to date, although Interactive expects its CLEC services to operate at
losses initially.
Regulatory Environment. Operating telephone companies are regulated by
state regulatory agencies with respect to its intrastate telephone services and
the Federal Communications Commission ("FCC") with respect to its interstate
telephone service and, with the enactment of the Telecommunications Act of 1996
(the "1996 Act"), certain other matters relating principally to fostering local
and intrastate competition.
Interactive's telephone subsidiaries participate in the National
Exchange Carrier Association ("NECA") common line and traffic sensitive tariffs
and participate in the access revenue pools administered by NECA for interstate
services. Where applicable, Interactive's subsidiaries also participate in
similar pooling arrangements approved by state regulatory authorities for
intrastate services. Such interstate and intrastate arrangements are intended to
compensate local exchange carriers ("LEC's"), such as Interactive's operating
telephone companies, for the costs, including a fair rate of return, of
facilities furnished in originating and terminating interstate and intrastate
long distance services.
In addition to access pool participation, certain of Interactive's
subsidiaries are compensated for their intrastate costs through billing and
keeping access charge revenues (without participating in an access pool). The
intrastate access charge revenues are developed based on intrastate access rates
filed with the state regulatory agency.
In addition, a 1989 FCC decision provided for price cap regulation for
certain interstate services. The price cap approach differs from traditional
rate-of-return regulation by focusing primarily on the prices of communications
services. The intention of price cap regulation is to focus on productivity and
the approved plan for telephone operating companies. This allows for the sharing
with its customers of profits achieved by increasing productivity. Alternatives
to rate-of-return regulation have also been adopted or proposed in some states
as well. Inter-Community Telephone Company is an example of one such subsidiary
which has elected a price cap limitation on intrastate access charges. However,
management does not believe that this agreement will have a material effect on
the Company's results. In certain states, regulators have ordered the
restructuring of local service areas to eliminate nearby long distance calls and
substitute extended calling areas.
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<PAGE>
Various aspects of federal and state telephone regulation have in
recent years been subject to re-examination and on-going modification. In
February 1996, the Telecommunications Act of 1996 (the "1996 Act"), which is the
most substantial revision of communication law since the 1930's, became law. The
1996 Act is intended generally to allow telephone, cable, broadcast and other
telecommunications providers to compete in each other's businesses, while
loosening regulation of those businesses. Among other things, the Act (i) would
allow major long distance telephone companies and cable television companies to
provide local exchange telephone service; (ii) would allow new local telephone
service providers to connect into existing local telephone exchange networks and
purchase services at wholesale rates for resale; (iii) would provide for a
commitment to universal service for high-cost, rural areas and authorizes state
regulatory commissions to consider their status on certain competition issues;
(iv) would allow the Regional Bell Operating Companies to offer long distance
telephone service and enter the alarm services and electronic publishing
businesses; (v) would remove rate regulation over non-basic cable service in
three years; and (vi) would increase the number of television stations that can
be owned by one party.
Although the FCC has completed numerous regulatory proceedings required
to implement the 1996 Act, the FCC is still in the process of promulgating new
regulations covering these and related matters. For certain issues, the FCC
bifurcated the proceedings between price cap and rate-of-return companies or in
the case of the Universal Service Fund (USF) between rural and non-rural
companies. In several cases, the regulations for the price-cap (or non-rural)
local exchange carriers (LECs) have been or are being determined first, followed
by separate proceedings for rate-of-return (or rural) companies. Since all of
Interactive's telephone subsidiaries are rural, rate-of-return companies for the
interstate jurisdiction, many of the issues are yet to be resolved by the FCC
for Interactive's subsidiaries. Current or anticipated proceedings, which could
have significant revenue impacts for rural, rate-of-return companies, include
changes in access charge regulations, jurisdictional separations rules (which
allocate costs between interstate and intrastate services), reevaluation of the
interstate rate-of-return and permanent USF procedures.
The USF is intended, among other things, to provide special support
funds to high cost rural LECs so that they can provide affordable services to
their customers notwithstanding their high cost due to low population density.
In May 1997, the FCC adopted interim USF procedures effective January 1, 1998
which continue to use actual embedded costs for rural companies. The interim
procedures transferred the Weighted DEM (which is a subsidy related to central
office switching equipment) and Long-Term Support (LTS) to the USF and required
all telecommunications companies (including Interactive's telephone
subsidiaries) to contribute to the fund. In addition, a cap was implemented on
the amount of corporate expense allowable for the computation of USF. The
interim rules are expected to be in effect until January 1, 2001. This is the
earliest date that a transition to a new universal service support mechanism may
begin. On July 1, 1998, the Federal-State Joint Board on Universal Service
(Joint Board) appointed a Rural Task Force ("RTF") to address changes to the
universal service support mechanisms for rural carriers. All of Interactive's
telephone companies are designated as rural carriers for universal service
support. Nine months after the implementation of a new universal service plan
for non-rural carriers, the RTF is scheduled to make recommendations to the
Joint Board regarding any changes required to the current universal service
support mechanism for rural carriers. This includes, but is not limited to,
reviewing a proxy model built on Forward-Looking Economic Costs (FLEC).
The FCC is currently in the process of determining permanent USF
procedures for non-rural carriers. In October 1998, the FCC adopted a proxy
model platform based on FLEC. The FCC is still in the process of developing
inputs for the FLEC proxy model for non-rural carriers. The new universal
service support mechanism for non-rural carriers based on the FLEC proxy model
is scheduled to be in effect January 1, 2000.
22
<PAGE>
In addition to the changes to universal service, the FCC also has open
dockets related to access charges, jurisdictional separations and rate-of-return
reevaluation. The FCC made several changes to access charges for price cap
companies in May 1997. The FCC issued a proposal for similar changes to access
charges for rate-of-return carriers in June 1998. In October 1997, the FCC
initiated a proceeding where companies provided comments to the FCC regarding
how costs should be allocated between the intrastate and interstate
jurisdictions. In October 1998, the FCC requested comments regarding whether the
interstate rate-of- return was at the appropriate rate. No final decision
regarding proposed changes for rate-of-return carriers related to access
charges, jurisdictional separations or rate-of-return reevaluation has been
issued by the FCC. Since interstate revenues constituted approximately 50% of
the regulated revenues of the Registrant's telephone companies in 1998,
modifications to access charges, separations, rate-of-returns, and/or USF could
have a material effect. It is impossible to determine the impact of these
proposed changes on the Registrant's telephone companies at this time.
Interactive cannot predict the effect of the 1996 Act, state
initiatives and new proposed Federal and state regulations, but because its
telecommunications and multimedia properties (other than its television stations
interests) are primarily in high-cost, rural areas, Interactive expects
competitive changes to be slower in coming than in non-rural areas.
Competition. All of Interactive's current telephone companies are
currently monopoly wireline providers in their respective area of local
telephone exchange service; although there can be no assurance that this will
continue. However, as a result of the 1996 Act, FCC and state regulatory
authority initiatives and judicial decisions, competition has been introduced
into certain areas of the toll network wherein certain providers are attempting
to bypass local exchange facilities to connect directly with high-volume toll
customers. For example, in the last few years the States of New 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.
B. Broadcasting
See the "Harvesting" initiative at page 19 above concerning the television
operations.
STATION WHBF-TV - Lynch Entertainment Corporation ("Lynch Entertainment I"), a
wholly-owned subsidiary of Interactive, and Lombardo Communications, Inc.,
wholly-owned by Philip J. Lombardo, are the general partners of Coronet
Communications Company ("Coronet"). Lynch Entertainment I has a 20% interest in
Coronet and Lombardo Communications, Inc. has an 80% interest. Coronet owns a
CBS-affiliated television station WHBF-TV serving Rock Island and Moline,
Illinois and Davenport and Bettendorf, Iowa.
STATION WOI-TV - Lynch Entertainment Corporation II ("LEC-II"), a wholly-owned
subsidiary of Interactive, owns 49% of the outstanding common shares of Capital
Communications Corporation ("Capital")
23
<PAGE>
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 an AM or FM
radio station or daily newspaper in the same market, although
24
<PAGE>
AM-FM station combinations by itself are permitted; (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
On December 1, 1995, CLR Video LLC, a 60% owned subsidiary of
Interactive acquired 23 cable television systems in northeast Kansas serving
approximately 4,500 subscribers for $5.2 million. Certain of the systems cluster
with local telephone exchanges owned by J.B.N. Telephone. Interactive also owns
a small cable system in Haviland, Kansas. Results of operations have not been
significant to date.
See the "harvesting" initiative at page 19 as to sale of Interactive's
DirectTV franchise in certain parts of New Mexico. In December 1999, 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 Services ("PCS").
A subsidiary of Interactive is a 49.9% limited partner in Fortunet
Communications, L.P. ("Fortunet"). Fortunet is the successor to five
partnerships that won 30 megahertz personal communications services 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 CBlock licensees four choices (one of
which was the resumption of principal and interest payments) with respect to
their licenses. The three other options, as modified in March 1998, were (i)
giving up all C-Block licenses in any Metropolitan Trading Areas ("MTA"); for
licenses returned, the licensee may either opt (a) to rebid on those licenses in
the reauction and forfeit 100% of the down payment or (b) to forego the
opportunity to rebid on those licenses and receive a credit of 70% of the down
payment to be used to prepay any licenses retained, (ii) using 70% of the down
payments (100% in the case of licenses to be paid up) to prepay licenses in any
MTA while giving up the licenses not prepaid, and (iii) giving up 15 MHZ of the
30 MHZ licenses in any
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<PAGE>
MTAs for forgiveness of 50% of the debt; a licensee who elects to resume
installment payments on the remaining portion would be entitled to a credit
towards debt service equal to 40% of the down payments on the spectrum given up
while a licensee who elects to prepay the retained licenses would receive a
credit towards prepayment equal to 70% of the down payments on the spectrum
given up. In the third quarter of 1997, Interactive provided a reserve of 30% of
its subsidiary's investment in Fortunet ($4.6 million after-tax).
In June 1998, Fortunet, pursuant to the FCC restructuring program,
elected to give up all of its PCS licenses, except for 15 MHZ licenses in
Tallahassee, Panama City and Ocala, Florida. It used the FCC credits from the
returned licenses to pay the remaining purchase prices for the retained Florida
licenses. Fortunet also received back $3.9 million from the FCC, which was used
to pay down a portion of Fortunet's loan from Interactive's subsidiary. This
reduced the loan to Fortunet to approximately $20 million. On April 15, 1999,
the FCC completed a reauction of all the "C Block" licenses that were returned
to it subsequent to the original auction, including the 15 MHZ licenses that
Fortunet returned on June 8, 1998, in the basic trading areas of Tallahassee,
Panama City, and Ocala, Florida. In that reauction, the successful bidders paid
a total of $2.7 million for the three licenses as compared to the $18.7 million
carrying amount of Interactive's investment in Fortunet. Accordingly, for the
quarter ended March 31, 1999, Interactive has provided 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.
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 have an aggregate purchase price of $19 million after a 25% bidding
credit. In December 1997, East/West Communications, Inc. ("East/West") succeeded
to the assets and liabilities of Aer Force with LPCSF receiving 49.9% of the
common stock. Immediately thereafter, Lynch spun off 39.9% of the common stock
of East/West to Lynch's shareholders and transferred 10% of East/West stock to
Gabelli Funds, Inc. ("GFI") in satisfaction of an obligation to pay it 10% of
the net profits of Aer Force (after an assumed cost of capital). Interactive
currently owns 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 $4.5
million at March 31, 1999, redeemable in 2009 subject to earlier payment in
certain circumstances. East/West has certain financial and operating hurdles to
overcome in the near term, including the need for sufficient liquidity.
East/West is a development stage company with no operations or
revenues. Its sole assets are its PCS licenses, and it owed the Federal
Communications Commission approximately $16.5 million as of March 31, 1999.
Scheduled interest and principal payments for the period June 30 - December 31,
1999 total $1,933,406 and for January 1 - December 31, 2000 totaled $2,624,890.
East/West raised approximately $1.2 million in a rights offering in June 1999,
of which approximately $0.5 million was available, after the repayment of loans
to directors, to meet those obligations. East/West has stated that unless it
sells its PCS business or joint ventures its PCS business with an entity that
has the capacity to provide substantial funds, it will need to raise substantial
capital to fund its installment payments to the FCC and build out its licenses.
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.
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<PAGE>
LPCSG also has an agreement with Bal/Rivgam LLC (in which GFI has a
49.9% equity interest), which won licenses in FCC's Wireless Communications
Services ("WCS") Auction in 1997, to receive a fee equal to 5% of the realized
net profits of Bal/Rivgam (after an assumed cost of capital), in return for
providing bidding and certain other services to Bal/Rivgam. Bal/Rivgam won 5 WCS
licenses covering a population of approximately 42 million with an aggregate
cost of $0.7 million. LPCSG also has an agreement to provide BCK\Rivgam L.L.C.,
in which GFI has a 49.9% equity interest, with similar services in connection
with the FCC's Local Multipoint Distribution Services ("LMDS") Auction ended on
March 25, 1998. Subject to final grant, BCK/Rivgam won three licenses covering a
population of 1.3 million with an aggregate cost of $6.1 million. LPCSG has an
agreement to receive 5% of the net profits of BCK\Rivgam (after an assumed cost
of capital).
FCC rules impose build-out requirements that require PCS licensees to
provide adequate service to at least one-third of the population in the licensed
area within five years from the date of grant and to at least two-thirds within
ten years, as well as build out requirements for WCS and LMDS licenses. Neither
Fortunet nor East/West has begun any build out of their licenses. There are also
substantial restrictions on the transfer of control of C and F Block PCS
licenses, WCS licenses and LMDS licenses.
There are many risks relating to PCS communications including without
limitation, the high cost of PCS licenses, the fact that it involves start-up
businesses, raising the substantial funds required to pay for the licenses and
the build out, determining the best way to develop the licenses and which
technology to utilize, the small size and limited resources of Fortunet and
East/West compared to other potential competitors, existing and changing
regulatory requirements, additional auctions of wireless telecommunications
spectrum and actually building out and operating new businesses profitably in a
highly competitive environment (including already established cellular telephone
operators and other new PCS licensees). There are also similar risks as to WCS
and LMDS licenses. There can be no assurance that any licenses granted to
Fortunet or East/West can be successfully sold or financed or developed, with
The Company's subsidiaries recovering their debt and equity investments.
II. SERVICES
The Morgan Group, Inc.
The Morgan Group Inc. ("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 purchased approximately 102,528
shares of its Class A common stock at $9.00 per share pursuant to a "Dutch
Auction." At March 25, 1999, Interactive's equity ownership in Morgan was
approximately 55%. Because the Class B common stock is entitled to two votes per
share, its voting interest in Morgan at March 25, 1999 was approximately 70%
and, therefore, Interactive continues to consolidate Morgan's results in its
financial statements. Morgan Class A common stock is listed on the American
Stock Exchange under the symbol "MG."
Morgan is the nation's largest publicly owned service company in
managing the delivery of manufactured housing, specialized equipment and
commercial vehicles 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 1,530 independent owneroperators and 1,810 other drivers who are
its employees (primarily part-time). Morgan dispatches its drivers
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<PAGE>
from 108 locations in 31 states. Morgan's largest customers include Fleetwood
Enterprises, Inc., Oakwood Homes Corporation, Winnebago Industries, Inc.,
Champion Enterprises, Inc., Cavalier Homes, Inc., Clayton Homes, Palm Harbor
Homes, Inc., Four Seasons Housing, Inc., Fairmont Homes, Inc. and Ryder Systems,
Inc.
In 1996, Morgan acquired the assets of Transit Homes of America, a
national outsourcing company located in Boise, Idaho. In 1995, Morgan acquired
the assets of Transfer Drivers, Inc. ("TDI"), a northern Indiana-based
outsourcing company. TDI is a market leader in the fragmented truck delivery
business focusing on relocation of consumer and commercial vehicles for
customers, including Budget One-Way Rental, Ryder System, Inc. and Ford Motor
Company.
Morgan also provides certain insurance and financing services to its
owner-operators through its subsidiaries, Interstate Indemnity Company
("Interstate") and Morgan Finance, Inc. ("Finance").
In the first half of 1997, Morgan discontinued the "Truckaway"
operation of the Specialized Transport Division taking a special charge to
income in the fourth quarter of 1996. Truckaway was a line of business which
focused on the transportation of van conversions, tent campers, and automotive
products utilizing Company-owned equipment. The truckaway operation had revenues
of $12,900,000 and an estimated operating loss of $1,800,000 for the year ended
December 31, 1996.
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 to
purchasers of manufactured homes and motor homes and the availability and price
of motor fuels. This industry is subject to production cycles. The manufactured
housing industry growth was approximately 2.3% in 1998.
Growth Strategy. Morgan's strategy is to grow through expansion in the
niche businesses already being served with heavy emphasis on outsourcing, along
with pursuing acquisitions of niche transportation carriers who are servicing
their customer base with unique service and/or equipment. In addition, the
Company looks to expand insurance product offerings to drivers through its
subsidiary Interstate.
Morgan's initiatives for improved margins are to exit lines of business
which are unrewarding, reducing corporate overhead, and improving the Company's
safety record. There is no assurance that such strategy and initiatives will be
successful in light of changing economic markets and competitive conditions.
Morgan is continuously reviewing and negotiating potential
acquisitions. 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.
Competition. All of Morgan's activities are highly competitive. In
addition to fleets operated by manufacturers, Morgan competes with several large
national interstate carriers and numerous small regional or local interstate and
intrastate carriers. Morgan's principal competitors in the manufactured housing
marketplace are privately owned. In the commercial transport market, Morgan
competes with large national interstate carriers, many of whom have
substantially greater resources than Morgan. 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, insurance coverage and the geographic
scope of the carrier's authority and operational structure. 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 has three lines of business: manufactured
housing, specialized outsourcing services and insurance and finance. The
Company's manufactured housing line provides outsourced
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<PAGE>
transportation and logistical services to manufacturers of manufactured housing
through a network of terminals located in 32 states. The Company's specialized
outsourcing services provides outsourced transportation services primarily to
manufacturers of recreational vehicles, commercial trucks and trailers through a
network of service centers in eight states. The third line, insurance and
finance, provides insurance and financing to the Company's drivers and
independent owner-operators.
Selected Operating and Industry Participation Information. The
following table sets forth certain operating and industry participation
information for each of the five years ended December 31, 1998.
<TABLE>
<CAPTION>
Manufactured Housing 1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Operating Information:
<S> <C> <C> <C> <C> <C>
New Home Shipments .................. 98,181 114,890 121,136 154,389 161,543
Other Shipments ..................... 23,423 29,860 23,465 24,144 17,330
-------- -------- -------- -------- --------
Total Shipments ..................... 121,604 144,750 144,601 178,533 178,873
Linehaul Revenues (000s) (1) ........ $ 53,520 $ 63,353 $ 72,616 $ 93,092 $ 94,158
Manufactured Housing
Industry Participation: 1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Industry Production (2) ............ 451,646 505,819 553,133 558,435 601,678
New Home Shipments ................. 98,181 114,890 121,136 154,389 161,543
Share of Unites Shipped ............ 21.7% 22.7% 21.9% 27.6% 26.8%
Specialized Outsourcing 1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Services Operating Information:
Shipments .......................... 73,994 94,291 99,623 80,314 82,344
Linehaul Revenues (000s)(1) ........ $43,443 $49,336 $49,259 $39,336 $42,994
<FN>
(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.
</FN>
</TABLE>
Customers and Marketing. 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 the Company's transportation
costs. Operating results generated under customer contracts in 1996, 1997, and
1998 were 62%, 68% and 64% of total operating revenues, respectively. Morgan's
ten largest customers have been served for at least three years and accounted
for approximately 59%, 66%, and 69% of its operating revenues in 1996, 1997, and
1998, respectively. The following customers accounted for more than 10% of
Morgan's revenues in 1998, 1997 and 1996: Oakwood Homes Corporation (21% in
1998, and 15% in 1997), and Fleetwood Enterprises, Inc. (17% in 1998, 19% in
1997, and 20% in 1996). Morgan has been servicing Oakwood for ten years and
Fleetwood for over 25 years and believes its relationship with both companies is
good.
Independent Owner-Operators. The shipment of product by Manufactured
Housing and certain Specialized Outsourcing Services such as towaway and pickup
is conducted by contracting for the use of the equipment of independent
owner-operators.
Owner-operators are independent contractors who own toters, tractors or
pickup trucks which they contract to, and operate for, Morgan on a long-term
basis. Independent owner-operators are not generally approved to transport
commodities on their own in interstate or intrastate commerce. Morgan, however,
possesses such approvals and/or authorities (see "Regulation"), and provides
marketing, insurance, communications, administrative, and other support required
for such transportation.
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<PAGE>
Risk Management, Safety and Insurance. The risk of substantial losses
arising from traffic accidents is inherent in any transportation business.
Morgan carries insurance to cover such losses up to $25 million per occurrence
with a deductible of up to $250,000 per occurrence for personal injury and
property damage. The frequency and severity of claims under the Company's
liability insurance affect the cost, and potentially the availability, of such
insurance. If Morgan is required to pay substantially greater insurance
premiums, or incurs substantial losses above $25 million or substantial losses
below its $150,000 deductible, its results of operations can be materially
adversely affected. There can be no assurance that Morgan can continue to
maintain its present insurance coverage on acceptable terms.
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 will continue to have jurisdiction
primarily to insure that carriers providing intrastate transportation services
maintain required insurance coverage, comply with all applicable safety
regulations, and conform to regulations governing size and weight of shipments
on state highways. Most states have adopted D.O.T. safety regulations and
conform to regulations governing size and weight of shipments on state highway,
and actively enforce them in conjunction with D.O.T. personnel.
Carriers normally are required to obtain authority from the I.C.C. or
its successor as well as various state agencies. Morgan is approved to provide
transportation from, to, and between all points in the continental United
States.
Federal regulations govern not only operating authority and
registration, but also such matters as the content of agreements with
owner-operators, required procedures for processing of cargo loss and damage
claims, and financial reporting. Morgan believes that it is in substantial
compliance with all material regulations applicable to its operations.
The D.O.T. regulates safety matters with respect to the interstate
operations of Morgan. Among other things, the D.O.T. regulates commercial driver
qualifications and licensing; sets minimum levels of carrier liability
insurance; requires carriers to enforce limitations on drivers' hours of
service; prescribes parts, accessories and maintenance procedures for safe
operation of freight vehicles; establishes noise emission and employee health
and safety standards for commercial motor vehicle operators; and utilizes
audits, roadside inspections and other enforcement procedures to monitor
compliance with all such regulations. In 1997, the D.O.T. has established
regulations which mandate random, periodic, pre-employment, post-accident and
reasonable cause drug testing for commercial drivers. The D.O.T. has also
established similar regulations for alcohol testing. Morgan believes that it is
in substantial compliance with all material D.O.T. requirements applicable to
its operations.
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
30
<PAGE>
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.
III. SPINNAKER STOCK
Interactive will own 1,000,000 shares of Common Stock of Spinnaker, of
which all are pledged by Lynch to two banks to secure two lines of credit to
Lynch aggregating $20.0 million. Interactive intends to sell such shares from
time to time to fund its acquisition program. On August 9, 1999, the closing
price in limited trading of Spinnaker Common Stock on the AMEX was $13.75 per
share. See "Risk Factors - Interactive May Have Difficulty Selling Spinnaker
Stock."
Spinnaker is a leading manufacturer of adhesive backed paper label
stock and industrial tape for the packaging industry as well as being a major
supplier of stock for pressure sensitive U.S. postage stamps. On April 12, 1999,
Spinnaker announced that it has agreed to sell 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 two
subsidiaries are Central Products Company, acquired from Alco Standard in 1995,
and Spinnaker Electrical, a pressure sensitive electrical tape business acquired
from tesa tape, inc., in 1998. The sales were closed on July 30, 1999 and August
10, 1999. The sales are part of a plan to seek strategic alternatives which
Spinnaker announced in November 1998.
IV. OTHER INFORMATION
While Interactive holds licenses of various types, Interactive does not
believe they are critical to its overall operations, except for (1) the
television-broadcasting licenses of WHBF-TV and WOI-TV; (2) Interactive's
telephone subsidiaries' franchise certificates to provide local-exchange
telephone service within its service areas; (3) Western New Mexico Telephone
Company's FCC licenses to operate point-to-point microwave systems; (4) licenses
held by partnerships and corporations in which Western New Mexico Telephone
Company and Inter-Community Telephone Company own minority interests to operate
cellular telephone systems covering areas in New Mexico and North Dakota, (5)
CLR Video's franchises to provide cable television service within its service
areas and (6) personal communications services licenses held by companies in
which Interactive's subsidiaries have investments, as well as the Las Cruces,
New Mexico PCS License held by Interactive.
The capital expenditures, earnings and competitive position of
Interactive have not been materially affected by compliance with current
federal, state, and local laws and regulations relating to the protection of the
environment; however, Interactive cannot predict the effect of future laws and
regulations. Interactive has not experienced difficulties relative to fuel or
energy shortages but substantial increases in fuel costs or fuel shortages could
adversely affect the operations of Morgan.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a discussion of Year 2000 matters.
31
<PAGE>
Interactive is a party to certain lawsuits in the ordinary course of
business, primarily at Morgan. See "Risk Factors - Morgan Claims Costs May
Affect Profitability" and "Business of Interactive - II. Services The Morgan
Group, Inc. - Risk Management, Safety and Insurance" for information on claims,
lawsuits and insurance relating to Morgan.
No portion of the business of Interactive is regarded as seasonal,
except that, in the case of Morgan, fewer shipments are scheduled during the
winter months in those parts of the country where weather conditions limit
highway use.
There were no customers in 1998 or 1997 that represents 10% or more of
combined revenues, except for Oakwood Homes Corporation (15.5% in 1998 and 11.1%
in 1997) and Fleetwood Enterprises, Inc. (12.7% in 1998 and 14.5% in 1997).
Interactive does not believe that its multimedia business is dependent on any
single customer.
Excluding the following for Morgan: approximately 1,530 independent
owner-operators and 1,420 other drivers, Interactive had a total of
approximately 630 employees at December 31, 1998, compared to approximately 633
employees at December 31, 1997.
Additional information with respect to each of Interactive's segments
is included in Note 13, Segment information to the Combined Financial Statements
included herein.
RELATIONSHIP BETWEEN LYNCH AND INTERACTIVE
AFTER THE SPIN OFF
Interactive was organized by Lynch as a wholly owned subsidiary. After
the Spin Off, Lynch will not have any ownership interest in Interactive, and
Interactive will be an independent public company.
Six current directors of Lynch will become directors of Interactive. It
is currently expected that for a period of up to three years following the Spin
Off, the current executive officers of Lynch will also be the executive officers
of Interactive. The employees of the corporate office of Lynch will become
employees of Interactive, and Lynch will be charged a management fee for
corporate services provided by the Interactive corporate office to Lynch. Lynch
will have no corporate office of its own.
Prior to the Spin Off, Interactive and Lynch will enter into a
Separation Agreement, described below, for the purpose of governing their
relationship subsequent to the Spin Off, including the provision of management
services and the allocation of tax and certain other liabilities and
obligations. Following the Spin Off, additional or modified agreements,
arrangements and transactions may be entered into by Interactive, Lynch and
their respective subsidiaries. The Separation Agreement was not and any
additional or modified agreements arrangements and transaction may not be the
result of arm's-length negotiations between independent parties, and as a result
the terms may be more or less favorable to one of the companies than if made on
an arms length basis.
The Separation Agreement will be filed as an exhibit to Interactive's
Registration Statement filed with the SEC registering Interactive's Common Stock
under the Exchange Act. The following description summarizes the material terms
of the Agreement, but the following descriptions do not purport to be complete
and are qualified in their entirety by reference to the exhibit.
The Separation Agreement provides that the transfer by Lynch to
Interactive of the assets and business entities constituting Interactive are on
an "as is, where is" basis, and no representations or warranties are being made
by Lynch with respect thereto.
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<PAGE>
The Separation Agreement provides that each of Lynch and Interactive
will be granted access to certain records and information in the possession of
the other and requires each of Lynch and Interactive to provide to the other
copies of all documents filed with the SEC pursuant to the periodic and interim
reporting requirements of the Exchange Act.
The Separation Agreement provides that, in general, except as otherwise
set forth therein or in any related agreement, all costs and expenses incurred
in connection with the Spin Off will be paid 50% by each Company.
The Separation Agreement generally provides for the assumption of
liabilities and cross indemnities designed to place with Interactive
responsibility for liabilities of its Interactive Businesses and with Lynch
responsibility for liabilities of its retained businesses. The Separation
Agreement generally provides that Interactive will be responsible for any tax
liabilities relating to its businesses, whether before or after the Spin Off,
and Lynch will be responsible for any tax liabilities relating to its retained
businesses, whether before or after the Spin Off, and for cross
indemnifications.
The Separation Agreement provides that Interactive may use the names
Lynch Interactive, Lynch Telephone, Lynch Telecommunications, Lynch Multimedia
and derivatives. While it is currently expected that Interactive will not seek
manufacturing acquisitions similar to Lynch's current manufacturing operations
and Lynch will not seek multimedia and transportation services acquisitions
similar to Interactive's current multimedia and services operations, the
Separation Agreement does not restrict either Interactive or Lynch.
The Separation Agreement provides that employees of the corporate
office of Lynch will become employees of Interactive following the Spin Off and
that Interactive will provide corporate management services to Lynch for a
transition period of up to three years, with Lynch paying a proportion of
Interactive's corporate office expense as described below under "Corporate
Expense." Subject to the direction of Lynch's Board of Directors, such corporate
management services may include supervision of operating subsidiaries, strategic
planning, acquisition analysis, investment banking and financial advisory
services, supervision of the preparation of the corporate tax returns, and
supervision of financial reporting and other regulatory matters applicable to
Lynch as a public company. In providing these services, Interactive may employ
consultants and other advisers in addition to utilizing its own employees. The
Separation Agreement provides that Interactive shall not be liable to Lynch in
connection with the provision of such services except for its wilful misconduct
and that Lynch will indemnify Interactive to the maximum extent permitted by law
for any claims against it except where it has been found liable for its willful
misconduct.
EXECUTIVE OFFICERS AND DIRECTORS OF INTERACTIVE
The executive officers and directors of Interactive at the Spin Off and
their ages as of April 1, 1999 are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Mario J. Gabelli 56 Director, Chairman of the Board and
Chief Executive Officer
Robert E. Dolan 47 Chief Financial Officer
Robert A. Hurwich 57 Vice President-Administration,
General Counsel and Secretary
Paul J. Evanson 57 Director
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
John C. Ferrara 47 Director
David C. Mitchell 57 Director
Salvatore Muoio 39 Director
Ralph R. Papitto 72 Director
</TABLE>
Each of the directors is currently a director of Lynch.
Mario J. Gabelli, Chairman and Chief Executive Officer of Lynch (since
1986); Chairman and Chief Executive Officer of Gabelli Funds, Inc., (since
1980), a private company which makes investments for its own account; Chairman
and Chief Executive Officer of Gabelli Asset Management Inc. (since 1999), a
NYSE listed holding company for subsidiaries engaged in various aspects of the
securities business (including GAMCO Investors, Inc. of which he is Chairman and
Chief Executive Officer); Director/Trustee and/or President of thirteen
registered investment companies managed by Gabelli Funds, LLC (since 1986);
Director of East/West Communications, Inc.; Governor of the American Stock
Exchange.
Robert E. Dolan, Chief Financial Officer of Lynch (since February 1992)
and Controller (since May 1990).
Robert A. Hurwich, Vice President-Administration, General Counsel and
Secretary of Lynch Corporation since February 1994.
Paul J. Evanson, President (since 1995) of Florida Power & Light Co.;
Vice President, Finance and Chief Financial Officer of FPL Group, Inc.
(1992-1995), parent company of Florida Power & Light; President and Chief
Operating Officer of Lynch (1988 - 1992); Chairman (1990 - 1992) and President
(1988 - 1992) of Spinnaker Industries, Inc., a subsidiary of Lynch engaged in
the manufacturing of adhesive backed materials; Director of FPL Group, Inc.,
Florida Power & Light Company and Southern Energy Homes, Inc.
John C. Ferrara, Executive Vice President and Chief Financial Officer
(1998-January 1999) of Golden Books Family Entertainment, Inc., a NASDAQ company
which published, licensed and marketed entertainment products and subsequently
filed for protection under the Bankruptcy Act in late February 1999; Vice
President and Chief Financial Officer (1989-1997) of Renaissance Communications
Corp., a NYSE company which owned and operated television broadcast stations;
from 1973-1989, various financial positions at The American Express Company,
National Broadcasting Company (NBC) and Deloitte & Touche; Director of Gabelli
Funds, Inc. (since 1999).
David C. Mitchell, President of the Telephone Group and member of the
Board of Directors of Rochester Telephone (now Frontier Corp.) until 1992;
President and Chief Executive Officer of Personal Sound Technologies, Inc., a
development stage new venture company bringing a technology hearing aid to
market (1992-3); Advisor to C-Tec Corporation from 1993 to its corporate
reorganization in 1997; Director of Commonwealth Telephone Enterprises, Inc.
(where he has also serves as an adviser), USN Communications, Inc., Marine
Midland Bank (Rochester, NY Board), Finger Lakes Long Term Care Insurance Co.
and IBS International Corp.
Salvatore Muoio, Principal and Chief Investment Officer of S. Muoio &
Co. LLC, a securities advisory firm (since 1996); Security Analyst and Vice
President of Lazard Freres & Co., L.L.C., an investment
34
<PAGE>
banking firm (1995-1996); Securities Analyst at Gabelli & Company, Inc.
(1985-1995).
Ralph R. Papitto, Chairman and Chief Executive Officer of AFC Cable
Systems, Inc. a manufacturer and supplier of electrical distribution products
(since 1993); Founder, Chairman and a Director of Nortek, Inc., a manufacturer
of construction products (1967-1993); Director of AFC Cable Systems, Inc.;
Chairman of the Board of Trustees of Roger Williams University.
The Board of Directors of Interactive has established three standing
committees, the principal duties of which are described below:
Audit Committee: Will recommend to the Board of Directors the
appointment of independent auditors; will review annual financial reports to
shareholders prior to their publications; will review the report by the
independent auditors concerning management procedures and policies; and will
determine whether the independent auditors have received satisfactory access to
Interactive's financial records and full cooperation of corporate personnel in
connection with their audit of Interactive's records. The initial members will
be Messrs. Ferrara (Chairman), Mitchell and Muoio.
Executive Compensation and Benefits Committee: Will develop and make
recommendations to the Board of Directors with respect to Interactive's
executive compensation policies; will recommend to the Board of Directors the
compensation to be paid to executive officers; will administer Interactive's
executive benefit plans; and will perform such other duties as may be assigned
to it by the Board of Directors. The initial members will be Messrs. Papitto
(Chairman), and Evanson.
Executive Committee: Will exercise all power and authority of the Board
of Directors, except as otherwise provided by Delaware law or by the By-laws of
Interactive, in the management affairs of Interactive during intervals between
meetings of the Board of Directors. The initial members will be Messrs Gabelli
(Chairman), Evanson and Papitto.
Interactive does not have a nominating committee. Nominations for
directors and officers of Interactive are matters considered by the entire Board
of Directors.
Compensation of Directors. Directors, who are not otherwise employees,
receive a monthly cash retainer of $1,500 and a fee of $2,000 for each in person
Board of Directors meeting and a fee of $1,000 for each telephonic Board of
Directors meeting (which lasts more than one hour) and each Committee meeting
the Director attends. In addition, a non-employee director serving as a
committee chairman receives an addition $2,000 annual cash retainer. A Director
who is an employee of Interactive is not compensated for services as a member of
the Board of Directors or any committee thereof. In addition, Interactive
purchases accident and dismemberment insurance coverage of $100,000 for each
member of the Board of Directors and maintains a liability insurance policy
which provides for indemnification of each Director (and officer) against
certain liabilities which each may incur in his capacity as such.
Indemnification of Directors and Officers. Under Section 145 of the
Delaware General Corporation Law ("Delaware Law"), the Company has broad powers
to indemnify its directors and officers against liabilities they may incur in
such capacities, including liabilities under the Securities Act. The Company's
Certificate of Incorporation provides that directors and officers of the Company
shall be indemnified to the fullest extent of Delaware law.
The Delaware Law provides that a corporation may limit the liability of
each director to the corporation or its stockholders for monetary damages except
for liability (i) for any breach of the director's duty of loyalty
35
<PAGE>
to the corporation or its stockholders, (ii) for acts or omissions not in good
faith or that involve intentional misconduct or a knowing violation of law,
(iii) in respect of certain unlawful dividend payments or stock redemptions or
repurchases and (iv) for any transaction which the director derives an improper
personal benefit. The Certificate of Incorporation provides for the elimination
and limitation of the personal liability of directors of the Company for
monetary damages to the fullest extent permitted by Delaware Law. In addition,
the Certificate of Incorporation provides that if Delaware Law is amended to
authorize the further elimination or limitation of the liability of a director,
then the liability of the directors shall be eliminated or limited to the
fullest extent permitted by Delaware Law, as so amended. The effect of this
provision is to eliminate the rights of the Company and its stockholders
(through stockholders' derivative suits on behalf of the Company) to recover
monetary damages against a director for breach of the fiduciary duty of care as
a director (including breaches resulting from negligent or grossly negligent
behavior) except in the situations described in clauses (i) through (iv) above.
This provision does not limit or eliminate the rights of the Company or any
stockholder to seek non-monetary relief such as an injunction or recission in
the event of a breach of a director's duty of care. The Company's Certificate of
Incorporation also provides that the Company shall, to the full extent permitted
by Delaware Law, as amended from time to time, indemnify and advance expenses to
each of its currently acting and former directors, officers, employees and
agents.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of Interactive where indemnification will
be required or permitted.
Executive Officers. The principal executive officers of Interactive
will initially be the same as the principal executive officers of Lynch. After a
transition period of up to three years, the chief executive officer and the
other principal officers can only be executive officers of either Interactive or
Lynch, although Mr. Gabelli may remain the Chairman of the Board of the company
of which he is no longer chief executive officer.
No determination has been made at this time as to which company the executive
officers will continue to serve.
Executive Officers Compensation. Messrs. Gabelli, Dolan and Hurwich
have been executive officers at Lynch for at least the last five years and are
expected to be executive officers of both Manufacturing and Interactive for a
transition period of up to three years from the date of the Spin Off. As
employees of Lynch, they received the following compensation:
<TABLE>
SUMMARY COMPENSATION TABLE
Annual Compensation
<CAPTION>
Long Term
Name and Compensation All Other
Principal Awards Compensation
Position Year Salary($) Bonus($)1 Stock Underlying Option2 ($)3
- -------- ---- --------- ---------- ------------------------ ----
<S> <C> <C> <C> <C> <C>
Mario J. Gabelli ............ 1998 500,000 0 -- 200
Chief Executive Officer, .. 1997 500,000 0 25,000 200
Chairman of the Board ... 1996 500,000 0 -- 200
Chairman of the Executive
Committee
<FN>
1Bonuses earned during any fiscal year are generally paid during the following
fiscal year.
2Shares of Common Stock underlying Phantom Stock Plan awards.
3The compensation reported represents contributions made by Lynch to the Lynch
401(k) Savings Plan. The amount of perquisites, as determined in accordance with
the rules of the Securities and Exchange Commission relating to Executive
Compensation did not exceed the lesser of $50,000 or 10% of salary and bonus for
1998. </FN> </TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
Long Term
Name and Compensation All Other
Principal Awards Compensation
Position Year Salary($) Bonus($)1 Stock Underlying Option2 ($)3
- -------- ---- --------- ---------- ------------------------ ----
<S> <C> <C> <C> <C> <C>
Robert E. Dolan ......... 1998 240,000 50,000 2,000 200
Chief Financial Officer 1997 201,000 0 4,000 200
1996 172,500 200,000 4,000 200
Robert A. Hurwich ....... 1998 164,000 20,000 1,000 200
Vice President-Admin.- 1997 156,000 0 1,500 200
istration, Secretary, 1996 147,500 50,000 2,500 200
General Counsel
</TABLE>
Corporate Expense
The employees of Lynch's corporate office will become employees of
Interactive at the time of the Spin Off and Interactive will become a lessee
with Lynch of the corporate office lease in Rye. After the Spin Off, Interactive
will provide corporate management services to Lynch for a period of up to three
years, and either Interactive or Lynch may amend or terminate the arrangements
at any time on 90 days notice to the other.
Pursuant to the management arrangement, expenses specifically related
to Interactive or Lynch will be charged to the company for which they were
incurred. Other corporate office expenses such as employee expense, rent, and
other non-specifically allocated corporate office expenses ("Corporate Overhead
Expense"), will be allocated between Interactive and Lynch. Based principally on
an informal estimate of time spent by the corporate office in the past on
Interactive and Lynch matters, the initial allocation of Corporate Overhead
Expense after the Spin Off will be 75% to Interactive and 25% to Lynch. However,
Interactive or Lynch may change that allocation from time to time to reflect
changing time estimates or other factors determined to be relevant at the time.
The employees have not and will not keep time sheets, and the allocation was not
and in the future may not be the result of arms-length negotiations and as a
result may be more or less favorable to one company or the other than might
otherwise result. Total corporate expense for pre-Spin Off Lynch for the year
ended December 31, 1998, was approximately $2.4 million. Interactive may hire an
executive substantially all of whose time would be spent on Interactive,
particularly its multimedia businesses, and whose cost would be billed
accordingly. Total corporate expense for Interactive and Lynch after the Spin
Off may be greater than for Lynch before the Spin Off. This may result, in part,
from the fact that there will be two public companies, each with its own
shareholders, transfer agent and registrar, directors, directors and officers
insurance, stock exchange listing, SEC filing, auditing and other public company
expenses.
Bonuses for corporate headquarters employees in 1999 are expected to be
determined under Lynch's bonus plans as if the Spin Off had not occurred, and
Interactive is expected to bear its proportionate share. Beginning in 2000, each
of Interactive and Lynch will determine their own bonuses for corporate office
staff and bear the cost thereof.
With respect to the 43,000 units under Lynch's Phantom Stock Plan, each
representing one share of Lynch stock outstanding at the time of the Spin Off,
the units will be divided into two units, one representing one share of
Interactive stock and one representing one share of Lynch stock. The original
unit grant price will be divided between the two new units based upon the
average relative market price of Interactive stock versus Lynch stock for the
five trading days beginning on the eleventh trading day after the effective date
of the Spin Off. Because the grant price has to double within the five grant
periods for the units to be exercisable, it is not currently probable that any
units will be exercised. However, each of Interactive and Lynch will bear its
own
37
<PAGE>
cost of the divided units. Interactive intends to adopt a new Phantom Stock Plan
similar to existing Lynch Phantom Stock Plan.
The foregoing arrangements, including the allocation of Corporate
Overhead Expense, may be changed in the future by either Interactive or Lynch.
TRANSACTIONS WITH CERTAIN AFFILIATED PERSONS
Mr. Gabelli is affiliated with various entities which he directly or
indirectly controls and which are engaged in various aspects of the securities
business, such as an investment advisor to various institutional and individual
clients including registered investment companies and pension plans, as a
broker-dealer, and as managing general partner of various private investment
partnerships. During 1998, Lynch and its subsidiaries engaged in various
transactions with certain of these entities and the amount of commissions, fees,
and other remuneration paid to such entities, excluding reimbursement of certain
expenses related to Mr. Gabelli's employment by the Corporation (including
approximately $72,000 reimbursement in connection with an airplane in part owned
by a subsidiary of Gabelli Funds, Inc.), was less than $60,000.
As of August 12, 1996, Rivgam Communicators, L.L.C., a subsidiary of
GFI, agreed to pay a subsidiary of Lynch a 10% net profit interest (after a
capital charge) in Rivgam in return for certain services provided or to be
provided, by Lynch's subsidiary in connection with bidding on and developing PCS
licenses. In December, 1998, Rivgam transferred to the subsidiary of Lynch a 10
megahertz PCS license in the Las Cruces, NM BTA in full satisfaction of Rivgam's
obligations under the agreement. The cost of the license to Rivgam in the
Federal Communications Commission's auction in 1997 was $674,000. In March, 1997
and February 1998, Bal/Rivgam, L.L.C. and BCK/Rivgam, L.L.C., in which
affiliates of GFI have a 49.9% interest, agreed to pay the subsidiary a 5% net
profits interest (after a capital charge) in Bal/Rivgam and BCK/Rivgam,
respectively, in return for certain services provided or to be provided by
Lynch's subsidiary in connection with bidding on and developing wireless
communication service licenses and local multipoint distribution services
licenses. Mr. Gabelli is the principal shareholder of GFI and is its Chairman
and Chief Executive Officer.
In 1998, Lynch entered into a lease for approximately 5,000 square feet
in a building in Rye, New York, recently purchased by an affiliate of Mr.
Gabelli, which Interactive will become a party to. The lease runs through
December, 2002, and provides for rent at approximately $18.00 per square foot,
per annum plus a minimum of $2.50 per square foot per annum for electricity,
subject to adjustment for increases in tax and other operating expenses. The
amount of the lease is currently approximately $8,620 per month.
In 1998, Interactive has entered into a non-exclusive agreement with
Gabelli & Company, Inc. ("G&C"), a subsidiary of GFI, pursuant to which G&C
would act as a financial advisor to assist the Corporation in the realization of
the value of its television investments. In the event that a transaction is
consummated with a party contacted by G&C, the Corporation would pay G&C a fee
of 0.75% of the consideration received. Interactive has an agreement in
principle to pay Gabelli Securities, Inc. a fee of approximately $100,000 in
connection with the acquisition by Interactive of Central Scott Telephone
Company.
PRINCIPAL STOCKHOLDERS OF INTERACTIVE
The following table sets forth certain information regarding beneficial
ownership of the Interactive's Common Stock effective as of the Spin Off by (i)
each person who is known by Interactive to own beneficially more than five
percent of Interactive's Common Stock, (ii) each of the Interactive's directors,
(iii) each of the Named Officers and (iv) all current executive officers and
directors as a group.
38
<PAGE>
<TABLE>
<CAPTION>
Name of Amount and Nature Percent
Beneficial Owner* of Beneficial Ownership of Class
- ----------------- ----------------------- --------
<S> <C> <C>
Dimensional Fund Advisors, Inc ..... 86,900(1) 6.1%
Mario J. Gabelli ................... 324,024(2) 22.9%
Paul J. Evanson .................... 5,652 **
John C. Ferrara .................... 1,414 **
David C. Mitchell .................. 400(3) **
Salvatore Muoio .................... 852 **
Ralph R. Papitto ................... 952 **
Robert E. Dolan .................... 235(4) **
Robert A. Hurwich .................. 298(5) **
All Directors and Executive
Officers as a group (eight in total) 333,824 23.6%
------- ----
<FN>
* The address of each holder of more than 5% of the Common Stock is as follows:
Dimensional Fund Advisors - 1299 Ocean Avenue, Santa Monica, CA 90401; and Mr.
Gabelli - Corporate Center at Rye, Rye, NY 10580.
** Represents holdings of less than one percent.
(1) Because of its investments and/or voting power over shares of Common
Stock of the Corporation held in the accounts of its investment
advisory clients, Dimensional Fund Advisors, Inc., an investment
adviser ("Dimensional"), is deemed to be the beneficial owner of 84,500
shares. Dimensional disclaims beneficial ownership of all such shares.
(2) Includes 252,836 shares of Common Stock owned directly by Mr. Gabelli
(including 2,922 held for the benefit of Mr. Gabelli under the
Corporation's 401(k) Savings Plan), 2,000 shares owned by a charitable
foundation of which Mr. Gabelli is a trustee and 70,000 shares owned by
a limited partnership in which Mr. Gabelli is the general partner and
has a 20% interest. Mr. Gabelli disclaims beneficial ownership of the
shares owned by the foundation and by the partnership, except for his
20% interest therein.
(3) 200 shares jointly owned with wife and sharing voting and investment
power.
(4) Includes 35 shares registered in the name of Mr. Dolan's children with
respect to which Mr. Dolan has voting and investment power.
(5) Held for the benefit of Mr. Hurwich under the Corporation's 401(k)
Savings Plan.
</FN>
</TABLE>
Morgan is an approximately 55% owned subsidiary of the Company whose
stock is traded on the AMEX. As of 1999 Mr. Gabelli beneficially owns 10,000
shares (0.8%) of Morgan Group's Class A Common Stock. He may also be deemed to
be a beneficial owner of 155,900 shares of Morgan's Class A Common Stock and
1,200,000 shares of Morgan's Class B Common Stock owned by the Company, by
virtue of his ownership of 22.9% of the shares of Common Stock of the Company.
Mr. Gabelli, however, specifically disclaims beneficial ownership of all shares
of Morgan Group stock held by Interactive.
DESCRIPTION OF CAPITAL STOCK OF INTERACTIVE
General
The Company is authorized to issue 10,000,000 shares of Common Stock,
$.0001 par value. The following description of the Company's capital stock does
not purport to be complete and is subject to and qualified in its entirety by
the Company's Certificate of Incorporation and Bylaws, and by the provisions of
applicable Delaware law.
39
<PAGE>
Common Stock
There are 1,412,383 shares of Common Stock outstanding and held by
Lynch. Concurrently with the Spin Off, all of such shares will be transferred to
shareholders of Lynch. The holders of Common Stock are entitled to receive
ratably such dividends, if any, as may be declared from time to time by the
Board of Directors out of funds legally available therefor. See "Dividend
Policy." Each share of Common Stock will have one vote on all matters submitted
to a vote of shareholders. In the event of the liquidation, dissolution or
winding up of Interactive, the holders of Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities, if any, then
outstanding.
Delaware Takeover Statute
The Company is subject to Section 203 of the Delaware General
Corporation Law ("Section 203"), which, subject to certain exceptions, prohibits
a Delaware corporation from engaging in any business combination with any
interested shareholder for a period of three years following the date that such
stockholder became an interested stockholder, unless: (i) prior to such date,
the board of directors of the corporation approved either the business
combination or the transaction that resulted in the stockholder becoming an
interested stockholder; (ii) upon consummation of the transaction that resulted
in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding for purposes of
determining the number of shares outstanding those shares owned (a) by persons
who are directors and also officers and (b) by employee stock plans in which
employee participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange offer;
or (iii) on or subsequent to such date, the business combination is approved by
the board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at least 66
2/3% of the outstanding voting stock that is not owned by the interested
stockholder.
Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii) any
sale, transfer, pledge or other disposition of 10% or more of the assets of the
corporation involving the interested stockholder; (iii) subject to certain
exceptions, any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder; (iv)
any transaction involving the corporation that has the effect of increasing the
proportionate share of the stock of any class or series of the corporation
beneficially owned by the interested stockholder; or (v) the receipt by the
interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation. In
general, Section 203 defines an interested stockholder as any entity or person
beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the Common Stock of Interactive is
ChaseMellon Shareholder Services, New York, New York.
FEDERAL INCOME TAX CONSEQUENCES OF SPIN OFF
Lynch has received a private tax ruling from the Internal Revenue
Service ("IRS") to the effect that:
1. The Spin Off will qualify as a tax-free spin off under Section 355
and 368 (a)(1)(D) of the Internal Revenue Code of 1986, as amended
(the "Code").
40
<PAGE>
2. No gain or loss with respect to the Interactive shares being spun
off will be recognized by Lynch on the Spin Off.
3. No gain or loss will be recognized by the holders of Lynch Common
Stock solely as a result of their receipt of shares being spun
off.
4. The tax basis of Lynch Common Stock and the Interactive shares
held immediately after the Spin Off by any holder will equal such
holder's tax basis in its Lynch Common Stock before the Spin Off,
allocated in proportion to the relative fair market values of the
Lynch Common Stock and the Interactive shares on the Spin Off
date.
5. The holding period of the Interactive shares received in the Spin
Off will include the holding period of the Lynch Common Stock with
respect to which the Interactive shares were distributed, provided
that such Lynch Common Stock was held as a capital asset on the
Spin Off date.
The IRS Ruling is subject to certain assumptions and the accuracy of
certain representations made by Lynch. Neither Lynch nor Interactive is aware of
any present facts or circumstances that would cause such assumptions or
representations to be untrue.
If the Spin Off were not to qualify as a tax-free spin off under
Sections 355 and 368(a)(1)(D) of the Code, then (i) Lynch would recognize
capital gain equal to the excess of (x) the fair market value of the Interactive
shares on the Spin Off date, over (y) Lynch's adjusted tax basis in the
Interactive shares on such date, and (ii) each holder of Lynch Common Stock who
receives Interactive shares in the Spin Off would be treated as receiving a
taxable distribution in an amount equal to the fair market value of such
Interactive shares on the Spin Off date, taxed first as a dividend to the extent
of such holder's pro rata share of Lynch's current and accumulated earnings and
profits, and then as a nontaxable return of capital to the extent of such
holder's basis in the Lynch Common Stock, with any remaining amount being taxed
as capital gain.
Even if the Spin Off qualifies as a tax-free spin off under Sections
355 and 368(a)(1)(D) of the Code, Lynch (but not Lynch shareholders) also would
recognize taxable gain on the Spin Off (determined as if Lynch had sold all the
Interactive shares for fair market value on the Spin Off date) if (a) 50% or
more of the outstanding stock of Interactive or Lynch were acquired (or deemed
to be acquired pursuant to certain transactions involving the stock or assets of
Lynch, Interactive, or their subsidiaries, and (b) the Spin Off and such
acquisition were treated as part of a plan or series of related transactions
(such a transaction, a "Change in Control Transaction"). For that purpose, any
acquisition of stock of Lynch or Interactive within the period beginning two
years prior to the Spin Off date and ending two years after the Spin Off date
would be presumed to be part of such a plan or series of related transactions,
although Lynch or Interactive, as the case may be, may be able to rebut such
presumption.
Pursuant to the Separation Agreement, Interactive and Lynch will each
bear their respective share of any corporate level tax arising on the Spin Off,
except that Interactive or Lynch, as the case may be, will be obligated to
indemnify the other party on an after-tax basis for 100% of such corporate level
tax if such tax is primarily attributable to (i) actions of Interactive or Lynch
after the Spin Off (including any cessation, transfer to affiliates or
disposition of its active trades or businesses, and certain reacquisitions of
its stock and payments of extraordinary dividends to its shareholders) or (ii)
involvement by Interactive or Lynch in a Change in Control Transaction.
Notwithstanding the foregoing provisions, under the consolidated return
regulations, Interactive and Lynch will each be severally liable to the IRS for
the full amount of any corporate level tax arising on the Spin Off that is not
paid by the other party. Neither Interactive nor Lynch will indemnify any holder
of Lynch Common Stock who receives shares in the Spin Off for any tax
liabilities.
Certain restructuring transactions that Lynch will effect prior to the
Spin Off may trigger tax liabilities.
41
<PAGE>
Current U.S. Treasury Regulations require each holder of Lynch Common
Stock who receives Interactive Common Stock pursuant to the Spin Off to attach
to his or her U.S. federal Income tax return for the year in which the Spin Off
occurs a detailed statement setting forth such data as may be appropriate in
order to show the applicability of Section 355 to the Spin Off. Following the
Spin Off, Lynch will convey the appropriate information to each holder of record
of Lynch Common Stock as of the Record Date.
This discussion of the anticipated Federal income tax consequences of
the Spin Off is for general information only and may not be applicable to
shareholders who are not citizens or residents of the United States or who are
otherwise subject to special treatment under the Code. Lynch stockholders should
consult their own advisers as to the specific tax consequences of the Spin Off,
including the effects of foreign, state and local tax laws and the effect of
possible changes in tax laws. See also "Risk Factors--Tax Free Spin Off Ruling."
AVAILABLE INFORMATION
Interactive has filed with the SEC a Registration Statement under the
Exchange Act with respect to the Shares being issued in the Spin Off. This
Information Statement does not contain all of the information set forth in the
Registration Statement and the exhibits thereto, to which reference is hereby
made. Statements made in this Information Statement as to the contents of any
contract, agreement or other document referred to herein are summaries only and
are not necessarily complete. With respect to each such contract, agreement or
other document filed as an exhibit to the Registration Statement, reference is
made to such exhibit for a more complete description of the matter involved, and
each such statement shall be deemed qualified in its entirety by such reference.
The Registration Statement and the exhibits thereto filed by Interactive with
the SEC may be inspected at the public reference facilities of the SEC listed
below.
After the Spin Off, Interactive will be subject to the informational
requirements of the Exchange Act, and in accordance therewith will file reports,
proxy statements and other information with the SEC. Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities maintained by the Commission at its principal offices at
Room 1024, 450 Fifty Street, N.W., Washington, D.C. 20549 and at the Regional
Offices of the Commission at Seven World Trade Center, Suite 1300, New York, New
York 10048 and in the Citicorp Center, Suite 1400, 500 West Madison Street,
Chicago, Illinois 60661. Copies of such information may be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. The Commission also maintains a
World Wide Web site (http://www.sec.gov) that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. In addition, it is expected that reports,
proxy statements and other information concerning Interactive will be available
for inspection at the offices of the American Stock Exchange, 86 Trinity Place,
New York, NY, 10006-1881.
Interactive intends to furnish holders of Interactive's shares with
annual reports containing consolidated financial statements (beginning with the
year ending December 31, 1999) audited by independent auditors.
Lynch, Morgan and Spinnaker have filed Annual Reports on Form 10-K and
Quarterly Reports on Form 10-Q with the SEC for the year ended December 31, 1998
and the quarters ended March 31, and June 30, 1999, which contain additional
information on Lynch, Morgan and Spinnaker.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS INFORMATION STATEMENT, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED. NEITHER THE DELIVERY OF THE INFORMATION STATEMENT NOR
ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL IMPLY THAT THERE HAS BEEN NO
CHANGE IN THE INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF INTERACTIVE
SINCE THE DATE HEREOF.
42
<PAGE>
Lynch Interactive Corporation
Index to Combined Financial Statements
<TABLE>
Page
<S> <C>
Report of Independent Auditors F-2
Combined Balance Sheets as of June 30, 1999
(unaudited) and as of December 31, 1998 and 1997 F-3
Combined Statements of Operations for the six
months ended June 30, 1999 and 1998 (unaudited) and
for the years ended December 31, 1998, 1997 and 1996 F-5
Combined Statements of Changes In Equity, Investments by and Advances from Lynch
Corporation for the six months ended June 30, 1999, and 1998 (unaudited) and
for the years ended December 31, 1998, 1997 and 1996 F-6
Combined Statements of Cash Flows for the six
months ended June 30, 1999 and 1998 (unaudited)
and for the years ended December 31, 1998, 1997 and 1996 F-7
Notes to Combined Financial Statements F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Lynch Corporation
We have audited the accompanying combined balance sheets of the net assets and
operations to be contributed to Lynch Interactive Corporation (see Note 1) as of
December 31, 1998 and 1997, and the related combined statements of operations,
equity, investments by and advances from Lynch Corporation and cash flows for
each of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the management of Lynch Corporation (the
"Company"). Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the 1996 financial statements
of Dunkirk and Fredonia Telephone Company, a wholly-owned subsidiary of DFT
Communications, Inc. (formerly Lynch Telephone VIII, a wholly-owned subsidiary
of Lynch Corporation) which statements reflect total revenues of $575,000 for
the two month period ended December 31, 1996, the 1997 and 1996 financial
statements of CLR Video, L.L.C., a wholly-owned subsidiary of Lynch Multimedia
(a wholly-owned subsidiary of Lynch Corporation) which statements reflect total
revenues of $1,505,000 and $1,399,000 for the years ended December 31, 1997 and
1996, respectively, and the 1997 and 1996 financial statements of Coronet
Communications Company and of Capital Communications Company, Inc. (corporations
in which the Company has a 20% and 49% interest, respectively). Those statements
were audited by other auditors whose reports have been furnished to us, and our
opinion, insofar as it relates to data included for Dunkirk and Fredonia in
1996, CLR Video, L.L.C. in 1997 and 1996, Coronet Communications Company in 1997
and 1996 and Capital Communications Company, Inc. in 1997 and 1996 is based
solely on the reports of other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. 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
combined financial statements referred to above present fairly, in all material
respects, the combined financial position of the net assets and operations to be
contributed to Lynch Interactive Corporation (see Note 1) at December 31, 1998
and 1997 and the combined results of its operations and its cash flows for each
of the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
/S/ ERNST & YOUNG LLP
Stamford, Connecticut
August 9, 1999
F-2
<PAGE>
<TABLE>
Lynch Interactive Corporation
Combined Balance Sheets
<CAPTION>
(Unaudited)
June 30, December 31,
1999 1998 1997
----------- ---------- ----------
(In Thousands)
ASSETS
CURRENT ASSETS:
<S> <C> <C> <C>
Cash and cash equivalents ........................... $ 17,972 $ 27,021 $ 27,058
Marketable securities ............................... 1,283 967 985
Trade accounts receivable less allowances of $288,
$320 and $286 in 1999, 1998 and 1997, respectively 19,372 18,853 18,907
Deferred income taxes ............................... 4,863 4,265 4,148
Other current assets ................................ 6,814 6,941 6,821
----- ----- -----
TOTAL CURRENT ASSETS ........................... 50,304 58,047 57,919
--------- --------- ---------
PROPERTY, PLANT AND EQUIPMENT:
Land ........................................... 1,247 1,247 1,098
Buildings and improvements ..................... 9,746 9,591 9,037
Machinery and equipment ........................ 131,185 129,251 121,435
------- ------- -------
142,178 140,089 131,570
Accumulated depreciation ....................... (53,296) (48,906) (39,797)
------- ------- -------
88,882 91,183 91,773
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS
OF COMPANIES ACQUIRED, NET ...................... 46,488 47,740 49,232
INVESTMENTS IN AND ADVANCES TO AFFILIATED ENTITIES .. 9,068 24,438 25,448
INVESTMENT IN SPINNAKER INDUSTRIES, INC ............. 13,375 17,750 20,250
OTHER ASSETS ........................................ 7,239 6,934 8,410
----- ----- -----
TOTAL ASSETS ..................................... $ 215,356 $ 246,092 $ 253,032
========= ========= =========
</TABLE>
See accompanying notes.
F-3
<PAGE>
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
1999 1998 1997
------------------------------------
(In Thousands)
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
<S> <C> <C> <C>
Notes payable to banks ............... $ 3,041 $ 2,037 $ 4,285
Notes payable to Lynch ............... 7,300 15,150 22,714
Trade accounts payable ............... 5,161 4,662 4,228
Accrued interest payable ............. 762 889 886
Taxes payable to Lynch ............... 1,732 2,841 366
Accrued liabilities .................. 15,593 16,176 16,437
Customer advances .................... 2,135 1,996 1,820
Current maturities of long-term debt . 7,848 8,639 7,583
----- ----- -----
TOTAL CURRENT LIABILITIES ....... 43,572 52,390 58,319
-------- -------- --------
LONG-TERM DEBT ......................... 116,069 119,024 126,617
DEFERRED INCOME TAXES .................. 13,125 19,850 22,440
OTHER LIABILITIES ...................... 5,723 4,987 3,455
MINORITY INTERESTS ..................... 9,803 10,527 9,246
EQUITY, INVESTMENTS BY AND ADVANCES FROM
LYNCH CORPORATION .................... 27,064 39,314 32,955
-------- -------- --------
TOTAL LIABILITIES AND EQUITY ........... $215,356 $246,092 $253,032
======== ======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE>
<TABLE>
Lynch Interactive Corporation
Combined Statements of Operations
<CAPTION>
(Unaudited)
Six Months Ended
June 30, Year ended December 31,
1999 1998 1998 1997 1996
--------- ---------- ---------- ---------- ---------
(In Thousands, Except Per Share Amounts)
SALES AND REVENUES:
<S> <C> <C> <C> <C> <C>
Multimedia ................................ $ 27,342 $ 26,324 $ 54,622 $ 47,908 $ 28,608
Services .................................. 75,595 75,494 150,454 146,154 132,208
--------- --------- --------- --------- ---------
102,937 101,818 205,076 194,062 160,816
--------- --------- --------- --------- ---------
COSTS AND EXPENSES:
Multimedia ................................ 19,169 18,452 38,176 35,363 21,435
Services .................................. 69,496 69,361 138,193 135,431 127,236
Selling and administrative ................ 6,448 6,321 12,050 11,980 10,205
--------- --------- --------- --------- ---------
OPERATING PROFIT ........................... 7,824 7,684 16,657 11,288 1,940
--------- --------- --------- --------- ---------
Other income (expense):
Investment income ......................... 1,034 1,600 1,865 1,678 2,150
Interest expense .......................... (5,247) (5,439) (10,383) (9,740) (6,293)
Equity in earnings of affiliated companies 103 125 317 154 119
Reserve for impairment of investment in PCS
license holders ........................ (15,406) -- -- (7,024) --
Gain on sales of subsidiary stock and other
operating assets ........................ -- 13 2,709 260 74
--------- --------- --------- --------- ---------
(19,516) (3,701) (5,492) (14,672) (3,950)
--------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES,
MINORITY INTERESTS AND EXTRA-
ORDINARY ITEM ............................ (11,692) 3,983 11,165 (3,384) (2,010)
Benefit (Provision) for income taxes ....... 3,766 (1,656) (5,012) 736 445
Minority interests ......................... (431) (373) (1,224) (631) 747
--------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE EXTRA-
ORDINARY ITEM ............................ (8,357) 1,954 4,929 (3,279) (818)
--------- --------- --------- --------- ---------
LOSS FROM EARLY EXTINGUISHMENT OF
DEBT, NET OF TAX BENEFIT OF $105 ........ (160) -- -- -- --
--------- --------- --------- --------- ---------
NET INCOME (LOSS) .......................... $ (8,517) $ 1,954 $ 4,929 $ (3,279) $ (818)
========= ========= ========= ========= =========
Weighted average shares outstanding ........ 1,417 1,418 1,418 1,415 1,388
PRO FORMA BASIC EARNINGS (LOSS) PER
SHARE:
INCOME (LOSS) BEFORE EXTRAORDINARY
ITEM ................................... $ (5.90) $ 1.38 $ 3.48 $ (2.32) $ (0.59)
EXTRAORDINARY ITEM ....................... (0.11) -- -- -- --
--------- --------- --------- --------- ---------
NET INCOME (LOSS) .......................... $ (6.01) $ 1.38 $ 3.48 $ (2.32) $ (0.59)
========= ========= ========= ========= =========
PRO FORMA DILUTED EARNINGS (LOSS)
PER SHARE:
INCOME (LOSS) BEFORE EXTRAORDINARY
ITEM ................................... $ (5.90) $ 1.38 $ 3.48 $ (2.32) $ (0.59)
EXTRAORDINARY ITEM ....................... (0.11) -- -- -- --
--------- --------- --------- --------- ---------
NET INCOME (LOSS) .......................... $ (6.01) $ 1.38 $ 3.48 $ (2.32) $ (0.59)
========= ========= ========= ========= =========
</TABLE>
F-5
<PAGE>
<TABLE>
Lynch Interactive Corporation
Combined Statements of Changes in Equity, Investment
by and Advances from Lynch Corporation
<CAPTION>
(Unaudited)
Six Months Ended
June 30, Year Ended December 31,
1999 1998 1998 1997 1996
------- -------- --------- --------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Equity at beginning of period ............ $ 39,314 $ 32,955 $ 32,955 $ 45,068 $ 29,427
Net income (loss) ...................... (8,517) 1,954 4,929 (3,279) (818)
Change in accumulated other comprehensive
income (loss) ......................... (2,473) (900) (1,500) (9,900) 11,450
-------- -------- -------- -------- --------
Total comprehensive (loss) income ..... (10,990) 1,054 3,429 (13,179) 10,632
Investment by and advances (to) from Lynch
Corporation ........................... (1,260) 2,559 2,930 1,066 5,009
-------- -------- -------- -------- --------
$ 27,064 $ 36,568 $ 39,314 $ 32,955 $ 45,068
======== ======== ======== ======== ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
<TABLE>
Lynch Interactive Corporation
Combined Statements of Cash Flows
<CAPTION>
(Unaudited)
Six Months Ended
June 30, Year Ended December 31,
1999 1998 1998 1997 1996
---------- --------- ---------- --------- ----------
(In Thousands)
OPERATING ACTIVITIES
<S> <C> <C> <C> <C> <C>
Net income (loss) ............................... $ (8,517) $ 1,954 $ 4,929 $ (3,279) $ (818)
Depreciation and amortization ................... 7,338 7,084 14,243 13,258 10,158
Net effect of purchases and sales
of trading securities ......................... (316) (150) 18 1,171 9,276
Minority interests .............................. 431 373 1,224 631 (747)
Morgan Special Charges .......................... -- -- -- -- 3,500
Earnings of affiliates .......................... (103) (125) (317) (154) (119)
Reserve for impairment in PCS license holders ... 15,406 -- -- 7,024 --
Deferred taxes .................................. (5,573) 306 (1,707) (1,647) (538)
Gain on sale of subsidiary stock ................ -- -- -- -- 74
Changes in operating assets and liabilities,
net of effects of acquisitions:
Receivables ................................. (519) (3,129) 54 (1,858) (656)
Accounts payable and accrued liabilities .... (1,064) 944 3,173 118 402
Other ....................................... 863 (403) 752 2,620 (1,038)
Other ........................................... -- (952) (2,654) (979) (189)
-------- -------- -------- -------- -------
NET CASH PROVIDED BY OPERATING
ACTIVITIES ...................................... 7,946 5,902 19,715 16,905 19,305
-------- -------- -------- -------- -------
INVESTING ACTIVITIES
Acquisitions (total cost less debt assumed and cash equivalents acquired):
Upper Peninsula Telephone Company ............. -- -- -- (24,568) --
Dunkirk and Fredonia .......................... -- -- -- -- (17,786)
Other ......................................... -- -- -- -- (7,037)
Investment in Personal Communications Services
Partnerships, net ............................ -- (343) 3,692 1,644 (27,106)
Capital expenditures ............................ (4,030) (4,919) (11,642) (11,837) (12,080)
Investment in Coronet Communications Company . -- -- -- 2,995 --
Sale of investments in DBS Operation and
cellular partnerships ...................... -- -- -- 8,576 --
Other ........................................ (110) 778 272 1,573 (399)
-------- -------- -------- -------- -------
NET CASH USED IN INVESTING ACTIVITIES ........... (4,140) (4,484) (7,678) (21,617) (64,408)
-------- -------- -------- -------- -------
FINANCING ACTIVITIES
Issuance of long-term debt ................... -- -- 964 23,765 50,259
Payments to reduce long-term debt ............ (3,746) (3,647) (7,501) (24,643) (7,951)
Net borrowings (payments), lines of credit ... (6,846) (6,934) (9,812) 8,742 9,610
Advances from Lynch Corp. .................... (1,260) 2,559 2,930 1,066 5,009
Other ........................................ (1,003) (46) 1,345 (545) 1,045
-------- -------- -------- -------- --------
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES ......................... (12,855) (12,074) 8,385 57,972
-------- -------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents ................................... (9,049) (6,650) (37) 3,673 12,869
Cash and cash equivalents at beginning of year 27,021 27,058 27,058 23,385 10,516
-------- -------- -------- -------- --------
Cash and cash equivalents at end of year ..... $ 17,972 $ 20,408 $ 27,021 $ 27,058 $ 23,385
======== ======== ======== ======== ========
</TABLE>
See accompanying notes.
F-7
<PAGE>
Lynch Interactive Corporation
Notes to Combined Financial Statements
1. Accounting and Reporting Policies
Background
In 1999, the Board of Directors of Lynch Corporation ("Lynch") approved in
principle the spin off to its shareholders of its multimedia and services
businesses as an independent publicly-traded company (the "Spin- Off"). The
multimedia and services businesses and the independently publicly-traded company
to which the assets and liabilities will be contributed are hereinafter referred
to as Lynch Interactive Corporation (the "Company" or "Lynch Interactive").
Prior to and contemporaneous with the Spin Off, certain legal and regulatory
actions will be taken to perfect the existence of the above mentioned affiliated
multimedia and service companies as subsidiaries of Lynch Interactive
Corporation. At the Spin Off, Lynch will distribute 100 percent of the
outstanding shares of common stock of its wholly-owned subsidiary, Lynch
Interactive, to holders of record of Lynch's common stock as of the close of
business on a date to be determined. Lynch Interactive's operations will consist
primarily of Lynch's multimedia and services businesses. In addition, as part of
the Spin Off, Lynch Interactive will own one million shares of common stock of
Spinnaker Industries, Inc. representing an approximately 13.6% ownership
interest (and an approximate 2.5% voting interest) and Lynch Interactive will
assume certain short-term and long-term debt obligations of Lynch. Prior to the
Spin Off, it is anticipated that Lynch Interactive will succeed to the credit
facilities established by Lynch.
In April 1999, Lynch received an Internal Revenue Service private letter ruling
that the distribution to its shareholders of the stock of Lynch Interactive
qualifies as tax-free for Lynch and its shareholders. In connection with
obtaining the rulings from the Internal Revenue Service ("IRS") as to the
tax-free nature of the Spin Off, Lynch made certain representations to the IRS,
which include, among other things, certain representations as to how Lynch and
Interactive intend to conduct their businesses in the future. The distribution
is subject to various regulatory approvals and approval of a definitive plan of
Lynch's Board of Directors.
Basis of Presentation
The combined 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 which will be contributed to
Interactive. However, the historical financial information presented herein
reflects periods during which the Company did not operate as an independent
public company and accordingly, certain assumptions were made in preparing such
financial information. Such information, therefore, may not necessarily reflect
the results of operations, financial condition or cash flows of the Company in
the future or what they would have been had the Company been an independent
public company during the reporting periods. Investments in affiliates in which
the Company does not have majority voting control are accounted for in
accordance with the equity method. All material intercompany transaction and
balances have been eliminated. The Company combines the operating results of its
telephone and cable television subsidiaries (60-100% owned at June 30, 1999) and
The Morgan Group, Inc., in which, at June 30, 1999, the Company owned 70.1% of
the voting power and 55.4% of common equity. The Company accounts for the
following affiliated Companies on the equity basis of accounting: Coronet
Communications Company (20% owned at June 30, 1999), Capital Communications
Company, Inc. (49% owned at June 30, 1999) and Fortunet Communications, Inc.
(49.9% owned at June 30, 1999). The shares of Spinnaker Industries, Inc., in
which the Company owns 2.5% of the voting power and 13.6% of the common equity,
are accounted for in accordance with Statement of Financial Accounting Standards
(SFAS) No. 115 "Investments in Debt and Equity Securities."
F-8
<PAGE>
Lynch has historically provided substantial support services such as finance,
cash management, legal, and human resources to its various business units. Lynch
allocates the cost for these services among the business units supported based
principally on informal estimates of time spent by the corporate office on both
Interactive and Lynch matters. In the opinion of management, the method of
allocating these costs is reasonable; however, the costs of these services
allocated to the Company are not necessarily indicative of the costs that would
have been incurred by the Company on a stand-alone basis. It is anticipated that
when the Company becomes an independent public company administrative expenses
will increase by approximately $.5 million (unaudited) per year as a result of
additional financial reporting requirements, stock transfer fees, directors'
fees, insurance, compensation and other costs.
Lynch Interactive and Lynch will enter into certain agreements governing various
ongoing relationships, including the provision of support services and a tax
sharing agreement. The tax sharing agreement will provide for the allocation of
tax attributes to each company as if it had actually filed with the respective
tax authority.
The Company has a significant need for resources to fund the holding company
activities of Interactive. The Company is currently considering various
alternative long and short-term financing arrangements. One such alternative
would be to sell a portion or all of certain investments in certain operating
entities. Additional debt and/or equity financing alternatives are also being
considered. While Lynch 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.
Interim Financial Statements (Unaudited)
The interim financial information as of June 30, 1999 and for the six months
ended June 30, 1999 and 1998 is unaudited. In the opinion of management, the
information furnished in the unaudited interim combined financial statements
reflects all adjustments necessary for a fair presentation of the financial
position and results of operations as of June 30, 1999 and for the six months
ended June 30, 1999 and 1998.
Due to the fact that the services business is seasonal with reduced sales in
winter months, the results of operations for the six months ended June 30, 1999
and 1998 may not be indicative of the Company's full year results.
Use of Estimates
The preparation of combined financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash Equivalents
Cash equivalents consist of highly liquid investments with a maturity of less
than three months when purchased.
At June 30, 1999, and at December 31, 1998 and 1997, respectively, assets of
$12.5 million, $20.8 million and $19.9 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.
F-9
<PAGE>
Marketable Securities
Marketable securities consist principally of common stocks. At June 30, 1999,
and at December 31, 1998, and 1997, respectively, certain marketable securities
and United States Treasury money market funds, classified as cash equivalents,
were classified as trading. Interactive's investment in Spinnaker Industries,
Inc. and certain other equity securities included in other assets with carrying
values of $1.6 million, $1.2 million and $1.0 million, respectively, at June 30,
1999, and at December 31, 1998 and 1997 were classified as available- for-sale.
Trading and available-for-sale securities are stated at fair value with
unrealized gains or losses on trading securities included in earnings and
unrealized gains or losses on available-for-sale securities included in equity
and as a component of comprehensive income (loss). Unrealized gains (losses) of
$316,000, $251,000, $82,000, $169,000 and $628,000 on trading securities has
been included in earnings for the six months ended June 30, 1999 and 1998 and
for the years ended December 31, 1998, 1997 and 1996, respectively. Unrealized
gains on available for sale securities were $12,959,000, $17,071,000 and
$19,470,000 at June 30, 1999 and December 31, 1998 and 1997, respectively. The
changes in unrealized gains in each of the periods presented, net of tax, have
been included in the Combined Statements of Changes in Equity, Investment by and
Advances from Lynch Corporation as "change in accumulated other comprehensive
income (loss)."
The cost of marketable securities sold is determined on the specific
identification method. Realized gains of $5,000, $103,000, $382,000, $229,000
and $102,000, and realized losses of $0, $0, $0, $9,000 and $112,000, are
included in investment income for the six months ended June 30, 1999 and 1998
and for the years ended December 31, 1998, 1997 and 1996, 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 years 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.
Total rent expense was $2.6 million, $2.8 million, and $2.2 million for the
years ended December 31, 1998, 1997 and 1996, respectively.
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 $46.5
million, $47.7 million and $49.2 million are net of accumulated amortization of
$12.7 million, $11.4 million and $9.0 million at June 30, 1999 and at December
31, 1998 and 1997, respectively.
F-10
<PAGE>
Equity, Investment By and Advances From Lynch Corporation
Equity represents the net investment in and advances to Interactive by Lynch. It
includes common stock, additional paid-in capital, net earnings and net
intercompany balances with Lynch which will be contributed at the time of the
Spin Off.
Multimedia
Multimedia revenues include local and intrastate telephone company service
revenues which are subject to review and approval by state public utility
commissions, and long distance network revenues, which are based upon charges to
long distance carriers through a tariff filed by the National Exchange Carriers
Association with the Federal Communications Commission. Revenues are based on
cost studies for the Company's exchanges, and have been estimated pending
completion of final cost studies. Estimated revenue is adjusted to actual upon
the completion of the cost studies.
Services
Service revenues and related estimated costs of transportation are recognized
when transportation of the manufactured housing, recreational vehicle or other
product is completed. Other operating expenses are recognized when incurred.
Morgan maintains personal injury and property damage insurance of up to
$25,000,000 per occurrence; with a deductible of $150,000 beginning April 1,
1998, and $250,000 for prior periods. Morgan maintains cargo damage insurance of
$1,000,000 per occurrence with a deductible of $150,000 beginning April 1, 1998,
and $250,000 for prior periods. Morgan's cargo damage insurance policy includes
a stop-loss provision, under which Morgan has recorded a receivable of $767,000
at December 31, 1998. Morgan carries statutory insurance limits on workers'
compensation with a deductible of $50,000. Claims and insurance accruals reflect
the estimated ultimate cost of claims for cargo loss and damage, personal injury
and property damage not covered by insurance. Morgan accrues its self-insurance
liability using a case reserve method based upon claims incurred and estimates
of unasserted and unsettled claims. These liabilities have not been discounted.
Comprehensive Income (Loss)
Effective January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes new standards for the reporting
and display of comprehensive income and its components. However, the adoption of
SFAS No. 130 had no impact on the Company's net income or equity. SFAS No. 130
requires unrealized gains or losses on the Company's available-for-sale
securities, which prior to adoption were reported separately in equity, to be
included in other comprehensive income (loss).
Segment Information
Effective December 1998, the Company adopted SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information. SFAS No. 131 superseded SFAS
No. 14, Financial Reporting for Segments of a Business Enterprise. SFAS No. 131
establishes new standards for reporting information about operating segments.
SFAS No. 131 requires disclosure of selected financial and descriptive
information for each operating segment based on management's internal
organizational decision-making structure. Additional information is required on
a company-wide basis for revenues by product or service, revenues and
identifiable assets by geographic location and information about significant
customers. The adoption of SFAS No. 131 did not affect results of operations or
financial position.
F-11
<PAGE>
Pensions and Other Post-Retirement Benefits
In February 1998, the FASB issued SFAS No. 132, Employers Disclosures About
Pensions and Other PostRetirement Benefits, which is an amendment to SFAS No.'s
87, 88, and 106. This SFAS revises employers' disclosures about pension and
other post-retirement benefit plans. It does not change the measurement or
recognition of those plans. The adoption of SFAS No. 132 in 1998 did not have a
significant impact on the Company's financial statements as the Company's
benefit plans are not material.
Impairments
The Company periodically assesses the net realizable value of its long-lived
assets and evaluates such assets for impairment whenever events or changes in
circumstances indicate the carrying amount of an asset may not be recoverable.
For assets to be held, impairment is determined to exist if estimated
undiscounted future cash flows are less than the carrying amount. For assets to
be disposed of, impairment is determined to exist if the estimated net
realizable value is less than the carrying amount.
Stock Based Compensation
In 1996, the Company adopted 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 provisions of
Accounting Principles Board Opinion ("APB") No. 25, Accounting for Stock Issued
to Employees and related interpretations. Under APB No. 25, if the exercise
price of the Company's employee stock options was not less than the market price
of the underlying stock on the date of grant, no compensation expense is
recognized. The Company is required to disclose the pro forma net income (loss)
and net income (loss) per share as if the fair value method defined in SFAS No.
123 had been applied to all grants made on or after January 1, 1995 (see Note
8).
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 lines of credit
approximates fair value, as the obligations bear interest at a floating rate.
The fair value of other long-term obligations approximates cost based on
borrowing rates for similar instruments. A subsidiary of the Company is a party
to an interest rate swap agreement (which is accounted for as an adjustment to
interest expense) with a principal amount of $9.3 million at December 31, 1998
which expires in December 2000. At December 31, 1998 and 1997, the Company
estimated it would have paid $390,000 and $406,000, respectively, to terminate
the swap agreement. The amount at June 30, 1999 is approximately the same as on
December 31, 1998.
Issuance of Stock by Subsidiaries 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.
There was $0.1 million of such gains in 1996.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 is
required to be adopted in years beginning after June 15,
F-12
<PAGE>
2000. SFAS No. 133 requires the Company to recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges must be adjusted to
fair value through income. If the derivative is a hedge, depending on the nature
of the hedge, changes in fair value are either offset against the changes in
fair value of assets and liabilities through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. Because of
the Company's minimal use of derivatives, Lynch management does not anticipate
that the adoption of SFAS No. 133 will have a significant effect on
Interactive's earnings or financial position.
2. Acquisitions and Dispositions
Acquisitions
On March 18, 1997, Lynch Michigan Telephone Holding Company, a wholly-owned
subsidiary of Lynch acquired approximately 60% of the outstanding shares of
Upper Peninsula Telephone Company for $15.2 million and completed the
acquisition of the remaining 40% on May 23, 1997 (the "Upper Peninsula
Acquisition"). The total cost of the acquisition was $26.5 million. As a result
of this transaction, the Company recorded $7.4 million in goodwill which is
being amortized over 25 years.
On December 30, 1996, The Morgan Group, Inc., 53% owned by Lynch, acquired the
operating assets of Transit Homes of America, Inc., a provider of transportation
services to a number of producers in the manufactured housing industry (the
"Transit Homes Acquisition"). The purchase price was approximately $4.4 million,
including assumed obligations. As a result of this transaction, the Company
recorded $4.1 million of goodwill which is being amortized over twenty years.
On November 26, 1996, DFT Communications, Inc., a wholly-owned subsidiary of
Lynch, acquired all of the outstanding shares of Dunkirk & Fredonia Telephone
Company, a local exchange company serving portions of western New York (the
"Dunkirk & Fredonia Acquisition"). The total cost of this transaction was $27.7
million. As a result of this transaction, the Company recorded $13.8 million in
goodwill which is being amortized over 25 years.
On June 3, 1996, Inter-Community Telephone Company, a Lynch Telephone
Corporation II subsidiary acquired four telephone exchanges in North Dakota
containing approximately 1,400 access lines from U.S. West Communications, Inc.
for approximately $4.7 million.
All of the above acquisitions were accounted for as purchases, and accordingly,
the assets acquired and liabilities assumed were recorded at their estimated
fair market values on their respective dates of acquisition. The operating
results of the acquired companies are included in the Combined Statements of
Operations from their respective acquisition dates.
Disposition
As of December 9, 1998, WNM Communications, Inc. a Lynch Telephone Corporation
subsidiary, sold the assets of its direct broadcast satellite business serving
portions of New Mexico for approximately $3.1 million (the "DBS Disposition").
As a result of the transaction, a pre-tax gain on the sale of the assets of
approximately $2.7 million was recognized and classified as gain on sale of
subsidiary stock and other operating assets in the Combined Statements of
Operations.
The following unaudited combined pro forma information shows the results of the
Company's operations presented as if the Upper Peninsula Acquisition, Transit
Homes Acquisition, Dunkirk & Fredonia Acquisition, and DBS Disposition were made
at the beginning of 1996. The unaudited proforma information is not
F-13
<PAGE>
necessarily indicative of the results of operations that would have occurred had
the transactions been made at that date nor is it necessarily indicative of
future results of operations.
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Sales ........... $ 204,281 $ 195,816 $ 209,426
Net income (loss) $ 3,077 $ (3,215) $ (1,388)
</TABLE>
3. Special Charges
Morgan Drive Away recorded in the fourth quarter of 1996, special charges of
$3,500,000 before income taxes relating to exiting the truckaway operation
($2,675,000) and a write down of properties in accordance with SFAS No.
121($825,000). Morgan recorded a special charge in 1997 of $624,000 before taxes
comprised of gains in excess of the net realizable value associated with exiting
the truckaway operation of $361,000, offset by charges related to driver pay of
$985,000. These charges have been included in the Company's operating profit.
4. Wireless Communications Services
Lynch Interactive, through limited partnerships, participated in the auctions
conducted by the Federal Communications Commission ("FCC") for 30 megahertz and
10 megahertz of broadband spectrum to be used for personal communications
services, the "C-Block" and "F-Block" auctions, respectively. These two
auctions, which were part of six auctions conducted by the FCC for a total 90
megahertz of spectrum, were specially designated by the FCC to encourage small
businesses to participate in the wireless telecommunications industry, so-called
"entrepreneurial blocks." To effectuate this, the FCC provided certain
qualifying bidders a 25% bidding credit to be used during the auction as well as
long-term financing for a substantial portion of the cost of the licenses
acquired. The licenses represent the right to provide wireless communications
services to territorial areas of the United States. Under FCC regulations,
service must be provided to one-third of the population within the area of the
license within five years of the date of the award and to two-thirds of the
population within ten years of the date of award. Failure to comply may result
in the forfeiture of the license. Lynch Interactive held a 49.9% limited
partnership interest in each of these partnerships and had committed to funding
the government interest and certain other expenses up to a specified amount as
discussed below.
In the C-Block auction, which ended in May 1996, Lynch Interactive 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. Lynch Interactive 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. These loans carry an annual commitment fee
of 20% and an interest rate of 15% which are payable when the loans mature in
2003. For accounting purposes, all cost and expenses, including interest
expense, associated with the licenses are currently being capitalized until
service is provided.
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
F-14
<PAGE>
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.
On June 8, 1998, Fortunet elected to apply its eligible credits relating to its
original deposit to the purchase of three licenses for 15 MHZ of PCS spectrum in
Tallahassee, Panama City and Ocala, Florida. Fortunet returned all the remaining
licenses and forfeited 30% of its original deposit in full satisfaction of the
government debt. Accordingly, Fortunet is currently the licensee for 15 MHZ of
spectrum in the three Florida markets covering a population ("POP") of
approximately 785,000 at a net cost at auction of $20.09 per POP.
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.
The balance sheets of Fortunet at December 31, 1998 and 1997 are as follows (in
thousands):
<TABLE>
<CAPTION>
December 31,
1998 1997
---- ----
Assets
<S> <C> <C>
Cost of licenses acquired ....... $ 26,982 $ 243,693
--------- ---------
Total assets .................... $ 26,982 $ 243,693
========= =========
Liabilities and Deficit
Due to the Department of Treasury $ -- $ 208,188
Due to Lynch Interactive ........ 61,857 49,513
Partnership Deficit ............. (34,875) (14,008)
--------- ---------
Total liabilities and deficit ... $ 26,982 $ 243,693
========= =========
</TABLE>
Included in "Due to Lynch Interactive" are interest and other financing fees
aggregating $40.9 million and $24.8 million at December 31, 1998 and 1997,
respectively. The net investment in Lynch Interactive's combined balance sheet
is $18.8 million at December 31, 1998, which includes cash advances plus
capitalized interest of $3.5 million ($1.6 million, $1.5 million and $0.4
million capitalized in 1998, 1997, and 1996, respectively).
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. Accordingly, for the quarter ended March
31, 1999, Interactive has provided 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,
to leave a carrying value of $3.4 million.
In the F-Block Auction, East/West Communications, Inc. ("East/West," formerly
Aer Force Communications B L.P.), acquired five licenses to provide personal
communications services in geographic areas of the United States with a total
population of 20 million at a net bid of $19.0 million. In order to fund
East/West's participation in the auction, the Company borrowed $11.8 million
under a short-term facility from Gabelli Funds, Inc. ("GFI"), an affiliate of
the Chairman and CEO of the Company. The money was repaid after completion of
the auction. $10.0 million of this was repaid with monies returned from the FCC
upon completion of the auction. In May and July 1997, the licenses were awarded.
$15.2 million of the cost of the licenses is financed with a loan from the
United States Government. As of November 30, 1997, Lynch Interactive had
invested $225,000 in partnership equity and provided the partnership with a loan
of $3.5
F-15
<PAGE>
million. In December 1997, the partnerships converted to a corporation with
Lynch Interactive receiving 49.9% of the common stock. Lynch Interactive spun
off 39.9% of the common stock of East/West to its shareholders and transferred
10% of East/West stock to GFI in satisfaction of an obligation to pay it 10% of
the net profits (after a capital charge) as partial compensation for a loan.
Prior to the conversion, Lynch Interactive contributed a portion of the debt
owed to it as a contribution to capital and immediately after the conversion the
remaining debt owed to it ($4.5 million book value) was converted into 7,800
shares ($7,800,000 liquidation preference) of Redeemable Preferred Stock. At
that time Lynch Interactive obligation to make further loans was terminated. The
Redeemable Preferred Stock has a 5% payment-in-kind dividend and is mandatorily
redeemable in 2009 subject to earlier payment in certain circumstances.
During 1998, Rivgam Communicators, LLC ("Rivgam"), a subsidiary of GFI,
transferred to Lynch PCS Corporation G ("Lynch PCS G") a subsidiary of Lynch
Interactive, its 10 MHZ PCS license covering the Rand-McNally basic trading area
of Las Cruces, New Mexico. This transfer was in full settlement of an agreement
between Lynch PCS G and Rivgam. This agreement provided that Lynch PCS G would
be compensated for certain bidding and administrative services it provided to
Rivgam in the PCS D and E Block Auctions by receiving a 10% net profit interest
(after capital charges) in any PCS licenses acquired by Rivgam. The transfer was
accounted for as a non-monetary transaction and resulted in Lynch Interactive
recognizing management service income of $1.0 million in 1998 based upon the
estimated fair value of the license. Lynch PCS G has similar arrangements with
two separate entities in which GFI has minority interests in which Lynch PCS G
is entitled to receive a 5% net profit interest (after capital charges) in
licenses acquired in the WCS and LMDS Auctions.
5. Investments in Affiliated Companies
Lynch Entertainment Corporation ("LENCO"), a wholly-owned subsidiary of the
Company, has a 20% investment in Coronet Communications Company ("Coronet"),
which operates television station WHBF-TV, a CBS affiliate in Rock Island,
Illinois. Lynch Entertainment Corporation II ("LENCO II"), a wholly-owned
subsidiary of the Company, has a 49% investment in Capital Communications
Company ("Capital"), which operates television station WOI-TV, an ABC affiliate
in Des Moines, Iowa.
At December 31, 1998 and 1997, LENCO's investment in Coronet was carried at a
negative $1,262,000 and a negative $1,612,000, respectively, due to LENCO's
guarantee of $3.8 million of $13.6 million of Coronet's third party debt. In
1997, Coronet repaid a $2.9 million loan to LENCO plus accrued interest.
Long-term debt of Coronet, at December 31, 1998, is comprised of $13.6 million
due to a third party lender which is due quarterly through December 31, 2003.
The Company recorded interest income on the LENCO debt of $30,000 and $287,000
for the years ended December 31, 1997 and 1996, respectively.
At December 31, 1998 and 1997, 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%.
Summarized financial information for companies listed above accounted for by the
equity method is as follows:
<TABLE>
<CAPTION>
Combined Information
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Current assets ................................. $ 5,607 $ 7,043 --
Property, plant & equipment, intangibles & other 15,296 16,482 --
Current liabilities ............................ 6,754 6,968 --
</TABLE>
F-16
<PAGE>
<TABLE>
<CAPTION>
Combined Information
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Long term debt & other long term liabilities 21,410 25,874 --
Net revenues ............................... 17,385 15,503 15,865
Gross profit ............................... 6,873 5,482 5,806
Net income before extraordinary item ....... 2,056 596 502
Net income ................................. 2,056 596 502
</TABLE>
6. Notes Payable and Long-term Debt
Long term debt represents borrowings by specific entities which will become
subsidiaries of Interactive.
Long-term debt consists of (all interest rates are at December 31, 1998):
Interest rates at June 30, 1999 have not significantly changed except where
noted. <TABLE> <CAPTION>
(Unaudited)
June 30, December 31,
1999 1998 1997
---- ---- ----
(In thousands)
<S> <C> <C> <C>
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% (4.7% weighted average), secured by assets of
the telephone companies of $107.2 million ................................... $ 48,859 $ 45,264 $ 47,109
Bank credit facilities utilized by certain telephone and telephone holding
companies through 2009, $33.7 million at a fixed interest rate averaging 8.9%
($28.8 million averaging 8.7% at June 30, 1999) and $16.9 million at variable
interest rates averaging 7.3% ($14.4 million averaging 6.7%
at June 30, 1999) ........................................................... 43,255 50,623 54,633
Unsecured notes issued in connection with acquisitions through 2006, all at
fixed interest rates averaging 9% .............................................. 28,179 28,003 28,049
Other .......................................................................... 3,624 3,773 4,409
--------- --------- ---------
123,917 127,663 134,200
Current maturities ............................................................. (7,848) (8,639) (7,583)
--------- --------- ---------
$ 116,069 $ 119,024 $ 126,617
========= ========= =========
</TABLE>
REA debt of $12.2 million bearing interest at 2% has been reduced by a purchase
price allocation of $2.6 million reflecting an imputed interest rate of 5%.
Unsecured notes issued in connection with the telephone company acquisitions are
predominantly held by members of management of the telephone operating
companies.
On a combined basis, at December 31, 1998, the company maintains short-term and
long-term line of credit facilities totaling $48.7 million (subject to
limitations that reduce the availability to $40.4 million), of which $16.6
million ($18.3 million at June 30, 1999) was available for future borrowings.
Lynch maintains $20.0 million short-term line of credit facilities, of which
$4.9 million was available at December 31, 1998. Borrowings under these
facilities have been allocated to Interactive (Parent Company) as it anticipates
that these facilities will be transferred to Interactive. Borrowings under these
facilities, which are at the same terms as between Lynch and third party
lenders, are included under the caption "Notes Payable to Lynch." The Morgan
Group maintains lines of credit totaling $15.0 million, $8.7 million of which
was available at December 31, 1998 ($5.6 million was available at June 30,
1999). On January 28, 1999, Morgan executed a new two-year renewable $20.0
million revolving credit facility which replaces the $15.0 million line. If not
renewed, this credit facility will convert to a three-year term loan. The
interest rates will be variable and adjusted quarterly. These facilities, as
well as facilities at other subsidiaries of Lynch Interactive, generally limit
the credit available under the lines of credit to certain variables, such as
receivables and other current
F-17
<PAGE>
assets, and are secured by the operating assets of the subsidiary, and include
various financial covenants. At December 31, 1998, $21.7 million of these total
facilities expire within one year. The weighted average interest rate for
short-term borrowings at December 31, 1998 was 7.8%. The Company pays fees
ranging from 0% to 0.375% on its unused lines of credit. Morgan has $6.6 million
of letters of credit outstanding at December 31, 1998, which are required for
self-insurance retention reserves and other business needs.
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, 1998 and 1997, substantially all the
subsidiaries' net assets are restricted.
Cash payments for interest were $10.1 million, $9.8 million and $5.4 million for
the years ended December 31, 1998, 1997 and 1996, respectively, and $5.2 million
and $6.2 million for the six months ended June 30, 1999 and 1998, respectively.
Aggregate principal maturities of long-term debt at December 31, 1998 for each
of the next five years are as follows: 1999--$8.6 million; 2000--$15.8 million;
2001--$11.9 million, 2002--$11.1 million and 2003--$5.3 million.
7. Minority Interests and Other Related Party Transactions
Interactive owns all of the Class B common stock of The Morgan Group, Inc. and
155,900 shares of Morgan's Class A common stock, which in the aggregate
represents 68% of the combined voting power of the combined classes of Morgan's
common stock and 53% of the economic equity ownership. The Class B Morgan common
stock is entitled to two votes per common share.
During 1998, Lynch entered into a five-year lease for its corporate headquarters
for an annual payment of $90,000 with an affiliate of its Chairman and Chief
Executive Officer. It is anticipated that Interactive will be added as a lessee
to this lease.
8. Stock Option Plans
On June 4, 1993, the Board of Directors of Morgan approved the adoption of a
stock option plan which provides for the granting of incentive or non-qualified
stock options to purchase up to 200,000 shares of Class A Common Stock to
officers, including members of Morgan's Board of Directors, and other key
employees. No options may be granted under this plan at less than the fair
market value of the Common stock at the date of the grant, except for certain
non-employee directors. Although the exercise period is determined when options
are actually granted, an option shall not be exercised later than 10 years and
one day after it is granted. Stock options granted will terminate if the
grantee's employment terminates prior to exercise for reasons other than
retirement, death, or disability. Stock options vest over a four year period
pursuant to the terms of the plan, except for stock options granted to a
non-employee director which are immediately vested. The pro forma effect of
accounting for Morgan' stock options under the fair value method would have
reduced net income, or increased the net loss, by less than $0.1 million for
each period presented. For the purposes of these computations, the fair value of
the stock options at the date of the grant was estimated using a Black-Scholes
option pricing model with the following weighted average assumptions for all
periods presented: risk-free interest rate - 5%, expected dividend yield - 1%,
volatility factor of Morgan's Class A common stock - 0.25, expected life of
stock option - 10 years.
Employees and non-employee directors of Morgan have been granted non-qualified
stock options to purchase
F-18
<PAGE>
113,375 and 57,000 share, respectively, of Morgan' Class A common stock, net of
cancellations and shares exercised.
A summary of Morgan's stock option activity and related information follows:
<TABLE>
<CAPTION>
Year Ended December 31
1998 1997 1996
---------------------- --------------------- -------------------
Weighted Weighted Weighted
Options Average Options Average Options Average
(000) Exercise (000) Exercise (000) Exercise
Price Price Price
---------------------- ---------------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 167 $ 8.32 176 $ 8.40 139 $ 8.55
Granted .................... 23 8.11 25 8.13 49 7.99
Exercised .................. (7) 8.25 (26) 8.73 -- --
Canceled ................... (13) 8.59 (8) 8.07 (12) 8.57
---- ----- ---- ----- ---- -----
Outstanding at end of year ..... 170 $ 8.28 167 $ 8.32 176 $ 8.40
Exercisable at end of year ..... 124 $ 8.42 109 $ 8.35 92 $ 8.64
</TABLE>
Exercise prices for options outstanding as of December 31, 1998, ranged from
$6.20 to $10.19. The weighted-average remaining contractual life of those
options is 6.6 years. The weighted-average fair value of options granted during
each year was immaterial
On February 29,1996, Lynch Corporation adopted a Stock Appreciation Rights
program for certain employees. To date, 43,000 of Stock Appreciation Rights
("SAR") have 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 Company's common stock on the exercise
date exceeds the grant price of the SAR. Effective September 30, 1998, Lynch
amended the SAR program so that the SAR's became exercisable only if the market
price for the Lynch's shares exceeds 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 SAR's for changes in the market price in the
Company's common stock until it becomes probable that the SAR's will become
exercisable. With respect to the 43,000 units currently outstanding, each
representing one share of Lynch stock outstanding at the time of the Spin Off,
the units will be divided into two units, one representing one share of
Interactive stock and one representing one share of Lynch stock. The original
unit grant price will be divided between the two new units based upon the
average relative market price of Interactive stock versus Lynch stock for the
five trading days beginning on the eleventh trading day after the effective date
of the Spin Off. The net income (expense) relating to this program that was
allocated to Interactive prior to the time of the amendment was $139,000 in
income in 1998 and ($329,000) of expense in 1997. There was no expense for this
program in 1996.
9. Income Taxes
Lynch Corporation files consolidated federal and state income tax returns which
include all eligible subsidiaries, including Interactive. The provisions
(benefits) for income taxes in the combined statements of operations for all
periods presented have been computed assuming Interactive had not been included
in a consolidated income tax return with Lynch. All income tax payments are made
by Interactive through Lynch.
Deferred income taxes for 1998 and 1997 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
F-19
<PAGE>
at December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Dec. 31, 1998 Dec. 31, 1997
Deferred Tax Deferred Tax
Asset Liability Asset Liability
----- --------- ----- ---------
(In Thousands)
<S> <C> <C> <C> <C>
Fixed assets revalued under purchase
accounting and tax over book depreciation ...... $ -- $ 7,535 $ -- $ 7,455
Discount on long-term debt ....................... -- 1,085 -- 1,184
Basis difference in subsidiary and affiliate stock -- 1,795 -- 1,696
Unrealized gains on marketable securities ........ -- 6,788 -- 7,788
Partnership tax losses in excess of book losses .. -- 1,309 -- 2,849
Other reserves and accruals ...................... 4,145 -- 3,759 --
Other ............................................ 120 1,338 389 1,468
------ ------ ------ -----
Total deferred income taxes ...................... $ 4,265 $19,850 $ 4,148 $22,440
======= ======= ======= =======
</TABLE>
The provision (benefit) for income taxes is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(In Thousands)
Current payable taxes:
<S> <C> <C> <C>
Federal ....... $ 2,887 $(2,812) $(1,096)
State and local 418 429 113
------- ------- -------
3,305 (2,383) (983)
Deferred taxes:
Federal ........ 1,704 1,625 536
State and local 3 22 2
------- ------- -------
1,707 1,647 538
------- ------- -------
$ 5,012 $ (736) $ (445)
======= ======= =======
</TABLE>
A reconciliation of the provision (benefit) for income taxes from continuing
operations and the amount computed by applying the statutory federal income tax
rate to income before income taxes, minority interest, and extraordinary item
follows: <TABLE> <CAPTION>
1998 1997 1996
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Tax at statutory rate ....................... $ 3,796 $(1,138) $ (683)
Increases (decreases):
State and local taxes, net of federal benefit 558 294 74
Amortization of goodwill .................... 387 314 81
Operating losses of subsidiaries ............ 313 (224) 209
Reduction attributable to special
election by captive insurance company ...... -- (155) (194)
Other ....................................... (42) 173 68
------- -------- -------
$ 5,012 $ (736) $ (445)
======= ======= =======
</TABLE>
Net cash payments for income taxes were $5.6 million, $0.7 million and $1.9
million for the years ended December 31, 1998, 1997 and 1996, respectively, and
$1.7 million and $1.9 million for the six months ended June 30, 1999 and 1998,
respectively.
10. Employee Benefit Plans
The Company, maintains several defined contribution plans at its telephone
subsidiaries, Morgan and corporate office. Company 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, 1997 and 1996, was $0.7
million, $0.7 million and $0.4 million, respectively.
F-20
<PAGE>
In addition, three of the company's telephone subsidiaries participate in a
multi-employer defined benefit plan which is administrated by a telephone
industry association. Under this plan accumulated benefits and plan assets are
not determined or allocated separately by individual employees. Accordingly,
such data is not currently available. Total expense of these plans was $0.1
million for each of the three years in the period ended December 31, 1998.
There were no unfunded pension liabilities for any of the years from 1998 to
1996.
11. Contingencies
Lynch Interactive has pending claims incurred in the normal course of business.
Management believes that the ultimate resolution of these claims will not have a
material adverse effect on the combined liquidity, financial position or
operations of Lynch Interactive.
12. Segment Information
The Company is principally engaged in two business segments: multimedia and
services. All businesses are located domestically, and substantially all
revenues are domestic. The multimedia segment includes local telephone
companies, the investment in PCS entities and investments in two
network-affiliated television stations. The services segment includes
transportation and related services.
Services provided by Morgan to Oakwood Homes Corporation accounted for
approximately $31.8 million, $21.6 million and $12.9 million in 1998, 1997, and
1996, respectively. In addition, another Morgan customer, Fleetwood Enterprises,
Inc. accounted for approximately $26.0 million, $28.1 million, and $26.6 million
of revenues in 1998, 1997, and 1996, respectively. $13.4 million of the
Company'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. The Company believes that its
telecommunications businesses are not dependent on any single customer.
EBITDA (before corporate allocation) for operating segments is equal to
operating profit before interest, taxes, depreciation, amortization and
allocated corporate expenses. EBITDA is presented because it is a widely
accepted financial indicator of value and ability to incur and service debt.
EBITDA is not a substitute for operating income or cash flows from operating
activities in accordance with generally accepted accounting principles.
Operating profit (loss) is equal to revenues less operating expenses, excluding
unallocated general corporate expenses, interest and income taxes. Lynch
allocates a portion of its general corporate expenses to its operating segments.
Such allocation to the Company was $639,000, $632,000 and $632,000 during the
years ended December 31, 1998, 1997 and 1996, respectively and $635,000 and
$316,000 for the six months ended June 30, 1999 and 1998, 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.
F-21
<PAGE>
<TABLE>
<CAPTION>
(Unaudited)
Six Months Ended
June 30, Year ended December 31
1999 1998 1998 1997 1996
------------ ------------ ------------ ------------ ------------
Revenues
<S> <C> <C> <C> <C> <C>
Multimedia ............................................... $ 27,342 $ 26,324 $ 54,622 $ 47,908 $ 28,608
Services ................................................. 75,595 75,494 150,454 146,154 132,208
--------- --------- --------- --------- ---------
Combined total .............................................. $ 102,937 $ 101,818 $ 205,076 $ 194,062 $ 160,816
========= ========= ========= ========= =========
EBITDA (before corporate allocation)
Multimedia ................................................ $ 14,914 $ 14,191 $ 29,389 $ 24,666 $ 15,863
Services .................................................. 1,428 1,525 3,337 2,190 (1,665)
Corporate expenses, gross ................................. (1,170) (1,086) (1,826) (2,310) (2,100)
--------- --------- --------- --------- ---------
Combined total ............................................ $ 15,172 $ 14,636 $ 30,900 $ 24,546 $ 12,098
========= ========= ========= ========= =========
Operating profit
Multimedia ................................................ $ 7,568 $ 7,528 $ 15,757 $ 11,845 $ 6,611
Services .................................................. 761 892 2,007 1,015 (3,263)
Unallocated corporate expense ............................. (505) (736) (1,107) (1,572) (1,408)
--------- --------- --------- --------- ---------
Combined total ............................................ $ 7,824 $ 7,684 $ 16,657 $ 11,288 $ 1,940
========= ========= ========= ========= =========
Depreciation and amortization
Multimedia ................................................ $ 6,761 $ 6,546 $ 12,995 $ 12,175 $ 8,653
Services .................................................. 617 583 1,230 1,075 1,498
All other ................................................. (40) (45) 18 8 7
--------- --------- --------- --------- ---------
Combined total ............................................ $ 7,338 $ 7,084 $ 14,243 $ 13,258 $ 10,158
========= ========= ========= ========= =========
Capital expenditures
Multimedia ................................................ $ 3,525 $ 4,534 $ 11,028 $ 10,914 $ 11,056
Services .................................................. 505 358 566 919 1,007
General corporate ......................................... -- 27 48 4 17
--------- --------- --------- --------- ---------
Combined total ............................................ $ 4,030 $ 4,919 $ 11,642 $ 11,837 $ 12,080
========= ========= ========= ========= =========
Total assets
Multimedia ................................................ $ 161,539 $ 192,598 $ 195,010 $ 196,285 $ 178,415
Services .................................................. 33,643 35,850 33,590 33,784 34,046
General corporate ......................................... 20,174 24,906 17,492 22,963 36,190
--------- --------- --------- --------- ---------
Combined total ......................................... $ 215,356 $ 253,354 $ 246,092 $ 253,032 $ 248,651
========= ========= ========= ========= =========
Total operating profit for reportable segments ........... $ 7,824 $ 7,684 $ 16,657 $ 11,288 $ 1,940
Other profit or loss:
Investment income ....................................... 1,034 1,600 1,865 1,678 2,150
Interest expense ...................................... (5,247) (5,439) (10,383) (9,740) (6,293)
Equity in earnings of affiliated companies .............. 103 125 317 154 119
Reserve for impairment of investment in PCS license
holders ................................................. (15,406) -- -- (7,024) --
Gain on sales of subsidiary and affiliate stock and other
operating assets ........................................ -- 13 2,709 260 74
--------- --------- --------- --------- ---------
Income (loss) before income taxes, minority interests
and extraordinary item .................................. $ (11,692) $ 3,983 $ 11,165 $ (3,384) $ (2,010)
========= ========= ========= ========= =========
</TABLE>
F-22
<PAGE>
13. Pro Forma Earnings Per Share
The following table sets forth the computation of pro forma basic and diluted
earnings per share from continuing operations before extraordinary items. Pro
forma earnings (loss) per share are calculated assuming that the shares
outstanding for all periods are the same as the shares outstanding for Lynch
Corporation: <TABLE> <CAPTION>
(Unaudited)
Six Months Ended
June 30, 1999 Year Ended December 31,
1999 1998 1998 1997 1996
------------ ------------ ----------- ------------- --------------
Numerator:
<S> <C> <C> <C> <C> <C>
Income (loss) from continuing
operations before extraordinary item .... $(8,357,000) $ 1,954,000 $ 4,929,000 $(3,279,000) $ (818,000)
Numerator for pro forma basic and
diluted earnings per share ............. (8,357,000) 1,954,000 4,929,000 (3,279,000) (818,000)
Denominator:
Denominator for pro forma basic and
diluted earnings per share-
weighted average shares ................ 1,417,000 1,418,000 1,418,000 1,415,000 1,388,000
Pro forma basic earnings (loss) per
share before extraordinary item .... $ (5.90) $ 1.38 $ 3.48 $ (2.32) $ (0.59)
=========== =========== =========== =========== ===========
Pro forma diluted earnings (loss) per
share before extraordinary item .... $ (5.90) $ 1.38 $ 3.48 $ (2.32) $ (0.59)
=========== =========== =========== =========== ===========
</TABLE>
14. Subsequent Events
On February 22, 1999, Lynch's 53%-owned subsidiary, The Morgan Group, Inc.
announced a tender offer to purchase shares of its Class A common stock. Under
terms of the offer, Morgan would determine the price to be paid for shares
between $8.50 and $10.00 per share. The tender offer concluded on March 19,
1999, whereby Morgan purchased 102,528 shares at $9.00 per share. Lynch did not
tender any of its Morgan shares. The effect of this transaction on Interactive
was to increase the voting power in Morgan's combined classes of common stock
from 68% to 70% and to increase the economic equity ownership from 53% to 55%.
In mid-July 1999, an Interactive subsidiary acquired by merger Central Scott
Telephone Company ("Scott") for approximately $28.1 million in cash. Scott has
approximately 6,000 access lines in Scott County, Iowa. Interactive is funding
the acquisition principally through borrowings. Scott had revenues of $4.4
million in 1998. While Scott was profitable in 1998, Scott is not expected to
contribute to Interactive's earnings in 1999 due to interest expense on the
expected financing debt.
F-23
Exhibit 99.5
McGLADREY&PULLEN, LLP
Certified Public Accountants and Consultants
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Capital Communications Company, Inc.
Bronxville, New York
We have audited the accompanying statements of operations, stockholders' equity
(deficit), and cash flows of Capital Communications Company, Inc. for the year
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Capital
Communications Company, Inc. for the year ended December 31, 1996, in conformity
with generally accepted accounting principles.
/s/McGladrey & Pullen, LLP
New York, New York
January 29, 1997
Exhibit 99.6
McGLADREY&PULLEN, LLP
Certified Public Accountants and Consultants
INDEPENDENT AUDITOR'S REPORT
To the Partners
Coronet Communications Company
Bronxville, New York
We have audited the accompanying statements of operations, partners' capital
(deficit), and cash flows of Coronet Communications Company for the year ended
December 31, 1996. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Coronet
Communications Company for the year ended December 31, 1996, in conformity with
generally accepted accounting principles.
/s/McGladrey & Pullen, LLP
New York, New York January 24, 1997 (Except for Note 4, which is as of January
31, 1997)
Exhibit 99.7
Johnson
Mackowiak
Moore
& Myott, LLP
Certified Public Accountants & Consultants
INDEPENDENT AUDITOR'S REPORT
January 31, 1997
To the Board of Directors
Dunkirk and Fredonia Telephone Company
40 Temple Street
Box 209
Fredonia, New York 14063
We have audited the accompanying consolidated balance sheet of Dunkirk and
Fredonia Telephone Company (a wholly owned subsidiary of Lynch Telephone
Corporation, VIII) and subsidiaries as of December 31, 1996 and the related
consolidated statements of income, retained earnings and cash flows for the
period November 26, 1996 through December 31, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards
and the Government Auditing Standards, issued by the Comptroller General of the
United States. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated 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 provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Dunkirk and Fredonia
Telephone Company and subsidiaries as of December 31, 1996 and the results of
their operations and their cash flows for the period then ended in conformity
with generally accepted accounting principles.
The accompanying statements present only the operation of Dunkirk and Fredonia
Telephone Company and its subsidiaries since the date of sale of 100% of its
stock to Lynch Telephone Corporation VIII.
JOHNSON, MACKOWIAK, MOORE & MYOTT LLP
Exhibit 99.8
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Lynch Corporation
We have audited the accompanying combined balance sheets of the net assets and
operations to be contributed to Lynch Interactive Corporation (see Note 1) as of
December 31, 1998 and 1997, and the related combined statements of operations,
equity, investments by and advances from Lynch Corporation and cash flows for
each of the three years in the period ended December 31, 1998. Our audits also
included the accompanying financial statement schedule listed in Item 15(a).
These financial statements and schedule are the responsibility of the management
of Lynch Corporation (the "Company"). Our responsibility is to express an
opinion on these financial statements and schedule based on our audits. We did
not audit the 1996 financial statements of Dunkirk and Fredonia Telephone
Company, a wholly-owned subsidiary of DFT Communications, Inc. (formerly Lynch
Telephone VIII, a wholly-owned subsidiary of Lynch Corporation) which statements
reflect total revenues of $575,000 for the two month period ended December 31,
1996, the 1997 and 1996 financial statements of CLR Video, L.L.C., a
wholly-owned subsidiary of Lynch Multimedia (a wholly-owned subsidiary of Lynch
Corporation) which statements reflect total revenues of $1,505,000 and
$1,399,000 for the years ended December 31, 1997 and 1996, respectively, and the
1997 and 1996 financial statements of Coronet Communications Company and of
Capital Communications Company, Inc. (corporations in which the Company has a
20% and 49% interest, respectively). Those statements were audited by other
auditors whose reports have been furnished to us, and our opinion, insofar as it
relates to data included for Dunkirk and Fredonia in 1996, CLR Video, L.L.C. in
1997 and 1996, Coronet Communications Company in 1997 and 1996 and Capital
Communications Company, Inc. in 1997 and 1996, is based solely on the reports of
other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. 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
combined financial statements referred to above present fairly, in all material
respects, the combined financial position of the net assets and operations to be
contributed to Lynch Interactive Corporation (see Note 1) at December 31, 1998
and 1997 and the combined results of its operations and its cash flows for each
of the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. Also, in our opinion, based on our
audits and the reports of other auditors, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects, the information set for
therein.
/S/ERNST & YOUNG LLP
Stamford, Connecticut
August 9, 1999
