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, 1998
------------------
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.)
401 Theodore Fremd Avenue, Rye, New York 10580
- ---------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(914) 921-7601
--------------
Registrant's telephone number, including area code
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the Registrant's classes of
Common Stock, as of the latest practical date.
Class Outstanding at October 30, 1998
----- -------------------------------
Common Stock, no par value 1,418,248
<PAGE>
INDEX
LYNCH CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
- ------- ---------------------
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet:
- September 30, 1998
- December 31, 1997 (Audited)
Condensed Consolidated Statements of Operations:
- Three and nine months ended September 30, 1998 and 1997
Condensed Consolidated Statements of Cash Flows:
- Nine months ended September 30, 1998 and 1997
Notes to Consolidated Financial Statements:
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II. OTHER INFORMATION
- -------- -----------------
Item 5. Other
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
- ----------
<PAGE>
Part 1- FINANCIAL INFORMATION
- -----------------------------
Item 1- Financial Statements
- -----------------------------
LYNCH CORPORATION AND SUBSIDIARIES
----------------------------------
CONDENSED CONSOLIDATED BALANCE SHEET
------------------------------------
(In thousands)
<TABLE>
<CAPTION>
September 30 December 31
1998 1997
(Unaudited) (A)
----------- ---
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and Cash Equivalents ............................. $ 20,491 $ 33,557
Marketable Securities and Short-Term Investments ...... 1,249 985
Receivables, less Allowances of $1125 and $1448 ....... 62,699 54,480
Inventories ........................................... 50,966 35,685
Deferred Income Tax Benefits .......................... 17,993 17,993
Other Current Assets .................................. 11,935 10,059
--------- ---------
Total Current Assets ................................. 165,333 152,759
PROPERTY, PLANT AND EQUIPMENT:
Land .................................................. 2,767 1,742
Buildings and Improvements ............................ 29,932 25,272
Machinery and Equipment ............................... 229,231 190,579
--------- ---------
261,930 217,593
Accumulated Depreciation .............................. (73,877) (60,064)
--------- ---------
188,053 157,529
INVESTMENTS IN AND ADVANCES TO PCS ENTITIES .............. 23,419 25,448
EXCESS OF COSTS OVER FAIR VALUE OF NET ASSETS ACQUIRED ... 91,407 73,257
OTHER ASSETS ............................................. 15,907 14,645
--------- ---------
Total Assets ......................................... $ 484,119 $ 423,638
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes Payable to Banks ................................ $ 55,599 $ 29,021
Trade Accounts Payable ................................ 37,314 21,381
Accrued Liabilities ................................... 41,107 37,104
Current Maturities of Long - Term Debt ................ 11,579 9,302
--------- ---------
Total Current Liabilities ............................ 145,599 96,808
LONG-TERM DEBT ........................................... 246,810 242,776
DEFERRED INCOME TAXES .................................... 33,835 33,764
PENSION LIABILITIES AND OTHER POST- RETIREMENT BENEFITS .. 3,047 0
MINORITY INTERESTS ....................................... 15,333 13,839
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 .......................... 8,537 8,644
RETAINED EARNINGS ..................................... 26,451 23,414
ACCUMULATED OTHER COMPREHENSIVE INCOME ................ 98 0
TREASURY STOCK OF 52,943 AND 54,143 SHARES, AT COST ... (730) (746)
--------- ---------
Total Shareholders' Equity ........................... 39,495 36,451
--------- ---------
Total Liabilities and Shareholders' Equity ........... $ 484,119 $ 423,638
========= =========
<FN>
(A) The Balance Sheet at December 31,1997 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. </FN> </TABLE>
<PAGE>
LYNCH CORPORATION AND SUBSIDIARIES
----------------------------------
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
----------------------------------------------
(UNAUDITED)
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30 Ended September 30
1998 1997 1998 1997
---- ---- ---- ----
SALES AND REVENUES ............................
<S> <C> <C> <C> <C>
Multimedia ................................ $ 14,196 $ 12,739 $ 40,520 $ 34,901
Services .................................. 39,135 38,293 114,629 111,137
Manufacturing ............................. 81,300 67,685 227,715 202,884
----------- ----------- ----------- -----------
134,631 118,717 382,864 348,922
----------- ----------- ----------- -----------
Costs and expenses:
Multimedia ................................ 9,958 9,396 28,410 26,188
Services .................................. 35,856 34,821 105,217 101,674
Manufacturing ............................. 70,910 57,164 197,529 170,369
Selling and administrative ................ 10,362 11,049 31,576 32,052
----------- ----------- ----------- -----------
OPERATING PROFIT .............................. 7,545 6,287 20,132 18,639
Other income (expense):
Investment Income ......................... 760 554 2,527 1,411
Interest expense .......................... (7,087) (5,901) (20,621) (17,178)
Share of operations of affiliated companies 44 20 169 91
Reserve for impairment of PCS licenses .... 0 (7,024) 0 (7,024)
Gain (Loss) on Sale of Subsidiary Stock ... 2,127 (91) 2,082 169
----------- ----------- ----------- -----------
(4,156) (12,442) (15,843) (22,531)
----------- ----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES AND MINORITY INTERESTS ......... 3,389 (6,155) 4,289 (3,892)
Provision for income taxes .................... (1,423) 2,041 (1,801) 1,139
Minority interests ............................ 183 (160) 549 (783)
----------- ----------- ----------- -----------
NET INCOME (LOSS) ............................. $ 2,149 ($ 4,274) $ 3,037 ($ 3,536)
=========== =========== =========== ===========
Weighted average shares outstanding ........ 1,418,000 1,417,000 1,418,000 1,414,000
Basic earnings per share:
Net Income (Loss) ........................ $ 1.52 ($ 3.02) $ 2.14 ($ 2.50)
=========== =========== =========== ===========
Diluted earnings per share:
Net Income (Loss) ........................ $ 1.52 ($ 3.02) $ 2.14 ($ 2.50)
=========== =========== =========== ===========
</TABLE>
<PAGE>
LYNCH CORPORATION AND SUBSIDIARIES
----------------------------------
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
----------------------------------------------
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
------------
1998 1997
---- ----
OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss) ......................................... 3,037 (3,536)
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization .......................... 18,925 15,984
Net effect of purchases and sales of trading securities (264) (763)
Deferred taxes ......................................... 0 (2,388)
Share of operations of affiliated companies ............ (169) (91)
Minority interests ..................................... (549) 783
Gain on sale of stock by subsidiaries ................... (2,082) (169)
Reserve for impairment of PCS licenses ................. 0 7,024
Changes in operating assets and liabilities:
Receivables .......................................... (3,620) (4,449)
Inventories .......................................... (3,911) 216
Accounts payable and accrued liabilities ............. 21,250 1,259
Other ................................................ (3,133) (635)
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES ................. 29,484 13,235
------- -------
INVESTING ACTIVITIES
Capital Expenditures ...................................... (16,636) (13,700)
Investment in Coronet Communications Company .............. 0 2,995
Investment in Upper Peninsula Telephone Company ........... 0 (25,721)
Investment in Spinnaker Coating - Maine ................... (47,734) 0
Investment in Spinnaker Electrical Tape Company ........... (2,000) 0
Sale of Investments - Cellular partnerships ............... 0 8,576
Investment in Personal Communications Services Partnerships 3,726 2,145
Other ..................................................... (416) (82)
------- -------
NET CASH USED IN INVESTING ACTIVITIES ..................... (63,060) (25,787)
------- -------
FINANCING ACTIVITIES
Issuance of debt, net ..................................... 21,389 3,219
Treasury stock transactions ............................... 90 657
Minority interest transactions ............................ (969) 286
------- -------
NET CASH FROM FINANCING ACTIVITIES ........................ 20,510 4,162
------- -------
Net decrease in cash and cash equivalents ................ (13,066) (8,390)
Cash and cash equivalents at beginning of period .......... 33,557 33,946
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................ 20,491 25,556
======= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<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 ............................. 100.0%
World Surfer, Inc. .......................................... 100.0%
Lynch Kansas Telephone Corporation ............................ 100.0%
Lynch Telephone Corporation VI ................................ 98.0%
JBN Telephone Company, Inc. ................................. 98.0%
JBN Finance Corporation ................................... 98.0%
Giant Communications, Inc. .................................. 100.0%
Lynch Telephone Corporation VII ............................. 100.0%
USTC Kansas, Inc. ......................................... 100.0%
Haviland Telephone Company, Inc. ......................... 100.0%
Haviland Finance Corporation ........................... 100.0%
DFT Communications Corporation ................................ 100.0%
Dunkirk & Fredonia Telephone Company ........................ 100.0%
Cassadaga Telephone Company ............................... 100.0%
Macom, Inc. ............................................. 100.0%
Comantel, Inc. ............................................ 100.0%
D&F Cellular Telephone, Inc. ............................ 100.0%
DFT Long Distance Corporation ............................... 100.0%
DFT Local Service Corporation ............................... 100.0%
Erie Shore Communications, Inc. ......................... 100.0%
LMT Holding Corporation ......................................... 100.0%
Lynch Michigan Telephone Holding Corporation ................... 100.0%
Upper Peninsula Telephone Company ........................... 100.0%
Alpha Enterprises Limited ................................... 100.0%
Upper Peninsula Cellular North, Inc. .................... 100.0%
Upper Peninsula Cellular South, Inc. .................... 100.0%
Global Television, Inc. ......................................... 100.0%
Inter-Community Acquisition Corporation ......................... 100.0%
Home Transport Service, Inc. .................................... 100.0%
Lynch Capital Corporation ....................................... 100.0%
Lynch Entertainment Corporation ................................. 100.0%
Lynch Entertainment Corporation II .............................. 100.0%
Lynch International Exports, Inc. ............................... 100.0%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Owned by
Subsidiary Lynch
- ---------- -----
<S> <C>
Lynch Manufacturing Corporation .................................. 100.0%
Lynch Display Technologies, Inc. ............................... 100.0%
Lynch Systems, Inc. .......................................... 91.0%
M-tron Industries, Inc. ......................................... 91.0%
M-tron Industries, Ltd. ....................................... 91.0%
Spinnaker Industries, Inc. ...................................... 61.2%
Entoleter, Inc. .............................................. 61.2%
Spinnaker Coating, Inc. ...................................... 61.2%
Spinnaker Coating-Maine, Inc. .............................. 61.2%
Central Products Company ..................................... 61.2%
Spinnaker Electrical Tape Company ............................ 61.2%
Lynch Multimedia Corporation ..................................... 100.0%
CLR Video, L.L.C ............................................... 60.0%
The Morgan Group, Inc. ........................................... 68.06%(V)/53.06%(O)
Morgan Drive Away, Inc. ........................................ 68.06%(V)/53.06%(O)
Transport Services Unlimited, Inc. ........................... 68.06%(V)/53.06%(O)
Interstate Indemnity Company ................................... 68.06%(V)/53.06%(O)
Morgan Finance, Inc. ........................................... 68.06%(V)/53.06%(O)
TDI, Inc. ...................................................... 68.06%(V)/53.06%(O)
Home Transport Corporation ................................... 68.06%(V)/53.06%(O)
MDA Corporation .............................................. 68.06%(V)/53.06%(O)
Lynch PCS Communications Corporation ............................. 100.0%
Lynch PCS Corporation A ........................................ 100.0%
Lynch PCS Corporation F ........................................ 100.0%
Lynch PCS Corporation G ........................................ 100.0%
Lynch Interactive Corporation .................................... 100.0%
Lynch Telecommunications Corporation ............................. 100.0%
Lynch Telephone Corporation .................................... 83.1%
Western New Mexico Telephone Company, Inc. ................... 83.1%
WNM Communications Corporation ............................... 83.1%
Wescel Cellular, Inc. ........................................ 83.1%
Wescel Cellular of New Mexico, L.P. ........................ 42.4%
Wescel Cellular, Inc. II ..................................... 83.1%
Northwest New Mexico Cellular, Inc. ........................ 40.6%
Northwest New Mexico Cellular of New Mexico, L.P............ 20.7%
Enchantment Cable Corporation ............................ 83.1%
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%
<FN>
Notes: (V)=Percentage voting control; (O)=Percentage of equity ownership
</FN>
</TABLE>
<PAGE>
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
presentations have been included. Operating results for the three and nine month
periods ended September 30, 1998 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1998. 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, 1997.
C. Acquisitions
- -- ------------
On July 31, 1998, Registrant's subsidiary, Spinnaker Industries, Inc. acquired
tesa tape, inc.'s pressure sensitive electrical tape product line and its
Carbondale, IL manufacturing plant. The purchase price totaled $10.7 million,
comprising 200,000 shares of Spinnaker common stock, cash and a seller note. The
newly acquired plant produces electrical tape for insulating motors, coils and
transformers for customers in Europe, Canada and the U.S. Sales in 1997 totaled
approximately $20 million.
On March 17, 1998, Spinnaker Coating-Maine, Inc. acquired the pressure sensitive
adhesive-backed label stock business of S.D. Warren. The purchase price was
approximately $52.0 million, plus the assumption of certain liabilities and was
funded by issuing the seller a convertible subordinated note of $7.0 million
with the remainder funded by Spinnaker's revolving credit facility. As a result
of this transaction, the Registrant recorded approximately $19.6 million in
goodwill which is being amortized over 30 years.
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.
All of the above acquisitions were accounted for as purchases, and accordingly,
the assets acquired and liabilities assumed were recorded at their estimated
fair market values.
The operating results of the acquired companies are included in the Consolidated
Statement of Operations from their respective acquisition dates. The following
unaudited proforma information shows the results of the Registrant's operations
as though the acquisitions of tesa tape, inc.'s pressure sensitive tape product
line, S.D. Warren's adhesive-backed label stock business and Upper Peninsula
Telephone Company were made at the beginning of 1997.
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine months Ended
September 30 September 30
(In thousands, except per share data) 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales and Revenues ....................... $ 135,887 $ 139,420 $ 403,772 $ 413,167
Operating Profit ......................... 7,862 8,569 23,000 26,684
Income from Continuing Operations
Before Income Taxes and Minority Interest 3,664 (4,789) 5,903 618
Net Income ............................... 2,225 (3,743) 3,497 (1,956)
Net Income Per Share ..................... 1.57 (2.65) 2.47 (1.38)
</TABLE>
D. Inventories
- -- -----------
Inventories are stated at the lower of cost or market value. At September 30,
1998, inventories were valued by three methods: last-in, first-out (LIFO) - 48%,
specific identification - 50%, and first-in, first-out (FIFO) - 2%. At December
31, 1997, the respective percentages were 48%, 43%, and 9%.
<TABLE>
<CAPTION>
Sept.30 Dec. 31
1998 1997
---- ----
<S> <C> <C>
Raw Material and Supplies .................... $15,016 $10,493
Work in Progress ............................. 7,011 3,544
Finished Goods ............................... 28,939 21,648
------- -------
Total Inventories ........................ $50,966 $35,685
======= =======
</TABLE>
E. Indebtedness
- -- ------------
On a consolidated basis, at September 30, 1998, the Registrant maintains
short-term and long-term lines of credit facilities totaling $118.1 million, of
which $40.7 million was available. The Registrant (Parent Company) maintains two
short-term lines of credit facilities totaling $22.0 million, of which $11.3
million was available at September 30, 1998. The facilities will expire on
December 29, 1998 ($10.0 million) and December 31, 1998 ($12.0 million),
respectively. Spinnaker Industries, Inc. maintains lines of credit at its
subsidiaries which total $65.0 million, of which $12.2 million was available at
September 30, 1998. The Morgan Group maintains lines and letters of credit
totaling $23.0 million, of which $14.5 million was available at September 30,
1998. 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. Due
to certain of these restrictive covenants and working capital requirements of
the subsidiaries, cash distributions from the subsidiaries are limited. At
September 30, 1998, $38.1 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.
<PAGE>
<TABLE>
<CAPTION>
Long term debt consists of: 9-30-98 12-31-97
- --------------------------- ------- --------
Spinnaker Industries Inc. 10.75% Senior Secured
<S> <C> <C>
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% ........................................................ 45,729 47,109
Bank credit facilities utilized by certain telephone
and telephone holding companies through 2009, $33.2
million at a fixed interest rate averaging 9.0% and
$18.5 million at variable interest rates averaging 8.6% ........................ 51,683 54,633
Unsecured notes issued in connection with acquisitions
at fixed interest rates averaging 9.2% with maturities
through 2006 ................................................................... 35,557 28,049
Other .......................................................................... 10,420 7,287
--------- ---------
258,389 252,078
Current maturities ............................................................. (11,579) (9,302)
--------- ---------
Total ...................................................................... $ 246,810 $ 242,776
========= =========
</TABLE>
F. Earnings Per Share
- -- ------------------
In December 1997, the Registrant adopted Statement of Financial Accounting
Standards ("SFAS") No. 128, Earnings Per Share which changed the methodology of
calculating earnings per share. Basic earnings per common share amounts are
based on the average number of common shares outstanding during each period,
excluding the dilutive effects of options, warrants, and convertible securities.
Diluted earnings per share reflect the effect, where dilutive, of 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. All earnings per share amounts
have been presented in accordance with, and where appropriate, restated to
conform to the SFAS No. 128 requirements.
G. Comprehensive Income
- -- --------------------
Effective January 1, 1998, the Registrant adopted SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components; however, the adoption of
SFAS No. 130 had no impact on the Company's net income. SFAS No. 130 requires
unrealized gains or losses on the Registrant's available-for-sale securities,
which prior to adoption were reported separately in shareholders equity to be
included in other comprehensive income.
The components of comprehensive income, net of tax, for the nine months ended
September 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net Income (Loss).................. $ 3,037 $(3,536)
Unrealized gain on securities...... 98 --
------- -------
Comprehensive income (Loss)......... $ 3,135 $(3,536)
======= =======
</TABLE>
<PAGE>
The components of accumulated other comprehensive income, net of related tax, at
September 30, 1998 and December 31, 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Unrealized gains on securities ....... $98 $--
--- ---
Accumulated comprehensive income ..... $98 $--
=== ===
</TABLE>
H. Gain on Sale of Subsidiary Stock
- -- --------------------------------
On July 31, 1998, Spinnaker Industries, Inc. completed the acquisition of the
electrical tape division of tesa tape, inc. Part of the purchase price was the
issuance of 200,000 shares, subject to certain adjustments of Spinnaker's Class
A Common Stock. As a result of this issuance, the Registrant recorded a gain on
sale of subsidiary stock of $2.1 million in the third quarter of 1998, or $1.2
million ($0.87 per share) after tax.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
----------------------------------------------------------------
RESULTS OF OPERATIONS.
----------------------
Sales and Revenues
- ------------------
Revenues for the third quarter of 1998 increased by $15.9 million, or 13%, from
the comparable period in the prior year. The percentage contribution to the
overall increase by each operating segment is as follows: multimedia - 9% ($1.5
million), The Morgan Group, Inc. - 5% ($0.8 million), and manufacturing - 86%
($13.6 million). Multimedia's revenues increased due to growth in access lines,
additional revenue streams, such as Internet services and improved recovery of
costs under regulatory the model. The Morgan Group, Inc. recorded increases in
the Specialized Transport Business offset by lower Manufactured Housing
revenues. Within the manufacturing group, Spinnaker Industries, Inc. revenues
increased $19.1 million. In March 1998, Spinnaker acquired the adhesive-back
division of S.D. Warren Company. The operation contributed approximately $15.2
million to Spinnaker's revenue increase. On July 31, 1998, Registrant's
subsidiary, Spinnaker acquired tesa tape, inc.'s pressure sensitive electrical
tape product line. This business contributed $1.2 million to Spinnaker's revenue
increase. Spinnaker's other operations recorded 5% revenue increase. Revenues at
Lynch Systems, Inc. decreased by $4.6 million between the two quarters due to
lack of orders for extra large glass press machines. M-tron Industries, Inc.
revenues were below prior year by $0.8 million reflecting an overall decline in
industry shipments.
For the nine months ended September 30, 1998, revenues increased from the prior
year period by $33.9 million, or 10%. The percentage contribution to the
increase by each business segment is as follow: multimedia - 17% ($5.6 million),
The Morgan Group, Inc. - 10% ($3.5 million) and manufacturing - 73% ($24.8
million). Aside from the factors noted above, the acquisition of Upper Peninsula
Telephone Company in March 1997, incrementally increased the revenues $2.3
million in multimedia on a year-to-date basis. Spinnaker's acquisition of the
adhesive-backed business of S.D. Warren contributed $32.4 million to the
manufacturing revenue increases.
<PAGE>
Operating Profit
- ----------------
Operating profit for the third quarter of 1998 increased by $1.3 million.
Operating profit in the multimedia segment increased by $0.9 million. Primary
factors contributing to the growth were: increase in access lines, increased
revenues associated with non-traditional telephone services, improved recovery
of costs under the regulatory model, and lower costs at certain operations.
Morgan's operating profit decreased by $0.6 million between the two quarters as
a result of increased claims costs. Operating profit in the manufacturing group
increased by $0.1 million as an increase at Spinnaker was offset by declines at
Lynch Systems and M-tron. Spinnaker's results, whose operating profit increased
by $1.1 million, increased due to the inclusion of S.D. Warren acquisition
offset by increased depreciation and amortization relating to the S.D. Warren
acquisition. Lynch Systems' and M-tron's operating profit decreased by $0.9
million and $0.2 million, respectively.
Net corporate expenses during the third quarter of 1998 decreased by $0.8
million from the prior year, primarily attributable to the reversal of non-cash
charge relating to stock appreciation rights ("SARs"). In the third quarter of
1998 the Registrant reversed a previously recorded SAR accrual of $0.6 million.
A $0.3 million charge was recorded in the third quarter of 1997.
Effective September 30, 1998, the Registrant amended the SAR (stock appreciation
rights) Program so that the SARs become exercisable only in the event the market
price for the Registrant's shares double from the SAR exercise price within five
years from original issuance. The exercise prices of the 42,700 SARs currently
outstanding range from $63.03 to $84.63. On September 30, 1998, the closing
price of the Registrant's Common shares in trading on the American Stock
Exchange was $76.50. This amendment will eliminate the recording of the profit
and loss effect from changes in the market price in the Registrant's common
stock until it is probable that the SARs will become exercisable.
Operating profit for the first nine months ended September 30, 1998 increased by
$1.5 million from the nine months ended September 30, 1997. Operating profit of
multimedia segment increased by $3.4 million reflecting the growth in continuing
operations plus the acquisition of Upper Peninsula Telephone Company in March
1997. Operating profit at The Morgan Group, Inc. fell by $1.4 million between
the two periods due to high claims costs plus increased data processing and
administrative costs in the Specialized Transport Group. In the manufacturing
segment operating profit fell $1.5 million. Lynch Systems' operating profit
(loss) decreased overall operating profit by $1.7 million between the two
nine-month periods. Spinnaker's operating profit increased by $0.4 million,
offsetting M-tron's $0.4 million decline. Within corporate operations, the SAR
accrual for the nine months ended September 30, 1998, decreased expenses by a
$0.2 million as compared to a SAR expense of $0.7 million in the comparable 1997
period.
Other Income (Expense), Net
- ---------------------------
Investment income in the third quarter of 1998 increased by $0.2 million from
the third quarter of 1997. Realized and unrealized gains from the Company's
investment in marketable securities and accrued interest from the Registrant's
investment in East/West Communications, Inc. Redeemable Preferred Stock were the
primary causes of the increase. These factors also caused year-to-date
investment income to be greater than the previous year by $1.1 million.
<PAGE>
Interest expense in the third quarter of 1998 increased by $1.2 million from the
third quarter of 1997. The increase was primarily due to the increased debt
level resulting from the acquisitions by Spinnaker of S.D. Warren's pressure
sensitive adhesive-backed label stock business and tesa tape, inc.'s electrical
tape division. On a year-to-date basis, interest expense increased by $3.4
million, $2.4 million was associated with Spinnaker's acquisitions.
Additionally, in March 1997 the Registrant acquired Upper Peninsula Telephone
Company; incrementally this acquisition added $0.3 million of interest expense
to the current year-to-date versus the prior year-to-date. Also during 1998, the
Registrant is capitalizing less interest with regard to a subsidiary's loan to
Fortunet Communications, L.P. ("Fortunet"), a PCS license holder in which the
subsidiary owns a 49.9% limited partnership, due to the write-off of a portion
of the costs associated with the loan in the third quarter of 1997.
On July 31, 1998, Spinnaker Industries, Inc. completed the acquisition of the
electrical tape division of tesa tape, inc. Part of the purchase price was the
issuance of 200,000 shares, subject to certain adjustments of Spinnaker's Class
A Common Stock. As a result of this issuance, the Registrant recorded a gain on
sale of subsidiary stock of $2.1 million in the third quarter of 1998, or $1.2
million ($0.87 per share) after tax.
During the third quarter of 1997, the Registrant wrote off 30% of the investment
in, loans to, and deferred costs associated with Fortunet, a partnership formed
to acquire, construct and operate licenses for the provision of personal
communications services in the PCS 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 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 business 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 ("POPs") 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 the build-out of these
licenses through the capital markets much more difficult than previously
anticipated.
As a result of a petition by Fortunet, as well as many of the license holders
from this auction, the FCC afforded license holders a choice of four
restructuring 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 down-payment in these licenses. As a result of
the FCC proposal, the management of the Registrant provided for a 30% reserve of
its investment at the that time, as this represented management's estimate of
the impairment of this investment given the then current available alternatives.
<PAGE>
On July, 8, 1998, Fortunet returned 28 of the 31 licenses it was awarded and
returned half of the spectrum of the remaining three licenses. Fortunet
currently is the licensee for 15 megahertz of spectrum in three Florida markets:
Tallahassee, Panama City, and Ocala covering approximately 785,000 POPs at a
cost of $20.09 per 15 MHZ POP (equal to $40.18 per 30MHz POP). It used the down
payment from the licenses returned, after deducting the 30% forfeited, to repay
all remaining Government debt. No further write-off have been recorded as a
result of this restructure.
Tax Provision
- -------------
The income tax provision includes federal, as well as state and local taxes. The
tax provision for the three and nine months ended September 30, 1998 and 1997,
represents effective tax rates of (42%) and (40%), respectively. The differences
from the federal statutory rate are principally due to the effect of state
income taxes and amortization of non-deductible goodwill.
Minority Interest
- -----------------
Profit (loss) associated with minority interests, increased net income by $0.2
million in the third quarter of 1998 in comparison to the decrease in net income
of $0.2 million in the third quarter of 1997. The variance was $1.3 million for
the nine month periods ending September 30, 1998 and 1997.
These were due to reduced profits at the Spinnaker Industries, Inc., a 61.2%
owned subsidiary, and The Morgan Group, Inc., a 53% owned subsidiary offset by
higher profitability at telephone operations.
Net Income (Loss)
- -----------------
Net income for the three months ended September 30, 1998 was $2.1 million, or
$1.52 per share, as compared to a loss of $4.3 million, or $3.02 per share in
the previous year's quarter. Net income for the nine months ended September 30,
1998 was $3.0 million, or $2.14 per share, as compared to a loss of $3.5
million, or $2.50 per share.
Backlog/New Orders
- ------------------
Total backlog of manufactured products at September 30, 1998 was $16.1 million,
backlog was $30.9 million at December 31, 1997. Included in the backlog at
December 31, 1997 was a $16 million glass press order at Lynch Systems from an
international customer. The customer subsequently canceled this order. The
purchase order associated with this order contained a cancellation provision
pursuant to which the customer paid Lynch Systems $2.4 million which can be used
by the customer as a discount for future orders. Aside from the cancellation at
Lynch Systems referred to above, backlog increased by $1.2 million as an
increase in backlog at Spinnaker of $4.1 million offset lower backlogs at Lynch
Systems of $2.1 million and M-tron of $0.8 million.
<PAGE>
Liquidity/Capital Resources
- ---------------------------
As of September 30, 1998, the Company had current assets of $165.3 million and
current liabilities of $145.6 million. Working capital was therefore $19.7
million as compared to $56.0 million at December 31, 1997. The decrease is
primarily due to the acquisition of S.D. Warren's pressure sensitive adhesive
backed label stock business, a majority of which was financed by the draw down
on a working capital revolver, which is classified as a current liability. Nine
months capital expenditures were $16.7 million in 1998 and $13.7 million in
1997.
At September 30, 1998, total debt was $314.0 million, which was $32.9 million
more than the $281.1 million at the end of 1997, primarily due to the
acquisitions of S.D. Warren and tesa tape inc.'s electrical tape division. Debt
at September 30, 1998 included $234.2 million of fixed interest rate debt, at an
average cash interest rate of 9.0% and $79.7 million of variable interest rate
debt at an average interest rate of 9.4%. Additionally, at September 30, 1998
the Company had $40.7 million in unused lines of credit of which (i) $14.5
million was attributable to Morgan and (ii) $12.2 million was attributable to
Spinnaker. Certain restrictive covenants within the debt facilities at both
Spinnaker and Morgan limit their ability to provide the parent company with
significant funding. As of September 30, 1998, the Parent Company had borrowed
$10.7 million under short-term lines of credit facilities. The lines currently
total $22.0 million. These funds were primarily used to fund loans by
subsidiaries to partnerships in the PCS Auctions and fund a portion of the
purchase price of Upper Peninsula Telephone Company. These short-term lines of
credit expire by the end of December 1998. Management anticipates that these
lines will be renewed for one year but there is no assurance that they will be.
Lynch Corporation 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 Lynch Corporation from its subsidiaries.
In December 1996, the Company's Board of Directors announced that it is
examining the possibility of splitting, through a "spin-off," 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 spin-off 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.
The Company has a significant need for resources to fund the operation of the
parent company, meet its current funding commitments and fund future growth.
Lynch is currently considering various alternative long and short-term financing
arrangements, including the possible sale of certain assets. While management
expects to obtain adequate financing resources to enable the company to meet its
obligations, there is no assurance that such can be readily obtained or at
reasonable costs.
<PAGE>
The Company has initiated a comprehensive review of its computer systems to
identify the systems that could be affected by the "Year 2000" issue and is
developing and conducting an implementation plan to resolve the issue. The Year
2000 problem is the result of computer programs being written using two digits
(rather than four) to define the applicable year. Any of the Company's programs
or programs utilized by vendors to the Company that have time-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a major system failure or miscalculation. The Company's year
2000 review is being performed primarily by internal staff, and in certain
operations is supplemented by outside consultants. The principal Information
Technology ("IT") systems that may be impacted by the Year 2000 for the
Company's telecommunications operations are central office switching, billing
and accounting. The principal IT systems for the Morgan Group are order entry
dispatch and accounting. The principal IT systems for the Company's
manufacturing companies are sales order entry, shop floor control, inventory
control and accounting. The Year 2000 may also impact various non-IT systems,
including among other things security systems, HVAC, elevator systems, and
communications systems. In addition, each of Company businesses may be impacted
by the Year 2000 readiness of third party vendor/suppliers.
Due to the integral nature of switching equipment and billing software to their
operations, the telecommunications businesses are most effected by the Year 2000
issue. The majority of the telephone companies' switching and billing software
is expected to be Year 2000 compliant by the end of 1998, with the remaining
compliant by the end of first half of 1999. The telecommunications businesses
rely on switching equipment and software provided by third party vendors. It is
the Company's understanding that the vendors have completed testing of the
software and that no additional action by the Company will be required after
installation. The telecommunications businesses periodically upgrade switching
software in order to remain current with respect to service features. The
upgrades that provide Year 2000 readiness also provide other enhanced service
features and have been capitalized. Other remediation costs, including internal
costs have been charged to expense as incurred. The total cost of switching
software upgrades is estimated to be approximately $0.8 million, of which
approximately $0.3 million has been spent to date. The telecommunications
businesses have not developed a contingency plan and are in the process of
developing such a plan.
The Morgan Group, Inc. is in the process of remediating the Year 2000 issue,
primarily through the replacement of a significant portion of its operating
software. Implementation is expected to be completed by July 1999, with final
testing completed by September 1999. The total cost of Year 2000 remediation is
estimated to be approximately $0.4 million, of which less than $0.1 million has
been spent to date. Costs specifically associated with modifying internal use
software are charged to expense as incurred. At this time, The Morgan Group has
not developed a comprehensive contingency plan.
The assessment phase for the Company's manufacturing businesses is substantially
complete. Ongoing remediation efforts include the replacement of certain
software as well as programming changes to certain existing software. An
estimate of the total cost of remediatin has not been determined. However,
managment believes that the cost will not materiall affect results of
operations. A comprehensive contingency plan has not been completed at this
time.
<PAGE>
The estimated costs and projected dates of completion for the Company's Year
2000 program are based on management's estimates and were developed using
numerous assumptions of future events, some of which are beyond the Company's
control. The Company presently believes that with modifications to existing
software and converting to new software, the Year 2000 issue will not pose
significant operational problems for the Company as a whole. However, if such
modifications and conversions are not completed timely or are ineffective, the
Year 2000 issue may materially and adversely impact the Company's financial
condition, results of operations and cash flows.
The Registrant has recently initiated two programs which may effect future
operating results and financial condition.
(1) Cost Cutting -
--- --------------
The Registrant is taking a three step approach to cutting costs. First
is a review to eliminate certain centralized overhead costs. Second, a
review of Registrant's overall financial costs is being undertaken
with an objective of achieving savings from refinancing and
restructuring certain debt instruments. Third, the Registrant's
operating entities will take advantage of cost savings opportunities
without sacrificing quality of service.
(2) Harvesting -
--- ------------
The second program is a concentrated effort to monetize the
Registrant's assets, including selling a portion or all of certain
investments in Registrant's operating entities. These may include
Registrant's minority interests in network affiliated television
stations, direct broadcast television service, and certain telephone
operations where competitive local exchange carrier opportunities are
not readily apparent. Registrant's approximately 61% owned subsidiary,
Spinnaker, has retained Schroder & Co., Inc. to seek strategic
alternatives, including a possible sale, merger or other combination
of Spinnaker. Additionally, the Registrant is searching for a way to
accelerate the growth with M-tron as well as provide the Registrant
with a more financially visible investment. There is no assurance that
all or any part of this program can be effected or effected on
acceptable terms.
Included in this Management Discussion and Analysis of Financial Condition and
Results of Operations and Item 5 below are certain forward looking financial and
other information, including without limitation matters relating to PCS, a
possible spin-off, a refinancing/strategic initiative program, the anticipation
that short-term lines of credit would be renewed, "Year 2000" matters, and the
Registrant's cost cutting and harvesting initiatives. 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 herein,
the ability to successfully implement cost cutting and harvesting initiatives,
the expected performance of the economy and financial markets as they impact the
Registrant's businesses, financing needs and ability to harvest and monetize
certain assets, competition, tax consequences relating to a possible spin-off,
and ability of Registrant and, in certain cases, third parties to achieve their
Year 2000 compliance. As a result, such information is subject to uncertainties,
risks and inaccuracies.
<PAGE>
Two subsidiaries of the Registrant, The Morgan Group, Inc. and Spinnaker
Industries, Inc., file reports with the Securities and Exchange Commission
pursuant to the Securities Exchange Act of 1934, as amended.
PART II OTHER INFORMATION
- -------------------------
Item 5. Other Information
- ------- -----------------
Reference is made to Registrant's Harvesting initiative, discussed in
Part I, Item 2, Management's Discussion and Analysis of Finance
Condition and Results of Operations, above.
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) Exhibits
*10(p) - Amended Phantom Stock Plan
27 - Financial Data Schedule
(b) No reports on Form 8-K were filed during the third quarter of 1998
- -----------------
* Management contract or compensatory arrangement.
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
November 16, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Financial Statements as of September 30, 1998 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000061004
<NAME> Lynch Corporation
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollar
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 20,491
<SECURITIES> 1,249
<RECEIVABLES> 62,699
<ALLOWANCES> 1,125
<INVENTORY> 50,966
<CURRENT-ASSETS> 165,333
<PP&E> 261,930
<DEPRECIATION> 73,877
<TOTAL-ASSETS> 484,119
<CURRENT-LIABILITIES> 145,599
<BONDS> 246,810
0
0
<COMMON> 5,139
<OTHER-SE> 34,356
<TOTAL-LIABILITY-AND-EQUITY> 484,119
<SALES> 382,864
<TOTAL-REVENUES> 382,864
<CGS> 331,156
<TOTAL-COSTS> 362,732
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,621
<INCOME-PRETAX> 4,289
<INCOME-TAX> 1,801
<INCOME-CONTINUING> 3,037
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,037
<EPS-PRIMARY> 2.14
<EPS-DILUTED> 2.14
</TABLE>
Exhibit A 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, the per
share amount thereof shall reduce the Grant Price.
5. Exercisability:
(a) Subject to Section 5(b) below, at any time and from time to time after
the Share Units vest and prior to the fifth anniversary of the date of
grant a Grantee may exercise the Share Units by giving written notice
thereof to the Corporation.
(b) Share Units will become exercisable only if, at anytime during the
five year period beginning from the date of the grant, the price of
the Common Stock, in trading on the American Stock Exchange (or any
other trading market) exceeds two times the Grant Price (as it may be
reduced pursuant to the Plan) of the Share Unit.
(c) If the Share Units become first exercisable within four weeks of their
expiration date, the expiration will be extended so that the share
units remaining are exercisable for a full four weeks.
(d) If the Grantee is an employee or officer of the Corporation or its
subsidiaries (or successors thereto) on the date of exercise, the
Corporation, within 30 days after receipt of the written notice of
exercise, 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 (as it may be reduced pursuant to the Plan) multiplied by
the number of Share Units exercised.
(e) If the Grantee is no longer an employee or officer of the Corporation
or its subsidiaries (or successors thereto), for any reason, on the
date that the condition in Subsection 5(b) is satisfied, the Grantee
shall be deemed to have exercised his Share Units as of such date. The
Corporation shall, within 30 days after receipt of the written notice
of exercise, pay to the Grantee an amount equal to the closing price
of the Common Stock on the AMEX on the date that Grantee ceased to be
such an employee or officer (or if there was no trade on such date,
the closing price on the last preceding date on which the stock
traded) less the Grant Price (as it may be reduced pursuant to the
Plan) multiplied by the number of Share Units exercised.
(f) 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 the
Exercise Price in the case of Subsection 5(d) above and valued at the
closing price of a share of Common Stock on the AMEX on the date that
the condition in Section 5(b) is satisfied in the case of Subsection
5(e) above.
<PAGE>
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. ss.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.
