SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) of the
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 1-106
LYNCH CORPORATION
(Exact name of Registrant as specified in its charter)
Indiana 38-1799862
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8 Sound Shore Drive, Suite 290, Greenwich, Connecticut 06830
(Address of principal executive offices) (Zip code)
(203) 629-3333
Registrant's telephone number, including area code
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the Registrant's classes
of Common Stock, as of the latest practical date.
Class Outstanding at May 1, 1996
Common Stock, no par value 1,390,579
<PAGE>
INDEX
LYNCH CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statement of Operations:
- Three months ended March 31, 1996 and 1995
Condensed Consolidated Balance Sheet:
- March 31, 1996
- December 31, 1995 (Audited)
Condensed Consolidated Statement of Cash Flows:
- Three months ended March 31, 1996 and 1995
Notes to Condensed Consolidated Financial Statements
Item 2. Managements's Discussion and Analysis of Financial Condition and
Results of Operations
PART II. OTHER INFORMATION
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
<PAGE>
Part 1- FINANCIAL INFORMATION
- -----------------------------
Item 1- Financial Statements
- ----------------------------
<TABLE>
LYNCH CORPORATION AND SUBSIDIARIES
----------------------------------
<CAPTION>
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
----------------------------------------------
(UNAUDITED)
(In thousands, except share amounts)
Three Months
Ended March 31
--------------
1996 1995
---------- ----------
<S> <C> <C>
SALES AND REVENUES
Multimedia $ 6,715 $ 5,685
Services 30,506 26,803
Manufacturing 73,709 37,300
---------- ----------
110,930 69,788
---------- ----------
Costs and expenses:
Multimedia 4,610 4,225
Services 28,561 24,233
Manufacturing 61,234 30,236
Selling and administrative 10,615 7,060
---------- ----------
OPERATING PROFIT 5,910 4,034
Other income (expense):
Investment Income 433 884
Interest expense (3,954) (2,204)
Share of operations of affiliated companies 19 (70)
Gain on Sale of Stock by Subsidiary 44 0
---------- ----------
(3,458) (1,390)
---------- ----------
INCOME BEFORE INCOME TAXES AND
MINORITY INTERESTS 2,452 2,644
Provision for income taxes (963) (1,096)
Minority interests (288) (423)
---------- ----------
NET INCOME $1,201 $1,125
---------- ----------
Weighted average shares outstanding 1,397,000 1,401,000
========== ==========
NET INCOME PER SHARE $0.86 $0.80
========== ==========
</TABLE>
<TABLE>
LYNCH CORPORATION AND SUBSIDIARIES
-----------------------------------
<CAPTION>
CONDENSED CONSOLIDATED BALANCE SHEET
------------------------------------
(In thousands)
March 31 December 31
1996 1995
(Unaudited) (A)
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents $ 23,204 $ 15,921
Marketable Securities and
Short-Term Investments 6,409 11,432
Receivables, less Allowances of
$ 1286 and $1732 52,959 52,306
Inventories 33,911 33,235
Deferred Income Tax Benefits 3,944 3,944
Other Current Assets 7,016 6,810
-------- --------
Total Current Assets 127,443 123,648
PROPERTY, PLANT AND EQUIPMENT:
Land 2,068 2,068
Buildings and Improvements 17,725 16,675
Machinery and Equipment 132,602 128,397
-------- --------
152,395 147,140
Less Accumulated Depreciation 40,053 36,093
-------- --------
Net Property, Plant and Equipment 112,342 111,047
INVESTMENT IN AND ADVANCES
TO AFFILIATED COMPANIES 9,356 8,982
ACQUISITION INTANGIBLES 51,843 53,060
OTHER ASSETS 7,449 5,702
-------- --------
Total Assets $308,433 $302,439
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes Payable to Banks $ 8,789 $ 9,622
Trade Accounts Payable 24,528 20,147
Accrued Liabilities 28,338 28,545
Current Maturities of Long-Term Debt 38,419 39,708
-------- --------
Total Current Liabilities 100,074 98,022
LONG-TERM DEBT 139,485 138,029
DEFERRED INCOME TAXES 17,912 17,912
MINORITY INTERESTS 13,532 12,964
SHAREHOLDERS' EQUITY
COMMON STOCK, NO PAR VALUE-10,000,000 SHARES
AUTHORIZED; 1,471,191 shares issued
(at stated value) 5,139 5,139
ADDITIONAL PAID - IN CAPITAL 8,425 7,873
RETAINED EARNINGS 24,977 23,776
TREASURY STOCK OF 80,612 AND 92,528
SHARES, AT COST (1,111) (1,276)
-------- --------
Total Shareholders' Equity 37,430 35,512
-------- --------
Total Liabilities and Shareholders' Equity $308,433 $302,439
======== ========
(A) The Balance Sheet at December 31,1995 has been derived from the Audited
Financial Statements at that date, but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
</TABLE>
<TABLE>
LYNCH CORPORATION AND SUBSIDIARIES
----------------------------------
<CAPTION>
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
---------------------------------------------
(UNAUDITED)
(In thousands)
Three Months Ended
March 31
---------- ----------
1996 1995
---------- ----------
OPERATING ACTIVITIES
<S> <C> <C>
Net Income $ 1,201 $ 1,125
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,931 2,550
Net effect of sales of trading securities 5,023 2,726
Share of operations of affiliated companies (19) 70
Minority interests 288 423
Changes in operating assets and liabilities:
Receivables (653) 5,876
Inventories (676) (12,193)
Accounts payable and accrued liabilities 4,174 4,402
Other (2,008) (90)
-------- --------
NET CASH FROM OPERATING ACTIVITIES 11,261 4,889
-------- --------
INVESTING ACTIVITIES
Capital Expenditures (3,906) (3,101)
Other (327) 0
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (4,233) (3,101)
-------- --------
FINANCING ACTIVITIES
Repayments of debt, net (741) (482)
Treasury stock transactions 723 0
Minority interest transactions 273 (117)
-------- --------
NET CASH FROM (USED IN)FINANCING ACTIVITIES 255 (599)
-------- --------
Net increase in cash and cash equivalents 7,283 1,189
Cash and cash equivalents at
beginning of period 15,921 18,010
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 23,204 $ 19,199
======== ========
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A. Subsidiaries of the Registrant
The present operating subsidiaries of the Registrant are as follows:
Lynch Multimedia Corporation
CLR Video LLC (60% owned)
Lynch Telecommunications Corporation
Lynch Telephone Corporation (80.1% owned)
Western New Mexico Telephone Company, Inc.
WNM Communications Corporation
Lynch Telephone Corporation II (83.0% owned)
Inter-Community Telephone Company
Lynch Telephone Corporation III (81% owned)
Cuba City Telephone Exchange Company
Belmont Telephone Company
Lafayette County Satellite TV, Inc.
Brighton Communications Corporation
Lynch Telephone Corporation IV
Bretton Woods Telephone Company
Lynch Telephone Corporation VI (98% owned)
J.B.N. Telephone Company, Inc.
J.B.N. Finance Corporation
Lynch Telephone Corporation VII
USTC Kansas Inc.
Haviland Telephone Company
Haviland Finance Corporation
Global Television Inc.
Lynch Entertainment Corporation
Coronet Communications Company (20% owned)
Lynch Entertainment Corporation II
Capital Communications Corporation (49% owned)
The Morgan Group, Inc. (equity ownership 49%
- voting ownership 64%)
Morgan Drive Away, Inc.
Transport Services Unlimited, Inc.
Interstate Indemnity Inc.
Morgan Finance, Inc.
Lynch Capital Corporation
Lynch Manufacturing Corporation
Lynch Machinery, Inc. (90% owned)
Tri-Can International, Ltd.
M-tron Industries, Inc. (94% owned)
M-tron Industries, Ltd.
Spinnaker Industries, Inc. (previously named Safety Railway
Service Corporation) (78% owned)
Central Products Acquisition Corp.
Brown-Bridge Industries, Inc. (80.1% owned)
Entoleter, Inc.
Lynch International Exports, Inc.
B. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month period ended March 31,
1996 are not necessarily indicative of the results that may be expected for the
year ended December 31, 1996. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1995.
C. Acquisitions
On October 4, 1995, Central Products Acquisition Corp., a wholly-owned
subsidiary of Spinnaker Industries, Inc. (an 78% owned subsidiary of Lynch)
acquired from Alco Standard Corporation ("Alco"), the assets and stock of
Central Products Company. Central Products manufactures a wide variety of
carton sealing tapes and related equipment. The cost of the acquisition was
$80.0 million. As a result of this transaction, the Company recorded $27.2
million in goodwill which is being amortized over 25 years. This transaction
was accounted for as a purchase, and accordingly, the assets acquired and
liabilities assumed were recorded at their estimated fair market value.
The operating results of the acquired companies are included in the consolidated
statements of operations from their respective acquisition dates. The following
combined proforma information shows the results of the Registrant's operations
presented as through the purchase of Central Products had been made at the
beginning of 1995.
<TABLE>
<CAPTION>
First Quarter Ended
March 31
1996 1995
(In thousands, except
per share data)
<S> <C> <C>
Sales and Revenues $110,930 $100,798
Operating Profit 5,910 7,224
Net Income 1,201 1,743
Net Income per Share 0.86 1.24
</TABLE>
D. Inventories
Inventories are stated at the lower of cost or market value. At March 31, 1996,
inventories were valued by three methods: last-in, first-out (LIFO) - 56%,
specific identification - 40%, and first-in, first-out (FIFO) - 4%. At December
31, 1995, the respective percentages were 58%, 38%, and 4%.
<TABLE>
<CAPTION>
In Thousands
3-31-96 12-31-95
<S> <C> <C>
Raw materials and supplies $11,572 $10,676
Work in process 10,322 10,286
Finished goods 12,017 12,273
TOTAL INVENTORIES $33,911 $33,235
</TABLE>
E. Indebtedness
On a consolidated basis, at March 31, 1996, the Registrant maintains short-term
and long term lines of credit facilities totaling $81.6 million, of which $30.2
million is available. Lynch Corporation, the Parent Company, maintains a $12.0
million short term line of credit facility, of which $6.8 million was available
at March 31,1996. This facility has recently been extended to April 15, 1997.
Spinnaker Industries, Inc. maintains lines of credit at its subsidiaries which
total $45.5 million, of which $11.7 million was available at March 31, 1996 and
The Morgan Group maintains lines of credit totaling $18.0 million, $10.5 million
of which was available at March 31, 1996. These facilities as well as
facilities at other subsidiaries of the Registrant, generally limit the credit
available under the lines of credit to certain variables, such as inventories
and receivables, are secured by the operating assets of the subsidiary, and
include various financial covenants. At March 31, 1996, $3.4 million of these
total facilities expire within one year.
Long-term debt consists of (all interest rates are weighted averages,
where applicable at March 31, 1996):
<TABLE>
<CAPTION>
In Thousands
3-31-96 12-31-95
<S> <C> <C>
Rural Electrification Administration and
Rural Telephone Bank notes payable
in equal quarterly installments through
2023 at fixed rates (3.5%) 28,251 27,543
Bank credit facilities utilized by
certain telephone and telephone
holding companies at both 9.5% fixed
and 8.9% variable rates 28,140 28,255
Unsecured notes issued in connection
with telephone company acquisitions
at 10% fixed rate 16,120 16,149
Debt associated with Central Products:
Revolving line of credit 9.25% variable rate 13,223 14,126
Term loan 9.5% variable rate 35,250 35,625
Notes to seller 9.2% variable rate 30,000 30,000
Bank debt associated with Brown-Bridge
at variable rates 9.5%:
Revolving line of credit 12,611 12,646
Term loan 6,112 6,691
Other 8,197 6,702
177,904 177,737
Current Maturities (38,419) (39,708)
$139,485 $138,029
</TABLE>
In general, the long-term debt credit facilities are secured by property, plant
and equipment, inventory, receivables and common stock of certain subsidiaries
and contain certain covenants restricting distributions to the Registrant.
As part of Spinnaker's acquisition of Central Products Company from Alco
Standard on October 4, 1995 (see note C), Alco provided two loans totaling $25
million and received the right to sell these notes to Spinnaker and demand
payment (the "Put Agreement"). Lynch agreed to guarantee the notes and provide
funds for the Put Agreements. As of January 2, 1996, Alco exercised the rights
under the Put Agreement to sell the notes back to Spinnaker and in connection
therewith, as described below, Spinnaker entered into a new financing agreement
with the seller and a third party to make a partial principal payment on the
note and replace the balance with a new financing arrangement.
On April 5, 1996, Spinnaker entered into an agreement with a third party for an
$8.5 million bridge loan. The bridge loan is due on December 30, 1996, and if
not paid will convert into a 5 year term loan. The third party will be entitled
to receive a warrant to purchase 2.5% of the common equity of Spinnaker for each
quarter the term loan is outstanding up to 20% on a fully diluted basis, of the
common equity of Spinnaker. The bridge loan bears interest at the greater of
the LIBOR reference rate or the Treasury rate plus 5% for the first 90 days,
then incrementally increasing by .25% for every subsequent 90 day period.
On April 5, 1996, the rate in effect was 10.4%. Spinnaker may also fix the rate
at 18% if the floating rate increases to or above that rate. The bridge loan
and term loan include a payment in kind ("PIK") feature that allows Spinnaker to
pay an interest in excess of 16% (the maximum cash interest) by issuing
additional bridge notes. Also on April 5, 1996, an entity affiliated with
Richard J. Boyle and Ned N. Fleming III ("BF"), the Company's Chairman and Chief
executive Officer and President, respectively, exercised warrants to purchase
187,476 share of Spinnaker's common stock resulting in proceeds of $500,000
which will be used by the Company to make scheduled interest payment on the
bridge loans. The Company has pledged its shares of Spinnaker stock to secure
such loans. The agreement requires BF to continue to exercise its warrants to
provide funds to satisfy the outstanding interest that will be due on the bridge
loan and term loans. Spinnaker is actively pursuing various alternatives to
refinance the indebtedness of Spinnaker and its subsidiaries, including
refinancing the bridge loan before it matures. There can be no assurance that
Spinnaker can successfully complete any such refinancing.
Concurrently with the closing of the bridge loan, Spinnaker paid Alco
$7.5 million of which $5.5 million was a principal payment on the $25 million
note, approximately $1.0 million related to accrued interest and $1.0 million
was applied toward a $1.75 million purchase price for a warehouse facility in
Denver, Colorado. The unpaid balance of the $25 million note, together with the
balance due on the warehouse facility was restructured into a series of new
convertible subordinated notes consisting of the following:
(a) A 7%, $6 million convertible subordinated note that automatically
converts including accrued interest, into Spinnaker common stock 30
days after the execution of the note at a conversion price per share
of approximately $35. After conversion, Alco is entitled to sell the
shares. If the proceeds of this sale are less than $6 million,
Spinnaker is required to pay the difference between $6 million and the
sales proceeds to Alco either in cash or an equivalent number of common
shares;
(b) A 7%, $7 million convertible subordinated note due April 1997. The
note contains a PIK feature that allows Spinnaker, at its option, to
satisfy the interest by increasing the principal amount of the note.
However, if Spinnaker selects the PIK option, the interest rate on the
note is 9%. All or any part of this note can be converted at Alco's
option into shares of Spinnaker's common stock after April 1, 1997 at
the then market price; and
(c) A 7%, $7.25 million convertible subordinated note due April 1998. The
note contains a PIK feature that allows Spinnaker, at its option, to
satisfy interest by increasing the principal amount of the note.
However, if Spinnaker selects the PIK option, the interest rate on the
note is 9%. All or any part of this note can be converted at Alco's
option into shares of Spinnaker stock after April 1, 1998 at the then
current market price.
Based on the terms of the bridge loan and the restructured subordinated notes
with Alco, the Company has classified the $25 million subordinated notes to Alco
as long-term.
F. Income Taxes
The income tax provision includes federal, as well as state and local taxes.
The tax provisions for the three months ending March 31, 1996 and 1995 represent
effective tax rates of 40.0% and 41.5%, respectively. The rates differ from the
federal statutory rate principally due to the effect of state income taxes,
amortization of goodwill, and, in 1995 a valuation reserve provided on the
benefit associated with the Registrant's equity in losses of Capital
Communications Corporation.
G. Capital Stock
In 1987 and 1992, the Board of Directors authorized the purchase of up to a
total of 300,000 shares of Common Stock of the Registrant. These shares will
be retained as treasury stock for future use as required. Through March 31,
1996, the Registrant had purchased 230,861 shares of Common Stock to date at an
average price of $13.15.
H. Earnings Per Share
Earnings per common and common equivalent share amounts are based on the average
number of common shares outstanding during each period, assuming the exercise
of all stock options having an exercise price less than the average market price
of the common stock using the treasury stock method. Fully diluted earnings per
share reflect the effect, where dilutive, of the exercise of all stock options
having an exercise price less than the greater of the average or closing market
price at the end of the period of the Common Stock of the Registrant using the
treasury stock method.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Sales and Revenues
Revenues for the first quarter of 1996 increased by $41.1 million or 59.0% from
the first quarter of 1995. Contributions to the overall increase from the
multimedia, services and manufacturing segments were 3%, 9%, and 88%,
respectively. The acquisition of Central Products Company by Spinnaker
Industries, on October 4, 1995, was the predominant cause of the increase.
Central Products, with revenues of $32.0 million in the first quarter of 1996,
represented 88% of the increase in the manufacturing segment and 78% of the
overall increase in the Registrant's revenues. Revenues at Brown Bridge
Industries increased by $4.2 million as a result of recently obtained
contracts. Revenues at the Morgan Group, Inc. increased by $3.7 million
reflecting increased demand in manufactured housing and the results of
Transfer Drivers, Inc., which was acquired on May 22,1995, offset by a
decline in recreational vehicle shipments.
On a prospective basis, the inclusion of the Central Products operation for a
full year is expected to result in increased reported revenues by the
Registrant in the second and third quarters of 1996 versus the respective prior
year periods.
Operating Profit
Operating profit for the first quarter of 1996, increased by $1.9 million, or
46.5%, from the first quarter of 1995. On a segment basis, multimedia and
manufacturing operations increased by $0.8 million and $2.2 million,
respectively, while the operating profit of the services segment declined by
$0.7 million. The inclusion of the Central Products operations in the first
quarter of 1996 increased operating profit by $2.0 million. Improved results
at Brown Bridge, contributed $0.2 million to the operating profit improvement.
Within the multimedia segment, the inclusion of CLR Video, which acquired a
4,500 cable operation on December 1, 1995, contributed $0.1 million in operating
profit for the quarter. In addition, the increased level of capital
expenditures by our telephone operations, resulted in increased revenue recovery
and operating profit in 1996. The decline in operating profit at The Morgan
Group of $0.8 million, resulted from reduced recreational vehicle margins due
with reduced demand plus higher safety and information technology initiatives.
On a prospective basis, the inclusion of Central Products is expected to result
in increased reported operating profit by the Registrant in the second and third
quarters of 1996 versus the respective prior year periods.
Other Income (Expense), Net
Investment income in the first quarter of 1996 was $0.5 million lower than the
first quarter of the previous year due to decreased net marketable securities
gains plus lower investments in securities generating current investment
income.
Interest expense in the first quarter of 1996 was $1.8 million higher than the
first quarter of the previous year due to interest expense associated with the
acquisitions of Central Products and CLR Video of $1.7 million and $0.1 million,
respectively. Offsetting this increase was a $0.1 million decrease in interest
expense associated with other lower borrowing levels.
As described in Note E to the Condensed Consolidated Financial
Statements, as part of Spinnaker's acquisition of Central Products, Spinnaker
issued to Alco a $6 million Convertible Subordinated Note that automatically
converts into Spinnaker Common Stock 30 days after the execution of the Note at
a conversion price per share of approximately $35. Accordingly, in early May,
1996, this Note converted into shares of Spinnaker stock. Also as noted,
Spinnaker is required to pay the difference between $6 million and the sales
proceeds of the shares by Alco.
As it is the accounting policy of the Registrant to recognize gains and
losses on the sale of subsidiary stock, the conversion of this Note would result
in a significant gain to the Registrant.
Tax Provision
The income tax provision includes federal, as well as state and local taxes.
The tax provisions for the three months ended March 31, 1996 and 1995, represent
effective tax rates of 40.0% and 41.5%, respectively. The rates differ from the
federal statutory rate principally due to the effect of state income taxes,
amortization of goodwill, and, in 1995, a valuation reserve provided on the
benefit associated on the Registrant's equity in losses in Capital
Communications Corporation.
Minority Interest
Minority interest was $0.1 million lower in the first quarter of 1996 versus the
first quarter of 1995, due to a lower contribution of The Morgan Group to the
1996 results. In the first quarter of 1995, minority interest expense
associated with The Morgan Group was $0.2 million.
Net Income (Loss)
Net income for the three months ended March 31, 1996 was $1.2 million, or $0.86
per share, in comparison to net income for the three months ended March 31, 1995
of $1.0 million, or $0.80 per share.
Backlog/New Orders
Total backlog of manufactured products at March 31, 1996 was $34.4 million,
which represents a slight increase from the backlog of $34.0 million at December
31, 1995. Within the manufacturing group, the backlog at Brown Bridge and
M-tron decreased by $1.6 million and $0.3 million, respectively, and Lynch
Machinery's increased by $1.2 million.
Liquidity/Capital Resources
At March 31, 1996, the Registrant had $29.6 million in cash and short-term
investments, $2.5 million of which was at the Parent Company, which was $2.2
million more than the amount reported at December 31, 1995. Working capital at
March 31, 1995, was $27.4 million compared to $25.6 million at December 31,
1996. Total debt was $186.7 million at March 31, 1996 compared to $187.4
million at December 31, 1995. As reported in the Registrant's Statement of
Consolidated Cash Flow, during the three months ended March 31, 1996,
operating activities generated $11.3 million in cash, investing activities
(utilized) $4.2 million, and financing activities generated $0.3 million.
The respective amounts for the three months ended March 31, 1995 were $4.9
million, $3.1 million and ($0.6 million), respectively. A significant build
up of inventories at Lynch Machinery in the first quarter of 1995 was
primarily responsible for the significant fluctuation in cash generated from
operating activities between the two periods. Registrant maintains an
active acquisition program and generally finances each acquisition with a
significant component of debt. This acquisition debt contains restrictions
on the amount of readily available funds that can be transferred to the
Parent Company from its subsidiaries. At March 31, 1996, the Registrant has
$30.2 of unused short-term and long-term lines of credit facilities, $6.8
million of which applied to the Parent Company.
Subsidiaries of the Registrant hold limited partnership interests in and have
loan commitments to five partnerships which were the winning bidders on an
aggregate of 31 licenses in the Federal Communications Commission's recently
concluded C-Block auction for 30 megahertz of broadband spectrum to be used for
personal communications services (PCS). See Item 5 below. The licenses have
an aggregate purchase price of $215 million, after a 25% bidding credit that the
FCC provides to "small businesses." Under FCC regulations, 5% of the purchase
price of the licenses is due May 15, 1996 and 5% is due at the time the licenses
are awarded, which are expected to occur in the summer of 1996. The remaining
90% will be funded by a loan from the U.S. Government with a ten-year life with
principal payments beginning in year seven.
Registrant's subsidiaries have an aggregate commitment to loan the partnerships
$41.8 million, $6.4 million of which has been met as of March 31, 1996, to be
utilized principally by the partnerships to fund down payments on the licenses
and interest payments on the Government loans. The Registrant is pursuing
various alternatives to obtain the financing necessary to meet this current
funding commitment, but there can be no assurance that the Registrant can
successfully complete any such financing. In addition, the Registrant expects
that either directly or through the above entities or through other potential
joint ventures, to participate in the scheduled FCC auction of 10 megahertz of
spectrum also to be used for personal communications services, the so called
"D-E-F" block auction. The funding aspects of the acquisition of licenses and
the subsequent mandatory build out requirements plus the amortization of the
license, could significantly and materially impact Registrant's reported net
income over the next several years. Under the current structure, the
ramifications of this would not impact reported revenues and operating profit
in the future.
PART II OTHER INFORMATION
Item 5. Other Information
Subsidiaries of Registrant are 49.9% limited partners in Aer Force
Communications, L.P., Southeast Wireless Communications, L.P., Fortunet
Wireless Communications L.P., High Country Communications, L.P. and New
England Wireless Communications, L.P. (collectively the "PCS
Partnerships"). In the Federal Communications Commission ("FCC")'s
recently concluded 30 megahertz C-Block auction (restricted to small
businesses and certain other qualifying bidders) of personal
communications services ("PCS") licenses, the PCS Partnerships won 31
licenses in 17 states covering a population of approximately 7 million.
The licenses have an aggregate purchase price of $288 million before
a 25% bidding credit.
Under FCC rules, the PCS Partnerships are required to make a down
payment equal to 10% of the cost (net of bidding credits) of the
licenses ($21.5 million), half of which is due on May 15, 1996 and the
other half of which is due five business days after the grant of the
licenses. The Government is providing 10 year financing, interest only
for the first six years, for the remaining 90%. Registrant's
subsidiaries have entered into agreements to loan the PCS Partnerships
in the aggregate $41.8 million to be utilized by the PCS Partnerships
to fund down payments on the licenses, interest payments on the
Government loans and certain other partnership expenses. The 50.1%
general partners have no obligation to provide loans or additional
funds to the PCS Partnerships. The grant of licenses won in the
auction is subject to the FCC's application and review process, in
which other bidders and the FCC have the right to challenge the PCS
Partnerships' qualifications. FCC rules also impose build-out
requirements that require 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 two-thirds within ten years. There
are also substantial restrictions on the transfer of control of PCS
licenses, including no transfers in the first three years. There are
many risks relating to PCS, including without limitation, the
possibility of challenges to licenses, 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 the PCS Partnerships compared to
other potential competitors, existing and changing regulatory
requirements, and actually building out and operating the licenses
profitably in a highly competitive environment (including already
established cellular telephone operators and other new PCS licensees).
There can be no assurance that any licenses granted to the PCS
Partnerships can be successfully financed, developed and/or operated.
Registrant will request Spinnaker Industries, Inc. ("Spinnaker")'s
Board of Directors to give the 90 day notice of termination under
Spinnaker's Management Agreement with Boyle, Fleming, George & Co.,
Inc., with the intent of having Messrs. Boyle and Fleming, Chairman and
Chief Executive Officer and President, respectively, enter into
employment arrangements with Spinnaker.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10(w)(i) - Amendment No. 1 to the Loan Agreement, dated as of
November, 1996, between Lynch PCS Corporation A and Aer Force
Communications, L.P. (amendments in similar form are being
entered into with respect to the other Loan Agreements).
27-Financial Data Schedule
(b) Reports on Form 8-K
On January 4, February 2, March 1, March 14, and April 19,1996,
Registrant filed Amendments (2)-(6), respectively, to its Form
8-K, dated October 4, 1995, with respect to the Central Products
acquisition and financing. On March 20, 1996, Registrant filed
a Form 8-K, dated March 13, 1996, with respect to a change of
independent accountants at Registrant's subsidiary, The Morgan
Group, Inc. and with respect to the pending acquisition of
Dunkirk & Fredonia Telephone Company, which was amended on April
4, 1996.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LYNCH CORPORATION
(Registrant)
BY:s/Robert E. Dolan
Robert E. Dolan
Chief Financial Officer
May 15, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Condensed Consolidated Statements of Operations and Condensed Consolidated
Balance Sheets and is qualified in its entirety by reference to such
Form 10-Q.
</LEGEND>
<CIK> 0000061004
<NAME> LYNCH CORPORATION
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 23,204
<SECURITIES> 6,409
<RECEIVABLES> 52,959
<ALLOWANCES> 1,286
<INVENTORY> 33,911
<CURRENT-ASSETS> 127,443
<PP&E> 152,395
<DEPRECIATION> 40,053
<TOTAL-ASSETS> 308,433
<CURRENT-LIABILITIES> 100,074
<BONDS> 139,485
0
0
<COMMON> 5,139
<OTHER-SE> 32,291
<TOTAL-LIABILITY-AND-EQUITY> 308,433
<SALES> 110,930
<TOTAL-REVENUES> 110,930
<CGS> 94,405
<TOTAL-COSTS> 105,020
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,954
<INCOME-PRETAX> 2,452
<INCOME-TAX> 963
<INCOME-CONTINUING> 1,201
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,201
<EPS-PRIMARY> .86
<EPS-DILUTED> .86
</TABLE>
Amendment No. 1 (the "Amendment"), dated as of May 6, 1996, to the
Loan Agreement (the "Agreement") dated as of November 6, 1995,
between Aer Force Communications, L.P. and Lynch PCS Corporation A
WHEREAS Borrower needs additional funds to fund the initial 5% down
payment on certain PCS Licenses won by Borrower in the C-Block Auction;
WHEREAS the Agreement inadvertently failed to provide that Lender would
make Supplemental Loans for that purpose; and
WHEREAS Lender is willing to make Supplemental Loans for such purpose.
NOW, THEREFORE, the parties agree as follows:
1. Terms defined in the Agreement shall have the same meaning in this
Amendment.
2. Section 2.02(c) is amended to provide that Lender will make
Supplement Loans to Borrower for the purpose of allowing Borrower to fund the
initial 5% down payments due on PCS Licenses won by Borrower in the C-Block
Auction, which payments are due within 5 business days after the C-Block Auction
terminates. To the extent made by Lender, such Supplement Loans shall reduce
Lender's commitment set forth in Section 2.02(c) to make additional Supplemental
Loans. Lender's obligations to make Supplemental Loans as provided in this
Section 2 shall be subject to all of the terms and conditions set forth in the
Agreement.
3. Except as specifically modified by this Amendment, the Agreement
shall remain in full force and effect.
In Witness of their Agreement, the parties have executed this Amendment
as of the date first above written.
Lender: Borrower:
Lynch PCS Corporation A Aer Force Communications, L.P.
By: By:
Aer Force Corporation, its
General Partner
By:
Name:
Title:
