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 September 30, 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 November 1, 1997
Common Stock, no par value 1,416,834 <PAGE>
<PAGE>
INDEX
LYNCH CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet:
- September 30, 1997
- December 31, 1996 (Audited)
Condensed Consolidated Statements of Operations:
- Three and nine months ended September 30, 1997 and 1996
Condensed Consolidated Statements of Cash Flows:
- Nine months ended September 30, 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 2. Changes in Securities
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
<PAGE>
<TABLE>
<PAGE>
Part 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements
LYNCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
<CAPTION>
(In thousands) September 30 December 31
1997 1996
(Unaudited) (A)
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and Cash Equivalents $ 25,556 $ 33,946
Marketable Securities and Short-Term Investments 2,919 2,156
Receivables, Less Allowances of $1,624 and $1,525 57,572 52,963
Inventories 36,643 36,859
Deferred Income Tax Benefits 5,571 5,571
Other Current Assets 11,230 8,598
Total Current Assets 139,491 140,093
PROPERTY, PLANT AND EQUIPMENT:
Land 1,473 1,367
Buildings and Improvements 23,847 21,334
Machinery and Equipment 188,350 157,025
213,670 179,726
Less Accumulated Depreciation (58,012) (46,707)
Net Property, Plant and Equipment 155,658 133,019
INVESTMENTS IN AND ADVANCES TO PCS ENTITIES 24,947 34,116
INVESTMENTS IN AND ADVANCES TO AFFILIATED COMPANIES 1,273 2,529
EXCESS OF COSTS OVER FAIR VALUE OF NET ASSETS ACQUIRED 74,133 69,206
OTHER ASSETS 13,486 13,657
Total Assets $408,988 $392,620
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes Payable to Banks $ 22,334 $ 17,419
Trade Accounts Payable 21,033 20,998
Accrued Liabilities 39,174 36,275
Current Maturities of Long-Term Debt 8,776 23,769
Total Current Liabilities 91,317 98,461
LONG-TERM DEBT 244,952 219,579
DEFERRED INCOME TAXES 22,557 22,389
MINORITY INTERESTS 14,201 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 8,635 8,417
RETAINED EARNINGS 22,936 26,472
TREASURY STOCK OF 54,357 AND 80,157 SHARES AT COST (749) (1,105)
Total Shareholders' Equity 35,961 38,923
Total Liabilities and Shareholders' Equity $408,988 $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.
See Notes to Condensed Consolidated Financial Statements<PAGE>
<PAGE>
<TABLE>
LYNCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(In thousands, except share amounts)
<CAPTION>
Three Months Nine Months
Ended September 30 Ended September 30
SALES AND REVENUES 1997 1996 1997 1996
<S> <C> <C> <C> <C>
Multimedia $ 12,739 $ 7,397 $ 34,901 $ 20,753
Services 38,293 35,306 111,137 102,510
Manufacturing 67,685 74,618 202,884 217,026
118,717 117,321 348,922 340,289
Costs and expenses:
Multimedia 9,396 5,223 26,188 14,824
Services 34,821 32,417 101,674 94,922
Manufacturing 57,164 63,063 170,369 180,670
Selling and administrative 11,049 9,904 32,052 31,839
OPERATING PROFIT 6,287 6,714 18,639 18,034
Other income (expense):
Investment Income 554 519 1,411 1,667
Interest expense (5,901) (4,254) (17,178) (12,439)
Share of operations of
affiliated companies 20 8 91 74
Impairment of PCS licenses (7,024) 0 (7,024) 0
Gain (Loss) on Sale of
Subsidiary Stock (91) 0 169 4,178
(12,442) (3,727) (22,531) (6,520)
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES
AND MINORITY INTERESTS (6,155) 2,987 (3,892) 11,514
Provision for income taxes 2,041 (1,240) 1,139 (4,666)
Minority interests (160) (498) (783) (1,160)
INCOME (LOSS) FROM CONTINUING
OPERATIONS $ (4,274) $ 1,249 $ (3,536) $ 5,688
DISCONTINUED OPERATIONS:
LOSS FROM OPERATIONS OF DIS-
CONTINUED LYNCH TRI-CAN INTER-
NATIONAL (LESS APPLICABLE INCOME
TAXES OF $90) 0 0 0 (148)
LOSS ON DISPOSAL OF LYNCH TRI-CAN
INTER-NATIONAL(LESS APPLICABLE
INCOME TAXES OF $305) 0 0 0 (595)
NET INCOME (LOSS) $ (4,274) $ 1,249 $ (3,536) $ 4,945
Weighted average shares
outstanding 1,417,000 1,408,000 1,414,000 1,404,000
INCOME (LOSS) PER COMMON SHARE:
INCOME (LOSS) FROM
CONTINUING OPERATIONS $ (3.02) $ 0.89 $ (2.50) $ 4.05
LOSS FROM DISCONTINUED OPERATIONS 0.00 0.00 0.00 (0.53)
NET INCOME (LOSS) $ (3.02) $ 0.89 $ (2.50) $ 3.52
</TABLE>
See Notes to Condensed Consolidated Financial Statements<PAGE>
<PAGE>
<TABLE>
LYNCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(In thousands)
<CAPTION>
Nine Months Ended
September 30
1997 1996
OPERATING ACTIVITIES
<S> <C> <C>
Net Income (Loss) $(3,536) $ 4,945
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 15,984 12,514
Net effect of purchases and
sales of trading securities (763) 9,461
Deferred taxes (2,388) 1,707
Share of operations of affiliated companies (91) (74)
Minority interests 783 1,160
Gain on sale of stock by subsidiaries (169) (4,187)
Impairment of PCS Licenses 7,024 0
Changes in operating assets and liabilities:
Receivables (4,449) (2,741)
Inventories 216 (5,953)
Accounts payable and accrued liabilities 1,259 1,268
Other (635) (3,255)
NET CASH FROM OPERATING ACTIVITIES 13,235 14,854
INVESTING ACTIVITIES
Capital Expenditures (13,700) (17,435)
Acquisition of lines from U.S. West 0 (5,680)
Investment in Coronet Communications Company 2,995 0
Investment in Upper Peninsula Telephone Company (25,721) 0
Sale of Investments-Cellular Partnership 8,576 0
Investment in Personal Communications
Services Partnerships 2,145 (14,306)
Other (82) (363)
NET CASH USED IN INVESTING ACTIVITIES (25,787) (37,784)
FINANCING ACTIVITIES
Issuance of long-term debt, net 3,219 22,410
Treasury stock transactions 657 730
Minority interest transactions 286 637
NET CASH FROM FINANCING ACTIVITIES 4,162 23,777
Net increase (decrease) in cash and cash equivalents (8,390) 847
Cash and cash equivalents at beginning of period 33,946 15,921
CASH AND CASH EQUIVALENTS AT END OF PERIOD 25,556 16,768
</TABLE>
See Notes to Condensed Consolidated Financial Statements. <PAGE>
<PAGE>
<TABLE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A. Subsidiaries of the Registrant
<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. 100.0%
Lynch Kansas Telephone Corporation 100.0%
Lynch Telephone Corporation VI 98.0%
J.B.N. Telephone Company, Inc. 98.0%
J.B.N. 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%
D&F Cellular Telephone, Inc. 100.0%
Erie Shore Communications, Inc. 100.0%
DFT Long Distance 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 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 Display Technologies, Inc. 100.0%
Lynch Machinery, Inc. 90.0%
M-tron Industries, Inc. 94.0%
M-tron Industries, Ltd. 94.0%
Spinnaker Industries, Inc 67.3%
Entoleter, Inc. 67.3%
Brown-Bridge Industries, Inc. 67.3%
Central Products Company 67.3%
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 66.24%(V)/50.95%(0)
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 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%
</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 and nine month periods ended September 30, 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 completed the acquisition of the remaining 40% on May 23, 1997.
The total cost of the acquisition was $26.5 million. As a result of this
transaction, the Registrant recorded approximately $7.4 million in goodwill
which is being amortized over 25 years.
On December 31, 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 25, 1996, DFT Communications Corporation, 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 Nine Months Ended
September 30 September 30
1997 1996 1997 1996
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Sales and Revenues $118,717 $130,981 $351,178 $378,198
Operating Profit 6,287 7,952 19,549 26,388
Income (Loss) from Continuing
Operations Before Income Taxes
and Minority Interest (6,155) 3,101 (3,664) 16,454
Net Income (Loss) (4,274) 1,220 (3,440) 7,946
Net Income (Loss) Per Share ($3.02) $0.87 ($2.43) $5.66
</TABLE>
The proforma results for the nine months ending September 30, 1996, 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 $2.8 million for the
nine months ended September 30, 1996. The assets sold primarily consisted of
inventory, fixed assets and intangibles. Accordingly, during the nine months
ended September 30, 1996, results of Tri-Can are presented as "discontinued
operations."
E. Inventories
Inventories are stated at the lower of cost or market value. At September
30, 1997, 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, 1996, the respective percentages were 53%, 42%, and 5%.
<TABLE>
<CAPTION>
In Thousands
9-30-97 12-31-96
<S> <C> <C>
Raw material and supplies $ 9,634 $10,987
Work in process 5,104 3,950
Finished goods 21,905 21,922
Total Inventories $36,643 $36,859
</TABLE>
F. Indebtedness
On a consolidated basis, at September 30, 1997, the Registrant maintains
short-term and long-term lines of credit facilities totaling $81.2 million,
of which $52.1 million was available. The Registrant (Parent Company)
maintains an $18.0 million short-term line of credit facility, of which $3.5
million was available at September 30, 1997. This facility decreases by $1.0
million per month starting on November 30, 1997 and will expire on February
16, 1998. Spinnaker Industries, Inc. maintains lines of credit at its
subsidiaries which total $40.0 million, of which $39.7 million was available
at September 30, 1997. The Morgan Group maintains lines of credit totaling
$10.4 million, $1.6 million was available at September 30, 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, and are secured by the
operating assets of the subsidiary, and include various financial covenants.
At September 30, 1997, $30.1 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
million 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 $40.0
million asset-backed senior-secured revolving credit facility.
<TABLE>
<CAPTION>
Long term debt consists of: 9-30-97 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% (4.7% weighted average) 47,549 34,734
Bank credit facilities utilized by certain
telephone and telephone holding companies
through 2009, $36.4 million at a fixed
interest rate averaging 8.9% and $19.3 million
at variable interest rates averaging 9.0% 55,742 41,513
Unsecured notes issued in connection with
telephone company acquisitions at fixed
interest rates averaging 9% with maturities
through 2006. 27,945 28,044
Gabelli Funds, Inc. and affiliates loans
at fixed rates of 10% due on August 12, 1997 0 11,800
Other 7,492 12,257
253,728 243,348
Current Maturities (8,776) (23,769)
$244,952 $219,579
</TABLE>
H. Gain (Loss) on Sale of Subsidiary Stock
As a result of the conversion of the $6.0 million Convertible Subordinated
Alco Note of Spinnaker into their Common Stock on May 5, 1996 and other
transactions, the Registrant, in accordance with its accounting policy,
recognized a gain of $4.1 million, ($2.4 million, or $1.74 per share after
taxes) in the second quarter of 1996. During the third quarter of 1997, as a
result of the exercise of a portion of the stock warrants held by the
management of Spinnaker, the Registrant recorded a loss of $91 thousand, or
$53 thousand after tax (or $0.04 per share).
I. 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.
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.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Sales and Revenues
Revenues for the third quarter of 1997 increased by $1.4 million, or 1%, from
the third quarter of 1996. Within the operating segments, multimedia, whose
revenues increased by 72%, contributed $5.3 million to the increase and
services, whose revenues increased by 8%, contributed $3.0 million to the
overall increase. Revenues of the manufacturing segment dropped 9% and were
$6.9 million less than the third quarter of 1996. The acquisitions of
Dunkirk & Fredonia Telephone Company ($2.6 million contribution), which
occurred on November 26, 1996, and Upper Peninsula Telephone Company ($2.2
million contribution), which a majority interest was obtained on March 18,
1997, were the primary contributors 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
"Truckaway" revenues, an operation which was sold in the second quarter of
1997, was the primary contributor to the increased revenues at The Morgan
Group, Inc. Within the manufacturing group, revenues for Spinnaker were
lower by $6.8 million or 11% from the third quarter of 1996: at Central
Products Company, competitive pricing pressure offset somewhat higher unit
demand and resulted in lower revenues by $2.1 million, timing of shipments
decreased Brown-Bridge revenues by $3.1 million and Entoleter revenues of
industrial equipment were lower by $1.6 million. Timing delays in the
manufacturing of extra-large glass presses resulted in a $2.8 million period
to period short-fall in revenues at Lynch Machinery, Inc. and improved demand
for electronic components, predominantly by telecommunications capital
equipment manufacturers, resulted in higher revenues of $2.6 million at M-
tron.
For the nine months ended September 30, 1997, revenues increased by $8.6
million, or 3% better than the nine months ended September 30, 1996.
Multimedia revenues increased by $14.1 million reflecting the acquisitions of
Dunkirk & Fredonia and Upper Peninsula of $7.6 million and $4.4 million,
respectively. Morgan's revenues increased by $8.6 million reflecting
revenues of Transit Homes of America of $13.9 million, offset by lower driver
outsourcing Truckaway revenues. Manufacturing revenues decreased by $14.1
million reflecting (1) order short-fall at Lynch Machinery, $5.8 lower (2)
revenue shortfalls at all three units of Spinnaker, $11.6 million decrease
and (3) offset by improved demand at M-tron, $3.3 million increase.
Operating Profit
Operating profit for the third quarter of 1997 decreased by $.4 million from
the third quarter of 1996. Operating profit in the multimedia and services
segments increased by $1.2 million and $0.5 million, respectively, while
manufacturing operating profits decreased by $2.0 million. Corporate
expenses increased by $0.1 million. In the multimedia segment, higher
revenues resulted in increased EBITDA (earnings before interest, taxes,
depreciation and amortization) of $2.3 million, offset by increased
depreciation and amortization expense of $1.1 million, both primarily
associated with the acquisitions of Dunkirk & Fredonia Telephone Company and
Upper Peninsula Telephone Company. Increased revenues and absence of the
unprofitable Truckaway operation, increased operating profit at Morgan by
$0.5 million or 59%. The decrease in the operating profit at the
manufacturing group related to the reduced revenues at all the operating
units except for M-tron whose revenues and profit increased significantly.
For the nine months ended September 30, 1997, operating profit increased by
$0.6 million, or 3%. Multimedia operating profit increased by $2.7 million
reflecting the acquisition of Dunkirk & Fredonia and Upper Peninsula of $0.7
million and $1.9 million, respectively. Morgan's operating profit increased
by $1.6 million reflecting higher revenues and improved product mix.
Manufacturing operating profit fell by $3.9 million. Spinnaker's operating
profit fell by $0.9 million due to reduced revenues at all units. Lynch
Machinery's operating profit fell by $2.8 million reflecting reduced
revenues. M-tron's operation profit increased by $0.2 million.
Other Income (Expense), Net
Investment income in the third quarter of 1997 was $0.6 million which was an
increase of $0.1 million from the third quarter of 1996.
Interest expense increased by $1.6 million to $5.9 million in the third
quarter of 1997 from $4.3 in the third quarter of 1996. The increase was a
result of an increase in interest expense 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 and $0.6 million with the acquisition of Upper
Peninsula Telephone Company. These amounts did not include $0.7 million of
capitalized interest associated with the development of the personal
communications services ("PCS") licenses. On a year to date basis, the
acquisition of Dunkirk & Fredonia contributed $1.5 million of interest
expense, Upper Peninsula contributed $1.1 million of additional interest
expense and Spinnaker's high yield results in $2.6 million of incremental
interest expense. This amount did not include $1.7 million of capitalized
interest for PCS licenses.
As part of Spinnaker's acquisition of Central Products, Spinnaker issued to
Alco a $6 million Convertible Subordinated Note that converted into Spinnaker
Common Stock on May 5, 1996. As it is the accounting policy of the
Registrant to recognize gains and losses on the sale of stock by a
subsidiary, the conversion of this Note resulted in a pre-tax gain of $4.1
million to the Registrant in the second quarter of 1996.
During the third quarter of 1997, the Registrant took 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 in the so called C-
Block auction. Such write-off amounted to $7.0 million, or $4.6 million
after tax benefit.
In May 1996, the FCC concluded the so-called "C-Block" auction for 30-
megahertz of broadband spectrum across the United States to be used for
personal communications services ("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 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 30-megahertz POP, after the 25%
bidding credit. Events during and subsequent to the auction, as well as
other externally driven technological and market forces, have made financing
of the build-out 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, has
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,
afforded license holders a choice of four options, one of which was the
resumption of current debt payments; which had been suspended earlier this
year. 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. While Fortunet is still examining what
action, if any, it will take with these options and will continue to look for
ways to finance and build out this spectrum, the management of the Registrant
provided for a 30% reserve of its investment at this time, as this represents
management's estimate of the impairment of this investment given the current
available alternatives.
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
September 30, 1997 and 1996, represent effective tax rates of (33%) and 42%,
respectively. The 1997 rate is effected due to the anticipated inability to
currently provide for a state income tax benefit for the impairment of the
PCS investment. The remaining differences from the federal statutory rate
are principally due to the effect of state income taxes and amortization of
non-deductible goodwill.
Minority Interest
Minority interest was $0.3 million lower in the third quarter of 1997 versus
the third quarter of 1996, predominantly due to decreased net profits at
Spinnaker Industries, Inc. a 67.3% owned subsidiary.
Income From Continuing Operations
During the third quarter of 1997, the Registrant recorded losses from
continuing operations of ($4.3) million, or ($3.02) per share, as compared to
income from continuing operations of $1.2 million, or $.89 per share, in the
third quarter of 1996. The gain on the sale of Lafayette County Satellite TV
in 1997 had a net profit effect of $158 thousand, or $0.11 per share, and the
gain on the conversion of the Alco note in the third quarter of 1996, had a
net profit effect of $2.4 million, or $1.74 per share in 1996.
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 nine months ended September 30, 1996 are treated
as discontinued operations.
Net Income/Loss
Net loss for the three months ended September 30, 1997 was ($4.3) million, or
($3.02) per share, as compared to a net income of $1.2 million, or $0.89 per
share in the previous year's quarter. Net loss for the nine months ended
September 30, 1997 was ($3.5) million, or ($2.50) per share, as compared to
$4.9 million, or $3.52 per share, for the comparable period in 1996.
Backlog/New Orders
Total backlog of manufactured products at September 30, 1997 was $44.4
million, which represents an increase of $23.5 million from the backlog of
$20.9 million at December 31, 1996. A $16.0 million extra-large glass press
order at Lynch Machinery helped increase their backlog to $26.7 million.
Liquidity/Capital Resources
At September 30, 1997, the Registrant has $28.5 million in cash and short-
term investments, $1.2 million of which was at the Parent Company, which was
$7.6 million less than the amount reported at December 31, 1996. Working
capital at September 30, 1997, was $48.2 million compared to $41.6 million at
December 31, 1996. The decrease in cash and short-term investments was
primarily the result of funding the acquisition of Upper Peninsula and the
increase in working capital was primarily the result of the reduction in the
current portion of long-term debt. Total debt was $276.1 million at
September 30, 1997 compared to $260.8 million at December 31, 1996. The
increase was due primarily to debt incurred to fund the Registrant's
acquisition of Upper Peninsula Telephone Company. As reported in the
Registrant's Consolidated Statement of Cash Flow, during the nine months
ended September 30, 1997, operating activities generated $13.2 million in
cash, investing activities used $25.8 million, and financing activities
provided $4.2 million. Respective amounts for nine months ended September
30, 1996, were $14.9 million, ($37.8) million, and $23.8 million. The net
loss, lower net sales of trading securities, and an increase in accounts
receivable at The Morgan Group, Inc. resulted in decreased cash generated
from operating activities for the nine months ended September 30, 1997 versus
the nine months ending September 30, 1996. With regard to investment
activities, the acquisition of Upper Peninsula Telephone Company, offset by
repayment of a note by Coronet Communications Corporation, sale of cellular
partnership interests previously held by Upper Peninsula Telephone Company
and return of bidding deposits from the FCC with respect to activities by Aer
Force Communications B, L.P., resulted in a $12.0 million decrease in cash
used in investing activities as compared to the prior year period. The $4.0
million generated from financing activities resulted when the Registrant
repaid a $10 million affiliate loan with funds received from the return of
the F-Block bidding deposit, borrowed $10 million from an affiliate to
finance the acquisition of 60% of the shares of Upper Peninsula Telephone
Company and the payment of the first interest installment on the C-Block debt
(see below). The Registrant borrowed an additional $10 million in July to
pay for the 40% of Upper Peninsula. This compared to net borrowings of $22.4
million in the first three quarters of 1996, due to capital expenditures and
acquisition of telephone access lines by the Registrant's telephone
companies.
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 September 30,
1997, the Registrant has $52.1 million of unused short-term and long-term
lines of credit facilities, $3.5 million 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 PCS.
In the C-Block Auction, Fortunet, 49.9% owned by a subsidiary of the
Registrant, acquired 31 licenses to provide PCS to geographic areas of the
United States with a population of 7.0 million. The cost of these licenses
was $216.2 million. $194.6 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.
In the F-Block Auction, East/West Communications, Inc. ("East/West"),
incorporated in August 1997 as a successor to Aer Force Communications B,
L.P. minority owned by a subsidiary of the Registrant, 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 is financed with a
loan from the United States Government. The interest rate on the loan is
6.25% with quarterly principal amortization in years 3 to 10. On May 12,
1997, the Registrant's subsidiary loaned East/West $1.0 million to make its
final down payment on four of the five licenses (which were awarded). On
July 14, 1997, the Registrant loaned East/West $0.9 million to make the final
down payment on the fifth license which was awarded at that time. As of
September 30, 1997, Registrant's subsidiary has invested $99 thousand in
partnership equity and provided East/West with a loan of $2.5 million funded
by a short-term secured borrowing by the Registrant and has a funding
commitment of $8.9 million to East/West. The Registrant has borrowed the
$3.5 million on a short-term basis to fund its F-Block loan commitment. In
addition, the Registrant intends to dividend to its shareholders its 40% net
interest of East/West on or about December 5, 1997, subject to necessary
approvals.
The Registrant's subsidiaries are currently seeking alternatives to minimize
or raise funds for their funding commitments to the entities. There are many
risks associated with PCS. Interest payments on the Government debt which
were suspended in March-April, 1997 by the FCC will resume beginning March
31, 1998. 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 December, 1996, the Registrants' 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 enhance financings and 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 order to fund future growth of the Registrant's manufacturing
subsidiaries, each of these subsidiaries, Spinnaker Industries, Inc., Lynch
Display Technologies, Inc. (parent of Lynch Machinery, Inc.) and M-tron
Industries, Inc. is in the process of undertaking refinancing/strategic
initiative program, that is, to either raise financing for future
acquisitions or form a joint venture strategic partnership. There is no
assurance that any or all of these companies can accomplish these programs.
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, including without limitation matters relating to PCS, possible
spin-offs and a refinancing/strategic initiative program. It should be
recognized that such information are projections, 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, tax consequences and what actions the
FCC may take with respect to PCS. As a result, such information is subject
to uncertainties, risks and inaccuracies.
PART II OTHER INFORMATION
Item 2. Changes in Security and Use of Proceeds
(c) On August 11, 1997, Registrant granted 214 shares of its
common stock pursuant to Registrant's Directors Stock Plan
to a person who became a director of Registrant in 1997, at
a price of $70.10 per share (equal to the average stock
price for the 30 trading days ended December 31, 1996).
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.
Item 5. Other Information
Reference is made to Item 2. Management's Discussions and
Analysis of Financial Condition and Results of Operations for
information on personal communications services. See also Item
1-I(c) Personal Communications Services ("PCS") in Registrant's
Form 10-K for the year ended December 31, 1996.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<C> <S>
10(u)(i)(a) - Correction to Loan Agreement dated as of
August 12, 1996 between Registrant and
Gabelli Funds, Inc.
10(x) - Letter Agreement dated March 25, 1997
between Bal/Rivgam L.L.C. and Lynch PCS
Corporation G.
10(y)(i) - Promissory Notes of Registrant, dated
March 17, 1997, in the aggregate amount of
$10 million payable to Gabelli Funds, Inc.
and Gabelli Securities, Inc. (which Notes
have been paid off).
10(y)(ii) - Pledge and Security Interest Agreement,
dated as of March 17, 1997 relating to the
Promissory Notes.
*10(z) - Principal Executive Bonus Plan
27 - Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
Registrant filed a Form 8-K, dated October 14, 1997
(Item 5. Other Information) with respect to a letter
from Lynch Interactive Corporation to Hector
Communications Corporation.
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: s/Robert E. Dolan
Robert E. Dolan
Chief Financial Officer
Correction to Loan Agreement ("Loan Agreement")
dated as of August 12, 1996
by and between
Lynch Corporation, as "Borrower"
and
Gabelli Funds, Inc., as "Lender"
Whereas the Borrower and the Lender agree that the Section
2.01(d), as originally executed, was incorrect and desire to
correct said provision;
Now Therefore, the Borrower and Lender agree that Section
2.01(d) shall be corrected in its entirety to read as follows:
"(d) Special Fee. If Borrower has not prepaid the Loan
in full within five Business Days after the end of the F-Block
Auction, Borrower shall pay Lender a special fee equal to 20.04008%
of the Net Profits of PCSF's partnership interest in Bidder, from
time to time as and when realized. Net Profits shall not include
any amounts received by PCSF pursuant to the Bidder Loan Agreement
and shall be net of any losses of PCSF under the Bidder Loan
Agreement. For purposes of computing Net Profits, capital
contributions by PCSF to Bidder shall be deemed to be loans to
Bidder under the Bidder Loan Agreement and interest under the
Bidder Loan Agreement shall include deemed commitment fees and
interest on such capital contributions. Net Profits shall mean and
shall be deemed to be realized at the time of (i) any profits
received by PCSF from the sale, directly or indirectly, of all or
a substantial portion of the assets of Bidder and the distribution
of the proceeds to the partners (after payments of the principal
and interest under the Bidder Loan Agreement), (ii) any payments
or distributions by Bidder to Borrower or its Affiliates, including
loans (other than principal, interest and other amounts as
contemplated in the Bidder Loan Agreement and the Expenses
Agreement referred to therein) including loans, (iii) the proceeds
from any sale, directly or indirectly, including a merger or
similar transaction, by Borrower of any of its partnership interest
in Bidder, and/or (iv) the net proceeds from any sale of the stock
of PCSF, whether by the existing stockholder or an Affiliate, to
a person or entity that is not its Affiliate of PCSF. The term
"Affiliate" shall have the meaning in Rule 12b-2 under the
Securities Exchange Act of 1934, as amended. Any dispute under
this Section 2(d), including without limitation the amount of
profit, the value of any non-cash items or other matters, if the
parties cannot otherwise agree, shall be submitted to binding
arbitration under the rules of the American Arbitration
Association."
IN WITNESS WHEREOF, the Borrower and the Lender have executed
this Correction effective as of August 12, 1996.
LYNCH CORPORATION GABELLI FUNDS, INC.
By: By:
Robert E. Dolan
Chief Financial Officer
Bal/Rivgam L.L.C.
19 Spectacle Lane
Wilton, CT 06897
March 25, 1997
Lynch PCS Corporation G
8 Sound Shore Drive
Greenwich, CT 06830
Gentlemen:
This will confirm the agreement between Bal/Rivgam L.L.C.
("Bal/Rivgam") and Lynch PCS Corporation G ("LPCG") with respect
to Bal/Rivgam's participation in the Federal Communications
Commission ("FCC")'s auctions for licenses for wireless personal
communications services ("WCS").
1. LPCG Services. LPCG will provide certain services as
follows:
(i) LPCG will be responsible for submitting bids in the WCS
auctions on behalf of Bal/Rivgam, subject to the control and as
authorized by Bal/Rivgam;
(ii) LPCG will be responsible, in consultation with
Bal/Rivgam, for recommending certain strategies for any WCS
licenses won; and
(iii)LPCG will provide such other ancillary services as agreed
to between LPCG and Bal/Rivgam.
2. Compensation. In return for LPCG's providing such services,
Bal/Rivgam will
(a) reimburse LPCG for all out-of-pocket expenses incurred
by LPCG in connection with providing such services provided
Bal/Rivgam is the winning bidder on any WCS Licenses; and
(b) pay LPCG 5% of the Net Profits of Bal/Rivgam from time
to time as and when realized.
With respect to any capital contributions by Rivgam Communicators,
L.L.C., ("Rivgam") or James Balitsos ("Balitsos"), or any Affiliate
of Rivgam or Balitsos, to Bal/Rivgam up to an aggregate maximum of
25% of the cost (net of any bidding credits) of WCS Licenses won
by Bal/Rivgam in the WCS auctions (the "Equity Investment"), there
shall be deemed to be, for purposes of computing Net Profits, an
interest expense equal to 20% plus the higher of the prime rate (as
set forth in the Wall Street Journal) or 7% (reset annually on each
April 4), compounded annually. Interest, commitment fees and other
payments on loans by Rivgam to Bal/Rivgam (the "Rivgam Loan")
pursuant to the Loan Agreement (the "Rivgam Loan Agreement") dated
as of April 4, 1997, shall be deemed to be costs at the rates
stated therein in computing Net Profits, but the special fee (the
"Special Fee") provided for in Section 2.01(e) of the Rivgam Loan
Agreement shall not be deemed to be a cost for purposes of
computing Net Profits. Net Profits shall mean and shall be deemed
to be realized at the time of (i) any profits received by
Bal/Rivgam from the sale, directly or indirectly, of all or a
substantial portion of the assets of Bal/Rivgam (assuming the
payment of the principal and deemed interest expense on the Equity
Investment), (ii) any payments or distributions by Bal/Rivgam,
including loans, to the members of Bal/Rivgam or their Affiliates
(other than payments of principal and deemed interest expense on
the Equity Investment, payments (other than the Special Payment)
pursuant to the Rivgam Loan Agreement and payments pursuant to the
Expenses Agreement referred to in the Rivgam Loan Agreement), (iii)
the proceeds from any sale, directly or indirectly, including a
merger or similar transaction, by any members of Bal/Rivgam of any
of their interest in Bal/Rivgam and/or (iv) the proceeds from any
sale or transfer of any interest in any member of Bal/Rivgam,
whether by an existing shareholder or an Affiliate, to a person
that is not an Affiliate of Bal/Rivgam. The term "Affiliate" shall
have the meaning in Rule 12b-2 under the Securities Exchange Act
of 1934, as amended. Any recipient of any distributions or
proceeds from sale shall be responsible, in addition to Bal/Rivgam,
for the payment of any amounts due under clause (b) above.
3. Other.
(a) The agreement shall be binding on any successors to LPCG,
Bal/Rivgam and any members of Bal/Rivgam.
(b) Bal/Rivgam shall not conduct any business other than WCS.
(c) This Agreement shall be construed in accordance with the
internal law of the State of Connecticut (without reference to
choice of law provisions).
(d) Any dispute hereunder shall be subject to arbitration in
New York City or Stamford, Connecticut, in accordance with the
rules of the American Arbitration Association.
IN WITNESS WHEREOF, the parties have duly executed and
delivered this Letter Agreement as of July 31, 1996.
LYNCH PCS CORPORATION G BAL/RIVGAM L.L.C.
By:
Robert E. Dolan James Balitsos
President Managing Director
AGREED TO: RIVGAM COMMUNICATORS, INC.
A member of Bal/Rivgam
By:
James Balitsos
A member of Bal/Rivgam
PROMISSORY NOTE
$5,000,000 March 17, 1997
FOR VALUE RECEIVED, LYNCH CORPORATION, an Indiana corporation
("Borrower"), promises to pay to Gabelli Funds, Inc. ("Lender") or
order, by wire transfer sent to an account designated in writing
to Borrower from time to time by the holder hereof (or in such
other manner or at such other place as the holder hereof shall
notify Borrower in writing), the principal amount of Five Million
Dollars ($5,000,000), with interest from the date hereof on the
unpaid principal balance hereunder at the rate of prime rate in
effect from time to time as reported in the Wall Street Journal,
payable at Maturity. The principal amount of this Note, and all
accrued and unpaid interest thereon, shall be due and payable on
the earlier (i) of May 19, 1997, or (ii) the date of closing of a
loan to Lynch Michigan Telephone Holding Corporation for the
permanent financing of the acquisition of Upper Peninsula Telephone
Company (the "Maturity Date"). On the Maturity Date, Borrower
shall also pay to Lender $50,000 as a commitment fee.
Each payment under this Note shall first be credited
against accrued and unpaid interest, and the remainder shall be
credited against principal. This Note may be prepaid in whole or
in part at any time, after five (5) Business Days written notice
of Borrower's intention to make any such prepayment, which notice
shall specify the date and amount of such prepayment. Partial
payment hereunder shall be in an aggregate principal amount of
Fifty Thousand Dollars ($50,000) or any integral multiple thereof.
The written notice of Borrower to make a prepayment hereunder shall
create an obligation of Borrower to pay the amount specified on the
date specified in such notice. Any prepayment shall be without
penalty except that interest shall be paid to the date of payment
on the principal amount prepaid.
Principal and interest shall be payable in lawful money
of the United States of America.
In no event shall such interest or other amounts be
charged under this Note which would violate any applicable usury
law.
If any default occurs in any payment due under this Note,
Borrower promises to pay all reasonable costs and expenses,
including reasonable attorneys' fees and expenses, incurred by each
holder hereof in collecting or attempting to collect the
indebtedness under this Note, whether or not any action or
proceeding is commenced, and hereby waives the right to plead any
and all statutes of limitation as a defense to a demand hereunder
to the full extent permitted by law. None of the provisions hereof
and none of the holders' rights or remedies hereunder on account
of any past or future defaults shall be deemed to have been waived
by the holders' acceptance of any past due installments or by any
indulgence granted by the holder to Borrower.
Borrower waives presentment, demand, protest and notice
thereof or of dishonor, and agree that they shall remain liable for
all amounts due hereunder notwithstanding any extension of time or
change in the terms of payment of this Note granted by any holder
hereof, any change, alteration or release of any property now or
hereafter securing the payment hereof or any delay or failure by
the holder hereof to exercise any rights under this Note or the
Loan Agreement.
All amounts payable by Borrower pursuant to this Note shall
be secured by a security interest in certain assets as provided for
in the Pledge and Security Agreement.
This Note shall be governed by, and construed in accordance
with, the laws of the State of New York without giving effect to
its choice of law doctrine.
IN WITNESS WHEREOF, Borrower has caused this Note to be duly
executed the day and year first above written.
LYNCH CORPORATION
By:
Name: Robert E. Dolan
Title: Chief Financial Officer
<PAGE>
PROMISSORY NOTE
$5,000,000 March 17, 1997
FOR VALUE RECEIVED, LYNCH CORPORATION, an Indiana corporation
("Borrower"), promises to pay to Gabelli Securities, Inc.
("Lender") or order, by wire transfer sent to an account designated
in writing to Borrower from time to time by the holder hereof (or
in such other manner or at such other place as the holder hereof
shall notify Borrower in writing), the principal amount of Five
Million Dollars ($5,000,000), with interest from the date hereof
on the unpaid principal balance hereunder at the rate of prime
rate in effect from time to time as reported in the Wall Street
Journal, payable at Maturity. The principal amount of this Note,
and all accrued and unpaid interest thereon, shall be due and
payable on the earlier (i) of May 19, 1997, or (ii) the date of
closing of a loan to Lynch Michigan Telephone Holding Corporation
for the permanent financing of the acquisition of Upper Peninsula
Telephone Company (the "Maturity Date"). On the Maturity Date,
Borrower shall also pay to Lender $50,000 as a commitment fee.
Each payment under this Note shall first be credited
against accrued and unpaid interest, and the remainder shall be
credited against principal. This Note may be prepaid in whole or
in part at any time, after five (5) Business Days written notice
of Borrower's intention to make any such prepayment, which notice
shall specify the date and amount of such prepayment. Partial
payment hereunder shall be in an aggregate principal amount of
Fifty Thousand Dollars ($50,000) or any integral multiple thereof.
The written notice of Borrower to make a prepayment hereunder shall
create an obligation of Borrower to pay the amount specified on the
date specified in such notice. Any prepayment shall be without
penalty except that interest shall be paid to the date of payment
on the principal amount prepaid.
Principal and interest shall be payable in lawful money
of the United States of America.
In no event shall such interest or other amounts be
charged under this Note which would violate any applicable usury
law.
If any default occurs in any payment due under this Note,
Borrower promises to pay all reasonable costs and expenses,
including reasonable attorneys' fees and expenses, incurred by each
holder hereof in collecting or attempting to collect the
indebtedness under this Note, whether or not any action or
proceeding is commenced, and hereby waives the right to plead any
and all statutes of limitation as a defense to a demand hereunder
to the full extent permitted by law. None of the provisions hereof
and none of the holders' rights or remedies hereunder on account
of any past or future defaults shall be deemed to have been waived
by the holders' acceptance of any past due installments or by any
indulgence granted by the holder to Borrower.
Borrower waives presentment, demand, protest and notice
thereof or of dishonor, and agree that they shall remain liable for
all amounts due hereunder notwithstanding any extension of time or
change in the terms of payment of this Note granted by any holder
hereof, any change, alteration or release of any property now or
hereafter securing the payment hereof or any delay or failure by
the holder hereof to exercise any rights under this Note or the
Loan Agreement.
All amounts payable by Borrower pursuant to this Note shall
be secured by a security interest in certain assets as provided for
in the Pledge and Security Agreement.
This Note shall be governed by, and construed in accordance
with, the laws of the State of New York without giving effect to
its choice of law doctrine.
IN WITNESS WHEREOF, Borrower has caused this Note to be duly
executed the day and year first above written.
LYNCH CORPORATION
By:
Name: Robert E. Dolan
Title: Chief Financial Officer
PLEDGE AND SECURITY INTEREST AGREEMENT
PLEDGE AND SECURITY INTEREST AGREEMENT ("Agreement") dated as
of the 17th day of March, 1997, by and between Gabelli Funds, Inc.,
a New York corporation, and Gabelli Securities, Inc., a New York
corporation (collectively "Lenders"), and Lynch Corporation, an
Indiana corporation ("LC"), and Lynch Michigan Telephone Holding
Corporation ("LMT").
WITNESSETH
WHEREAS, LC owns all of the issued and outstanding shares of
stock of Lynch Entertainment Corporation ("LEC") and Lynch
Entertainment Corporation II ("LEC II"), which stock has been
pledged to Gabelli Funds, Inc. pursuant to a Pledge and Security
Interest Agreement dated as of August 12, 1997, and LMT owns 5,123
shares of Common Stock of Upper Peninsula Telephone Company
("UPTC") and expects to acquire the remaining outstanding shares
of UPTC shortly, (all such shares, plus any additional shares of
UPTC, which LMT may acquire, being referred to herein as the
"Shares").
WHEREAS, to induce Lenders to make loans aggregating
$10,000,000 (the "Loans") to LC pursuant to Promissory Notes dated
March 17, 1997 (the "Promissory Notes"), LC and LMT have agreed to
pledge the Shares to Lenders, all as security for the repayment of
all amounts due to Lenders under the Promissory Notes.
NOW THEREFORE, in consideration of the promises and the mutual
representations, warranties and covenants herein contained, the
parties hereto agree as follows:
1. PLEDGE AND SECURITY INTEREST.
A. In consideration of the Loans from the Lenders to LC and
other good and valuable consideration accruing to each
of the parties pledging or granting a security interest
hereunder, each of LC and LMT, as to the collateral
owned by it, hereby grants a security interest to
Lenders in the Shares, as collateral, together with
stock powers duly endorsed in blank. The Lenders shall
hold the Shares, as security for the payment of all
amounts due under the Promissory Notes, and shall not
register the Shares in any other name, encumber, give up
possession or control of, assign, transfer, dispose of
or take any other action with respect to the Shares,
except in accordance with the provisions of Section 5 of
this Agreement.
B. If any person, entity or agency should claim that any
pledge, or grant of a security interest, under this
Agreement (i) would violate any law or require the
consent (which is not received) of any governmental
agency, (ii) would violate any provision, including any
restriction on transfer or similar provisions, or cause
a default under, any existing agreement to which the
parties hereto or any of their subsidiaries or any
entities in which the parties hereto or their
subsidiaries have an interest are parties or by which
any of their assets are bound or (iii) would give any
other person, entity or agency a right to acquire under
an existing agreement any assets owned by the parties
hereto, their subsidiaries or any entities which the
parties hereto or their subsidiaries have an interest
in, LC shall use its best efforts (a) to determine the
validity of such claim and, if it believes the claim
might be valid, (b) to remedy or seek a waiver or other
relief with respect thereto; provided, however, that if
the claim is legally valid, the pledge or grant of the
security interest under this Agreement shall be deemed
void ab initio and not to have been made, but only to
the extent necessary to make the claim not legally
valid, and Lenders will confirm that it has no pledge or
security interest to such extent. If any pledge or
grant of securities shall be deemed void and not to have
been made under this Section 1, LC shall use its best
efforts to grant or cause to be granted to Lenders
pledges or securities interests in other assets to
collateralize appropriately the Loans.
2. DISTRIBUTIONS.
During the term of this pledge and security interest, and so
long as LC is not in default under the Promissory Notes, all
cash dividends, interest, distributions and other cash
amounts received by LC or LMT as a result of their respective
record ownership of the Shares, shall belong to LC or LMT, as
the case may be.
3. VOTING RIGHTS.
During the term of this pledge and security interest, and so
long as LC is not in default under the Promissory Notes, LC
and LMT shall have the right to vote the Shares (including
the giving of written consents) on all corporate questions or
actions requiring shareholder approval; provided that (A) LC
and LMT shall not, without the prior written consent of
Lenders, vote the Shares (i) in a manner which would cause LC
to be in breach of the terms of this Agreement or the
Promissory Notes, or (ii) in favor of any amendment to the
Certificates of Incorporation of UPTC, LEC or LEC II, the
liquidation or dissolution of UPTC, LEC or LEC II, any
merger, consolidation or reorganization of UPTC, LEC or LEC
II, or any sale of substantially all of the assets of UPTC,
LEC or LEC II, except that UPTC may enter into a Plan of
Share Exchange substantially in the form attached as Exhibit
A hereto. In addition, LC and LMT agree that they will cause
UPTC, LEC and LEC II not, without the prior written consent
of Lenders, to vote to issue any additional shares or equity
securities or rights to acquire shares or equity securities,
or redeem any of its outstanding equity securities.
4. ADJUSTMENTS.
In the event that, during the term of this pledge and
security interest, any stock dividend, reclassification,
readjustment, or other change is declared or made in the
capital structure of UPTC, LEC or LEC II, all new,
substituted, or additional shares, or other securities,
issued in respect of the Shares by reason of any such change
shall be delivered to Lenders by LC or LMT and held by the
Lenders under the terms of this Agreement in the same manner
as the Shares.
5. DEFAULT.
In the event that LC defaults in the performance of any of
its obligations under either of the Promissory Notes, and
such default is not cured within twenty (20) business days
after receipt by LC of a written notice advising of same, the
Lenders shall have the rights and remedies available to the
Lenders as secured lenders under the Promissory Notes, this
Agreement and applicable law.
6. TERMINATION.
The security interest granted under this Agreement in the
Shares shall terminate upon the full payment by LC of all of
its obligations under both of the Promissory Notes, and the
Lenders shall immediately redeliver the Shares to LC or LMT,
as the case may be.
7. CERTIFICATES.
The Certificate for the Shares shall bear a legend as
follows: "This Certificate has been delivered to, and is
being held by, Gabelli Funds, Inc., a New York corporation,
and Gabelli Securities, Inc., a New York corporation
(collectively the "Lenders") as security for loans, pursuant
to, and subject to the terms of, a Pledge and Security
Interest Agreement dated as of March 18, 1997 between
Lenders, Lynch Corporation, an Indiana corporation, and Lynch
Michigan Telephone Holding Corporation, a Michigan
corporation."
8. NOTICES.
All notice, requests, demands or other communication
hereunder shall be in writing, and shall be delivered to the
parties at the addresses set forth below (or to such other
person or entity or address as either party may specify by
due notice to the other party) and shall be deemed to have
been duly given if delivered or mailed, first class postage
prepaid:
(a) If to Lenders:
Gabelli Funds, Inc.
Gabelli Securities, Inc.
555 Theodore Fremd Avenue
Suite C-300
Rye, NY 10580-1430
Attn:
Copy to: General Counsel at the same address
(b) If to LC or LMT:
c/o Lynch Corporation
8 Sound Shore Drive, Suite 290
Greenwich, CT 06830
Attn: Robert E. Dolan
Copy to: General Counsel at the same address
9. GOVERNING LAW.
This Agreement shall be governed by and construed in
accordance with the laws of the State of New York, including
without limitation Article 9 of the New York Uniform
Commercial Code.
IN WITNESS WHEREOF, the parties have duly executed this
Agreement as of the day and year hereinabove set forth.
ATTEST: GABELLI FUNDS, INC.
By:
ATTEST: GABELLI SECURITIES, INC.
By:
ATTEST: LYNCH CORPORATION
By:
Robert A. Hurwich Robert E. Dolan
Secretary Chief Financial Officer
ATTEST: LYNCH MICHIGAN TELEPHONE HOLDING
CORPORATION
By:
Robert E. Dolan
President
LYNCH CORPORATION
PRINCIPAL EXECUTIVE BONUS PLAN
The purpose of this Plan is to provide the Chief Executive Officer of
the Lynch Corporation (the "Company") and certain other designated key
employees with an Annual Bonus (as defined below) that qualifies as
performance-based compensation under Section 162(m) of the Internal Revenue
Code of 1986, as amended (the "Code") or any successor section and the
Treasury regulations promulgated thereunder ("Section 162(m) of the Code").
Under the Plan, the Chief Executive Officer and designated key employees of
the Company may participate in the Annual Bonus Pool (as defined below) if
certain preestablished performance goals are attained. This Plan is
effective as of January 1, 1997, subject to approval by the shareholders of
the Company in accordance with the laws of the State of Indiana.
i. Definitions. The following terms, as used herein,
shall have the following meanings:
(i) "Annual Bonus" shall mean, with
respect to each Participant, the
product of the Participant's
Individual Bonus Pool Percentage
and the achieved Annual Bonus Pool
for any Plan Year.
(ii) "Annual Bonus Pool" shall mean,
with respect to each Plan Year,
that amount determined pursuant to
an objective formula or standard
that is based on the attainment of
preestablished performance goals
specified by the Committee in
accordance with Section 4 hereof.
(iii) "Board" shall mean the Board of
Directors of the Company.
(iv) "Committee" shall mean the
Executive Compensation and Benefits
Committee of the Board, or such
other committee of the Board
comprised solely of two (2) or more
members who qualify as "outside
directors" within the meaning of
Section 162(m) of the Code.
(v) "Individual Bonus Pool Percentage"
shall mean, with respect to each
Participant, that percentage of the
achieved Annual Bonus Pool, as
specified by the Committee in
accordance with Section 4(b)
hereof, used to determine the
Participant's Annual Bonus for any
Plan Year.
(v) "Participant" shall mean the Chief Executive Officer of the
Company and any other key employee of the Company
(including subsidiaries) selected, in accordance with
Section 3 hereof, to participate in the Plan.
(vi) "Plan Year" shall mean each
calendar year during which the Plan
is in effect.
(vi) "Pre-Tax Profits" shall mean the Company's income before
income taxes, (excluding any provision for annual bonuses
under the Plan and under the Bonus Plan applicable to other
corporate employees), minority interest (if any),
extraordinary items (if any), cumulative changes in
accounting (if any) and discontinued operations (if any)
contained in the Statement of Consolidated Income in the
Company's annual financial statements adjusted by (i) the
minority interest effects on such pre-tax profits, and
(ii) the pre-tax effect of income or loss associated with
discontinued operation net of minority interest effects.
(vi) "Shareholders Equity" shall mean (i) with respect to the
1997 Plan Year, shareholders equity at the beginning of the
Plan Year, (ii) with respect to the 1998 Plan Year, the
average of shareholders equity at the beginning of the 1998
Plan Year and the beginning of the 1997 Plan Year and (iii)
with respect to the 1999 and subsequent Plan Years, the
average of shareholders equity at the beginning of the Plan
Year and at the beginning of the two preceding Plan Years,
in each case as reported in the Company's consolidated
balance sheet in its annual financial statements.
ii. Administration of the Plan. The Plan shall be
administered by the Committee. The Committee shall have
exclusive and final authority in all determinations and
decisions affecting the Plan and each Participant. The
Committee shall also have the sole authority to interpret
the Plan, to designate eligible Participants in the Plan
(other than the Chief Executive Officer of the Company), to
establish and revise rules and regulations relating to the
Plan, to delegate such responsibilities or duties as it
deems desirable, and to make any other determination that
it believes necessary or advisable for the administration
of the Plan including, but not limited to: (i) setting the
performance criteria and the Individual Bonus Pool
Percentages within the Plan guidelines, and (ii) certifying
attainment of performance goals and other material terms.
The Committee shall have the authority in its sole
discretion, subject to and not inconsistent with the
express provisions of the Plan, to incorporate provisions
in the performance goals allowing for adjustments in
recognition of unusual or non-recurring events affecting
the Company or the financial statements of the Company, or
in response to changes in applicable laws, regulations, or
accounting principles; provided, that the Committee shall
have such authority solely to the extent permitted by
Section 162(m) of the Code. To the extent any provision of
the Plan creates impermissible discretion under Section
162(m) of the Code or would otherwise violate Section
162(m) of the Code, such provision shall have no force or
effect.
iii. Eligibility and Participation.
(i) For each Plan Year, the Committee,
in its sole discretion, may select
the employees of the Company (other
than the Chief Executive Officer of
the Company) who are to participate
in the Plan from among the key
employees of the Company.
(ii) No person (except the Chief
Executive Officer of the Company)
shall be entitled to an Annual
Bonus under this Plan for any Plan
Year unless he or she is so
designated as a Participant for
that Plan Year. The Committee may
add or delete individuals from the
list of designated Participants at
any time and from time to time, in
its sole discretion, subject to any
limitations required to comply with
Section 162(m) of the Code.
iv. Payment.
(i) With respect to each Participant,
payment under the Plan will be made
in cash in an amount equal to the
achieved Annual Bonus, as
determined by the Committee in its
sole discretion for each Plan Year.
Payment with respect to a Plan Year
shall be made only if and to the
extent the applicable performance
goals upon which the Annual Bonus
Pool is based are attained.
Notwithstanding anything else
herein, the Committee may, in its
sole discretion, elect to pay any
Participant an amount that is less
than (but in no event more than)
his or her Annual Bonus regardless
of the degree of attainment of the
performance goals with respect to
the Annual Bonus Pool.
(ii) Not later than ninety (90) days
after the commencement of each Plan
Year (or, in the event the period
of service to which the performance
goal relates is shorter than a Plan
Year, during such time period
required by Section 162(m) of the
Code), the Committee shall
establish in writing all
performance goals with respect to
the Annual Bonus Pool and the
Individual Bonus Pool Percentages
for each Participant for such Plan
Year. At the time the performance
goals are established, the
Committee shall prescribe an
objective formula or standard to
determine the amount of the Annual
Bonus Pool which may be payable
based upon the degree of attainment
of the performance goals during the
Plan Year. In no event may the
total of the Individual Bonus Pool
Percentages for all Participants
exceed one hundred percent (100%)
of the Annual Bonus Pool for any
Plan Year.
(iii) The performance goals with respect
to the Annual Bonus Pool shall be
based on the attainment of certain
target levels of, or a percentage
increase in, Pre-Tax Profits in
excess of certain target levels or
percentages of Shareholders Equity.
Notwithstanding the preceding
sentence, in no event shall any
Participant's Annual Bonus for any
Plan Year exceed: (i) in the case
of the Chief Executive Officer of
the Company, eighty percent (80%)
of an amount equal to twenty
percent (20%) of the excess of (a)
Pre-Tax Profits for such Plan Year
less (b) twenty-five percent (25%)
of Shareholders Equity; or (ii) in
the case of any Participant other
than the Chief Executive Officer,
twenty percent (20%) of an amount
equal to twenty percent (20%) of
the excess of (a) Pre-Tax Profits
for such Plan Year less (b) twenty-
five percent (25%) of Shareholders
Equity (the "Maximum Annual
Bonus"). Subject to Section 2 of
the Plan regarding certain
adjustments, in connection with the
establishment of the performance
goals, the performance criteria
listed above for the Company shall
be determined in accordance with
generally accepted accounting
principles consistently applied by
the Company, but before
consideration of payments to be
made pursuant to this Plan.
(iv) Unless otherwise
determined by the
Committee in its sole
discretion, each
Participant shall, to
the extent the
applicable performance
goals with respect to
the Annual Bonus Pool
are attained at the end
of a Plan Year, have
the right to receive
payment of a prorated
portion of such
Participant's Annual
Bonus under the Plan
for any Plan Year
during which the
Participant's
employment with the
Company is terminated
for any reason other
than for "cause" (as
determined by the
Committee in its sole
discretion).
v. Time of Payment. Subject to Section 4 hereof, each
Participant's Annual Bonus under this Plan will be paid
within a reasonable period after performance goal
achievements for the Plan Year have been finalized,
reviewed, approved, and certified in writing by the
Committee.
vi. Miscellaneous Provisions.
(i) Each Participant's rights and
interests under the Plan may not be
sold, assigned, transferred,
pledged or alienated.
(ii) In the case of any Participant's
death, payment, if any, under the
Plan shall be made to his
designated beneficiary, or in the
event no beneficiary is designated
or surviving, to the Participant's
estate.
(iii) Neither this Plan nor any action
taken hereunder shall be construed
as giving any Participant the right
to continue his employment with of
the Company.
(iv) The Company shall have the right to
make such provisions as it deems
necessary or appropriate to satisfy
any obligations it may have to
withhold federal, state or local
income or other taxes incurred by
reason of payments made pursuant to
the Plan.
(v) The Plan and any amendments thereto
shall be construed, administered
and governed in all respects in
accordance with the laws of the
State of Indiana (regardless of the
law that might otherwise govern
under applicable principles of
conflicts of law).
(vi) The Plan is designed and intended
to comply with Section 162(m) of
the Code with regard to awards made
to each Participant and all
provisions hereof shall be limited,
construed and interpreted in a
manner to so comply.
(vii) The Board or the Committee may at
any time and from time to time
alter, amend, suspend or terminate
the Plan in whole or in part;
provided, that no amendment shall,
without the prior approval of the
shareholders of the Company in
accordance with the laws of the
State of Indiana to the extent
required under Code Section 162(m):
(i) materially alter the
performance goals as set forth in
Section 4(c) hereof, (ii) increase
the Maximum Annual Bonus for any
Plan Year, (iii) change the class
of employees eligible to
participate in this Plan, or
(iv) implement any change to a
provision of the Plan requiring
shareholder approval in order for
the Plan to continue to comply with
the requirements of Code Section
162(m). Notwithstanding the
foregoing, no amendment shall
affect adversely any of the rights
of any Participant, without such
Participant's consent, under the
award theretofore granted under the
Plan.
<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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 25,556
<SECURITIES> 2,919
<RECEIVABLES> 57,572
<ALLOWANCES> 1,624
<INVENTORY> 36,643
<CURRENT-ASSETS> 139,491
<PP&E> 213,670
<DEPRECIATION> 58,012
<TOTAL-ASSETS> 408,988
<CURRENT-LIABILITIES> 91,317
<BONDS> 244,952
0
0
<COMMON> 5,139
<OTHER-SE> 30,822
<TOTAL-LIABILITY-AND-EQUITY> 408,988
<SALES> 348,922
<TOTAL-REVENUES> 348,922
<CGS> 298,231
<TOTAL-COSTS> 330,283
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 7,024
<INTEREST-EXPENSE> 17,178
<INCOME-PRETAX> (3,892)
<INCOME-TAX> (1,139)
<INCOME-CONTINUING> (3,536)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,536)
<EPS-PRIMARY> (2.50)
<EPS-DILUTED> (2.50)
</TABLE>
