SECURITIES & 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, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 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 (20 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, 1997
Common Stock, no par value 1,416,834<PAGE>
INDEX
LYNCH CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations:
- Three months ended March 31, 1997 and 1996
Condensed Consolidated Balance Sheet:
- March 31, 1997
- December 31, 1996 (Audited)
Condensed Consolidated Statements of Cash Flows:
- Three months ended March 31, 1997 and 1996
Notes to Consolidated Financial Statements:
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
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
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(In thousands, except share amounts)
<CAPTION>
Three Months
Ended March 31
1997 1996
<S> <C> <C>
SALES AND REVENUES
Multimedia $ 10,067 $ 6,715
Services 33,633 30,506
Manufacturing 65,079 72,254
108,779 109,475
Costs and Expenses:
Multimedia 7,807 4,610
Services 30,969 28,561
Manufacturing 55,442 60,147
Selling and administrative 10,325 10,220
OPERATING PROFIT 4,236 5,937
Other Income (Expense):
Investment Income 433 433
Interest Expense (5,469) (3,944)
Share of Operations of Affiliated Companies 14 19
Gain on Sale of Subsidiary Stock 0 44
(5,022) (3,448)
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES AND MINORITY INTERESTS (786) 2,489
Provision for Income Taxes 315 (977)
Minority Interests (41) (288)
INCOME (LOSS) FROM CONTINUING OPERATIONS $ (512) $ 1,224
DISCONTINUED OPERATIONS:
LOSS FROM OPERATIONS OF DISCONTINUED
LYNCH TRI-CAN INTERNATIONAL 0 (23)
NET INCOME (LOSS) $ (512) $ 1,201
Weighted Average Shares Outstanding 1,413,000 1,397,000
INCOME PER COMMON SHARE:
INCOME (LOSS) FROM CONTINUING OPERATIONS (0.36) 0.88
LOSS FROM DISCONTINUED OPERATIONS 0.00 (0.02)
NET INCOME (LOSS) (.36) 0.86
</TABLE>
<TABLE>
<PAGE>
LYNCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands)
<CAPTION>
March 31, December 31,
1997 1996
(Unaudited) (A)
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and Cash Equivalents $ 27,685 $ 33,946
Marketable Securities and Short-Term Investments 1,666 2,156
Receivables, less Allowances of $1501 and $1525 51,965 52,963
Inventories 35,937 36,859
Deferred Income Tax Benefits 5,571 5,571
Other Current Assets 9,492 8,598
Total Current Assets 132,316 140,093
PROPERTY, PLANT AND EQUIPMENT:
Land 1,472 1,367
Buildings and Improvements 23,485 21,334
Machinery and Equipment 180,054 157,025
205,011 179,726
Less Accumulated Depreciation 50,396 46,707
Net Property, Plant and Equipment 154,615 133,019
INVESTMENTS IN AND ADVANCES TO PCS ENTITIES 28,606 34,116
INVESTMENTS IN AND ADVANCES TO AFFILIATED COMPANIES 1,293 2,529
EXCESS OF COSTS OVER FAIR VALUE
OF NET ASSETS ACQUIRED 72,821 69,206
OTHER ASSETS 22,675 13,657
Total Assets $412,326 $392,620
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes Payable to Banks $ 18,273 $ 17,419
Trade Accounts Payable 19,476 20,998
Accrued Liabilities 38,365 36,275
Current Maturities of Long-Term Debt 20,913 23,769
Total Current Liabilities 97,027 98,461
LONG-TERM DEBT 232,355 219,579
DEFERRED INCOME TAXES 24,945 22,389
MINORITY INTERESTS 18,931 13,268
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 8,718 8,417
RETAINED EARNINGS 25,960 26,472
TREASURY STOCK OF 54,357 & 80,157 SHARES, AT COST (749) (1,105)
Total Shareholders' Equity 39,068 38,923
Total Liabilities and Shareholders' Equity $412,326 $392,620
</TABLE>
(A) The Balance Sheet at December 31,1996 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>
<PAGE>
LYNCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(In thousands)
<CAPTION>
Three Months Ended
March 31
1997 1996
OPERATING ACTIVITIES
<S> <C> <C>
Net Income (Loss) $ (512) $ 1,201
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 4,826 3,931
Net effect of purchases and sales
of trading securities 490 5,023
Share of operations of affiliated companies (14) (19)
Minority interests 41 288
Changes in operating assets and liabilities:
Receivables 998 (653)
Inventories 922 (676)
Accounts payable and accrued liabilities (663) 4,174
Other (1,153) (2,008)
NET CASH FROM OPERATING ACTIVITIES 4,935 11,261
INVESTING ACTIVITIES
Capital Expenditures (3,315) (3,906)
Investment in Coronet Communications Company 2,995 0
Investment in Upper Peninsula Telephone Company (15,474) 0
Investment in Personal Communications
Services Partnerships 4,989 0
Other 7 (327)
NET CASH USED IN INVESTING ACTIVITIES (10,798) (4,233)
FINANCING ACTIVITIES
Repayments of debt, net (1,017) (741)
Treasury stock transactions 657 723
Minority interest transactions (38) 273
NET CASH FROM (USED IN)FINANCING ACTIVITIES (398) 255
Net increase (decrease)in cash and cash equivalents (6,261) 7,283
Cash and cash equivalents at beginning of period 33,946 15,921
CASH AND CASH EQUIVALENTS AT END OF PERIOD 27,685 23,204
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A. 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, Inc. 100.0%
World Surfer, Inc.
Lynch Telephone Corporation VI 98.0%
J.B.N. Telephone Company, Inc. 98.0%
J.B.N. Finance Corporation 98.0%
Giant Communications, Inc.
Lynch Telephone Corporation VII 100.0%
USTC Kansas, Inc. 100.0%
Haviland Telephone Company, Inc. 100.0%
Haviland Finance Corporation 100.0%
Lynch Telephone Corporation VIII 100.0%
Dunkirk & Fredonia Telephone Company 100.0%
Cassadaga Telephone Company 100.0%
Macom, Inc. 100.0%
Comantel, Inc. 100.0%
D&F Cellular Telephone, Inc. 100.0%
Erie Shore Communications, Inc. 100.0%
LMT Holding Corporations 100.0%
Lynch Michigan Telephone Holding Corp. 100.0%
LMT Acquisition Co., Inc. 100.0%
Upper Peninsula Telephone Company 60.53%
Alpha Enterprises Limited 60.53%
Upper Peninsula Cellular North, Inc. 60.53%
Upper Peninsula Cellular South, Inc. 60.53%
Global Television, Inc. 100.0%
Inter-Community Acquisition Corporation 83.0%
Home Transport Services, Inc. 100.0%
Lynch Capital Corporation 100.0%
Lynch Entertainment Corporation 100.0%
Lynch Entertainment Corporation II 100.0%
Lynch International Exports, Inc. 100.0%
Lynch Manufacturing Corporation 100.0%
Lynch Machinery, Inc. 90.0%
M-tron Industries, Inc. 94.0%
M-tron Industries, Ltd 94.0%
Spinnaker Industries, Inc. 73.4%
Entoleter, Inc. 73.4%
Brown-Bridge Industries, Inc. 73.4%
Central Products Company 73.4%
Lynch Multimedia Corporation 100.0%
CLR Video, L.L.C. 60.0%
The Morgan Group, Inc. 66.24%(V)/50.95%(O)
Morgan Drive Away, Inc. 66.24%(V)/50.95%(O)
Transport Services Unlimited, Inc. 66.24%(V)/50.95%(O)
Interstate Indemnity Company 66.24%(V)/50.95%(O)
Morgan Finance, Inc. 66.24%(V)/50.95%(O)
TDI, Inc. 66.24%(V)/50.95%(O)
Home Transport Corporation 66.24%(V)/50.95%(O)
MDA Corporation
Lynch PCS Communications Corporation 100.0%
Lynch PCS Corporation A 100.0%
Lynch PCS Corporation G 100.0%
Lynch Interactive Corporation 100.0%
Lynch Telecommunications Corporation 100.0%
Lynch Telephone Corporation 80.1%
Western New Mexico Telephone Co., Inc. 80.1%
WNM Communications Corporation 80.1%
Wescel Cellular, Inc. 80.1%
Wescel Cellular of New Mexico
Limited Partnership 40.9%
Wescel Cellular, Inc. II 80.1%
Northwest New Mexico Cellular, Inc. 40.1%
Northwest New Mexico Cellular of
New Mexico Limited Partnership 20.5%
Enchantment Cable Corporation 80.1%
Lynch Telephone Corporation II 83.0%
Inter-community Telephone Company 83.0%
Inter-community Telephone Company II 83.0%
Lynch Telephone Corporation III 81.0%
Cuba City Telephone Exchange Company 81.0%
Belmont Telephone Company 81.0%
Lafayette County Satellite TV, Inc. 81.0%
</TABLE>
Notes:
(V)=Percentage voting control; (O)=Percentage of equity ownership
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 the 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, 1997 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1997. 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, 1996.
C. Acquisitions
On March 18, 1997, Lynch Michigan Telephone Holding Company, a wholly-owned
subsidiary of the Registrant, acquired approximately 60% of the outstanding
shares of Upper Peninsula Telephone Company for $15.2 million. The Registrant
expects to complete the acquisition of the remaining 40% of the stock of Upper
Peninsula by the end of the second quarter of 1997. As a result of this
transaction, the Registrant recorded approximately $4.4 million in goodwill
which is being amortized over 25 years.
On December 30, 1996, The Morgan Group, Inc., an approximately 51% owned
subsidiary of the Registrant, 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 purchase price was approximately $4.4
million, including assumed obligations.
On November 26, 1996, Lynch Telephone Corporation VIII, a wholly-owned
subsidiary of the Registrant, acquired all of the outstanding shares of Dunkirk
& Fredonia Telephone Company, a local exchange company serving portions of
Western New York. The total cost of this transaction was $27.7 million. As a
result of this transaction, the Registrant recorded $13.8 million in goodwill
which is being amortized over 25 years.
All of these acquisitions were accounted for as purchases, and, accordingly, the
assets and liabilities were recorded at their estimated fair market value.
The operating results of the acquired companies are included in the Consolidated
Statement of Income from their respective acquisition dates. The following
unaudited proforma information shows the results of the Registrant's operations
as though the purchase of Upper Peninsula Telephone Company, Transit Homes and
Dunkirk & Fredonia were made at the beginning of 1996.
<TABLE>
<CAPTION>
Three Months Ended
March 31
1997 1996
(In thousands, except
per share data)
<S> <C> <C>
Sales and Revenues $111,035 $120,370
Operating Profit 5,187 12,102
Income from Continuing Operations Before
Income Taxes and Minority Interest (279) 7,608
Net Income (326) 4,515
Net Income Per Share $(0.23) $3.23
</TABLE>
The 1996 proforma results reflect the sale of Dunkirk & Fredonia's cellular
telephone interests which resulted in a pre-tax gain of $5.1 million, or $3.65
per share, included in operating profit. The after-tax gain on the sale of the
cellular interests was $3.4 million, or $2.43 per share.
D. Discontinued Operations
During the second quarter of 1996, the Registrant decided to discontinue the
operations of Tri-Can International, Ltd. ("Tri-Can") and sell the assets of
that operation. The sale was completed in August 1996. Tri-Can, a manufacturer
of packaging machinery, recorded sales of $1.5 million for the three months
ended March 31, 1996. The assets sold primarily consisted of inventory fixed
assets, inventory and intangibles. Accordingly, during the first quarter of
1996, results of Tri-Can are presented as "discontinued operations."
E. Inventories
Inventories are stated at the lower of cost or market value. At March 31, 1997,
inventories were valued by three methods: last-in, first-out (LIFO) - 57%,
specific identification - 39%, and first-in, first-out (FIFO) - 4%. At December
31, 1996, the respective percentages were 53%, 42%, and 5%.
<TABLE>
<CAPTION>
In Thousands
3-31-97 12-31-96
<S> <C> <C>
Raw material and supplies $14,958 $10,987
Work in process 3,579 3,950
Finished good 17,400 21,922
Total Inventories $35,937 $36,859
</TABLE>
F. Indebtedness
On a consolidated basis, at March 31, 1997, the Registrant maintains short-term
and long-term lines of credit facilities totaling $85.4 million, of which $48.0
million was available. The Registrant maintains a $12.0 million short-term line
of credit facility, of which $0.1 million was available at March 31, 1997. This
facility will expire on April 15, 1998. Spinnaker Industries, Inc. maintains
lines of credit at its subsidiaries which total $40.0 million, of which $39.8
million was available at March 31, 1997. The Morgan Group maintains lines of
credit totaling $10.4 million, $0.9 million was available at March 31, 1997.
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, which are secured by the
operating assets of the subsidiary, and include various financial covenants.
At March 31, 1997, $33.0 million of these total facilities expire within one
year.
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.
On October 23, 1996, Spinnaker Industries completed the issuance of $115,000,000
of 10-3/4% senior secured debt due 2006. The debt proceeds were used to
extinguish substantially all existing bank debt, bridge loans, and lines of
credit at Spinnaker and its two major operating subsidiaries, Central Products
and Brown-Bridge. In addition, Spinnaker established a $40 million asset-backed
senior-secured revolving credit facility.
<TABLE>
<CAPTION>
3-31-97 12-31-96
<S> <C> <C>
Spinnaker Industries, Inc. 10.75% Senior
Secured Note due 2006 $115,000 $115,000
Rural Electrification Administration and
Rural Telephone Bank notes payable in
equal quarterly installments through 2027
at fixed interest rates ranging from 2% to
7.5% (6.1% weighted average) 47,343 34,734
Bank credit facilities utilized by certain
telephone and telephone holding companies
through 2008, $37.0 million at a fixed
interest rate averaging 9.1% and $3.8 million
at variable interest rates averaging 8.4% 40,799 41,513
Unsecured notes issued in connection with
telephone company acquisitions; $28.0 million
at fixed interest averaging 9% and $1.7 million
at a variable rate of 8.0% 29,763 29,783
Gabelli Funds, Inc. and affiliates loans:
at fixed rates of 10% due in 1997 1,800 11,800
at prime rate (8.5%) due in 1997 10,000 --
Other 8,563 10,518
253,268 243,348
Current Maturities (20,913) (23,769)
$232,355 $219,579
</TABLE>
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Sales and Revenues
Revenues for the first quarter 1997 decreased by $0.7 million, or 1%, from the
first quarter of 1996. Within the operating segments, the multimedia and
services revenues increased by 50% and 10%, respectively, but the revenues of
the manufacturing segment decreased by 10%. The acquisition of Dunkirk &
Fredonia Telephone Company, which occurred on November 26, 1996, was the primary
contributor to the increase in multimedia's operating revenues. Revenues of
$4.8 million as a result of the acquisition of Transit Homes of America, Inc.,
which occurred on December 30, 1996, offset by lower driver outsourcing and
"Truckaway" revenues, was the primary contributor to the increased revenues at
services. Within the manufacturing group, all companies reported lower revenues
than the first quarter of the prior year. Revenues for Spinnaker declined by
$4.9 million from the first quarter of the previous year due to an uneven
pattern of orders for pressure sensitive stamps at Brown-Bridge Industries,
Inc. At Central Products Company, competitive pricing pressure offset high unit
demand and capacity limitations and also resulted in lower revenues. Timing of
orders for glass presses resulted in a $1.8 million short-fall in revenues at
Lynch Machinery, Inc. and an overall industry softness for electronic components
requirements resulted in lower revenues of $0.5 million at M-tron.
Operating Profit
Operating profit for the first quarter of 1997 declined by $1.7 million from the
first quarter of 1996. Operating profit in the multimedia and services segments
increased by $0.1 million and $0.5 million, respectively, while manufacturing
operating profits fell by $2.2 million. In the multimedia segment, higher
revenues offset by increased depreciation and amortization expense, in part,
associated with the acquisition of Dunkirk & Fredonia Telephone Company,
resulted in essentially flat operating profit. Increased revenues resulted in
the increased operating profit at Morgan. The decline in the operating profit
at the manufacturing group related to lower volume and, in the case of Central
Products, higher volume at lower prices, coupled with unfavorable manufacturing
variances.
Other Income (Expense), Net
Investment income in the first quarter of 1997 was the same as the first quarter
of 1996.
Interest expense increased by $1.5 million to $5.5 million in the first quarter
of 1997 from $3.9 in the first quarter of 1996. The increase was a result of
an increase in interest payments and amortization of deferred financing costs
of $1.0 million at Spinnaker Industries, Inc., as a result of the issuance of
$115 million of senior secured notes on October 23, 1996, and interest expenses
of $0.5 million associated with the acquisition of Dunkirk & Fredonia Telephone
Company. As described in Footnote F of the Notes to Consolidated Financial
Statement, Spinnaker Industries completed the issuance of new debt to be used
primarily to extinguish previously existing credit facilities. These amounts
were offset by $0.5 million of capitalized interest associated with the
development of the PCS licenses.
Tax Provision
The income tax provision (benefit) includes federal, as well as state and local
taxes. The tax provision (benefit) for the three months ended March 31, 1997
and 1996, represent effective tax rates of (40.0%) and 40%, respectively. The
rates differ from the federal statutory rate principally due to the effect of
state income taxes and amortization of non-deductible goodwill.
Minority Interest
Minority interest was $247 thousand lower in the first quarter of 1997 versus
the first quarter of 1996, predominantly due to the loss recorded by Spinnaker
Industries and lower profits at the other manufacturing companies in 1997 versus
1996 offset by increased earnings at the telephone companies and Morgan.
Income From Continuing Operations
During the first quarter of 1997, the Registrant recorded a loss from continuing
operations of $0.5 million, or $0.36 per share, as compared to income from
continuing operations of $1.2 million, or $0.88 per share, in the first quarter
of 1996. Lower operating profit generated by our manufacturing subsidiaries
coupled with increased interest expense as a result of the senior note offering
by Spinnaker Industries, were the primary causes of the unfavorable variances.
Discontinued Operations
The Registrant had decided to discontinue the operations at Tri-Can
International, Ltd. in the second quarter of 1996 (see Note D). Accordingly,
its operating results in the first quarter of 1996 are treated as discontinued
operations.
Net Income (Loss)
Net loss for the three months ended March 31, 1997 was $0.5 million, or $0.36
per share, as compared to a net income of $1.2 million, or $0.86 per share in
the previous year's quarter.
Backlog/New Orders
Total backlog of manufactured products at March 31, 1997 was $27.0 million,
which represents an increase of $6.1 million from the backlog of $20.9 million
at December 31, 1996. An $8.1 million extra-large glass press order at Lynch
Machinery helped increase their backlog by $4.1 million and receipt of orders
for pressure sensitive stamps at Brown-Bridge increased their backlog by $0.9
million.
Liquidity/Capital Resources
At March 31, 1997, the Registrant has $29.4 million in cash and short-term
investments, $0.1 million of which was at the Parent Company, which was $6.8
million less than the amount reported at December 31, 1996. Working capital at
March 31, 1997, was $35.3 million compared to $41.6 million at December 31,
1996. Additional loans of $3.9 million were made in 1997 to the PCS
partnerships to fund interest payments required by the Federal Communications
Commission with regard to personal communications service licenses awarded to
these partnerships in the "C" Block Auction. Total debt was $271.5 million at
March 31, 1997 compared to $260.8 million at December 31, 1996. The increase
was due primarily to debt assumed in the Registrant's acquisition of Upper
Peninsula Telephone Company. As reported in the Registrant's Consolidated
Statement of Cash Flow, during the three months ended March 31, 1997, operating
activities generated $4.9 million in cash, investing activities used $10.8
million, and financing activities used $0.4 million. With regard to operating
activities, reduced sales of trading securities plus the absence of a
significant customer deposits at Lynch Machinery, which occurred in the 1996
period, resulted in the reduced cash provided from operating activities. The
investment in Upper Peninsula Telephone Company plus the first interest payment
on the C-Block partnerships, offset by the return of the bidding deposit in the
F-Block Auction, resulted in the net cash used in investing activities. The
essentially flat cash used in financing activities resulted when the Registrant
repaid a $10 million affiliate loan with funds received from the F-Block bidding
deposit, but reborrowed an additional $10 million from an affiliate to close on
the acquisition of 60% of the shares of Upper Peninsula Telephone Company.
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, 1997, the
Registrant has $48.0 million of unused short-term and long-term lines of credit
facilities, $0.1 of which applied to the Parent Company.
Subsidiaries of the Registrant hold limited partnership interests in and have
loan commitments to two partnerships which were the winning bidders in the
Federal Communications Commission's ("FCC") C-Block and F-Block Auctions for 30
megahertz and 10 megahertz, respectively, of broadband spectrum to be used for
personal communications services (PCS). In the C-Block Auction, an entity
acquired 31 licenses to provide personal communications services to geographic
areas of the United States with a population of 7.0 million. The cost of these
licenses was $216.2 million. $194.0 million of the cost of these licenses was
funded via a loan from the United States Government. The loan requires
quarterly interest payments of 7% (The Registrant argues strenuously that the
interest rate should have been 6.51%, the applicable treasury rate at the time
the licenses were awarded), and with quarterly principal amortization in years
7, 8, 9, and 10. Recently, the FCC has suspended until further notice the
quarterly payments, pending resolutions of certain matters. As of March 31,
1997, Registrant subsidiaries invested $598,000 in partnership equity and $24.4
million in loans and have funding commitments to provide an additional $16.3
million in loans. In the F-Block Auction, an entity acquired five licenses to
provide personal communications services in geographic areas of the United
States with a total population of 20 million. The cost of these licenses was
$19.0 million. $15.2 million of the cost of the licenses will be financed with
a loan from the United States Government. The interest rate on the loan will
be the long-term Government rate at the date of issuance and with quarterly
principal amortization in year 3 to 10. As of March 31, 1997, Registrant's
subsidiary has invested $99,000 in partnership equity and provided the entity
with a loan of $1.6 million funded by a short-term secured borrowing by the
Registrant and has a funding commitment of $10 million to the entity. On May
12, 1997, the Registrant loaned the entity $1.0 million to make its final down
payment on four of the five licenses and the licenses were awarded. The fifth
license is currently being contested, but the Registrant believes it will be
awarded sometime during 1997 and the down payment of $0.9 million will be
required to be made. The Registrant has borrowed the $2.6 million on a short-
term basis to fund its F-Block loan commitment.
The Registrant's subsidiaries are currently seeking alternatives to minimize or
raise funds for their funding commitments to the entities, but currently expect
to fund required interest payments. There are many risks associated with
personal communications services. In addition, funding aspects of acquisition
of licenses and the subsequent mandatory build out requirements plus the
amortization of the license, could significantly and materially impact the
Registrant's reported net income over the next several years. Of note, under
the current structure the ramifications of this should not impact reported
revenues and EBITDA in the future. For further information on PCS, including
various risks, see Item 1 -I(c) of Form 10-K for the year ended
December 31, 1996.
In mid-March 1997, the Registrant acquired 60% of stock of Upper Peninsula
Telephone Company for approximately $15.3 million with a short-term secured
bridge financing. The Registrant is currently seeking permanent financing to
replace in the bridge financing and to finance the acquisition of the remaining
stock of Upper Peninsula.
In December, 1996, the Registrant"s Board of Directors announced that it is
examining the possibility of splitting, through a "Spin-off," of either its
communications operations or its manufacturing operations. A spin-off could
improve management focus, facilitate and enhanced financings set the stage for
future growth, including acquisitions. A split could also help surface the
underlying values of the company as the different business segments appeal to
differing "value" and "growth" cultures in the investment community. There are
a number of matters to be examined in connection with a possible spin-off,
including tax consequences, and there is no assurance that such a spin-off will
be effected.
In February 1997, the Financial Accounting Standards Board issued, Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," which
changes the methodology of calculating earnings per share. SFAS No.128 requires
a disclosure of diluted earnings per share regardless of its difference from
basic earnings per share. The Registrant plans to adopt SFAS No. 128 in
December 1997. Early adoption is not permitted. The Registrant does not expect
the adoption of SFAS No. 128 to have a material effect on the financial
statements.
Included in this Management Discussion and Analysis of Financial Condition and
Results of Operations are certain forward looking financial and other
information. It should be recognized that such information are estimates or
forecasts based on various assumptions, including without limitation meeting
its assumptions regarding expected operating performance and other matters
specifically set forth, as well as the expected performance of the economy as
it impacts the Registrant's businesses, and which accordingly are subject to
uncertainties and risks.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
See Item 5, second paragraph
Item 2. Changes in Securities
(c) On January 2, 1997, Registrant granted 214 shares of its
common stock to each of six outside directors of Registrant
at a price of $70.10 per share (equal to the average stock
price for the 30 trading days ended December 31, 1996)
pursuant to Registrant's Directors Stock Plan. The issuance
was exempt from registration under the Securities Act of 1993
(the "Securities Act") under Section 4(2) thereof and/or the
"no sale" theory. On March 6, 1997, Registrant granted
31,700 phantom stock units to seven employees of Registrant
at $70.106 per unit pursuant to Registrant's Phantom Stock
Plan. Registrant disclaims that the phantom stock units are
equity securities. In addition, such units would be exempt
from registration under the Securities act under Section 4(a)
thereof and/or the "no sale" theory.
Item 5. Other Information
Registrant is examining various equity financing possibilities,
including a private and/or an initial public offering, for Lynch
Display Technologies, Inc., which would be the parent company of
Lynch Machinery, Inc.; however, there is no assurance that any such
financing can be done at terms acceptable to Registrant.
Reference is made to Item 1 - I(C) Personal Communications Services
("PCS") in Registrant Form 10-K for the year ended December 31,
1996, and Aer Force Communications B, L.P. ("Aer Force B"), which
won licenses in the Federal Communications Commission's F-Block PCS
Auction. Aer Force B, together with various other bidders in the
PCS auctions, has received a civil investigative demand ("CID")
from the United States Department of Justice for documents and
information in connection with an investigation to determine
whether there has been bid rigging and market allocation for
licenses auctioned by the FCC for PCS. Registrant expects that Aer
Force B will comply with the CID.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
*10(p) - Phantom Stock Plan as Amended
27 - Financial Data Schedule
(b) Reports on Form 8-K
On January 14, 1997, a report on Form 8-K to report the
acquisition of the operating assets of Transit Homes of
America, Inc. by the Registrant's approximately 51%-owned
subsidiary, The Morgan Group, Inc.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LYNCH CORPORATION
(Registrant)
By: Robert E. Dolan
Robert E. Dolan
Chief Financial Officer
May 15, 1997
As Amended
LYNCH CORPORATION
PHANTOM STOCK PLAN
1. Participants: Any officer or employee of the Lynch
Corporation (the "Corporation") designated by a committee (the
"Committee") appointed by the Board of Directors of the Corporation
(the "Board of Directors").
2. Share Unit/Grant Price: The Committee may, from time to time,
grant to any officer or employee of the Corporation (a "Grantee")
such number of "Share Units" as it in its discretion deems
appropriate. Each Share Unit shall, for purposes of the Plan, be
deemed to be the equivalent of one share of Common Stock of the
Corporation ("Common Stock"). The Grant Price shall be average
closing price of the Common Stock on the American Stock Exchange
("AMEX") for the 30 trading days prior to the date of grant (or,
at the option of the Committee or the Board of Directors, January
1 of the year in which the grant is made) (whether or not the stock
traded on said day).
3. Vesting: Share Units shall vest and become exercisable on the
first anniversary of the date of grant if the Grantee is on such
first anniversary an officer or employee of the Corporation(and
notwithstanding the reason that Grantee is no longer an officer or
employee); provided, however, that if the Grantee ceases to be
either an officer or employee of the Corporation prior to such
first anniversary by reason of death or permanent disability, the
Share Units shall vest and become exercisable proportionally over
the portion of first year after the date of grant that the Grantee
is an officer or employee.
4. Cash Dividends: If cash dividends are declared on the Common
Stock, additional Share Units shall be granted to Grantees equal
to the dividends that would be payable on the Share Units (if they
were shares of Common Stock) divided by the closing price of the
Common Stock on the AMEX on the date of payment of the cash
dividends (or if there was no trade on such date, the closing price
on the last preceding date on which the stock traded). Such
additional Share Units shall be deemed granted for vesting and
other purposes as of date of grant of the related Share Units.
5. Exercise of Share Units: At any time and from time to time
after the Share Units vest and become exercisable and prior to the
earlier of (i) the fifth anniversary of the date of grant or (ii)
30 days after the Grantee is no longer either an officer or
employee of the Corporation (notwithstanding the reason that
Grantee is no longer an officer or employee), a Grantee may
exercise the Share Units by giving written notice thereof to the
Corporation. Within 30 days after receipt of the written notice
of exercise, the Corporation shall pay to the Grantee an amount
equal to the closing price of the Common Stock on the AMEX on the
date of exercise (or if there was no trade on such date, the
closing price on the last preceding date on which the stock traded)
("Exercise Price") less the Grant Price multiplied by the number
of Share Units exercised. At its option, the Corporation may pay
up to 50% of the value of the Share Units exercised in shares of
Common Stock, valued at Exercise Price.
6. Adjustments Upon Changes in Capitalization: The number of
Share Units and/or the Grant Price shall be adjusted by the
Committee for stock splits, stock or other non-cash dividends,
spinoffs, recapitalizations, combinations or exchanges of shares,
merger, consolidation or liquidation, or the like.
7. Taxes: The Corporation may withhold cash from any payment to
satisfy Federal, state or local withholding or similar taxes.
8. No Transfer: Unless the Committee determines otherwise, Share
Units granted pursuant to the Plan shall not be transferable by the
Grantee other than by will or the laws of descent and distribution
or pursuant to a qualified domestic relations order as defined by
the Internal Revenue Code of 1986, as amended, 26 V.S.C. 1 et seq
or Title I of the Employee Retirement Security Act or the rules
thereunder. A designation of a beneficiary by a Grantee shall not
constitute a transfer.
9. Plan Termination: No grants under the Plan shall be made
after December 31, 2000, unless extended by action of the Board of
Directors of the Corporation.
10. Share Units Not Stock: Grantees shall not have any rights
(including the right to vote) of a shareholder of stock in respect
of Share Units.
11. No Right to Employment: Nothing contained herein shall give
any Grantee any right to remain as an officer or in the employ of
the Corporation or any of its subsidiaries or shall limit the right
of the Corporation or any of its subsidiaries to terminate, with
or without cause, a Grantee's employment or officer status.
12. Lynch Stock: Any shares of Common Stock issued to a Grantee
upon exercise of Share Units shall be held by the Grantee for
investment and without a view to sale or distribution. Such shares
may only be transferred or sold (i) in compliance with the
Securities Act of 1933, as amended (the "Securities Act") and any
state securities laws and (ii) if in the opinion of counsel
satisfactory to the Corporation, the transfer or sale complies with
clause (i). The Corporation has no obligation to register any
shares issued to any Grantee. Certificates for shares issued to
Grantees shall contain such legend to the foregoing effect as the
Committee shall determine.
13. Plan Agreement: The Committee may require Grantees, as a
condition of the grant, to execute such agreement with the
Corporation (which agreements need not be the same) relating to
Share Units granted to such Grantee as the Committee shall
determine.
14. Amendment/Discontinuance of Plan: The Plan may be amended in
any respect or discontinued at any time by action of the Board of
Directors; provided, however, that any such action shall not affect
any Share Units previously granted without the consent of the
Grantee of such Units.
15. Administration/Interpretation: The Plan shall be administered
by the Committee. The Committee may (but need not be) be an
existing committee of the Board of Directors. Subject to the
express provisions of the Plan, the Committee is authorized to
interpret the Plan and to make such determinations as it deems
necessary or advisable for the administration of the Plan. Neither
the members of the Committee nor any other director, officer or
employee of the Corporation shall have any liability to any party
for any action taken or not taken, in good faith, under the Plan
or based on or arising out of a determination of any question under
the Plan, made in good faith.
16. Effective Date: The Plan shall be effective as of February
29, 1996.
17. Non-Exclusive: Adoption of the Plan shall not be construed
as creating any limitations on the power of the Board to adopt such
other incentive arrangements as it may deem desirable, either
generally or applicable only in specific cases.
18. Governing Law: The Plan shall be governed by the laws of the
State of Indiana.
<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>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 27,685
<SECURITIES> 1,666
<RECEIVABLES> 53,466
<ALLOWANCES> 1,501
<INVENTORY> 35,937
<CURRENT-ASSETS> 132,316
<PP&E> 205,011
<DEPRECIATION> 50,396
<TOTAL-ASSETS> 412,326
<CURRENT-LIABILITIES> 97,027
<BONDS> 0
0
0
<COMMON> 5,139
<OTHER-SE> 33,929
<TOTAL-LIABILITY-AND-EQUITY> 412,326
<SALES> 108,779
<TOTAL-REVENUES> 108,799
<CGS> 94,218
<TOTAL-COSTS> 104,543
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,469
<INCOME-PRETAX> (786)
<INCOME-TAX> 315
<INCOME-CONTINUING> (512)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (512)
<EPS-PRIMARY> 0.36
<EPS-DILUTED> 0.36
</TABLE>
