-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, H1wM2Ev9lVBgmVwbsyY+ZER5l2FewNBZ9+YjY/qbdIzoxJaO0812aH2LxyJGlHeo Zhz6VhVMiBJKkcXWivMQlg== 0000061004-97-000023.txt : 19970530 0000061004-97-000023.hdr.sgml : 19970530 ACCESSION NUMBER: 0000061004-97-000023 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970318 ITEM INFORMATION: Other events ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19970529 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: LYNCH CORP CENTRAL INDEX KEY: 0000061004 STANDARD INDUSTRIAL CLASSIFICATION: TRUCKING (NO LOCAL) [4213] IRS NUMBER: 381799862 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-00106 FILM NUMBER: 97615803 BUSINESS ADDRESS: STREET 1: 8 SOUND SHORE DR STE 290 CITY: GREENWICH STATE: CT ZIP: 06830 BUSINESS PHONE: 2036293333 MAIL ADDRESS: STREET 1: 8 SOUND SHORE DRIVE STREET 2: SUITE 290 CITY: GREENWICH STATE: CT ZIP: 06830 8-K/A 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K/A(1) CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) MARCH 18, 1997 LYNCH CORPORATION (Exact name of registrant as specified in its charter) INDIANA 1-106 38-1799862 (State of jurisdiction (Commission (I.R.S. Employer of Incorporation) File Number) Identifications No.) 8 SOUND SHORE DRIVE, SUITE 290, GREENWICH, CONNECTICUT 06830 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: 203/629-3333 Item 5. Other Events See Subsequent Event under Item 7(b) - Pro Forma Unaudited Financial Information below for information on the acquisition of the minority stock interest in Upper Peninsula Telephone Company. Item 7. Financial Statements and Exhibits This amends Form 8-K previously filed by the Registrant on April 1, 1997, and filed by Registrant with respect to an event occurring on March 18, 1997. The following financial statement and pro forma financial information are contained herein: (a) Financial Statements of Businesses Acquired Upper Peninsula Telephone Company and Subsidiaries 1. Independent Auditors' Report 2. Consolidated Balance Sheets as of December 31, 1996 and 1995 3. Consolidated Statements of Operations and Business Unit Equity for years ended December 31, 1996 and 1995 4. Consolidated Statements of Cash Flows for the years ended December 31, 1996 and 1995 5. Notes to Consolidated Financial Statements (b) Pro Forma Unaudited Financial Information 1. Pro Forma Combined Condensed Balance Sheet as of December 31, 1996 2. Notes to Pro Forma Combined Condensed Balance Sheet 3. Pro Forma Combined Condensed Statements of Operations for the Year Ended December 31, 1996 4. Notes to Pro Forma Combined Condensed Statements of Income SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. LYNCH CORPORATION /S/ROBERT E. DOLAN ROBERT E. DOLAN Chief Financial Officer Date: May 29, 1997 UPPER PENINSULA TELEPHONE COMPANY AND SUBSIDIARIES Financial Statements Together With Independent Auditor's Report As of December 31, 1996 and 1995 INDEPENDENT AUDITOR'S REPORT Board of Directors UPPER PENINSULA TELEPHONE COMPANY AND SUBSIDIARIES Carney, Michigan We have audited the accompanying consolidated balance sheets of Upper Peninsula Telephone Company and Subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, retained earnings and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards and Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Upper Peninsula Telephone Company and Subsidiaries as of December 31, 1996 and 1995, and the results of its consolidated operations and its consolidated cash flows for the years then ended in conformity with generally accepted accounting principles. Board of Directors UPPER PENINSULA TELEPHONE COMPANY AND SUBSIDIARIES As explained in Note M to the financial statements, Upper Peninsula Telephone Company and Subsidiaries retroactively changed its method of recording their investments in cellular partnerships to the equity method as of January 1, 1995. In accordance with Government Auditing Standards, we have also issued a report on our consideration of the Company's Internal Control Structure and a report on its Compliance with Laws and Regulations, both dated March 12, 1997. Siepert & Co. LLP Certified Public Accountants Beloit, Wisconsin March 12, 1997 UPPER PENINSULA TELEPHONE COMPANY AND SUBSIDIARIES Consolidated Balance Sheets As of December 31, 1996 and 1995
ASSETS 1996 1995 Current Assets: Cash and cash equivalents $ 712,529 $ 358,834 Temporary cash investments - at cost 314,336 420,457 Telecommunications accounts receivable 176,647 179,475 Other accounts receivable (Note D) 1,110,272 1,355,657 Interest receivable 1,324 3,239 Materials and supplies - at average cost 297,988 411,313 Prepayments 61,470 67,179 Total current assets 2,674,566 2,796,154 Investments: Investment in cellular partnerships - at equity (Note J) 1,759,020 1,309,691 Rural Telephone Bank Stock - at cost (Note C) 355,023 354,559 Other investments 2,692 20,000 Nonregulated assets 88,941 78,928 Total investments 2,205,676 1,763,178 Other Debits: Organization expense (Note I) 70,968 70,968 Deferred income taxes (Note K) 102,553 164,649 Deferred debt expense 15,950 17,306 Other deferred charges 10,000 Total other debits 199,471 252,923 Telecommunications Plant: (Note B) Telecommunications plant in service 28,378,762 27,134,736 Less: Accumulated depreciation 6,948,635 5,929,985 Net telecommunications plant in service 21,430,127 21,204,751 Telecommunications plant under construction 387,137 117,143 Total net telecommunications plant 21,817,264 21,321,894 Total Assets $26,896,977 $26,134,149
The following notes are an integral part of this statement. UPPER PENINSULA TELEPHONE COMPANY AND SUBSIDIARIES Consolidated Balance Sheets As of December 31, 1996 and 1995
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995 Current Liabilities: Current maturity of long-term debt $ 285,200 $ 247,100 Notes payable (Note E) 100,000 680,000 Accounts payable- Construction 6,876 88,596 Trade 442,643 584,113 Customer deposits and advance billings 34,110 27,637 Accrued liabilities- Wages 53,085 37,494 Income taxes 48,568 20,799 Interest 9,000 9,602 Total current liabilities 979,482 1,695,341 Other Credits: Deferred investment tax credit (Notes B & K) 89,405 101,319 Long-Term Debt: (Net of Current Maturity) (Note F) Mortgage notes payable 11,865,110 12,169,602 Stockholders' Equity: Common stock - $10 stated value; 10,000 shares authorized; 8,464 shares issued and outstanding for 1996 and 1995 84,640 84,640 Paid-in capital 393,382 393,382 Retained earnings (Note L) 13,484,958 11,689,865 Total stockholders' equity 13,962,980 12,167,887 Total Liabilities And Stockholders' Equity $26,896,977 $26,134,149
The following notes are an integral part of this statement. UPPER PENINSULA TELEPHONE COMPANY AND SUBSIDIARIES Consolidated Statements of Retained Earnings For the Years Ended December 31, 1996 and 1995
1996 1995 Balance, Beginning of Year $11,689,865 $10,480,246 Cumulative effect on prior years of retroactive restatement for accounting change (Note M) (99,440) Balance, Beginning of Year, As Restated 11,689,865 10,380,806 Add: Net income for year 2,049,013 1,943,859 Deduct: Dividends paid 253,920 634,800 Balance, End of Year $13,484,958 $11,689,865
The following notes are an integral part of this statement. UPPER PENINSULA TELEPHONE COMPANY AND SUBSIDIARIES Consolidated Statements of Income For the Years Ended December 31, 1996 and 1995
1996 1995 Regulated Operations: Operating Revenues: Local service revenue $ 762,149 $ 728,780 Carrier access revenue 7,328,785 6,759,369 Toll service revenue 10,021 5,858 Other operating revenue 398,078 357,211 Uncollectible operating revenue (31,850) (44,450) Total operating revenue 8,467,183 7,806,768 Operating Expenses: Plant specific 858,907 726,389 Plant nonspecific 357,506 319,855 Depreciation 1,400,174 1,299,410 Customer operations 455,899 427,947 Corporate operations 1,266,889 1,190,854 Taxes other than income 574,561 522,628 Income taxes 1,005,960 905,603 Total operating expenses 5,919,896 5,392,686 Net Operating Income - Regulated 2,547,287 2,414,082 Nonregulated Operations: Equity in undistributed earnings of cellular partnerships (Note J) 567,559 413,462 Operating revenues 65,026 62,718 Operating expenses (167,100) (152,302) Income taxes (157,742) (42,585) Net operating income - nonregulated 307,743 281,293 Total Net Operating Income 2,855,030 2,695,375 Other Income: Interest income 48,932 62,259 Other expense (81,307) (29,112) Income taxes (36,810) (17,657) Total other income (expense) (69,185) 15,490 Interest and Fixed Charges: Interest on long-term debt 717,318 721,148 Other interest charges 18,156 44,500 Amortization of debt expense 1,358 1,358 Total interest and fixed charges 736,832 767,006 Net Income $2,049,013 $1,943,859
The following notes are an integral part of this statement. UPPER PENINSULA TELEPHONE COMPANY AND SUBSIDIARIES Consolidated Statements of Cash Flows For the Years Ended December 31, 1996 and 1995
1996 1995 Cash Flows From Operating Activities: Net income $2,049,013 $1,943,859 Adjustments to reconcile net income to net cash provided by operating activities - Depreciation 1,400,174 1,299,410 Amortization expense 1,358 1,358 Deferred income taxes 62,096 16,641 Amortization of investment tax credits (11,914) (12,157) Equity in undistributed earnings of cellular partnerships (567,559) (413,462) (Increase) decrease in current assets - Telecommunications and other receivables 250,126 (753,246) Materials and supplies 113,325 (115,561) Prepayments 5,710 (10,269) Increase (decrease) in current liabilities - Accounts payable (223,190) 275,883 Customer deposits and advance payments 6,473 2,386 Accrued liabilities 42,758 1,247 Net cash provided by operating activities 3,128,370 2,236,089 Cash Flows From Investing Activities: Gross additions to telecommunications plant in service and under construction (1,862,499) (2,279,861) Net salvage on plant retirements (43,691) 27,945 Increase in other deferred charges (10,000) Cash distribution from cellular partnerships 118,230 208,871 Decrease in other investments 16,844 (23,200) Decrease in nonregulated assets 632 (45,445) Decrease in cash investments 106,121 45,883 Net cash used by investing activities (1,674,363) (2,065,807) Cash Flows From Financing Activities: Net change in short-term borrowing (580,000) 480,000 Proceeds from long-term financing 9,740 487,200 Payment on long-term debt (276,132) (463,304) Cash dividends (253,920) (634,800) Net cash used by financing activities (1,100,312) (130,904) Net Increase in Cash and Cash Equivalents 353,695 39,378 Cash and Cash Equivalents, Beginning of Year 358,834 319,456 Cash and Cash Equivalents, End of Year $ 712,529 $ 358,834
The accompanying notes are an integral part of this statement. UPPER PENINSULA TELEPHONE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements For the Years Ended December 31, 1996 and 1995 Note A: Nature of Operations The accompanying financial statements include the accounts of Upper Peninsula Telephone Company (Company), its wholly owned subsidiary, Alpha Enterprises Limited, Inc. (Alpha) and Alpha's wholly owned subsidiaries, Upper Peninsula Cellular North, Inc. (UPCN) and Upper Peninsula Cellular South, Inc. (UPCS). All intercompany items have been eliminated. The Company's principal business is to provide local telephone service and telephone access for all customers within specific boundaries in a noncompetitive market. However, recent government legislation will subject the Company to a possible future competitive market in which to operate. Alpha is a holding company, holding the interests in UPCN and UPCS. UPCN's and UPCS's principal business is holding interests in cellular partnerships serving areas within the State of Michigan. Note B: Summary of Significant Accounting Policies The accounting policies of the Company conform to generally accepted accounting principles and reflect practices appropriate to the telecommunications industry. The Company grants credit to customers, substantially all of whom are its local subscribers or connecting companies. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 1. Telecommunications plant in service is recorded at original cost. The provision for depreciation is computed on a straight-line basis by applying a rate to group account assets for statement and income tax purposes. Retirements are recorded on average unit costs. UPPER PENINSULA TELEPHONE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements For the Years Ended December 31, 1996 and 1995 Note B: Summary of Significant Accounting Policies (Continued) 2. Payroll taxes and employees' insurance costs are capitalized on all plant additions. Interest during construction (IDC) is being recorded on major projects. The IDC rate used was 6.9% and 7.5% for 1996 and 1995, respectively, which took into consideration the current cost of debt funds. There was $15,902 and $30,154 of IDC capitalized in 1996 and 1995, respectively. These capitalizations are being treated as additions to telecommunications plant for both statement and tax purposes. 3. The Company has elected to defer income tax savings earned by investment tax credit and is amortizing these savings over the service life of the assets on which the investment tax credit was taken. 4. In general, revenues are recognized when earned regardless of the period in which they are billed or received. Revenue for interstate access service is received through tariffed access charges filed by the National Exchange Carrier Association (NECA) with the Federal Communications Commission (FCC) on behalf of the member companies. These access charges are billed by the Company to the interstate long distance carrier, and pooled with like revenues from all NECA member companies. The portion of the pooled access charge revenue received by the Company is based upon its actual cost of providing interstate long distance service. Revenue for intrastate access service is received through tariffed access charges filed by the Michigan Exchange Carrier Association (MECA) with the Michigan Public Service Commission (PSC) on behalf of the member companies. These charges are billed by the Company to the intrastate long distance carrier, and pooled with like revenues from all MECA member companies. The portion of the pooled access charge revenue received by the Company is based upon its actual cost of providing the service. UPPER PENINSULA TELEPHONE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements For the Years Ended December 31, 1996 and 1995 Note B: Summary of Significant Accounting Policies (Continued) Revenue estimates recorded are subject to final acceptance by NECA and MECA. Revenues for 1996 include the following prior period adjustments, additional interstate revenues of approximately $175,400 resulting from true-ups of prior year cost studies and additional intrastate revenues of approximately $65,600 resulting from true-ups of prior year cost studies and true-ups of prior year MECA pool revenues. 5. For purposes of the statement of cash flows, cash equivalents include checking, savings, money market deposits and certificates of deposit with original maturities of less than three months. All other temporary cash investments, if any, with original maturities of over three months and less than one year are included in temporary cash investments. Note C: Rural Telephone Bank Stock The Rural Telephone Bank stock consists of 1,615,438 shares of Class B stock. The Company purchased 355,023 shares from the Rural Telephone Bank as a condition of obtaining long-term financing. Holders of Class B stock are entitled to patronage dividends in the form of additional Class B stock, however, such stock must be held until the related Rural Telephone Bank loan is repaid and may be redeemed only after all shares of Class A stock have been retired, at the discretion of the Board of Directors of the Rural Telephone Bank. As of December 31, 1996, the Company has received 1,260,415 shares of the Class B patronage dividends. Note D: Other Accounts Receivable As discussed in Note B the Company receives settlements from various interexchange toll carriers which are subject to adjustments in subsequent years. In connection with this the Company has recorded estimated receivables of $421,097 and $562,518 as of December 31, 1996 and 1995, respectively. UPPER PENINSULA TELEPHONE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements For the Years Ended December 31, 1996 and 1995 Note E: Note Payable During 1993, the Company received a line of credit for $1,000,000 at the prime rate of interest plus one and one half percent. The line of credit is available until August 8, 1998. The Company must pay off the line of credit for a minimum of five consecutive days each year. At December 31, 1996, the Company had $900,000 available on this line of credit. Note F: Long-Term Debt The long-term debt of the Company is secured by a mortgage on the assets of the corporation under the terms of a consolidated loan agreement between the Company, the United States of America Department of Agriculture Rural Utilities Service (RUS) and the Rural Telephone Bank (RTB). All assets of the Company are pledged as security for these mortgage notes. Amounts outstanding at December 31, 1996 and 1995 and other terms of the notes are as follows:
1996 1995 2% Mortgage notes payable serially to 2016 to the United States Government $ 2,324,402 $ 2,443,185 5% Mortgage notes payable serially to 2016 to the United States Government 2,808,585 2,869,669 7% Mortgage notes payable serially to 2009 to the United States Government 504,781 528,961 7.5% Mortgage notes payable serially to 2027 to the United States Government 6,512,542 6,574,887 Subtotal 12,150,310 12,416,702 Less: Current maturity 285,200 247,100 Total Long-Term Debt $11,865,110 $12,169,602
UPPER PENINSULA TELEPHONE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements For the Years Ended December 31, 1996 and 1995 Note F: Long-Term Debt - (Continued) The Company has $38,402 of unadvanced RTB loan fund available for plant additions. If these funds are advanced, they will have a 7.5% interest rate and will be repayable over a period of 35 years. Required principal payments based on the outstanding debt on December 31, 1996 for the next five (5) years are estimated to be as follows:
Year Amount 1997 $285,200 1998 298,300 1999 312,200 2000 326,800 2001 342,300
Note G: Related Party Transactions The Company provides construction, maintenance, general office and management services to a nonaffiliated company at cost. This company is related through common ownership by a majority stockholder of Upper Peninsula Telephone Company. Charges to this company amounted to $2,019 and $1,768 for the years 1996 and 1995, respectively. Note H: Supplemental Disclosures of Cash Flow Information
1996 1995 Cash paid during the year for interest $ 773,576 $ 766,163 Cash paid during the year for income taxes $1,125,234 $ 979,203
Note I: Organization Costs During 1990, Alpha, UPCN, and UPCS were all formed. The organization costs associated with each of these companies have been capitalized. These costs will not be amortized. A breakdown of these costs at December 31, 1996, is as follows: UPCN - $37,827 and UPCS - $33,141. These costs include legal fees, filing fees and other costs associated with setting up the corporations. UPPER PENINSULA TELEPHONE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements For the Years Ended December 31, 1996 and 1995 Note J: Investment in Cellular Partnership During 1991, UPCN and UPCS invested in separate RSA Cellular Partnerships covering areas in the State of Michigan. UPCN is a 7.882% general partner with an investment of $659,952 at December 31, 1996. UPCS is a 14.2857% general partner with an investment of $1,099,068 at December 31, 1996. These investments are recorded at equity. These investments consist of the following:
1996 1995 UPCN Capital contributions paid $ 648,053 $ 648,053 Equity in undistributed earnings of the partnership 224,713 6,535 Capital distributions received (212,814) (94,584) Total 659,952 560,004 UPCS Capital contributions paid 635,305 635,305 Equity in undistributed earnings of the partnership 578,050 228,669 Capital distributions received (114,287) (114,287) Total 1,099,068 749,687 Total $1,759,020 $1,309,691
Following is an unaudited summary of financial position and operations of Cellular North Michigan Network General Partnership of which UPCN is a general partner.
1996 1995 Current assets $ 2,790,000 $2,416,000 Property and equipment, net 7,589,000 6,171,000 Total Assets $10,379,000 $8,587,000 Current Liabilities $ 2,005,000 $1,482,000 Partner's Equity $ 8,374,000 $7,105,000 Operating Revenues $11,058,000 $7,874,000 Net Income $ 2,769,000 $1,673,000
UPPER PENINSULA TELEPHONE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements For the Years Ended December 31, 1996 and 1995 Note J: Investment in Cellular Partnership (Continued) Following is an unaudited summary of financial position and operations of Cellular Mobile Systems of Michigan RSA No. 7 Limited Partnership of which UPCS is a general partner.
1996 1995 Current assets $3,396,000 $3,079,000 Property and equipment, net 5,542,000 3,216,000 Total Assets $8,938,000 $6,295,000 Current Liabilities $1,245,000 $1,047,000 Partners' Equity $7,693,000 $5,248,000 Operating Revenues $7,332,000 $5,373,000 Net Income $2,445,000 $1,970,000
Note K: Income Taxes The Company implemented FASB Statement No. 109, Accounting for Income Taxes, in 1993. The Company has recognized the following deferred tax liabilities and deferred tax assets:
Year Ended Year Ended 12/31/96 12/31/95 Federal Deferred Income Taxes Investment tax credit $ 30,398 $ 34,448 Cellular partnerships 67 45,173 Net operating loss 72,088 96,862 Valuation allowance - 0 - (11,834) Total federal deferred income taxes 102,553 164,649 State Deferred Income Taxes - 0 - - 0 - Total Deferred Income Taxes $ 102,533 $ 164,649
The Company has recorded deferred income taxes on the following temporary timing differences: Use of investment tax credit deferral method, partnership differences and net operating loss carryforwards. UPPER PENINSULA TELEPHONE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements For the Years Ended December 31, 1996 and 1995 Note K: Income Taxes - (Continued) The Company has elected to defer income tax savings earned by investment tax credit and is amortizing these savings over the service life of the assets on which the investment tax credit was taken. Amortization of investment tax credits amount to $11,941 for the year 1996 and $12,157 for the year 1995. The Company has no investment tax credits to carryforward to future years. UPCN and UPCS have recorded deferred income taxes on the differences between net undistributed income from their investments in cellular partnerships and their K-1's from the partnerships. The subsidiaries have net operating loss carryforwards since the companies have elected to file separate income tax returns instead of filing a consolidated income tax return. At December 31, 1996 the following subsidiaries have net operating loss carryforwards: Alpha - $106,927 and UPCN - $105,097. These losses can be used to offset future taxable income subject to limitations. These carryforwards will begin to expire in 2006. Alpha had recorded a valuation allowance for the deferred tax asset resulting from the net operating losses. This valuation allowance was eliminated during 1996. The following is a breakdown of the components of income tax expense:
1996 1995 Federal: Taxes currently payable $1,053,865 $ 892,699 Deferred income taxes 110,388 127,646 Valuation allowance (11,834) (111,005) ITC amortization (11,941) (12,157) Prior year accrual difference (9,628) 3,586 Total federal income tax expense 1,130,850 900,769 State: Taxes currently payable 69,629 65,076 Prior year accrual difference 33 Total state income tax expense 69,662 65,076 Total Income Tax Expense $1,200,512 $ 965,845
UPPER PENINSULA TELEPHONE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements For the Years Ended December 31, 1996 and 1995 Note L: Dividend Restriction Under the most restrictive provisions of the Company's RUS loan agreement, there is approximately $5,799,500 of the Companies retained earnings available for dividend distribution. Note M: Accounting Change During 1996, UPCN and UPCS changed their method of carrying their investment in cellular partnerships from cost to equity. UPCN and UPCS made this change due to the appearance of significant influence over the operations of the partnerships since they are each general partners in the respective partnerships. Under the cost method, income is recorded only when distributions are received. Under the equity method, the companies record their proportionate share of the earnings of the respective cellular partnerships. The effect of this change was to decrease net income for 1996 by $44,753. The financial statements for 1995 have been restated for the change which resulted in an increase in net income for 1995 of $144,193. Retained earnings as of the beginning of 1995, has been decreased by $99,440 for the effect of retroactive application of the new method. LYNCH CORPORATION Pro Forma Combined Condensed Balance Sheet and Statements of Operations The following unaudited pro forma combined condensed balance sheet and statement of operations have been prepared from the historical results of operations of both Lynch Corporation and Upper Peninsula Telephone Company. The pro forma balance sheet is presented as if the acquisition of approximately 60% of Upper Peninsula Telephone Company had occurred at December 31, 1996. The allocations of purchase price to assets acquired and liabilities assumed, including related amortization, are based on preliminary estimates and may be adjusted when the final fair value allocations are determined. The pro forma statement of operations reflect the combined revenues and expenses of Lynch Corporation and Upper Peninsula Telephone Company as if the acquisition had been consummated at the beginning of the period presented. These statements should be read in conjunction with the historical financial statements of Upper Peninsula Telephone Company included elsewhere in this Form 8-K/A(1) and the historical financial statements of Lynch, included in Lynch's most recently filed Forms 10-K and 10-Q including the notes thereto . The pro forma combined results are not necessarily indicative of the combined results of future operations. Subsequent Event It should be noted that subsequent to the reportable event of March 18, 1997, on which these pro forma financials have been based, the Registrant acquired on May 23, 1997, pursuant to a plan of share exchange, the remaining 39.47% of the stock of Upper Peninsula Telephone Company. The acquisition price is approximately $10.0 million, to be paid for in cash (or at the option of minority shareholders in notes) as soon as reasonably practicable after June 30, 1997. As a result of this transaction, the minority interests reflected in the pro forma balance sheet and income statement would have bee eliminated and such items as goodwill, debt, and interest would increase. LYNCH CORPORATION Notes to Pro Forma Combined Condensed Balance Sheet (1) Cash used to purchase 60.53% of Upper Peninsula Telephone Company. The total purchase price was $16.0 million including approximately $0.7 million in closing costs. Of the $16.0 million, $10.0 million was borrowed from lending institutions. (2) Reflects the write-up of Upper Peninsula Telephone Company's cellular interests to fair market value before taxes. (3) Excess purchase price, including estimated acquisition costs of $0.7 million, over the estimated fair value of net assets acquired. (4) Additional long-term debt incurred to finance the acquisition of Upper Peninsula Telephone Company. (5) Deferred tax liability related to the write-up of Upper Peninsula's cellular interests. (6) Adjustment of minority interest represents 39.47% of Upper Peninsula's equity retained by minority shareholders. (7) Elimination of Upper Peninsula Telephone's equity. LYNCH CORPORATION AND SUBSIDIARIES PRO FORMA COMBINED CONDENSED BALANCE SHEET DECEMBER 31, 1996 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
1996 1996 LYNCH Upper Lynch 10-K Peninsula Adjustments Pro Forma Current Assets: Cash and cash equivalents $ 33,946 $ 1,027 $ (6,000)(1) $ 28,973 Marketable securities 2,156 0 $ 2,156 Receivables, net 52,963 1,288 $ 54,251 Inventories 36,859 298 $ 37,157 Deferred income taxes 5,571 14 $ 5,585 Other current assets 8,598 61 $ 8,659 Total Current Assets 140,093 2,688 (6,000) 136,781 Property, Plant and Equipment-net 131,364 21,817 $153,181 Investments in & advances to PCS entities 34,116 0 $ 34,116 Investments in & advances to affiliated companies 2,529 0 $ 2,529 Investments in cellular partnerships 1,759 6,531(2) $ 8,290 Excess of costs over fair value of assets acquired 69,206 3,238(3) $ 72,444 Other Assets 15,312 544 $ 15,856 Total Assets $392,620 $ 26,808 $ 3,769 $423,197 Current Liabilities: Notes payable to banks $ 17,419 $ 100 $ 17,519 Trade accounts payable 20,998 450 $ 21,448 Accrued liabilities 29,893 111 $ 30,004 Customer advances 6,382 34 $ 6,416 Current portion of long-term debt 23,769 285 833(4) $ 24,887 Total current liabilities 98,461 980 833 100,274 Long-term debt 219,579 11,865 9,167(4) $240,611 Deferred income taxes 22,389 0 2,221(5) $ 24,610 Minority interests 13,268 0 5,511(6) $ 18,779 Shareholders' Equity Common stock 5,139 85 (85)(7) $ 5,139 Additional paid-in capital 8,417 393 (393)(7) $ 8,417 Retained Earnings 26,472 13,485 (13,485)(7) $ 26,472 Treasury stock (1,105) $ (1,105) Total shareholders' equity 38,923 13,963 (13,963) 38,923 Total liabilities and shareholders' equity $392,620 $ 26,808 $ 3,769 $423,197
LYNCH CORPORATION Notes to Pro Forma Combined Condensed Statement of Income (1) Reflects an adjustment to provide for the pro forma effect of goodwill amortization for the year ended December 31, 1996. The pro forma estimate of goodwill was $3.2 million and the amortization period is twenty-five years. (2) Represents interest expense on additional debt of $10.0 million related to the acquisition of Upper Peninsula Telephone Company at an interest rate of 9%. (3) Reflects the adjustment to provide income tax benefits at the effective tax rate on the pro forma adjustments for the respective period. (4) Reflects 39.47% of the net income of Upper Peninsula Telephone Company controlled by minority shareholders. LYNCH CORPORATION AND SUBSIDIARIES PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1996 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
1996 1996 Lynch Upper Lynch 10-K Peninsula Adjustments Pro Forma SALES AND REVENUES: Multimedia $28,608 8,532 37,140 Services 132,208 132,208 Manufacturing 291,064 291,064 451,880 8,532 0 460,412 COSTS AND EXPENSES: Multimedia 21,435 3,207 24,642 Services 127,236 127,236 Manufacturing 241,683 241,683 Selling and Administrative 4,586 1,723 130(1) 46,439 OPERATING PROFIT 16,940 3,602 (130) 20,412 Other Income (expense): Investment Income 2,203 49 2,252 Interest Expense (17,011) (736) (900)(2) (18,647) Other Income (Expense) 0 335 335 Share of operations of affiliated companies 119 0 119 Gain on sales of subsidiary and affiliate stock 5,146 5,146 INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES, MINORITY INTERESTS, DISCONTINUED OPERATIONS AND EXTRAORDINARY ITEM 7,397 3,250 (1,030) 9,617 Provision for income taxes (3,021) (1,201) 306(3) (3,916) Minority Interests 418 (809)(4) (391) INCOME FROM CONTINUING OPERATIONS BEFORE DISCONTINUED OPERATIONS AND EXTRAORDINARY ITEM 4,794 2,049 (1,532) 5,311 Discontinued Operations (750) 0 0 (750) INCOME BEFORE EXTRAORDINARY ITEM 4,044 2,049 (1,532) 4,561 Loss on early extinguishment of debt, net of income tax benefit (1,348) (1,348) $ 2,696 $ 2,049 $(1,532) $ 3,213 Weighted Average Shares Outstanding 1,405,000 1,405,000 Earnings Per Share 1.92 2.29
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