SECURITIES & EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1997 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File No. 1-106 LYNCH CORPORATION (Exact name of Registrant as specified in its charter) Indiana 38-1799862 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 8 Sound Shore, Drive, Suite 290, Greenwich, Connecticut 06830 (Address of principal executive offices) (Zip Code) (203) 629-3333 Registrant's telephone number, including area code Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (20 has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the Registrant's classes of Common Stock, as of the latest practical date. Class Outstanding at May 1, 1997 Common Stock, no par value 1,416,834 INDEX LYNCH CORPORATION AND SUBSIDIARIES PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed Consolidated Statements of Operations: - Three months ended March 31, 1997 and 1996 Condensed Consolidated Balance Sheet: - March 31, 1997 - December 31, 1996 (Audited) Condensed Consolidated Statements of Cash Flows: - Three months ended March 31, 1997 and 1996 Notes to Consolidated Financial Statements: Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PART II. OTHER INFORMATION Item 1. Legal Proceedings Item 2. Changes in Securities Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K SIGNATURES Part 1- FINANCIAL INFORMATION Item 1- Financial Statements LYNCH CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) (In thousands, except share amounts) Three Months Ended March 31 1997 1996 SALES AND REVENUES Multimedia $ 10,067 $ 6,715 Services 33,633 30,506 Manufacturing 65,079 72,254 108,779 109,475 Costs and Expenses: Multimedia 7,807 4,610 Services 30,969 28,561 Manufacturing 55,442 60,147 Selling and administrative 10,325 10,220 OPERATING PROFIT 4,236 5,937 Other Income (Expense): Investment Income 433 433 Interest Expense (5,469) (3,944) Share of Operations of Affiliated Companies 14 19 Gain on Sale of Subsidiary Stock 0 44 (5,022) (3,448) INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND MINORITY INTERESTS (786) 2,489 Provision for Income Taxes 315 (977) Minority Interests (41) (288) INCOME (LOSS) FROM CONTINUING OPERATIONS $ (512) $ 1,224 DISCONTINUED OPERATIONS: LOSS FROM OPERATIONS OF DISCONTINUED LYNCH TRI-CAN INTERNATIONAL 0 (23) NET INCOME (LOSS) $ (512) $ 1,201 Weighted Average Shares Outstanding 1,413,000 1,397,000 INCOME PER COMMON SHARE: INCOME (LOSS) FROM CONTINUING OPERATIONS (0.36) 0.88 LOSS FROM DISCONTINUED OPERATIONS 0.00 (0.02) NET INCOME (LOSS) (.36) 0.86 LYNCH CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (In thousands) March 31, December 31, 1997 1996 (Unaudited) (A) ASSETS CURRENT ASSETS: Cash and Cash Equivalents $ 27,685 $ 33,946 Marketable Securities and Short-Term Investments 1,666 2,156 Receivables, less Allowances of $1501 and $1525 51,965 52,963 Inventories 35,937 36,859 Deferred Income Tax Benefits 5,571 5,571 Other Current Assets 9,492 8,598 Total Current Assets 132,316 140,093 PROPERTY, PLANT AND EQUIPMENT: Land 1,472 1,367 Buildings and Improvements 23,485 21,334 Machinery and Equipment 180,054 157,025 205,011 179,726 Less Accumulated Depreciation 50,396 46,707 Net Property, Plant and Equipment 154,615 133,019 INVESTMENTS IN AND ADVANCES TO PCS ENTITIES 28,606 34,116 INVESTMENTS IN AND ADVANCES TO AFFILIATED COMPANIES 1,293 2,529 EXCESS OF COSTS OVER FAIR VALUE OF NET ASSETS ACQUIRED 72,821 69,206 OTHER ASSETS 22,675 13,657 Total Assets $412,326 $392,620 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Notes Payable to Banks $ 18,273 $ 17,419 Trade Accounts Payable 19,476 20,998 Accrued Liabilities 38,365 36,275 Current Maturities of Long-Term Debt 20,913 23,769 Total Current Liabilities 97,027 98,461 LONG-TERM DEBT 232,355 219,579 DEFERRED INCOME TAXES 24,945 22,389 MINORITY INTERESTS 18,931 13,268 SHAREHOLDERS' EQUITY COMMON STOCK, NO PAR VALUE-10,000,000 SHARES AUTHORIZED; 1,471,191 shares issued (at stated value) 5,139 5,139 ADDITIONAL PAID - IN CAPITAL 8,718 8,417 RETAINED EARNINGS 25,960 26,472 TREASURY STOCK OF 54,357 & 80,157 SHARES, AT COST (749) (1,105) Total Shareholders' Equity 39,068 38,923 Total Liabilities and Shareholders' Equity $412,326 $392,620 (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. LYNCH CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (In thousands) Three Months Ended March 31 1997 1996 OPERATING ACTIVITIES Net Income (Loss) $ (512) $ 1,201 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,826 3,931 Net effect of purchases and sales of trading securities 490 5,023 Share of operations of affiliated companies (14) (19) Minority interests 41 288 Changes in operating assets and liabilities: Receivables 998 (653) Inventories 922 (676) Accounts payable and accrued liabilities (663) 4,174 Other (1,153) (2,008) NET CASH FROM OPERATING ACTIVITIES 4,935 11,261 INVESTING ACTIVITIES Capital Expenditures (3,315) (3,906) Investment in Coronet Communications Company 2,995 0 Investment in Upper Peninsula Telephone Company (15,474) 0 Investment in Personal Communications Services Partnerships 4,989 0 Other 7 (327) NET CASH USED IN INVESTING ACTIVITIES (10,798) (4,233) FINANCING ACTIVITIES Repayments of debt, net (1,017) (741) Treasury stock transactions 657 723 Minority interest transactions (38) 273 NET CASH FROM (USED IN)FINANCING ACTIVITIES (398) 255 Net increase (decrease)in cash and cash equivalents (6,261) 7,283 Cash and cash equivalents at beginning of period 33,946 15,921 CASH AND CASH EQUIVALENTS AT END OF PERIOD 27,685 23,204 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. Lynch Telephone Corporation VI 98.0% J.B.N. Telephone Company, Inc. 98.0% J.B.N. Finance Corporation 98.0% Giant Communications, Inc. Lynch Telephone Corporation VII 100.0% USTC Kansas, Inc. 100.0% Haviland Telephone Company, Inc. 100.0% Haviland Finance Corporation 100.0% Lynch Telephone Corporation VIII 100.0% Dunkirk & Fredonia Telephone Company 100.0% Cassadaga Telephone Company 100.0% Macom, Inc. 100.0% Comantel, Inc. 100.0% D&F Cellular Telephone, Inc. 100.0% Erie Shore Communications, Inc. 100.0% LMT Holding Corporations 100.0% Lynch Michigan Telephone Holding Corp. 100.0% LMT Acquisition Co., Inc. 100.0% Upper Peninsula Telephone Company 60.53% Alpha Enterprises Limited 60.53% Upper Peninsula Cellular North, Inc. 60.53% Upper Peninsula Cellular South, Inc. 60.53% Global Television, Inc. 100.0% Inter-Community Acquisition Corporation 83.0% Home Transport Services, Inc. 100.0% Lynch Capital Corporation 100.0% Lynch Entertainment Corporation 100.0% Lynch Entertainment Corporation II 100.0% Lynch International Exports, Inc. 100.0% Lynch Manufacturing Corporation 100.0% Lynch Machinery, Inc. 90.0% M-tron Industries, Inc. 94.0% M-tron Industries, Ltd 94.0% Spinnaker Industries, Inc. 73.4% Entoleter, Inc. 73.4% Brown-Bridge Industries, Inc. 73.4% Central Products Company 73.4% Lynch Multimedia Corporation 100.0% CLR Video, L.L.C. 60.0% The Morgan Group, Inc. 66.24%(V)/50.95%(O) Morgan Drive Away, Inc. 66.24%(V)/50.95%(O) Transport Services Unlimited, Inc. 66.24%(V)/50.95%(O) Interstate Indemnity Company 66.24%(V)/50.95%(O) Morgan Finance, Inc. 66.24%(V)/50.95%(O) TDI, Inc. 66.24%(V)/50.95%(O) Home Transport Corporation 66.24%(V)/50.95%(O) MDA Corporation Lynch PCS Communications Corporation 100.0% Lynch PCS Corporation A 100.0% Lynch PCS Corporation G 100.0% Lynch Interactive Corporation 100.0% Lynch Telecommunications Corporation 100.0% Lynch Telephone Corporation 80.1% Western New Mexico Telephone Co., Inc. 80.1% WNM Communications Corporation 80.1% Wescel Cellular, Inc. 80.1% Wescel Cellular of New Mexico Limited Partnership 40.9% Wescel Cellular, Inc. II 80.1% Northwest New Mexico Cellular, Inc. 40.1% Northwest New Mexico Cellular of New Mexico Limited Partnership 20.5% Enchantment Cable Corporation 80.1% Lynch Telephone Corporation II 83.0% Inter-community Telephone Company 83.0% Inter-community Telephone Company II 83.0% Lynch Telephone Corporation III 81.0% Cuba City Telephone Exchange Company 81.0% Belmont Telephone Company 81.0% Lafayette County Satellite TV, Inc. 81.0% Notes: (V)=Percentage voting control; (O)=Percentage of equity ownership B. Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of the management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 1997 are not necessarily indicative of the results that may be expected for the year ended December 31, 1997. For further information, refer to the consolidated financial statements and footnotes thereto included in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996. C. Acquisitions On March 18, 1997, Lynch Michigan Telephone Holding Company, a wholly-owned subsidiary of the Registrant, acquired approximately 60% of the outstanding shares of Upper Peninsula Telephone Company for $15.2 million. The Registrant expects to complete the acquisition of the remaining 40% of the stock of Upper Peninsula by the end of the second quarter of 1997. As a result of this transaction, the Registrant recorded approximately $4.4 million in goodwill which is being amortized over 25 years. On December 30, 1996, The Morgan Group, Inc., an approximately 51% owned subsidiary of the Registrant, acquired the operating assets of Transit Homes of America, Inc., a provider of transportation services to a number of producers in the manufactured housing industry. The purchase price was approximately $4.4 million, including assumed obligations. On November 26, 1996, Lynch Telephone Corporation VIII, a wholly-owned subsidiary of the Registrant, acquired all of the outstanding shares of Dunkirk & Fredonia Telephone Company, a local exchange company serving portions of Western New York. The total cost of this transaction was $27.7 million. As a result of this transaction, the Registrant recorded $13.8 million in goodwill which is being amortized over 25 years. All of these acquisitions were accounted for as purchases, and, accordingly, the assets and liabilities were recorded at their estimated fair market value. The operating results of the acquired companies are included in the Consolidated Statement of Income from their respective acquisition dates. The following unaudited proforma information shows the results of the Registrant's operations as though the purchase of Upper Peninsula Telephone Company, Transit Homes and Dunkirk & Fredonia were made at the beginning of 1996. Three Months Ended March 31 1997 1996 (In thousands, except per share data) Sales and Revenues $111,035 $120,370 Operating Profit 5,187 12,102 Income from Continuing Operations Before Income Taxes and Minority Interest (279) 7,608 Net Income (326) 4,515 Net Income Per Share $(0.23) $3.23 The 1996 proforma results reflect the sale of Dunkirk & Fredonia's cellular telephone interests which resulted in a pre-tax gain of $5.1 million, or $3.65 per share, included in operating profit. The after-tax gain on the sale of the cellular interests was $3.4 million, or $2.43 per share. D. Discontinued Operations During the second quarter of 1996, the Registrant decided to discontinue the operations of Tri-Can International, Ltd. ("Tri-Can") and sell the assets of that operation. The sale was completed in August 1996. Tri-Can, a manufacturer of packaging machinery, recorded sales of $1.5 million for the three months ended March 31, 1996. The assets sold primarily consisted of inventory fixed assets, inventory and intangibles. Accordingly, during the first quarter of 1996, results of Tri-Can are presented as "discontinued operations." E. Inventories Inventories are stated at the lower of cost or market value. At March 31, 1997, inventories were valued by three methods: last-in, first-out (LIFO) - 57%, specific identification - 39%, and first-in, first-out (FIFO) - 4%. At December 31, 1996, the respective percentages were 53%, 42%, and 5%. In Thousands 3-31-97 12-31-96 Raw material and supplies $14,958 $10,987 Work in process 3,579 3,950 Finished good 17,400 21,922 Total Inventories $35,937 $36,859 F. Indebtedness On a consolidated basis, at March 31, 1997, the Registrant maintains short-term and long-term lines of credit facilities totaling $85.4 million, of which $48.0 million was available. The Registrant maintains a $12.0 million short-term line of credit facility, of which $0.1 million was available at March 31, 1997. This facility will expire on April 15, 1998. Spinnaker Industries, Inc. maintains lines of credit at its subsidiaries which total $40.0 million, of which $39.8 million was available at March 31, 1997. The Morgan Group maintains lines of credit totaling $10.4 million, $0.9 million was available at March 31, 1997. These facilities, as well as facilities at other subsidiaries of the Registrant, generally limit the credit available under the lines of credit to certain variables, such as inventories and receivables, which are secured by the operating assets of the subsidiary, and include various financial covenants. At March 31, 1997, $33.0 million of these total facilities expire within one year. In general, the long-term debt credit facilities are secured by property, plant and equipment, inventory, receivables and common stock of certain subsidiaries and contain certain covenants restricting distributions to the Registrant. On October 23, 1996, Spinnaker Industries completed the issuance of $115,000,000 of 10-3/4% senior secured debt due 2006. The debt proceeds were used to extinguish substantially all existing bank debt, bridge loans, and lines of credit at Spinnaker and its two major operating subsidiaries, Central Products and Brown-Bridge. In addition, Spinnaker established a $40 million asset-backed senior-secured revolving credit facility. 3-31-97 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% (6.1% weighted average) 47,343 34,734 Bank credit facilities utilized by certain telephone and telephone holding companies through 2008, $37.0 million at a fixed interest rate averaging 9.1% and $3.8 million at variable interest rates averaging 8.4% 40,799 41,513 Unsecured notes issued in connection with telephone company acquisitions; $28.0 million at fixed interest averaging 9% and $1.7 million at a variable rate of 8.0% 29,763 29,783 Gabelli Funds, Inc. and affiliates loans: at fixed rates of 10% due in 1997 1,800 11,800 at prime rate (8.5%) due in 1997 10,000 -- Other 8,563 10,518 253,268 243,348 Current Maturities (20,913) (23,769) $232,355 $219,579 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Sales and Revenues Revenues for the first quarter 1997 decreased by $0.7 million, or 1%, from the first quarter of 1996. Within the operating segments, the multimedia and services revenues increased by 50% and 10%, respectively, but the revenues of the manufacturing segment decreased by 10%. The acquisition of Dunkirk & Fredonia Telephone Company, which occurred on November 26, 1996, was the primary contributor to the increase in multimedia's operating revenues. Revenues of $4.8 million as a result of the acquisition of Transit Homes of America, Inc., which occurred on December 30, 1996, offset by lower driver outsourcing and "Truckaway" revenues, was the primary contributor to the increased revenues at services. Within the manufacturing group, all companies reported lower revenues than the first quarter of the prior year. Revenues for Spinnaker declined by $4.9 million from the first quarter of the previous year due to an uneven pattern of orders for pressure sensitive stamps at Brown-Bridge Industries, Inc. At Central Products Company, competitive pricing pressure offset high unit demand and capacity limitations and also resulted in lower revenues. Timing of orders for glass presses resulted in a $1.8 million short-fall in revenues at Lynch Machinery, Inc. and an overall industry softness for electronic components requirements resulted in lower revenues of $0.5 million at M-tron. Operating Profit Operating profit for the first quarter of 1997 declined by $1.7 million from the first quarter of 1996. Operating profit in the multimedia and services segments increased by $0.1 million and $0.5 million, respectively, while manufacturing operating profits fell by $2.2 million. In the multimedia segment, higher revenues offset by increased depreciation and amortization expense, in part, associated with the acquisition of Dunkirk & Fredonia Telephone Company, resulted in essentially flat operating profit. Increased revenues resulted in the increased operating profit at Morgan. The decline in the operating profit at the manufacturing group related to lower volume and, in the case of Central Products, higher volume at lower prices, coupled with unfavorable manufacturing variances. Other Income (Expense), Net Investment income in the first quarter of 1997 was the same as the first quarter of 1996. Interest expense increased by $1.5 million to $5.5 million in the first quarter of 1997 from $3.9 in the first quarter of 1996. The increase was a result of an increase in interest payments and amortization of deferred financing costs of $1.0 million at Spinnaker Industries, Inc., as a result of the issuance of $115 million of senior secured notes on October 23, 1996, and interest expenses of $0.5 million associated with the acquisition of Dunkirk & Fredonia Telephone Company. As described in Footnote F of the Notes to Consolidated Financial Statement, Spinnaker Industries completed the issuance of new debt to be used primarily to extinguish previously existing credit facilities. These amounts were offset by $0.5 million of capitalized interest associated with the development of the PCS licenses. Tax Provision The income tax provision (benefit) includes federal, as well as state and local taxes. The tax provision (benefit) for the three months ended March 31, 1997 and 1996, represent effective tax rates of (40.0%) and 40%, respectively. The rates differ from the federal statutory rate principally due to the effect of state income taxes and amortization of non-deductible goodwill. Minority Interest Minority interest was $247 thousand lower in the first quarter of 1997 versus the first quarter of 1996, predominantly due to the loss recorded by Spinnaker Industries and lower profits at the other manufacturing companies in 1997 versus 1996 offset by increased earnings at the telephone companies and Morgan. Income From Continuing Operations During the first quarter of 1997, the Registrant recorded a loss from continuing operations of $0.5 million, or $0.36 per share, as compared to income from continuing operations of $1.2 million, or $0.88 per share, in the first quarter of 1996. Lower operating profit generated by our manufacturing subsidiaries coupled with increased interest expense as a result of the senior note offering by Spinnaker Industries, were the primary causes of the unfavorable variances. Discontinued Operations The Registrant had decided to discontinue the operations at Tri-Can International, Ltd. in the second quarter of 1996 (see Note D). Accordingly, its operating results in the first quarter of 1996 are treated as discontinued operations. Net Income (Loss) Net loss for the three months ended March 31, 1997 was $0.5 million, or $0.36 per share, as compared to a net income of $1.2 million, or $0.86 per share in the previous year's quarter. Backlog/New Orders Total backlog of manufactured products at March 31, 1997 was $27.0 million, which represents an increase of $6.1 million from the backlog of $20.9 million at December 31, 1996. An $8.1 million extra-large glass press order at Lynch Machinery helped increase their backlog by $4.1 million and receipt of orders for pressure sensitive stamps at Brown-Bridge increased their backlog by $0.9 million. Liquidity/Capital Resources At March 31, 1997, the Registrant has $29.4 million in cash and short-term investments, $0.1 million of which was at the Parent Company, which was $6.8 million less than the amount reported at December 31, 1996. Working capital at March 31, 1997, was $35.3 million compared to $41.6 million at December 31, 1996. Additional loans of $3.9 million were made in 1997 to the PCS partnerships to fund interest payments required by the Federal Communications Commission with regard to personal communications service licenses awarded to these partnerships in the "C" Block Auction. Total debt was $271.5 million at March 31, 1997 compared to $260.8 million at December 31, 1996. The increase was due primarily to debt assumed in the Registrant's acquisition of Upper Peninsula Telephone Company. As reported in the Registrant's Consolidated Statement of Cash Flow, during the three months ended March 31, 1997, operating activities generated $4.9 million in cash, investing activities used $10.8 million, and financing activities used $0.4 million. With regard to operating activities, reduced sales of trading securities plus the absence of a significant customer deposits at Lynch Machinery, which occurred in the 1996 period, resulted in the reduced cash provided from operating activities. The investment in Upper Peninsula Telephone Company plus the first interest payment on the C-Block partnerships, offset by the return of the bidding deposit in the F-Block Auction, resulted in the net cash used in investing activities. The essentially flat cash used in financing activities resulted when the Registrant repaid a $10 million affiliate loan with funds received from the F-Block bidding deposit, but reborrowed an additional $10 million from an affiliate to close on the acquisition of 60% of the shares of Upper Peninsula Telephone Company. Registrant maintains an active acquisition program and generally finances each acquisition with a significant component of debt. This acquisition debt contains restrictions on the amount of readily available funds that can be transferred to the Parent Company from its subsidiaries. At March 31, 1997, the Registrant has $48.0 million of unused short-term and long-term lines of credit facilities, $0.1 of which applied to the Parent Company. Subsidiaries of the Registrant hold limited partnership interests in and have loan commitments to two partnerships which were the winning bidders in the Federal Communications Commission's ("FCC") C-Block and F-Block Auctions for 30 megahertz and 10 megahertz, respectively, of broadband spectrum to be used for personal communications services (PCS). In the C-Block Auction, an entity acquired 31 licenses to provide personal communications services to geographic areas of the United States with a population of 7.0 million. The cost of these licenses was $216.2 million. $194.0 million of the cost of these licenses was funded via a loan from the United States Government. The loan requires quarterly interest payments of 7% (The Registrant argues strenuously that the interest rate should have been 6.51%, the applicable treasury rate at the time the licenses were awarded), and with quarterly principal amortization in years 7, 8, 9, and 10. Recently, the FCC has suspended until further notice the quarterly payments, pending resolutions of certain matters. As of March 31, 1997, Registrant subsidiaries invested $598,000 in partnership equity and $24.4 million in loans and have funding commitments to provide an additional $16.3 million in loans. In the F-Block Auction, an entity acquired five licenses to provide personal communications services in geographic areas of the United States with a total population of 20 million. The cost of these licenses was $19.0 million. $15.2 million of the cost of the licenses will be financed with a loan from the United States Government. The interest rate on the loan will be the long-term Government rate at the date of issuance and with quarterly principal amortization in year 3 to 10. As of March 31, 1997, Registrant's subsidiary has invested $99,000 in partnership equity and provided the entity with a loan of $1.6 million funded by a short-term secured borrowing by the Registrant and has a funding commitment of $10 million to the entity. On May 12, 1997, the Registrant loaned the entity $1.0 million to make its final down payment on four of the five licenses and the licenses were awarded. The fifth license is currently being contested, but the Registrant believes it will be awarded sometime during 1997 and the down payment of $0.9 million will be required to be made. The Registrant has borrowed the $2.6 million on a short- term basis to fund its F-Block loan commitment. The Registrant's subsidiaries are currently seeking alternatives to minimize or raise funds for their funding commitments to the entities, but currently expect to fund required interest payments. There are many risks associated with personal communications services. In addition, funding aspects of acquisition of licenses and the subsequent mandatory build out requirements plus the amortization of the license, could significantly and materially impact the Registrant's reported net income over the next several years. Of note, under the current structure the ramifications of this should not impact reported revenues and EBITDA in the future. For further information on PCS, including various risks, see Item 1 -I(c) of Form 10-K for the year ended December 31, 1996. In mid-March 1997, the Registrant acquired 60% of stock of Upper Peninsula Telephone Company for approximately $15.3 million with a short-term secured bridge financing. The Registrant is currently seeking permanent financing to replace in the bridge financing and to finance the acquisition of the remaining stock of Upper Peninsula. In December, 1996, the Registrant"s Board of Directors announced that it is examining the possibility of splitting, through a "Spin-off," of either its communications operations or its manufacturing operations. A spin-off could improve management focus, facilitate and enhanced financings set the stage for future growth, including acquisitions. A split could also help surface the underlying values of the company as the different business segments appeal to differing "value" and "growth" cultures in the investment community. There are a number of matters to be examined in connection with a possible spin-off, including tax consequences, and there is no assurance that such a spin-off will be effected. In February 1997, the Financial Accounting Standards Board issued, Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," which changes the methodology of calculating earnings per share. SFAS No.128 requires a disclosure of diluted earnings per share regardless of its difference from basic earnings per share. The Registrant plans to adopt SFAS No. 128 in December 1997. Early adoption is not permitted. The Registrant does not expect the adoption of SFAS No. 128 to have a material effect on the financial statements. Included in this Management Discussion and Analysis of Financial Condition and Results of Operations are certain forward looking financial and other information. It should be recognized that such information are estimates or forecasts based on various assumptions, including without limitation meeting its assumptions regarding expected operating performance and other matters specifically set forth, as well as the expected performance of the economy as it impacts the Registrant's businesses, and which accordingly are subject to uncertainties and risks. PART II OTHER INFORMATION Item 1. Legal Proceedings See Item 5, second paragraph Item 2. Changes in Securities (c) On January 2, 1997, Registrant granted 214 shares of its common stock to each of six outside directors of Registrant at a price of $70.10 per share (equal to the average stock price for the 30 trading days ended December 31, 1996) pursuant to Registrant's Directors Stock Plan. The issuance was exempt from registration under the Securities Act of 1993 (the "Securities Act") under Section 4(2) thereof and/or the "no sale" theory. On March 6, 1997, Registrant granted 31,700 phantom stock units to seven employees of Registrant at $70.106 per unit pursuant to Registrant's Phantom Stock Plan. Registrant disclaims that the phantom stock units are equity securities. In addition, such units would be exempt from registration under the Securities act under Section 4(a) thereof and/or the "no sale" theory. Item 5. Other Information Registrant is examining various equity financing possibilities, including a private and/or an initial public offering, for Lynch Display Technologies, Inc., which would be the parent company of Lynch Machinery, Inc.; however, there is no assurance that any such financing can be done at terms acceptable to Registrant. Reference is made to Item 1 - I(C) Personal Communications Services ("PCS") in Registrant Form 10-K for the year ended December 31, 1996, and Aer Force Communications B, L.P. ("Aer Force B"), which won licenses in the Federal Communications Commission's F-Block PCS Auction. Aer Force B, together with various other bidders in the PCS auctions, has received a civil investigative demand ("CID") from the United States Department of Justice for documents and information in connection with an investigation to determine whether there has been bid rigging and market allocation for licenses auctioned by the FCC for PCS. Registrant expects that Aer Force B will comply with the CID. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits *10(p) - Phantom Stock Plan as Amended 27 - Financial Data Schedule (b) Reports on Form 8-K On January 14, 1997, a report on Form 8-K to report the acquisition of the operating assets of Transit Homes of America, Inc. by the Registrant's approximately 51%-owned subsidiary, The Morgan Group, Inc. SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LYNCH CORPORATION (Registrant) By: Robert E. Dolan Robert E. Dolan Chief Financial Officer May 15, 1997