-----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, H7udby52eWPnC1+P23eEUTGSDhbW6VNk9EIWTP/KdVV84eytTKhKTmXmP0y2cbkC hKMl39Hdr/DwB/asNbO2ow== 0000061004-97-000035.txt : 19971117 0000061004-97-000035.hdr.sgml : 19971117 ACCESSION NUMBER: 0000061004-97-000035 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 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: 10-Q SEC ACT: SEC FILE NUMBER: 001-00106 FILM NUMBER: 97719938 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 10-Q 1 SECURITIES & EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1997 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File No. 1-106 LYNCH CORPORATION (Exact name of Registrant as specified in its charter) Indiana 38-1799862 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 8 Sound Shore, Drive, Suite 290, Greenwich, Connecticut 06830 (Address of principal executive offices) (Zip Code) (203) 629-3333 Registrant's telephone number, including area code Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (20 has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the Registrant's classes of Common Stock, as of the latest practical date. Class Outstanding at November 1, 1997 Common Stock, no par value 1,416,834 INDEX LYNCH CORPORATION AND SUBSIDIARIES PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheet: - September 30, 1997 - December 31, 1996 (Audited) Condensed Consolidated Statements of Operations: - Three and nine months ended September 30, 1997 and 1996 Condensed Consolidated Statements of Cash Flows: - Nine months ended September 30, 1997 and 1996 Notes to Consolidated Financial Statements: Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PART II. OTHER INFORMATION Item 2. Changes in Securities Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K SIGNATURES Part 1 - FINANCIAL INFORMATION Item 1 - Financial Statements LYNCH CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands) September 30 December 31 1997 1996 (Unaudited) (A) ASSETS CURRENT ASSETS: Cash and Cash Equivalents $ 25,556 $ 33,946 Marketable Securities and Short-Term Investments 2,919 2,156 Receivables, Less Allowances of $1,624 and $1,525 57,572 52,963 Inventories 36,643 36,859 Deferred Income Tax Benefits 5,571 5,571 Other Current Assets 11,230 8,598 Total Current Assets 139,491 140,093 PROPERTY, PLANT AND EQUIPMENT: Land 1,473 1,367 Buildings and Improvements 23,847 21,334 Machinery and Equipment 188,350 157,025 213,670 179,726 Less Accumulated Depreciation (58,012) (46,707) Net Property, Plant and Equipment 155,658 133,019 INVESTMENTS IN AND ADVANCES TO PCS ENTITIES 24,947 34,116 INVESTMENTS IN AND ADVANCES TO AFFILIATED COMPANIES 1,273 2,529 EXCESS OF COSTS OVER FAIR VALUE OF NET ASSETS ACQUIRED 74,133 69,206 OTHER ASSETS 13,486 13,657 Total Assets $408,988 $392,620 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Notes Payable to Banks $ 22,334 $ 17,419 Trade Accounts Payable 21,033 20,998 Accrued Liabilities 39,174 36,275 Current Maturities of Long-Term Debt 8,776 23,769 Total Current Liabilities 91,317 98,461 LONG-TERM DEBT 244,952 219,579 DEFERRED INCOME TAXES 22,557 22,389 MINORITY INTERESTS 14,201 13,268 SHAREHOLDERS' EQUITY COMMON STOCK, NO PAR VALUE-10,000,000 SHARES AUTHORIZED; 1,471,191 shares issued (at stated value) 5,139 5,139 ADDITIONAL PAID - IN CAPITAL 8,635 8,417 RETAINED EARNINGS 22,936 26,472 TREASURY STOCK OF 54,357 AND 80,157 SHARES AT COST (749) (1,105) Total Shareholders' Equity 35,961 38,923 Total Liabilities and Shareholders' Equity $408,988 $392,620
(A)The Balance Sheet at December 31, 1996 has been derived from the Audited Financial Statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See Notes to Condensed Consolidated Financial Statements LYNCH CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) (In thousands, except share amounts)
Three Months Nine Months Ended September 30 Ended September 30 SALES AND REVENUES 1997 1996 1997 1996 Multimedia $ 12,739 $ 7,397 $ 34,901 $ 20,753 Services 38,293 35,306 111,137 102,510 Manufacturing 67,685 74,618 202,884 217,026 118,717 117,321 348,922 340,289 Costs and expenses: Multimedia 9,396 5,223 26,188 14,824 Services 34,821 32,417 101,674 94,922 Manufacturing 57,164 63,063 170,369 180,670 Selling and administrative 11,049 9,904 32,052 31,839 OPERATING PROFIT 6,287 6,714 18,639 18,034 Other income (expense): Investment Income 554 519 1,411 1,667 Interest expense (5,901) (4,254) (17,178) (12,439) Share of operations of affiliated companies 20 8 91 74 Impairment of PCS licenses (7,024) 0 (7,024) 0 Gain (Loss) on Sale of Subsidiary Stock (91) 0 169 4,178 (12,442) (3,727) (22,531) (6,520) INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND MINORITY INTERESTS (6,155) 2,987 (3,892) 11,514 Provision for income taxes 2,041 (1,240) 1,139 (4,666) Minority interests (160) (498) (783) (1,160) INCOME (LOSS) FROM CONTINUING OPERATIONS $ (4,274) $ 1,249 $ (3,536) $ 5,688 DISCONTINUED OPERATIONS: LOSS FROM OPERATIONS OF DIS- CONTINUED LYNCH TRI-CAN INTER- NATIONAL (LESS APPLICABLE INCOME TAXES OF $90) 0 0 0 (148) LOSS ON DISPOSAL OF LYNCH TRI-CAN INTER-NATIONAL(LESS APPLICABLE INCOME TAXES OF $305) 0 0 0 (595) NET INCOME (LOSS) $ (4,274) $ 1,249 $ (3,536) $ 4,945 Weighted average shares outstanding 1,417,000 1,408,000 1,414,000 1,404,000 INCOME (LOSS) PER COMMON SHARE: INCOME (LOSS) FROM CONTINUING OPERATIONS $ (3.02) $ 0.89 $ (2.50) $ 4.05 LOSS FROM DISCONTINUED OPERATIONS 0.00 0.00 0.00 (0.53) NET INCOME (LOSS) $ (3.02) $ 0.89 $ (2.50) $ 3.52
See Notes to Condensed Consolidated Financial Statements LYNCH CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (In thousands)
Nine Months Ended September 30 1997 1996 OPERATING ACTIVITIES Net Income (Loss) $(3,536) $ 4,945 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 15,984 12,514 Net effect of purchases and sales of trading securities (763) 9,461 Deferred taxes (2,388) 1,707 Share of operations of affiliated companies (91) (74) Minority interests 783 1,160 Gain on sale of stock by subsidiaries (169) (4,187) Impairment of PCS Licenses 7,024 0 Changes in operating assets and liabilities: Receivables (4,449) (2,741) Inventories 216 (5,953) Accounts payable and accrued liabilities 1,259 1,268 Other (635) (3,255) NET CASH FROM OPERATING ACTIVITIES 13,235 14,854 INVESTING ACTIVITIES Capital Expenditures (13,700) (17,435) Acquisition of lines from U.S. West 0 (5,680) Investment in Coronet Communications Company 2,995 0 Investment in Upper Peninsula Telephone Company (25,721) 0 Sale of Investments-Cellular Partnership 8,576 0 Investment in Personal Communications Services Partnerships 2,145 (14,306) Other (82) (363) NET CASH USED IN INVESTING ACTIVITIES (25,787) (37,784) FINANCING ACTIVITIES Issuance of long-term debt, net 3,219 22,410 Treasury stock transactions 657 730 Minority interest transactions 286 637 NET CASH FROM FINANCING ACTIVITIES 4,162 23,777 Net increase (decrease) in cash and cash equivalents (8,390) 847 Cash and cash equivalents at beginning of period 33,946 15,921 CASH AND CASH EQUIVALENTS AT END OF PERIOD 25,556 16,768
See Notes to Condensed Consolidated Financial Statements. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS A. Subsidiaries of the Registrant
Owned by Subsidiary Lynch Brighton Communications Corporation 100.0% Lynch Telephone Corporation IV 100.0% Bretton Woods Telephone Company, Inc. 100.0% World Surfer, Inc. 100.0% Lynch Kansas Telephone Corporation 100.0% Lynch Telephone Corporation VI 98.0% J.B.N. Telephone Company, Inc. 98.0% J.B.N. Finance Corporation 98.0% Giant Communications, Inc. 100.0% Lynch Telephone Corporation VII 100.0% USTC Kansas, Inc. 100.0% Haviland Telephone Company, Inc. 100.0% Haviland Finance Corporation 100.0% DFT Communications Corporation 100.0% Dunkirk & Fredonia Telephone Company 100.0% Cassadaga Telephone Company 100.0% Macom, Inc. 100.0% Comantel, Inc. 100.0% D&F Cellular Telephone, Inc. 100.0% Erie Shore Communications, Inc. 100.0% DFT Long Distance Corporation 100.0% LMT Holding Corporation 100.0% Lynch Michigan Telephone Holding Corporation 100.0% Upper Peninsula Telephone Company 100.0% Alpha Enterprises Limited 100.0% Upper Peninsula Cellular North, Inc. 100.0% Upper Peninsula Cellular South, Inc. 100.0% Global Television, Inc. 100.0% Inter-Community Acquisition Corporation 83.0% Home Transport Services, Inc. 100.0% Lynch Capital Corporation 100.0% Lynch Entertainment Corporation 100.0% Lynch Entertainment Corporation II 100.0% Lynch International Exports, Inc. 100.0% Lynch Manufacturing Corporation 100.0% Lynch Display Technologies, Inc. 100.0% Lynch Machinery, Inc. 90.0% M-tron Industries, Inc. 94.0% M-tron Industries, Ltd. 94.0% Spinnaker Industries, Inc 67.3% Entoleter, Inc. 67.3% Brown-Bridge Industries, Inc. 67.3% Central Products Company 67.3% Lynch Multimedia Corporation 100.0% CLR Video, L.L.C. 60.0% The Morgan Group, Inc. 66.24%(V)/50.95%(O) Morgan Drive Away, Inc. 66.24%(V)/50.95%(O) Transport Services Unlimited, Inc. 66.24%(V)/50.95%(O) Interstate Indemnity Company 66.24%(V)/50.95%(O) Morgan Finance, Inc. 66.24%(V)/50.95%(O) TDI, Inc. 66.24%(V)/50.95%(O) Home Transport Corporation 66.24%(V)/50.95%(O) MDA Corporation 66.24%(V)/50.95%(0) Lynch PCS Communications Corporation 100.0% Lynch PCS Corporation A 100.0% Lynch PCS Corporation F 100.0% Lynch PCS Corporation G 100.0% Lynch Interactive Corporation 100.0% Lynch Telecommunications Corporation 100.0% Lynch Telephone Corporation 80.1% Western New Mexico Telephone Co., Inc. 80.1% WNM Communications Corporation 80.1% Wescel Cellular, Inc. 80.1% Wescel Cellular of New Mexico Limited Partnership 40.9% Wescel Cellular, Inc. II 80.1% Northwest New Mexico Cellular, Inc. 40.1% Northwest New Mexico Cellular of New Mexico Limited Partnership 20.5% Enchantment Cable Corporation 80.1% Lynch Telephone Corporation II 83.0% Inter-community Telephone Company 83.0% Inter-community Telephone Company II 83.0% Lynch Telephone Corporation III 81.0% Cuba City Telephone Exchange Company 81.0% Belmont Telephone Company 81.0%
Notes: (V)=Percentage voting control; (O)=Percentage of equity ownership B. Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of the management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended September 30, 1997 are not necessarily indicative of the results that may be expected for the year ended December 31, 1997. For further information, refer to the consolidated financial statements and footnotes thereto included in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996. C. Acquisitions On March 18, 1997, Lynch Michigan Telephone Holding Company, a wholly-owned subsidiary of the Registrant, acquired approximately 60% of the outstanding shares of Upper Peninsula Telephone Company for $15.2 million. The Registrant completed the acquisition of the remaining 40% on May 23, 1997. The total cost of the acquisition was $26.5 million. As a result of this transaction, the Registrant recorded approximately $7.4 million in goodwill which is being amortized over 25 years. On December 31, 1996, The Morgan Group, Inc., an approximately 51% owned subsidiary of the Registrant, acquired the operating assets of Transit Homes of America, Inc., a provider of transportation services to a number of producers in the manufactured housing industry. The purchase price was approximately $4.4 million, including assumed obligations. On November 25, 1996, DFT Communications Corporation, a wholly-owned subsidiary of the Registrant, acquired all of the outstanding shares of Dunkirk & Fredonia Telephone Company, a local exchange company serving portions of Western New York. The total cost of this transaction was $27.7 million. As a result of this transaction, the Registrant recorded $13.8 million in goodwill which is being amortized over 25 years. All of these acquisitions were accounted for as purchases, and, accordingly, the assets and liabilities were recorded at their estimated fair market value. The operating results of the acquired companies are included in the Consolidated Statement of Income from their respective acquisition dates. The following unaudited proforma information shows the results of the Registrant's operations as though the purchase of Upper Peninsula Telephone Company, Transit Homes and Dunkirk & Fredonia were made at the beginning of 1996.
Three Months Ended Nine Months Ended September 30 September 30 1997 1996 1997 1996 (In thousands, except per share data) Sales and Revenues $118,717 $130,981 $351,178 $378,198 Operating Profit 6,287 7,952 19,549 26,388 Income (Loss) from Continuing Operations Before Income Taxes and Minority Interest (6,155) 3,101 (3,664) 16,454 Net Income (Loss) (4,274) 1,220 (3,440) 7,946 Net Income (Loss) Per Share ($3.02) $0.87 ($2.43) $5.66
The proforma results for the nine months ending September 30, 1996, reflect the sale of Dunkirk & Fredonia's cellular telephone interests which resulted in a pre-tax gain of $5.1 million, or $3.65 per share, included in operating profit. The after-tax gain on the sale of the cellular interests was $3.4 million, or $2.43 per share. D. Discontinued Operations During the second quarter of 1996, the Registrant decided to discontinue the operations of Tri-Can International, Ltd. ("Tri-Can") and sell the assets of that operation. The sale was completed in August 1996. Tri-Can, a manufacturer of packaging machinery, recorded sales of $2.8 million for the nine months ended September 30, 1996. The assets sold primarily consisted of inventory, fixed assets and intangibles. Accordingly, during the nine months ended September 30, 1996, results of Tri-Can are presented as "discontinued operations." E. Inventories Inventories are stated at the lower of cost or market value. At September 30, 1997, inventories were valued by three methods: last-in, first-out (LIFO) - - 56%, specific identification - 40%, and first-in, first-out (FIFO) - 4%. At December 31, 1996, the respective percentages were 53%, 42%, and 5%.
In Thousands 9-30-97 12-31-96 Raw material and supplies $ 9,634 $10,987 Work in process 5,104 3,950 Finished goods 21,905 21,922 Total Inventories $36,643 $36,859
F. Indebtedness On a consolidated basis, at September 30, 1997, the Registrant maintains short-term and long-term lines of credit facilities totaling $81.2 million, of which $52.1 million was available. The Registrant (Parent Company) maintains an $18.0 million short-term line of credit facility, of which $3.5 million was available at September 30, 1997. This facility decreases by $1.0 million per month starting on November 30, 1997 and will expire on February 16, 1998. Spinnaker Industries, Inc. maintains lines of credit at its subsidiaries which total $40.0 million, of which $39.7 million was available at September 30, 1997. The Morgan Group maintains lines of credit totaling $10.4 million, $1.6 million was available at September 30, 1997. These facilities, as well as facilities at other subsidiaries of the Registrant, generally limit the credit available under the lines of credit to certain variables, such as inventories and receivables, and are secured by the operating assets of the subsidiary, and include various financial covenants. At September 30, 1997, $30.1 million of these total facilities expire within one year. In general, the long-term debt credit facilities are secured by property, plant and equipment, inventory, receivables and common stock of certain subsidiaries and contain certain covenants restricting distributions to the Registrant. On October 23, 1996, Spinnaker Industries completed the issuance of $115 million of 10-3/4% senior secured debt due 2006. The debt proceeds were used to extinguish substantially all existing bank debt, bridge loans, and lines of Credit at Spinnaker and its two major operating subsidiaries, Central Products and Brown-Bridge. In addition, Spinnaker established a $40.0 million asset-backed senior-secured revolving credit facility.
Long term debt consists of: 9-30-97 12-31-96 Spinnaker Industries, Inc. 10.75% Senior Secured Note due 2006 $115,000 $115,000 Rural Electrification Administration and Rural Telephone Bank notes payable in equal quarterly installments through 2027 at fixed interest rates ranging from 2% to 7.5% (4.7% weighted average) 47,549 34,734 Bank credit facilities utilized by certain telephone and telephone holding companies through 2009, $36.4 million at a fixed interest rate averaging 8.9% and $19.3 million at variable interest rates averaging 9.0% 55,742 41,513 Unsecured notes issued in connection with telephone company acquisitions at fixed interest rates averaging 9% with maturities through 2006. 27,945 28,044 Gabelli Funds, Inc. and affiliates loans at fixed rates of 10% due on August 12, 1997 0 11,800 Other 7,492 12,257 253,728 243,348 Current Maturities (8,776) (23,769) $244,952 $219,579
H. Gain (Loss) on Sale of Subsidiary Stock As a result of the conversion of the $6.0 million Convertible Subordinated Alco Note of Spinnaker into their Common Stock on May 5, 1996 and other transactions, the Registrant, in accordance with its accounting policy, recognized a gain of $4.1 million, ($2.4 million, or $1.74 per share after taxes) in the second quarter of 1996. During the third quarter of 1997, as a result of the exercise of a portion of the stock warrants held by the management of Spinnaker, the Registrant recorded a loss of $91 thousand, or $53 thousand after tax (or $0.04 per share). I. Earnings Per Share Earnings per common and common equivalent share amounts are based on the average number of common shares outstanding during each period, assuming the exercise of all stock options having an exercise price less than the average market price of the common stock using the treasury stock method. Fully diluted earnings per share reflect the effect, where dilutive, of the exercise of all stock options having an exercise price less than the greater of the average or closing market price at the end of the period of the Common Stock of the Registrant using the treasury stock method. In February 1997, the Financial Accounting Standards Board issued, Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," which changes the methodology of calculating earnings per share. SFAS No.128 requires a disclosure of diluted earnings per share regardless of its difference from basic earnings per share. The Registrant plans to adopt SFAS No. 128 in December 1997. Early adoption is not permitted. The Registrant does not expect the adoption of SFAS No. 128 to have a material effect on the financial statements. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Sales and Revenues Revenues for the third quarter of 1997 increased by $1.4 million, or 1%, from the third quarter of 1996. Within the operating segments, multimedia, whose revenues increased by 72%, contributed $5.3 million to the increase and services, whose revenues increased by 8%, contributed $3.0 million to the overall increase. Revenues of the manufacturing segment dropped 9% and were $6.9 million less than the third quarter of 1996. The acquisitions of Dunkirk & Fredonia Telephone Company ($2.6 million contribution), which occurred on November 26, 1996, and Upper Peninsula Telephone Company ($2.2 million contribution), which a majority interest was obtained on March 18, 1997, were the primary contributors to the increase in multimedia's operating revenues. Revenues of $4.8 million as a result of the acquisition of Transit Homes of America, Inc., which occurred on December 30, 1996, offset by lower "Truckaway" revenues, an operation which was sold in the second quarter of 1997, was the primary contributor to the increased revenues at The Morgan Group, Inc. Within the manufacturing group, revenues for Spinnaker were lower by $6.8 million or 11% from the third quarter of 1996: at Central Products Company, competitive pricing pressure offset somewhat higher unit demand and resulted in lower revenues by $2.1 million, timing of shipments decreased Brown-Bridge revenues by $3.1 million and Entoleter revenues of industrial equipment were lower by $1.6 million. Timing delays in the manufacturing of extra-large glass presses resulted in a $2.8 million period to period short-fall in revenues at Lynch Machinery, Inc. and improved demand for electronic components, predominantly by telecommunications capital equipment manufacturers, resulted in higher revenues of $2.6 million at M- tron. For the nine months ended September 30, 1997, revenues increased by $8.6 million, or 3% better than the nine months ended September 30, 1996. Multimedia revenues increased by $14.1 million reflecting the acquisitions of Dunkirk & Fredonia and Upper Peninsula of $7.6 million and $4.4 million, respectively. Morgan's revenues increased by $8.6 million reflecting revenues of Transit Homes of America of $13.9 million, offset by lower driver outsourcing Truckaway revenues. Manufacturing revenues decreased by $14.1 million reflecting (1) order short-fall at Lynch Machinery, $5.8 lower (2) revenue shortfalls at all three units of Spinnaker, $11.6 million decrease and (3) offset by improved demand at M-tron, $3.3 million increase. Operating Profit Operating profit for the third quarter of 1997 decreased by $.4 million from the third quarter of 1996. Operating profit in the multimedia and services segments increased by $1.2 million and $0.5 million, respectively, while manufacturing operating profits decreased by $2.0 million. Corporate expenses increased by $0.1 million. In the multimedia segment, higher revenues resulted in increased EBITDA (earnings before interest, taxes, depreciation and amortization) of $2.3 million, offset by increased depreciation and amortization expense of $1.1 million, both primarily associated with the acquisitions of Dunkirk & Fredonia Telephone Company and Upper Peninsula Telephone Company. Increased revenues and absence of the unprofitable Truckaway operation, increased operating profit at Morgan by $0.5 million or 59%. The decrease in the operating profit at the manufacturing group related to the reduced revenues at all the operating units except for M-tron whose revenues and profit increased significantly. For the nine months ended September 30, 1997, operating profit increased by $0.6 million, or 3%. Multimedia operating profit increased by $2.7 million reflecting the acquisition of Dunkirk & Fredonia and Upper Peninsula of $0.7 million and $1.9 million, respectively. Morgan's operating profit increased by $1.6 million reflecting higher revenues and improved product mix. Manufacturing operating profit fell by $3.9 million. Spinnaker's operating profit fell by $0.9 million due to reduced revenues at all units. Lynch Machinery's operating profit fell by $2.8 million reflecting reduced revenues. M-tron's operation profit increased by $0.2 million. Other Income (Expense), Net Investment income in the third quarter of 1997 was $0.6 million which was an increase of $0.1 million from the third quarter of 1996. Interest expense increased by $1.6 million to $5.9 million in the third quarter of 1997 from $4.3 in the third quarter of 1996. The increase was a result of an increase in interest expense and amortization of deferred financing costs of $1.0 million at Spinnaker Industries, Inc., as a result of the issuance of $115 million of senior secured notes on October 23, 1996, and interest expenses of $0.5 million associated with the acquisition of Dunkirk & Fredonia Telephone Company and $0.6 million with the acquisition of Upper Peninsula Telephone Company. These amounts did not include $0.7 million of capitalized interest associated with the development of the personal communications services ("PCS") licenses. On a year to date basis, the acquisition of Dunkirk & Fredonia contributed $1.5 million of interest expense, Upper Peninsula contributed $1.1 million of additional interest expense and Spinnaker's high yield results in $2.6 million of incremental interest expense. This amount did not include $1.7 million of capitalized interest for PCS licenses. As part of Spinnaker's acquisition of Central Products, Spinnaker issued to Alco a $6 million Convertible Subordinated Note that converted into Spinnaker Common Stock on May 5, 1996. As it is the accounting policy of the Registrant to recognize gains and losses on the sale of stock by a subsidiary, the conversion of this Note resulted in a pre-tax gain of $4.1 million to the Registrant in the second quarter of 1996. During the third quarter of 1997, the Registrant took a write off of 30% of the investment in, loans to, and deferred costs associated with its subsidiary's 49.9% equity ownership in Fortunet Communications, L.P. ("Fortunet"), a partnership formed to acquire, construct and operate licenses for the provision of personal communications services in the so called C- Block auction. Such write-off amounted to $7.0 million, or $4.6 million after tax benefit. In May 1996, the FCC concluded the so-called "C-Block" auction for 30- megahertz of broadband spectrum across the United States to be used for personal communications services ("PCS"). PCS is the second generation of low-cost digital wireless service utilized for voice, video and data devices. In the C-Block auction, certain qualified small businesses were afforded bidding credits as well as access to long-term government financing for the cost of the licenses acquired. As a result of this auction, Fortunet acquired 31 licenses in 17 states covering a population ("POP") of 7.0 million. The total cost of these licenses was $216 million, or $30.76 per 30-megahertz POP, after the 25% bidding credit. Events during and subsequent to the auction, as well as other externally driven technological and market forces, have made financing of the build-out of these licenses through the capital markets much more difficult than previously anticipated. Fortunet, as well as many of the license holders from this auction, has petitioned the FCC for relief in terms of (1) resetting the interest rate to the appropriate rate at the time; (2) further reducing or delaying the required debt payments in order to afford better access to capital markets; and (3) relaxing the restrictions with regard to ownership structure and alternative arrangements in order to afford these small businesses the opportunity to more realistically restructure and build-out their systems. The response from the FCC, which was announced on September 26, 1997, afforded license holders a choice of four options, one of which was the resumption of current debt payments; which had been suspended earlier this year. The ramifications of choosing the other three courses of action could result in Fortunet ultimately forfeiting either 30%, 50%, or 100% of its current investment in these licenses. While Fortunet is still examining what action, if any, it will take with these options and will continue to look for ways to finance and build out this spectrum, the management of the Registrant provided for a 30% reserve of its investment at this time, as this represents management's estimate of the impairment of this investment given the current available alternatives. Tax Provision The income tax provision (benefit) includes federal, as well as state and local taxes. The tax provision (benefit) for the three months ended September 30, 1997 and 1996, represent effective tax rates of (33%) and 42%, respectively. The 1997 rate is effected due to the anticipated inability to currently provide for a state income tax benefit for the impairment of the PCS investment. The remaining differences from the federal statutory rate are principally due to the effect of state income taxes and amortization of non-deductible goodwill. Minority Interest Minority interest was $0.3 million lower in the third quarter of 1997 versus the third quarter of 1996, predominantly due to decreased net profits at Spinnaker Industries, Inc. a 67.3% owned subsidiary. Income From Continuing Operations During the third quarter of 1997, the Registrant recorded losses from continuing operations of ($4.3) million, or ($3.02) per share, as compared to income from continuing operations of $1.2 million, or $.89 per share, in the third quarter of 1996. The gain on the sale of Lafayette County Satellite TV in 1997 had a net profit effect of $158 thousand, or $0.11 per share, and the gain on the conversion of the Alco note in the third quarter of 1996, had a net profit effect of $2.4 million, or $1.74 per share in 1996. Discontinued Operations The Registrant had decided to discontinue the operations at Tri-Can International, Ltd. in the second quarter of 1996 (see Note D). Accordingly, its operating results in the nine months ended September 30, 1996 are treated as discontinued operations. Net Income/Loss Net loss for the three months ended September 30, 1997 was ($4.3) million, or ($3.02) per share, as compared to a net income of $1.2 million, or $0.89 per share in the previous year's quarter. Net loss for the nine months ended September 30, 1997 was ($3.5) million, or ($2.50) per share, as compared to $4.9 million, or $3.52 per share, for the comparable period in 1996. Backlog/New Orders Total backlog of manufactured products at September 30, 1997 was $44.4 million, which represents an increase of $23.5 million from the backlog of $20.9 million at December 31, 1996. A $16.0 million extra-large glass press order at Lynch Machinery helped increase their backlog to $26.7 million. Liquidity/Capital Resources At September 30, 1997, the Registrant has $28.5 million in cash and short- term investments, $1.2 million of which was at the Parent Company, which was $7.6 million less than the amount reported at December 31, 1996. Working capital at September 30, 1997, was $48.2 million compared to $41.6 million at December 31, 1996. The decrease in cash and short-term investments was primarily the result of funding the acquisition of Upper Peninsula and the increase in working capital was primarily the result of the reduction in the current portion of long-term debt. Total debt was $276.1 million at September 30, 1997 compared to $260.8 million at December 31, 1996. The increase was due primarily to debt incurred to fund the Registrant's acquisition of Upper Peninsula Telephone Company. As reported in the Registrant's Consolidated Statement of Cash Flow, during the nine months ended September 30, 1997, operating activities generated $13.2 million in cash, investing activities used $25.8 million, and financing activities provided $4.2 million. Respective amounts for nine months ended September 30, 1996, were $14.9 million, ($37.8) million, and $23.8 million. The net loss, lower net sales of trading securities, and an increase in accounts receivable at The Morgan Group, Inc. resulted in decreased cash generated from operating activities for the nine months ended September 30, 1997 versus the nine months ending September 30, 1996. With regard to investment activities, the acquisition of Upper Peninsula Telephone Company, offset by repayment of a note by Coronet Communications Corporation, sale of cellular partnership interests previously held by Upper Peninsula Telephone Company and return of bidding deposits from the FCC with respect to activities by Aer Force Communications B, L.P., resulted in a $12.0 million decrease in cash used in investing activities as compared to the prior year period. The $4.0 million generated from financing activities resulted when the Registrant repaid a $10 million affiliate loan with funds received from the return of the F-Block bidding deposit, borrowed $10 million from an affiliate to finance the acquisition of 60% of the shares of Upper Peninsula Telephone Company and the payment of the first interest installment on the C-Block debt (see below). The Registrant borrowed an additional $10 million in July to pay for the 40% of Upper Peninsula. This compared to net borrowings of $22.4 million in the first three quarters of 1996, due to capital expenditures and acquisition of telephone access lines by the Registrant's telephone companies. Registrant maintains an active acquisition program and generally finances each acquisition with a significant component of debt. This acquisition debt contains restrictions on the amount of readily available funds that can be transferred to the Parent Company from its subsidiaries. At September 30, 1997, the Registrant has $52.1 million of unused short-term and long-term lines of credit facilities, $3.5 million of which applied to the Parent Company. Subsidiaries of the Registrant hold limited partnership interests in and have loan commitments to two partnerships which were the winning bidders in the Federal Communications Commission's ("FCC") C-Block and F-Block Auctions for 30 megahertz and 10 megahertz, respectively, of broadband spectrum to be used for PCS. In the C-Block Auction, Fortunet, 49.9% owned by a subsidiary of the Registrant, acquired 31 licenses to provide PCS to geographic areas of the United States with a population of 7.0 million. The cost of these licenses was $216.2 million. $194.6 million of the cost of these licenses was funded via a loan from the United States Government. The loan requires quarterly interest payments of 7% (The Registrant argues strenuously that the interest rate should have been 6.51%, the applicable treasury rate at the time the licenses were awarded), and with quarterly principal amortization in years 7, 8, 9, and 10. In the F-Block Auction, East/West Communications, Inc. ("East/West"), incorporated in August 1997 as a successor to Aer Force Communications B, L.P. minority owned by a subsidiary of the Registrant, acquired five licenses to provide personal communications services in geographic areas of the United States with a total population of 20 million. The cost of these licenses was $19.0 million. $15.2 million of the cost of the licenses is financed with a loan from the United States Government. The interest rate on the loan is 6.25% with quarterly principal amortization in years 3 to 10. On May 12, 1997, the Registrant's subsidiary loaned East/West $1.0 million to make its final down payment on four of the five licenses (which were awarded). On July 14, 1997, the Registrant loaned East/West $0.9 million to make the final down payment on the fifth license which was awarded at that time. As of September 30, 1997, Registrant's subsidiary has invested $99 thousand in partnership equity and provided East/West with a loan of $2.5 million funded by a short-term secured borrowing by the Registrant and has a funding commitment of $8.9 million to East/West. The Registrant has borrowed the $3.5 million on a short-term basis to fund its F-Block loan commitment. In addition, the Registrant intends to dividend to its shareholders its 40% net interest of East/West on or about December 5, 1997, subject to necessary approvals. The Registrant's subsidiaries are currently seeking alternatives to minimize or raise funds for their funding commitments to the entities. There are many risks associated with PCS. Interest payments on the Government debt which were suspended in March-April, 1997 by the FCC will resume beginning March 31, 1998. In addition, funding aspects of acquisition of licenses and the subsequent mandatory build out requirements plus the amortization of the license, could significantly and materially impact the Registrant's reported net income over the next several years. Of note, under the current structure, the ramifications of this should not impact reported revenues and EBITDA in the future. For further information on PCS, including various risks, see Item 1 -I(c) of Form 10-K for the year ended December 31, 1996. In December, 1996, the Registrants' Board of Directors announced that it is examining the possibility of splitting, through a "Spin-off," of either its communications operations or its manufacturing operations. A spin-off could improve management focus, facilitate and enhance financings and set the stage for future growth, including acquisitions. A split could also help surface the underlying values of the company as the different business segments appeal to differing "value" and "growth" cultures in the investment community. There are a number of matters to be examined in connection with a possible spin-off, including tax consequences, and there is no assurance that such a spin-off will be effected. In order to fund future growth of the Registrant's manufacturing subsidiaries, each of these subsidiaries, Spinnaker Industries, Inc., Lynch Display Technologies, Inc. (parent of Lynch Machinery, Inc.) and M-tron Industries, Inc. is in the process of undertaking refinancing/strategic initiative program, that is, to either raise financing for future acquisitions or form a joint venture strategic partnership. There is no assurance that any or all of these companies can accomplish these programs. In February 1997, the Financial Accounting Standards Board issued, Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," which changes the methodology of calculating earnings per share. SFAS No.128 requires a disclosure of diluted earnings per share regardless of its difference from basic earnings per share. The Registrant plans to adopt SFAS No. 128 in December 1997. Early adoption is not permitted. The Registrant does not expect the adoption of SFAS No. 128 to have a material effect on the financial statements. Included in this Management Discussion and Analysis of Financial Condition and Results of Operations are certain forward looking financial and other information, including without limitation matters relating to PCS, possible spin-offs and a refinancing/strategic initiative program. It should be recognized that such information are projections, estimates or forecasts based on various assumptions, including without limitation, meeting its assumptions regarding expected operating performance and other matters specifically set forth, as well as the expected performance of the economy as it impacts the Registrant's businesses, tax consequences and what actions the FCC may take with respect to PCS. As a result, such information is subject to uncertainties, risks and inaccuracies. PART II OTHER INFORMATION Item 2. Changes in Security and Use of Proceeds (c) On August 11, 1997, Registrant granted 214 shares of its common stock pursuant to Registrant's Directors Stock Plan to a person who became a director of Registrant in 1997, at a price of $70.10 per share (equal to the average stock price for the 30 trading days ended December 31, 1996). The issuance was exempt from registration under the Securities Act of 1993 (the "Securities Act") under Section 4(2) thereof and/or the "no sale" theory. Item 5. Other Information Reference is made to Item 2. Management's Discussions and Analysis of Financial Condition and Results of Operations for information on personal communications services. See also Item 1-I(c) Personal Communications Services ("PCS") in Registrant's Form 10-K for the year ended December 31, 1996. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10(u)(i)(a) - Correction to Loan Agreement dated as of August 12, 1996 between Registrant and Gabelli Funds, Inc. 10(x) - Letter Agreement dated March 25, 1997 between Bal/Rivgam L.L.C. and Lynch PCS Corporation G. 10(y)(i) - Promissory Notes of Registrant, dated March 17, 1997, in the aggregate amount of $10 million payable to Gabelli Funds, Inc. and Gabelli Securities, Inc. (which Notes have been paid off). 10(y)(ii) - Pledge and Security Interest Agreement, dated as of March 17, 1997 relating to the Promissory Notes. *10(z) - Principal Executive Bonus Plan 27 - Financial Data Schedule
(b) Reports on Form 8-K Registrant filed a Form 8-K, dated October 14, 1997 (Item 5. Other Information) with respect to a letter from Lynch Interactive Corporation to Hector Communications Corporation. SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LYNCH CORPORATION (Registrant) By: s/Robert E. Dolan Robert E. Dolan Chief Financial Officer EX-10 2 Correction to Loan Agreement ("Loan Agreement") dated as of August 12, 1996 by and between Lynch Corporation, as "Borrower" and Gabelli Funds, Inc., as "Lender" Whereas the Borrower and the Lender agree that the Section 2.01(d), as originally executed, was incorrect and desire to correct said provision; Now Therefore, the Borrower and Lender agree that Section 2.01(d) shall be corrected in its entirety to read as follows: "(d) Special Fee. If Borrower has not prepaid the Loan in full within five Business Days after the end of the F-Block Auction, Borrower shall pay Lender a special fee equal to 20.04008% of the Net Profits of PCSF's partnership interest in Bidder, from time to time as and when realized. Net Profits shall not include any amounts received by PCSF pursuant to the Bidder Loan Agreement and shall be net of any losses of PCSF under the Bidder Loan Agreement. For purposes of computing Net Profits, capital contributions by PCSF to Bidder shall be deemed to be loans to Bidder under the Bidder Loan Agreement and interest under the Bidder Loan Agreement shall include deemed commitment fees and interest on such capital contributions. Net Profits shall mean and shall be deemed to be realized at the time of (i) any profits received by PCSF from the sale, directly or indirectly, of all or a substantial portion of the assets of Bidder and the distribution of the proceeds to the partners (after payments of the principal and interest under the Bidder Loan Agreement), (ii) any payments or distributions by Bidder to Borrower or its Affiliates, including loans (other than principal, interest and other amounts as contemplated in the Bidder Loan Agreement and the Expenses Agreement referred to therein) including loans, (iii) the proceeds from any sale, directly or indirectly, including a merger or similar transaction, by Borrower of any of its partnership interest in Bidder, and/or (iv) the net proceeds from any sale of the stock of PCSF, whether by the existing stockholder or an Affiliate, to a person or entity that is not its Affiliate of PCSF. The term "Affiliate" shall have the meaning in Rule 12b-2 under the Securities Exchange Act of 1934, as amended. Any dispute under this Section 2(d), including without limitation the amount of profit, the value of any non-cash items or other matters, if the parties cannot otherwise agree, shall be submitted to binding arbitration under the rules of the American Arbitration Association." IN WITNESS WHEREOF, the Borrower and the Lender have executed this Correction effective as of August 12, 1996. LYNCH CORPORATION GABELLI FUNDS, INC. By: By: Robert E. Dolan Chief Financial Officer EX-10 3 Bal/Rivgam L.L.C. 19 Spectacle Lane Wilton, CT 06897 March 25, 1997 Lynch PCS Corporation G 8 Sound Shore Drive Greenwich, CT 06830 Gentlemen: This will confirm the agreement between Bal/Rivgam L.L.C. ("Bal/Rivgam") and Lynch PCS Corporation G ("LPCG") with respect to Bal/Rivgam's participation in the Federal Communications Commission ("FCC")'s auctions for licenses for wireless personal communications services ("WCS"). 1. LPCG Services. LPCG will provide certain services as follows: (i) LPCG will be responsible for submitting bids in the WCS auctions on behalf of Bal/Rivgam, subject to the control and as authorized by Bal/Rivgam; (ii) LPCG will be responsible, in consultation with Bal/Rivgam, for recommending certain strategies for any WCS licenses won; and (iii)LPCG will provide such other ancillary services as agreed to between LPCG and Bal/Rivgam. 2. Compensation. In return for LPCG's providing such services, Bal/Rivgam will (a) reimburse LPCG for all out-of-pocket expenses incurred by LPCG in connection with providing such services provided Bal/Rivgam is the winning bidder on any WCS Licenses; and (b) pay LPCG 5% of the Net Profits of Bal/Rivgam from time to time as and when realized. With respect to any capital contributions by Rivgam Communicators, L.L.C., ("Rivgam") or James Balitsos ("Balitsos"), or any Affiliate of Rivgam or Balitsos, to Bal/Rivgam up to an aggregate maximum of 25% of the cost (net of any bidding credits) of WCS Licenses won by Bal/Rivgam in the WCS auctions (the "Equity Investment"), there shall be deemed to be, for purposes of computing Net Profits, an interest expense equal to 20% plus the higher of the prime rate (as set forth in the Wall Street Journal) or 7% (reset annually on each April 4), compounded annually. Interest, commitment fees and other payments on loans by Rivgam to Bal/Rivgam (the "Rivgam Loan") pursuant to the Loan Agreement (the "Rivgam Loan Agreement") dated as of April 4, 1997, shall be deemed to be costs at the rates stated therein in computing Net Profits, but the special fee (the "Special Fee") provided for in Section 2.01(e) of the Rivgam Loan Agreement shall not be deemed to be a cost for purposes of computing Net Profits. Net Profits shall mean and shall be deemed to be realized at the time of (i) any profits received by Bal/Rivgam from the sale, directly or indirectly, of all or a substantial portion of the assets of Bal/Rivgam (assuming the payment of the principal and deemed interest expense on the Equity Investment), (ii) any payments or distributions by Bal/Rivgam, including loans, to the members of Bal/Rivgam or their Affiliates (other than payments of principal and deemed interest expense on the Equity Investment, payments (other than the Special Payment) pursuant to the Rivgam Loan Agreement and payments pursuant to the Expenses Agreement referred to in the Rivgam Loan Agreement), (iii) the proceeds from any sale, directly or indirectly, including a merger or similar transaction, by any members of Bal/Rivgam of any of their interest in Bal/Rivgam and/or (iv) the proceeds from any sale or transfer of any interest in any member of Bal/Rivgam, whether by an existing shareholder or an Affiliate, to a person that is not an Affiliate of Bal/Rivgam. The term "Affiliate" shall have the meaning in Rule 12b-2 under the Securities Exchange Act of 1934, as amended. Any recipient of any distributions or proceeds from sale shall be responsible, in addition to Bal/Rivgam, for the payment of any amounts due under clause (b) above. 3. Other. (a) The agreement shall be binding on any successors to LPCG, Bal/Rivgam and any members of Bal/Rivgam. (b) Bal/Rivgam shall not conduct any business other than WCS. (c) This Agreement shall be construed in accordance with the internal law of the State of Connecticut (without reference to choice of law provisions). (d) Any dispute hereunder shall be subject to arbitration in New York City or Stamford, Connecticut, in accordance with the rules of the American Arbitration Association. IN WITNESS WHEREOF, the parties have duly executed and delivered this Letter Agreement as of July 31, 1996. LYNCH PCS CORPORATION G BAL/RIVGAM L.L.C. By: Robert E. Dolan James Balitsos President Managing Director AGREED TO: RIVGAM COMMUNICATORS, INC. A member of Bal/Rivgam By: James Balitsos A member of Bal/Rivgam EX-10 4 PROMISSORY NOTE $5,000,000 March 17, 1997 FOR VALUE RECEIVED, LYNCH CORPORATION, an Indiana corporation ("Borrower"), promises to pay to Gabelli Funds, Inc. ("Lender") or order, by wire transfer sent to an account designated in writing to Borrower from time to time by the holder hereof (or in such other manner or at such other place as the holder hereof shall notify Borrower in writing), the principal amount of Five Million Dollars ($5,000,000), with interest from the date hereof on the unpaid principal balance hereunder at the rate of prime rate in effect from time to time as reported in the Wall Street Journal, payable at Maturity. The principal amount of this Note, and all accrued and unpaid interest thereon, shall be due and payable on the earlier (i) of May 19, 1997, or (ii) the date of closing of a loan to Lynch Michigan Telephone Holding Corporation for the permanent financing of the acquisition of Upper Peninsula Telephone Company (the "Maturity Date"). On the Maturity Date, Borrower shall also pay to Lender $50,000 as a commitment fee. Each payment under this Note shall first be credited against accrued and unpaid interest, and the remainder shall be credited against principal. This Note may be prepaid in whole or in part at any time, after five (5) Business Days written notice of Borrower's intention to make any such prepayment, which notice shall specify the date and amount of such prepayment. Partial payment hereunder shall be in an aggregate principal amount of Fifty Thousand Dollars ($50,000) or any integral multiple thereof. The written notice of Borrower to make a prepayment hereunder shall create an obligation of Borrower to pay the amount specified on the date specified in such notice. Any prepayment shall be without penalty except that interest shall be paid to the date of payment on the principal amount prepaid. Principal and interest shall be payable in lawful money of the United States of America. In no event shall such interest or other amounts be charged under this Note which would violate any applicable usury law. If any default occurs in any payment due under this Note, Borrower promises to pay all reasonable costs and expenses, including reasonable attorneys' fees and expenses, incurred by each holder hereof in collecting or attempting to collect the indebtedness under this Note, whether or not any action or proceeding is commenced, and hereby waives the right to plead any and all statutes of limitation as a defense to a demand hereunder to the full extent permitted by law. None of the provisions hereof and none of the holders' rights or remedies hereunder on account of any past or future defaults shall be deemed to have been waived by the holders' acceptance of any past due installments or by any indulgence granted by the holder to Borrower. Borrower waives presentment, demand, protest and notice thereof or of dishonor, and agree that they shall remain liable for all amounts due hereunder notwithstanding any extension of time or change in the terms of payment of this Note granted by any holder hereof, any change, alteration or release of any property now or hereafter securing the payment hereof or any delay or failure by the holder hereof to exercise any rights under this Note or the Loan Agreement. All amounts payable by Borrower pursuant to this Note shall be secured by a security interest in certain assets as provided for in the Pledge and Security Agreement. This Note shall be governed by, and construed in accordance with, the laws of the State of New York without giving effect to its choice of law doctrine. IN WITNESS WHEREOF, Borrower has caused this Note to be duly executed the day and year first above written. LYNCH CORPORATION By: Name: Robert E. Dolan Title: Chief Financial Officer PROMISSORY NOTE $5,000,000 March 17, 1997 FOR VALUE RECEIVED, LYNCH CORPORATION, an Indiana corporation ("Borrower"), promises to pay to Gabelli Securities, Inc. ("Lender") or order, by wire transfer sent to an account designated in writing to Borrower from time to time by the holder hereof (or in such other manner or at such other place as the holder hereof shall notify Borrower in writing), the principal amount of Five Million Dollars ($5,000,000), with interest from the date hereof on the unpaid principal balance hereunder at the rate of prime rate in effect from time to time as reported in the Wall Street Journal, payable at Maturity. The principal amount of this Note, and all accrued and unpaid interest thereon, shall be due and payable on the earlier (i) of May 19, 1997, or (ii) the date of closing of a loan to Lynch Michigan Telephone Holding Corporation for the permanent financing of the acquisition of Upper Peninsula Telephone Company (the "Maturity Date"). On the Maturity Date, Borrower shall also pay to Lender $50,000 as a commitment fee. Each payment under this Note shall first be credited against accrued and unpaid interest, and the remainder shall be credited against principal. This Note may be prepaid in whole or in part at any time, after five (5) Business Days written notice of Borrower's intention to make any such prepayment, which notice shall specify the date and amount of such prepayment. Partial payment hereunder shall be in an aggregate principal amount of Fifty Thousand Dollars ($50,000) or any integral multiple thereof. The written notice of Borrower to make a prepayment hereunder shall create an obligation of Borrower to pay the amount specified on the date specified in such notice. Any prepayment shall be without penalty except that interest shall be paid to the date of payment on the principal amount prepaid. Principal and interest shall be payable in lawful money of the United States of America. In no event shall such interest or other amounts be charged under this Note which would violate any applicable usury law. If any default occurs in any payment due under this Note, Borrower promises to pay all reasonable costs and expenses, including reasonable attorneys' fees and expenses, incurred by each holder hereof in collecting or attempting to collect the indebtedness under this Note, whether or not any action or proceeding is commenced, and hereby waives the right to plead any and all statutes of limitation as a defense to a demand hereunder to the full extent permitted by law. None of the provisions hereof and none of the holders' rights or remedies hereunder on account of any past or future defaults shall be deemed to have been waived by the holders' acceptance of any past due installments or by any indulgence granted by the holder to Borrower. Borrower waives presentment, demand, protest and notice thereof or of dishonor, and agree that they shall remain liable for all amounts due hereunder notwithstanding any extension of time or change in the terms of payment of this Note granted by any holder hereof, any change, alteration or release of any property now or hereafter securing the payment hereof or any delay or failure by the holder hereof to exercise any rights under this Note or the Loan Agreement. All amounts payable by Borrower pursuant to this Note shall be secured by a security interest in certain assets as provided for in the Pledge and Security Agreement. This Note shall be governed by, and construed in accordance with, the laws of the State of New York without giving effect to its choice of law doctrine. IN WITNESS WHEREOF, Borrower has caused this Note to be duly executed the day and year first above written. LYNCH CORPORATION By: Name: Robert E. Dolan Title: Chief Financial Officer EX-10 5 PLEDGE AND SECURITY INTEREST AGREEMENT PLEDGE AND SECURITY INTEREST AGREEMENT ("Agreement") dated as of the 17th day of March, 1997, by and between Gabelli Funds, Inc., a New York corporation, and Gabelli Securities, Inc., a New York corporation (collectively "Lenders"), and Lynch Corporation, an Indiana corporation ("LC"), and Lynch Michigan Telephone Holding Corporation ("LMT"). WITNESSETH WHEREAS, LC owns all of the issued and outstanding shares of stock of Lynch Entertainment Corporation ("LEC") and Lynch Entertainment Corporation II ("LEC II"), which stock has been pledged to Gabelli Funds, Inc. pursuant to a Pledge and Security Interest Agreement dated as of August 12, 1997, and LMT owns 5,123 shares of Common Stock of Upper Peninsula Telephone Company ("UPTC") and expects to acquire the remaining outstanding shares of UPTC shortly, (all such shares, plus any additional shares of UPTC, which LMT may acquire, being referred to herein as the "Shares"). WHEREAS, to induce Lenders to make loans aggregating $10,000,000 (the "Loans") to LC pursuant to Promissory Notes dated March 17, 1997 (the "Promissory Notes"), LC and LMT have agreed to pledge the Shares to Lenders, all as security for the repayment of all amounts due to Lenders under the Promissory Notes. NOW THEREFORE, in consideration of the promises and the mutual representations, warranties and covenants herein contained, the parties hereto agree as follows: 1. PLEDGE AND SECURITY INTEREST. A. In consideration of the Loans from the Lenders to LC and other good and valuable consideration accruing to each of the parties pledging or granting a security interest hereunder, each of LC and LMT, as to the collateral owned by it, hereby grants a security interest to Lenders in the Shares, as collateral, together with stock powers duly endorsed in blank. The Lenders shall hold the Shares, as security for the payment of all amounts due under the Promissory Notes, and shall not register the Shares in any other name, encumber, give up possession or control of, assign, transfer, dispose of or take any other action with respect to the Shares, except in accordance with the provisions of Section 5 of this Agreement. B. If any person, entity or agency should claim that any pledge, or grant of a security interest, under this Agreement (i) would violate any law or require the consent (which is not received) of any governmental agency, (ii) would violate any provision, including any restriction on transfer or similar provisions, or cause a default under, any existing agreement to which the parties hereto or any of their subsidiaries or any entities in which the parties hereto or their subsidiaries have an interest are parties or by which any of their assets are bound or (iii) would give any other person, entity or agency a right to acquire under an existing agreement any assets owned by the parties hereto, their subsidiaries or any entities which the parties hereto or their subsidiaries have an interest in, LC shall use its best efforts (a) to determine the validity of such claim and, if it believes the claim might be valid, (b) to remedy or seek a waiver or other relief with respect thereto; provided, however, that if the claim is legally valid, the pledge or grant of the security interest under this Agreement shall be deemed void ab initio and not to have been made, but only to the extent necessary to make the claim not legally valid, and Lenders will confirm that it has no pledge or security interest to such extent. If any pledge or grant of securities shall be deemed void and not to have been made under this Section 1, LC shall use its best efforts to grant or cause to be granted to Lenders pledges or securities interests in other assets to collateralize appropriately the Loans. 2. DISTRIBUTIONS. During the term of this pledge and security interest, and so long as LC is not in default under the Promissory Notes, all cash dividends, interest, distributions and other cash amounts received by LC or LMT as a result of their respective record ownership of the Shares, shall belong to LC or LMT, as the case may be. 3. VOTING RIGHTS. During the term of this pledge and security interest, and so long as LC is not in default under the Promissory Notes, LC and LMT shall have the right to vote the Shares (including the giving of written consents) on all corporate questions or actions requiring shareholder approval; provided that (A) LC and LMT shall not, without the prior written consent of Lenders, vote the Shares (i) in a manner which would cause LC to be in breach of the terms of this Agreement or the Promissory Notes, or (ii) in favor of any amendment to the Certificates of Incorporation of UPTC, LEC or LEC II, the liquidation or dissolution of UPTC, LEC or LEC II, any merger, consolidation or reorganization of UPTC, LEC or LEC II, or any sale of substantially all of the assets of UPTC, LEC or LEC II, except that UPTC may enter into a Plan of Share Exchange substantially in the form attached as Exhibit A hereto. In addition, LC and LMT agree that they will cause UPTC, LEC and LEC II not, without the prior written consent of Lenders, to vote to issue any additional shares or equity securities or rights to acquire shares or equity securities, or redeem any of its outstanding equity securities. 4. ADJUSTMENTS. In the event that, during the term of this pledge and security interest, any stock dividend, reclassification, readjustment, or other change is declared or made in the capital structure of UPTC, LEC or LEC II, all new, substituted, or additional shares, or other securities, issued in respect of the Shares by reason of any such change shall be delivered to Lenders by LC or LMT and held by the Lenders under the terms of this Agreement in the same manner as the Shares. 5. DEFAULT. In the event that LC defaults in the performance of any of its obligations under either of the Promissory Notes, and such default is not cured within twenty (20) business days after receipt by LC of a written notice advising of same, the Lenders shall have the rights and remedies available to the Lenders as secured lenders under the Promissory Notes, this Agreement and applicable law. 6. TERMINATION. The security interest granted under this Agreement in the Shares shall terminate upon the full payment by LC of all of its obligations under both of the Promissory Notes, and the Lenders shall immediately redeliver the Shares to LC or LMT, as the case may be. 7. CERTIFICATES. The Certificate for the Shares shall bear a legend as follows: "This Certificate has been delivered to, and is being held by, Gabelli Funds, Inc., a New York corporation, and Gabelli Securities, Inc., a New York corporation (collectively the "Lenders") as security for loans, pursuant to, and subject to the terms of, a Pledge and Security Interest Agreement dated as of March 18, 1997 between Lenders, Lynch Corporation, an Indiana corporation, and Lynch Michigan Telephone Holding Corporation, a Michigan corporation." 8. NOTICES. All notice, requests, demands or other communication hereunder shall be in writing, and shall be delivered to the parties at the addresses set forth below (or to such other person or entity or address as either party may specify by due notice to the other party) and shall be deemed to have been duly given if delivered or mailed, first class postage prepaid: (a) If to Lenders: Gabelli Funds, Inc. Gabelli Securities, Inc. 555 Theodore Fremd Avenue Suite C-300 Rye, NY 10580-1430 Attn: Copy to: General Counsel at the same address (b) If to LC or LMT: c/o Lynch Corporation 8 Sound Shore Drive, Suite 290 Greenwich, CT 06830 Attn: Robert E. Dolan Copy to: General Counsel at the same address 9. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, including without limitation Article 9 of the New York Uniform Commercial Code. IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the day and year hereinabove set forth. ATTEST: GABELLI FUNDS, INC. By: ATTEST: GABELLI SECURITIES, INC. By: ATTEST: LYNCH CORPORATION By: Robert A. Hurwich Robert E. Dolan Secretary Chief Financial Officer ATTEST: LYNCH MICHIGAN TELEPHONE HOLDING CORPORATION By: Robert E. Dolan President EX-10 6 LYNCH CORPORATION PRINCIPAL EXECUTIVE BONUS PLAN The purpose of this Plan is to provide the Chief Executive Officer of the Lynch Corporation (the "Company") and certain other designated key employees with an Annual Bonus (as defined below) that qualifies as performance-based compensation under Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code") or any successor section and the Treasury regulations promulgated thereunder ("Section 162(m) of the Code"). Under the Plan, the Chief Executive Officer and designated key employees of the Company may participate in the Annual Bonus Pool (as defined below) if certain preestablished performance goals are attained. This Plan is effective as of January 1, 1997, subject to approval by the shareholders of the Company in accordance with the laws of the State of Indiana. i. Definitions. The following terms, as used herein, shall have the following meanings: (i) "Annual Bonus" shall mean, with respect to each Participant, the product of the Participant's Individual Bonus Pool Percentage and the achieved Annual Bonus Pool for any Plan Year. (ii) "Annual Bonus Pool" shall mean, with respect to each Plan Year, that amount determined pursuant to an objective formula or standard that is based on the attainment of preestablished performance goals specified by the Committee in accordance with Section 4 hereof. (iii) "Board" shall mean the Board of Directors of the Company. (iv) "Committee" shall mean the Executive Compensation and Benefits Committee of the Board, or such other committee of the Board comprised solely of two (2) or more members who qualify as "outside directors" within the meaning of Section 162(m) of the Code. (v) "Individual Bonus Pool Percentage" shall mean, with respect to each Participant, that percentage of the achieved Annual Bonus Pool, as specified by the Committee in accordance with Section 4(b) hereof, used to determine the Participant's Annual Bonus for any Plan Year. (v) "Participant" shall mean the Chief Executive Officer of the Company and any other key employee of the Company (including subsidiaries) selected, in accordance with Section 3 hereof, to participate in the Plan. (vi) "Plan Year" shall mean each calendar year during which the Plan is in effect. (vi) "Pre-Tax Profits" shall mean the Company's income before income taxes, (excluding any provision for annual bonuses under the Plan and under the Bonus Plan applicable to other corporate employees), minority interest (if any), extraordinary items (if any), cumulative changes in accounting (if any) and discontinued operations (if any) contained in the Statement of Consolidated Income in the Company's annual financial statements adjusted by (i) the minority interest effects on such pre-tax profits, and (ii) the pre-tax effect of income or loss associated with discontinued operation net of minority interest effects. (vi) "Shareholders Equity" shall mean (i) with respect to the 1997 Plan Year, shareholders equity at the beginning of the Plan Year, (ii) with respect to the 1998 Plan Year, the average of shareholders equity at the beginning of the 1998 Plan Year and the beginning of the 1997 Plan Year and (iii) with respect to the 1999 and subsequent Plan Years, the average of shareholders equity at the beginning of the Plan Year and at the beginning of the two preceding Plan Years, in each case as reported in the Company's consolidated balance sheet in its annual financial statements. ii. Administration of the Plan. The Plan shall be administered by the Committee. The Committee shall have exclusive and final authority in all determinations and decisions affecting the Plan and each Participant. The Committee shall also have the sole authority to interpret the Plan, to designate eligible Participants in the Plan (other than the Chief Executive Officer of the Company), to establish and revise rules and regulations relating to the Plan, to delegate such responsibilities or duties as it deems desirable, and to make any other determination that it believes necessary or advisable for the administration of the Plan including, but not limited to: (i) setting the performance criteria and the Individual Bonus Pool Percentages within the Plan guidelines, and (ii) certifying attainment of performance goals and other material terms. The Committee shall have the authority in its sole discretion, subject to and not inconsistent with the express provisions of the Plan, to incorporate provisions in the performance goals allowing for adjustments in recognition of unusual or non-recurring events affecting the Company or the financial statements of the Company, or in response to changes in applicable laws, regulations, or accounting principles; provided, that the Committee shall have such authority solely to the extent permitted by Section 162(m) of the Code. To the extent any provision of the Plan creates impermissible discretion under Section 162(m) of the Code or would otherwise violate Section 162(m) of the Code, such provision shall have no force or effect. iii. Eligibility and Participation. (i) For each Plan Year, the Committee, in its sole discretion, may select the employees of the Company (other than the Chief Executive Officer of the Company) who are to participate in the Plan from among the key employees of the Company. (ii) No person (except the Chief Executive Officer of the Company) shall be entitled to an Annual Bonus under this Plan for any Plan Year unless he or she is so designated as a Participant for that Plan Year. The Committee may add or delete individuals from the list of designated Participants at any time and from time to time, in its sole discretion, subject to any limitations required to comply with Section 162(m) of the Code. iv. Payment. (i) With respect to each Participant, payment under the Plan will be made in cash in an amount equal to the achieved Annual Bonus, as determined by the Committee in its sole discretion for each Plan Year. Payment with respect to a Plan Year shall be made only if and to the extent the applicable performance goals upon which the Annual Bonus Pool is based are attained. Notwithstanding anything else herein, the Committee may, in its sole discretion, elect to pay any Participant an amount that is less than (but in no event more than) his or her Annual Bonus regardless of the degree of attainment of the performance goals with respect to the Annual Bonus Pool. (ii) Not later than ninety (90) days after the commencement of each Plan Year (or, in the event the period of service to which the performance goal relates is shorter than a Plan Year, during such time period required by Section 162(m) of the Code), the Committee shall establish in writing all performance goals with respect to the Annual Bonus Pool and the Individual Bonus Pool Percentages for each Participant for such Plan Year. At the time the performance goals are established, the Committee shall prescribe an objective formula or standard to determine the amount of the Annual Bonus Pool which may be payable based upon the degree of attainment of the performance goals during the Plan Year. In no event may the total of the Individual Bonus Pool Percentages for all Participants exceed one hundred percent (100%) of the Annual Bonus Pool for any Plan Year. (iii) The performance goals with respect to the Annual Bonus Pool shall be based on the attainment of certain target levels of, or a percentage increase in, Pre-Tax Profits in excess of certain target levels or percentages of Shareholders Equity. Notwithstanding the preceding sentence, in no event shall any Participant's Annual Bonus for any Plan Year exceed: (i) in the case of the Chief Executive Officer of the Company, eighty percent (80%) of an amount equal to twenty percent (20%) of the excess of (a) Pre-Tax Profits for such Plan Year less (b) twenty-five percent (25%) of Shareholders Equity; or (ii) in the case of any Participant other than the Chief Executive Officer, twenty percent (20%) of an amount equal to twenty percent (20%) of the excess of (a) Pre-Tax Profits for such Plan Year less (b) twenty- five percent (25%) of Shareholders Equity (the "Maximum Annual Bonus"). Subject to Section 2 of the Plan regarding certain adjustments, in connection with the establishment of the performance goals, the performance criteria listed above for the Company shall be determined in accordance with generally accepted accounting principles consistently applied by the Company, but before consideration of payments to be made pursuant to this Plan. (iv) Unless otherwise determined by the Committee in its sole discretion, each Participant shall, to the extent the applicable performance goals with respect to the Annual Bonus Pool are attained at the end of a Plan Year, have the right to receive payment of a prorated portion of such Participant's Annual Bonus under the Plan for any Plan Year during which the Participant's employment with the Company is terminated for any reason other than for "cause" (as determined by the Committee in its sole discretion). v. Time of Payment. Subject to Section 4 hereof, each Participant's Annual Bonus under this Plan will be paid within a reasonable period after performance goal achievements for the Plan Year have been finalized, reviewed, approved, and certified in writing by the Committee. vi. Miscellaneous Provisions. (i) Each Participant's rights and interests under the Plan may not be sold, assigned, transferred, pledged or alienated. (ii) In the case of any Participant's death, payment, if any, under the Plan shall be made to his designated beneficiary, or in the event no beneficiary is designated or surviving, to the Participant's estate. (iii) Neither this Plan nor any action taken hereunder shall be construed as giving any Participant the right to continue his employment with of the Company. (iv) The Company shall have the right to make such provisions as it deems necessary or appropriate to satisfy any obligations it may have to withhold federal, state or local income or other taxes incurred by reason of payments made pursuant to the Plan. (v) The Plan and any amendments thereto shall be construed, administered and governed in all respects in accordance with the laws of the State of Indiana (regardless of the law that might otherwise govern under applicable principles of conflicts of law). (vi) The Plan is designed and intended to comply with Section 162(m) of the Code with regard to awards made to each Participant and all provisions hereof shall be limited, construed and interpreted in a manner to so comply. (vii) The Board or the Committee may at any time and from time to time alter, amend, suspend or terminate the Plan in whole or in part; provided, that no amendment shall, without the prior approval of the shareholders of the Company in accordance with the laws of the State of Indiana to the extent required under Code Section 162(m): (i) materially alter the performance goals as set forth in Section 4(c) hereof, (ii) increase the Maximum Annual Bonus for any Plan Year, (iii) change the class of employees eligible to participate in this Plan, or (iv) implement any change to a provision of the Plan requiring shareholder approval in order for the Plan to continue to comply with the requirements of Code Section 162(m). Notwithstanding the foregoing, no amendment shall affect adversely any of the rights of any Participant, without such Participant's consent, under the award theretofore granted under the Plan. EX-27 7
5 This schedule contains summary financial information extracted from Condensed Consolidated Statements of Operations and Condensed Consolidated Balance Sheets and is qualified in its entirety by reference to such Form 10-Q. 0000061004 LYNCH CORPORATION 9-MOS DEC-31-1997 SEP-30-1997 25,556 2,919 57,572 1,624 36,643 139,491 213,670 58,012 408,988 91,317 244,952 0 0 5,139 30,822 408,988 348,922 348,922 298,231 330,283 0 7,024 17,178 (3,892) (1,139) (3,536) 0 0 0 (3,536) (2.50) (2.50)
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