FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
/ X / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Indiana 38-1799862
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State of other jurisdiction of (I.R.S Employer Identification No.)
incorporation or organization
8 Sound Shore Drive, Suite 290, Greenwich, CT 06830
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(Address of principal executive offices) (Zip Code)
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, No Par Value American Stock Exchange
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Indicate by mark if disclosure of delinquent filers pursuant to Item 405 of Regulations S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K. / /
The aggregate market value of voting stock held by non-affiliates of the Registrant (based upon the closing price of the Registrant's Common Stock on the American Stock Exchange on March 15, 1996 of $66 per share) was $68,254,000. (In determining this figure, the Registrant has assumed that all of the Registrant's directors and officers are affiliates. This assumption shall not be deemed conclusive for any other purpose.)
The number of outstanding shares of the Registrant's Common Stock was 1,390,464 as of March 15, 1996.
DOCUMENTS INCORPORATED BY REFERENCE:
Parts I, II, and IV: Certain portions of the Annual Report of Shareholders for the year ended December 31, 1995. Part III: Certain portions of the Proxy Statement for 1996 Annual Meeting of Shareholders to be held May 9, 1996.
PART I
ITEM 1. BUSINESS
The Registrant, Lynch Corporation ("Lynch"), incorporated in 1928 under the laws of the State of Indiana, is a diversified holding company with subsidiaries engaged in multimedia, services and manufacturing. Lynch's executive offices are located at 8 Sound Shore Drive, Greenwich, Connecticut 06830. Its telephone number is 203-629-3333. The company's business development strategy is to expand its existing operations through internal growth and acquisitions. For the year ended December 31, 1995, multimedia operations provided 7% of the Registrant's consolidated revenues; services operations provided 36% of the Registrant's consolidated revenues; and manufacturing operations provided 57% of the Registrant's consolidated revenues. As used herein, the Registrant includes subsidiary corporations.
I. MULTIMEDIA
A. TELECOMMUNICATIONS
Operations. The Registrant conducts its telecommunications operations through subsidiary corporations. The telecommunications segment is expanding through the selective acquisition of local exchange telephone companies serving rural areas and by offering additional services to existing customers. Since 1989, Registrant has acquired seven telephone companies, five of which have indirect minority ownership of 2% to 20%, whose operations range in size from less than 500 to over 5,000 access lines. Total access lines are now approximately 15,600, 76% of which are served by digital switches.
These subsidiaries' principal line of business is providing
telecommunications services. These services fall into four major categories:
local network, network access, long distance and other. Toll service to areas
outside franchised telephone service territory is furnished through switched
and special access connections with intrastate and interstate long distance
networks.
The Registrant owns minority interests in wireline cellular telephone service covering several Rural Service Areas ("RSA's") in New Mexico and North Dakota covering areas with a total population of 408,000, of which the Registrant's proportionate interest is 49,000. Operating results have been minimal to date.
Inter-Community Telephone Company's participation in the Defense Com- mercial Telecommunications Network/Defense Switching Network (DCTN/DSN) was terminated effective February 28, 1996.
The Company holds franchises, licenses and permits adequate for the conduct of its business in the territories which it serves.
Future growth in telephone operations is expected to be derived from the acquisition of additional telephone companies, from providing service to new or presently unserved establishments, and from upgrading existing customers to higher grades of service. The following table summarizes certain information regarding the Company's telephone operations.
YEAR ENDED DECEMBER 31,
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1995 1994 1993
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Telephone Operations
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Access lines* . . . . . . . . . . . . . . . . . 15,586 14,906 10,798
% Residential . . . . . . . . . . . . . . . . 78% 79% 78%
% Business (nonresidential) . . . . . . . . . 22% 21% 22%
Total revenues ($000's) . . . . . . . . . . . . 23,328 20,016 16,107
% Local service . . . . . . . . . . . . . . . 13% 12% 12%
% network access and long distance. . . . . . 70% 70% 70%
% Other . . . . . . . . . . . . . . . . . . . 17% 18% 18%
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Telephone Acquisitions. The Registrant pursues an active program of acquiring operating telephone companies. Since January 1, 1989, Lynch has acquired 7 telephone companies serving a total of 13,650 access lines at the time of these acquisitions for an aggregate consideration totaling $81.7 million. Haviland Telephone Company, which serves 3,600 access lines and represents the most recent of these acquisitions, was completed on September 26, 1994 for an aggregate consideration of approximately $13 million. In January 1995, Inter-Community Telephone Company signed an agreement with US West Communications, Inc. to acquire approximately 1,400 access lines in North Dakota. In August 1995, J.B.N. Telephone signed an agreement with United Telephone Company of Eastern Kansas to acquire approximately 354 access lines in Kansas. Those agreements, which are subject to certain conditions including regulatory approvals, are expected to close in the first half of 1996.
On November 4, 1995, subsidiaries of the Registrant entered into a contract to acquire the stock of privately owned Dunkirk & Fredonia Telephone Co. and its subsidiaries, Cassadaga Telephone Corporation and Comtel, Inc. (collectively "DFT") for $22 million. DFT serves approximately 10,700 access lines in western New York including the community of Fredonia where a campus of the state university is located, the Village of Cassadaga and the Hamlet of Stockton. DFT also owns and operates other telecommunications businesses including long distance resale and sales and servicing of telecommunications equipment. The closing under the contract is subject to certain conditions including regulatory approvals.
The Registrant continually evaluates acquisition opportunities targeting domestic rural telephone companies with a dominant market position, good growth potential and predictable cash flow. In addition, Registrant seeks companies with excellent local management already in place who will remain active with their company. Telephone holding companies and others actively compete for the acquisition of telephone companies and such acquisitions are subject to the consent or approval of regulatory agencies in most states. While management believes that it will be successful in making additional acquisitions, there can be no assurance that the Registrant will be able to negotiate additional acquisitions on terms acceptable to it or that regulatory approvals, where required, will be received.
Regulatory Environment. Operating telephone companies are regulated by state regulatory agencies with respect to intrastate telephone services and the Federal Communications Commission ("FCC") with respect to its interstate telephone service.
The Registrant's telephone subsidiaries participate in the National Exchange Carrier Association ("NECA") common line and traffic sensitive tariffs and participate in the access revenue pools administered by NECA for interstate services. Where applicable, the Company's subsidiaries also participate in similar pooling arrangements approved by state regulatory authorities for intra-state services. Such interstate and intrastate arrangements are intended to compensate local exchange carriers ("LEC's"), such as the Registrant's operating telephone companies, for the costs, including a fair rate of return, of facilities furnished in originating and terminating interstate and intrastate long distance services.
In addition to access pool participation, certain of the Registrant's subsidiaries are compensated for their intrastate costs through billing and keeping access charge revenues (without participating in an access pool). The access charge revenues are developed based on intrastate access rates filed with the state regulatory agency. One of the Registrant's subsidiaries also receives intrastate compensation from billing and keeping intrastate toll (without participating in a toll pool).
Various aspects of federal and state telephone regulation have in recent years been subject to re-examination and on-going modification. For example, the FCC is currently reviewing the structure of the Universal Service Fund mechanism as to whether it is effectively meeting its stated objectives and has proposed for comment various modifications thereto. In February 1996, Congress passed major telecommunications legislation (see below) intended, among other things, to introduce more competition in local telephone service by permitting long distance and cable television companies to provide local telephone service. In certain states, regulators have ordered the restructuring of local service areas to eliminate nearby long distance calls and substitute extended calling areas. In addition, a 1989 FCC decision provided for price cap regulation for certain interstate services. The price cap approach differs from traditional rate-of-return regulation by focusing primarily on the prices of communications services. The intention of price cap regulation is to focus on productivity and the approved plan for telephone operating companies. This allows for the sharing with its customers of profits achieved by increasing productivity. Alternatives to rate-of-return regulation have also been adopted or proposed in some states as well. Inter-Community Telephone Company is an example of one such subsidiary which has elected a price cap limitation on local exchange access charges. However, management does not believe that this agreement will have a material effect on the Registrant's results.
In February 1996, the Telecommunications Act of 1996, which is the most substantial revision of communication law since the 1930's, became law. The Act is intended generally to allow telephone, cable, broadcast and other telecommunications providers to compete in each other's businesses, while loosening regulation of those businesses. Among other things, the Act (i) would allow major long distance telephone companies and cable television companies to provide local exchange telephone service; (ii) would allow new local telephone service providers to connect into existing local telephone exchange networks and purchase services at wholesale rates for resale; (iii) reaffirms a general commitment to universal service for high-cost, rural areas and authorizes state regulatory commissions to consider their status on certain competition issues; (iv) would allow the Regional Bell Operating Companies to offer long distance telephone service and enter the alarm services and electronic publishing businesses; (v) would remove rate regulation over non-basic cable service in three years; and (vi) would increase the number of television stations that can be owned by one party. The FCC will be promulgating new regulations covering these and related matters. Registrant cannot predict the effect of the new Act, but because its telecommunications and multimedia properties (other than its television stations interests) are primarily in high-cost, rural areas, Registrant expects competitive changes to be slower in coming.
Competition. All of the Registrant's current telephone companies are currently monopoly providers in their respective area of local telephone exchange
service and are protected from landline, facilities-based competition. However, as a result of FCC and state agency regulatory and judicial decisions, competition has been introduced into certain areas of the toll network wherein certain providers are attempting to bypass local exchange facilities to connect directly with high-volume toll customers. For example, in June 1994 the Wisconsin Legislature passed a telecommunications bill intended to introduce more competition among providers of local services and reduce regulation. A substantial impact is yet to be seen on Registrant's telephone companies. The Registrant's subsidiaries do not expect bypass to pose a significant competitive threat due to a limited number of high-volume customers they serve. Regulatory authorities in certain states have taken steps to promote competition in local telephone exchange service, including in New York requiring certain companies to offer wholesale rates to resellers, and Congress in February 1996, passed legislation designed to introduce competition (see above). In addition, cellular radio or similar radio-based services could provide an alternative local telephone exchange service at some point in the future.
B. Entertainment
STATION WHBF-TV -- Lynch Entertainment Corporation ("Lynch Entertainment I"), a wholly-owned subsidiary of Registrant, and Lombardo Communications, Inc., wholly-owned by Philip J. Lombardo, are the general partners of Coronet Communications Company ("Coronet"). Lynch Entertainment I has a 20% interest in Coronet and Lombardo Communications, Inc. has an 80% interest. Coronet owns a CBS-affiliated television station WHBF-TV serving Rock Island and Moline, Illinois and Davenport and Bettendorf, Iowa.
STATION WOI-TV -- On March 1, 1994, Capital Communications Corporation ("Capital"), a corporation which is 49%-owned by Lynch Entertainment Corporation II, acquired the assets of WOI-TV for $12.7 million. WOI-TV is an ABC affiliate and serves the Des Moines, Iowa market. Lombardo Communications, Inc. II, controlled by Philip J. Lombardo, has the remaining 51% interest in Capital.
Operations. Revenues of a local television station depend to some extent upon its relationship with an affiliated network. In general, the affiliation contracts of WHBF-TV and WOI-TV with CBS and ABC, respectively, provide that the network will offer to the affiliated station the programs it generates, and the affiliated station will transmit a number of hours of network programming each month. The programs transmitted by the affiliated station generally include advertising originated by the network, for which the network is compensated by its advertisers.
The affiliation contract provides that the network will pay to the affiliated station an amount which is determined by negotiation, based upon the market size and rating of the affiliated station. Typically, the affiliated station also makes available a certain number of hours each month for network transmission without compensation to the local station, and the network makes available to the affiliated station certain programs which will be broadcast without advertising, usually public information programs. Some network programs also include "slots" of time in which the local station is permitted to sell spot advertising for its own account. The affiliate is permitted to sell advertising spots preceding, following, and sometimes during network programs.
A network affiliation is important to a local station because network programs, in general, have higher viewer ratings than non-network programs and help to establish a solid audience base and acceptance within the market for the local station. Because network programming often enhances a station's rating, a network-affiliated station is often able to charge higher prices for its own advertising time.
In addition to revenues derived from broadcasting network programs, local television stations derive revenues from the sale of advertising time for spot
advertisements, which vary from 10 seconds to 120 seconds in length, and from the sale of program sponsorship to national and local advertisers. Advertising contracts are generally short in duration and may be canceled upon two-weeks notice. WHBF-TV and WOI-TV are represented by a national firm for the sale of spot advertising to national customers, but have local sales personnel covering the service area in which each is located. National representatives are compensated by a commission based on net advertising revenues from national customers.
Competition. WHBF-TV and WOI-TV compete for revenues with local television and radio stations, cable television, and other advertising media, such as newspapers, magazines, billboards and direct mail. Generally, television stations such as WHBF-TV and WOI-TV do not compete with stations in other markets.
Other sources of competition include community antenna television ("CATV") systems, which carry television broadcast signals by wire or cable to subscribers who pay a fee for this service. CATV systems retransmit programming originated by broadcasters, as well as providing additional programming that is not originated on, or transmitted from, conventional broadcasting stations. In addition, some alternative media operators, such as multipoint distribution service owners provide, for a fee and on a subscription basis, programming that is not a part of regular television service. Additional program services are provided by low-power television stations and direct broadcast satellites provide video services as well.
Federal Regulation. Television broadcasting is subject to the jurisdiction of the FCC under the Communications Act of 1934, as amended ("Communications Act"). The Communications Act, and/or the FCC's rules, among other things, (i) prohibit the assignment of a broadcast license or the transfer of control of a corporation holding a license without the prior approval of the FCC; (ii) prohibit the common ownership of a television station and an AM or FM radio station or daily newspaper in the same market, although AM-FM station combinations by itself are permitted; (iii) prohibit ownership of a CATV system and television station in the same market; (iv) restrict the total number of broadcast licenses which can be held by a single entity or individual or entity with attributable interests in the stations and prohibits such individuals and entities from operating or having attributable interests in most types of stations in the same service area (loosened by the recently passed Federal telecommunications bill); and (v) prohibit a corporation from holding an FCC license if any of its officers or directors are aliens or if more than one-fifth of its capital stock is owned of record or voted by aliens or their representatives or by a foreign government or representative thereof, or by any corporation organized under the laws of a foreign country. See Regulatory Environment under A. above for a description of certain provisions of the Telecommunications Act of 1996. In calculating media ownership interests, Registrant's interests may be aggregated under certain circumstances with certain other interests of Mr. Mario J. Gabelli, Chairman and Chief Executive Officer of the Registrant, and certain of his affiliates.
Television licenses are issued for terms of five years and are renewable for terms of five years. The current licenses for WHBF-TV and WOI-TV expire on December 1, 1997 and February 1, 1998, respectively.
On December 1, 1995, Clear Video LLC, a 60% owned subsidiary of Registrant acquired 23 cable television systems in northeast Kansas serving approximately 4,500 subscribers for $5.2 million. Certain of the systems cluster with local telephone exchanges owned by J.B.N. Telephone. Registrant also owns a small cable system in Kansas.
Registrant also has the right to market direct broadcasting TV services via satellite to approximately 10,000 households in New Mexico and Wisconsin and had approximately 865 customers at December 31, 1995. Operating results have not been material to date.
C. Personal Communications Services ("PCS").
Subsidiaries of the Registrant are limited partners with a 49.9% equity interest in five partnerships (the "Partnerships") which filed applications on November 6, 1995, with the Federal Communications Commission ("FCC") to bid in the FCC's C-Block ("Entrepreneurs") Auction on Basic Trading Area licenses for 30 MHZ of spectrum to be used for broadband wireless personal communications services ("PCS") and made up-front cash deposits of approximately $7.6 million with the FCC which qualifies the Partnership to bid on up to 17 million POPs. The Auction began on December 11, 1995 and is continuing. FCC Rules provide for an installment payment plan for winning bidders in the Auction, pursuant to which winning bidders put up a down-payment equal to 10% of the cost of the licenses won, with interest only payments for six years and payment of principal and interest amortized over the remaining four years. Registrant's subsidiaries entered into agreements to loan funds to the Partnerships for up-front deposits, down payments and installments interest payments on any licenses won, and certain other Partnership expenses. The aggregate amount of such loans could be as high as $41.8 million, over approximately seven years with respect to licenses won. The FCC has imposed build out requirements that would require the licensee to provide adequate service to at least one-third of the population in the licensed area within five years and two-thirds within ten years. There can be no assurances that the Partnerships will win any PCS licenses or that if they do such licenses can be successfully developed.
II. SERVICES
A. THE MORGAN GROUP, INC.
The Morgan Group Inc. ("Morgan") is the Registrant's only service subsidiary. On July 22, 1993, Morgan completed an initial public offering ("IPO") of 1,100,000 shares of its Class A common Stock, $.015 par value, at $9.00 per share. As a result of this offering, Lynch's equity ownership in Morgan was reduced from 90% to 47%, represented by its ownership of 1,200,000 shares of Class B common stock. In December 1995, Lynch acquired from Morgan 150,000 shares of Class A common stock (plus $1.3 million in cash plus accrued dividends) in exchange for its 1,493,942 shares of Series A Preferred Stock of Morgan. Lynch's equity ownership in Morgan is approximately 49.5%. Because the Class B common stock is entitled to two votes per share, its voting interest in Morgan is approximately 65% and, therefore, Lynch continues to consolidate Morgan's results in its financial statements. Morgan Class A common stock is listed on the American Stock Exchange under the symbol "MG."
Morgan is the leading provider of outsourcing transportation services to the manufactured housing and recreational vehicle ("RV") and commercial truck industries in the United States and has been operating since 1936. Morgan provides outsourcing transportation services through a national network of approximately 1,480 independent owner-operators and 1,475 drive-away drivers. Morgan dispatches its drivers from 109 offices located in 38 states. Morgan's largest customers include Cavalier Homes, Inc., Champion Enterprises, Inc., Fleetwood Enterprises, Inc., Ryder Systems, Schult Homes, Oakwood Homes Corporation, Redman Homes, Skyline Corporation, Thor Industries, and Winnebago Industries, Inc. Morgan's services also include transporting other products, including commercial vehicles and office trailers. In May 1995, Morgan acquired the assets of Transfer Drivers, Inc. ("TDI"), which focuses on relocating rental equipment for companies such as Ryder Systems, Budget Rentals and Penske Truck Leasing and also delivery of new equipment from manufacturers including Utilimaster, Grumman Alson and Bluebird Bus. TDI, which has over 325 drivers, had revenues of $5.3 million in 1995. As of December 31, 1995, Morgan's owned transportation equipment included 18 tractors, 74 drop deck trailers, 20 car carrier trailers, 33 tent camper trailers, and 133 lowboy and miscellaneous trailers.
Morgan also provides certain insurance and financing services to its owner-operators. Morgan currently provides physical damage insurance and certain other insurance protection to the owners of equipment under lease to the Company through a captive insurance subsidiary. In addition, Morgan provides financing and certain guarantees of equipment loans through its finance subsidiary.
Industry Information. Morgan's business is substantially dependent upon the manufactured housing and recreational vehicle industries. Both of these industries are subject to broad production cycles. The manufactured housing industry continued to experience growth during 1995, while the recreational vehicle industry was down in 1995.
Growth Strategy. Morgan's strategy is to improve the efficiency of its core transportation services and expand its overall service capacity, possibly through acquisitions if suitable opportunities arise. Morgan also plans to evaluate and may pursue opportunities to expand its services to owner-operators, customers and dealers in areas related to its core business.
Morgan has been improving its operating efficiency by automating most of its dispatching functions and expanding its transportation capacity by purchasing additional transportation equipment. These improvements are expected to place Morgan in a better position to meet its customers' requirements.
Morgan is continuously reviewing and negotiating potential acquisitions. There can be no assurance that any future acquisitions will be effected or, if effected, that they can be successfully integrated with Morgan's business.
Customers and Marketing. Morgan's ten largest customers accounted for approximately 60% of its revenues in the previous three years.
Competition. All of Morgan's activities are highly competitive. In addition to fleets operated by manufacturers, Morgan competes with several large national interstate carriers and numerous small regional or local interstate and intrastate carriers. Morgan's principal competitors in the manufactured housing and RV marketplaces are privately owned. In the commercial transport market, Morgan competes with large national interstate carriers, many of whom have substantially greater resources than Morgan. Morgan also competes for certain services with railroad carriers. No assurance can be given that Morgan will be able to maintain its competitive position in the future.
Competition among carriers is based on the rate charged for services, quality of service, financial strength, insurance coverage and the geographic scope of the carrier's authority and operational structure. The availability of tractor equipment and the possession of appropriate registration approvals permitting shipments between points required by the customer may also be influential.
Selected Operating Information. The following tables set forth certain operating information for each of the five years ended December 31, 1995.
Years Ended December 31
1991 1992 1993 1994 1995
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(Revenues in thousands)
MANUFACTURED HOUSING GROUP:
Shipments . . . . . . . 81,330 80,587 95,184 121,604 135,750
Revenues. . . . $ 30,586 $ 32,324 $ 39,930 $ 53,520 $ 63,353
DRIVER OUTSOURCING:
Shipments . . . . . . . 22,601 23,636 30,978 32,060 49,885
Revenues. . . . . . . . $ 6,701 $ 8,055 $ 13,416 $ 15,197 $19,842
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SPECIALIZED TRANSPORT:
Shipments . . . . . . . 30,953 39,706 38,618 41,934 44,406
Revenues . . . . . . . $ 17,883 $ 24,016 $ 25,835 $ 28,246 $ 29,494
OTHER SERVICE REVENUES $ 3,437 $ 2,722 $ 3,612 $ 4,917 $ 9,614
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Total operating
revenues . . . . . . . $ 58,607 $ 67,116 $ 82,793 $101,880 $122,303
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INDUSTRY PARTICIPATION. The following tables set forth participation in the two principal industries the company operates in where industry information is available:
1991 1992 1993 1994 1995
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MANUFACTURED HOMES:
Industry production(1). . 250,376 309,457 374,126 451,646 505,819
Shipments 55,656 60,381 76,188 98,181 114,890
Shares of units shipped 22.2 19.5 20.4 21.7 22.7
RECREATIONAL VEHICLES:
Industry productions(2) 280,600 369,200 406,300 426,100 380,300
Units moved(3) 46,528 62,012 71,792 67,502 64,303
Shares of units shipped(3) 16.6 16.8 17.7 15.8 16.9
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Risk Management, Safety and Insurance. The risk of substantial losses arising from traffic accidents is inherent in any transportation business. Morgan carries insurance to cover such losses up to $15 million per occurrence with a deductible of up to $250,000 per occurrence for personal injury and property damage. The frequency and severity of claims under the Company's liability insurance affect the cost, and potentially the availability, of such insurance. If Morgan is required to pay substantially greater insurance premiums, or incurs substantial losses above $15 million or substantial losses below its $250,000 deductible, its results of operations can be materially adversely affected. There can be no assurance that Morgan can continue to maintain its present insurance coverage on acceptable terms.
Interstate Indemnity Company ("Interstate"), a wholly-owned insurance subsidiary of the Company, makes available physical damage insurance coverage for the Company's owner-operators. Interstate also writes performance surety bonds for Morgan Drive Away, Inc.
Regulation. Morgan's interstate operations are subject to regulation by the Interstate Commerce Commission ("I.C.C.") or its successor and the United States Department of Transportation ("D.O.T."). Effective August 26, 1994, essentially all motor common carriers were no longer required to file individually determined rates, classifications, rules or practices with the I.C.C. Effective January 1,1995, the economic regulation of certain intrastate operations by various state agencies was preempted by federal law. The states will continue to have jurisdiction primarily to insure that carriers providing intrastate transportation services maintain required insurance coverage, comply with all applicable safety regulations, and conform to regulations governing size and weight of shipments on state highways. Most states have adopted D.O.T. safety regulations and conform to regulations governing size and weight of shipments on state highways, and actively enforce them in conjunction with D.O.T. personnel.
(1) Based on reports of Manufactured Housing Institute ("MHI"). To calculate shares of homes shipped, Morgan assumes two unit shipments for each multi-section home.
(2) Based on reports of Recreational Vehicle Industry Association ("RVIA"), excluding van campers, truck campers, pick-up truck conversions, and sport utility vehicles conversion. RVIA began reporting truck and sport utility vehicle conversions in their industry shipment data in 1994.
(3) Shares of units shipped calculation includes travel trailers, two types of motor homes, van conversion, and tent campers and truck conversion in 1994 and 1995. Morgan's share of units shipped are based on units moved compared to industry production rather than shipments because certain RV shipments include more than one unit per move.
Carriers normally are required to obtain authority from the I.C.C. or its successor as well as various state agencies. Morgan is approved to provide transportation from, to, and between all points in the continental United States.
Morgan provides contract and non-contract transportation services to the shipping public pursuant to governing rates and charges maintained at its corporate and various dispatching offices. A contract carrier provides transportation services pursuant to a written contract designed to meet a customer's specific shipping needs or by dedicating equipment exclusively to a given customer for the movement of a series of shipments during a specified period of time.
Federal regulations govern not only operating authority and registration, but also such matters as the content of agreements with owner-operators, required procedures for processing of cargo loss and damage claims, and financial reporting. Morgan believes that it is in substantial compliance with all material regulations applicable to its operations.
The D.O.T. regulates safety matters with respect to the interstate operations of Morgan. Among other things, the D.O.T. regulates commercial driver qualifications and licensing; sets minimum levels of carrier liability insurance; requires carriers to enforce limitations on drivers' hours of service; prescribes parts, accessories and maintenance procedures for safe operation of freight vehicles; establishes noise emission and employee health and safety standards for commercial motor vehicle operators; and utilizes audits, roadside inspections and other enforcement procedures to monitor compliance with all such regulations. Recently, the D.O.T. has established regulations which mandate random, periodic, pre-employment, post-accident and reasonable cause drug testing for commercial drivers. The D.O.T. has also established similar regulations for alcohol testing. Morgan believes that it is in substantial compliance with all material D.O.T. requirements applicable to its operations.
From time to time, tax authorities have sought to assert that owner operators in the trucking industry are employees, rather than independent contractors. No such tax claim has been successfully made with respect to Morgan. Under existing industry practice and interpretations of federal and state tax laws, as well as Morgan's current method of operation, Morgan, based on the advise of counsel, maintains that its owner operators are not employees. Whether an owner operator is an independent contractor or employee is, however, generally a fact-sensitive determination and the laws and their interpretations can vary from state to state. There can be no assurance that tax authorities will not successfully challenge this position, or that such tax laws or interpretations thereof will not change. If the owner operators were determined to be employees, such determination could materially increase Morgan's employment tax and workers' compensation exposure.
Interstate, Morgan's insurance subsidiary, is a captive insurance company incorporated under Vermont law. It is required to report annually to the Vermont Department of Banking, Insurance & Securities and must submit to an examination by this Department on a triennial basis. Vermont regulations require Interstate to be audited annually and to have its loss reserves certified by an approved actuary. Morgan believes Interstate is in substantial compliance with Vermont insurance regulations.
III. MANUFACTURING
A. Spinnaker Industries, Inc. ("Spinnaker")
Spinnaker's common stock is traded in the over-the-counter market under the symbol "SPNI" and is listed in the National Association of Securities Dealers Automated Quotations System (NASDAQ). Registrant owns 2,259,063 shares of Spinnaker common stock, 83.17% of the outstanding. In June 1994, Spinnaker
entered into an agreement with Boyle, Fleming, George & Co., Inc. ("BF"), for BF to provide operating and strategic management to Spinnaker. In addition to a management fee, BF received a warrant to purchase 678,945 shares of Spinnaker common stock (20%) at a price of $2.67 per share (adjusted for the 3 for 2 stock splits in December 1994 and December 1995). BF may, on the occurance of an equity offering by Spinnaker, also receive warrants to acquire additional Spinnaker shares.
Spinnaker is a diversified manufacturing company with three subsidiaries: Brown-Bridge Industries, Inc.("Brown-Bridge"), 80.1% owned, acquired in September 1994, Central Products Company ("Central Products"), wholly-owned, acquired in October 1995 and Entoleter, Inc. ("Entoleter"), wholly-owned, which it has owned since Registrant acquired Spinnaker in 1987. Brown-Bridge is in the adhesive-coated paper industry. Central Products manufactures carton sealing tape. Entoleter manufactures size reduction, recycling and pollution control equipment.
BROWN-BRIDGE INDUSTRIES, INC.
In September 1994, Brown-Bridge acquired the assets of Kimberly Clark Corporation's Brown-Bridge operation and assumed certain liabilities at a cost of approximately $36 million. Brown-Bridge develops, manufactures, and markets adhesive coated paper that is converted by printers and industrial users into products used for marking, identifying, promoting, labeling, and decorating applications. End uses include consumer product labeling, electronic data processing (EDP) identification, pharmaceutical and food marking, and postage stamp paper.
Markets and Customers. Brown-Bridge competes in the $3.5 billion adhesive coated paper and film market, where it offers a full line of adhesive backed paper products that are pressure, heat and water sensitive. Although this market is dominated principally by two suppliers (see "Competition"), Brown-Bridge markets and sells its product nationally. Brown-Bridge principally sells products to printers, converters and paper merchants.
Brown-Bridge generally markets its products through its own sales representatives to regional and national printers, converters and merchants. The majority of sales represent product sold and shipped from Brown-Bridge's facilities in Troy, Ohio. However, Brown-Bridge also contracts with seven regional processors throughout the United States, with whom Brown-Bridge stores the product until sold. Generally, these processors perform both slitting and distribution services for Brown-Bridge.
Brown-Bridge's business is not dependent upon a single customer and the loss of any one customer would not have a material adverse effect on the business of Brown-Bridge. However, the top 25 customers account for approximately 50% of Brown-Bridge's total revenues.
Products: Pressure Sensitive. Pressure sensitive products, which are activated by the application of pressure, are manufactured with a three element construction consisting of face stock, adhesive coating, and silicone coated release liner. The adhesive product is sold in roll or sheet form for further conversion into products used primarily for marking, identification and promotional labeling. Brown-Bridge sells its pressure sensitive product line primarily to the graphic arts segment. Pressure sensitive products are sold under the trade names Strip Tac and Strip Tac Plus. Pressure sensitive products accounted for approximately $82,880,000 (61%) of Spinnaker's consolidated net sales during 1995.
Rolls. Roll pressure sensitive products are generally sold to label printers that produce products used primarily for informational labels (shipping labels, price labels, warning labels, etc.), product identification and postage stamps. A distinct product segment is EDP end use. These computer-generated labels are usually produced as part of forms set for mailing, shipping, inventory control labels or other similar
applications. This product line includes a variety of face stocks, several hot melt and emulsion adhesives (permanent, removable and speciality), and in-house coated silicone release liner.
Sheets. Sheet pressure sensitive products are sold to commercial sheet printers, who provide information labels and other products, such as bumper stickers. This product line consists of a variety of face stocks and several permanent, removable and speciality emulsion process adhesive.
Heat Sensitive. Heat sensitive products, which are activated by the application of heat, are manufactured by coating a face stock with either a hot melt coating or an emulsion process adhesive. The heat sensitive product line is sold primarily for labeling end uses. Adhesives are either instantaneous or delayed action to allow label repositioning. Heat sensitive uses include labels for pharmaceutical bottles, meat and cheese packages, supermarket scales, cassettes and bakery packages. The adhesive coated product is sold in roll or sheet form for further conversion. Brown-Bridge offers a full line of hot melt, delayed action products and a limited line of emulsion and wax-based instantaneous products. Heat sensitive products are sold under the trade name Heat Seal.
Water Sensitive. Water sensitive products, which are activated by the application of water, include a broad range of paper and cloth materials, coated with a variety of adhesives. There are two distinct water sensitive adhesives, known as conventional and dry gum, that are produced with different coating processes. The adhesive coated products are sold in roll or sheet form for further conversion to postage and promotional stamps, container labels, inventory control labels, shipping labels and splicing, binding, and stripping tapes. The water sensitive line is sold under the trade name Pancake and consists of three product groups: dry process, conventional gummed, and industrial.
Dry Process - Dry process is sold primarily for label and business forms uses. Dry process is sold in sheet form primarily to fine paper merchants for resale to commercial printers who, in turn, resell printed labels for a variety of uses such as carton labels. Dry process is also sold for use in roll form to manufactures of imprinting machines or to the distributors of machine rolls. Brown-Bridge offers dry process stock for both label and business forms applications, including laser printer compatible products.
Conventional Gum - Conventional gum products serve many of the same end uses for hand applied labels as dry process stock. A major portion of these products is sold for governmental postage and promotional stamp uses. These large volume pieces of business are awarded on a bid basis. Brown-Bridge is one of the largest manufacturers of postage stamp paper. Products are distributed either through fine paper merchants or directly to printers. Brown-Bridge products are available for both stamp and label applications.
Industrial - This product line consists of products sold in several small industry niches: acid-free electrical grades, binding and stripping tapes, cloth and splicing tapes, veneer tapes, and other craft and speciality items.
Manufacturing: Facilities. Brown-Bridge owns two manufacturing facilities in Troy, Ohio, where it mixes and coats paper stock with adhesives to produce water sensitive, heat sensitive and pressure sensitive roll and sheet products. In addition, in order to service roll pressure sensitive regional markets, Brown-Bridge has contracts with seven regional slitters/distributors in Los Angeles, Dallas, Atlanta, High Point (NC), Boston, and Chicago. These locations typically consist of warehouse space and one or more slitting machines owned by the regional slitter/distributor. Brown-Bridge stores products in these regional locations, until sold or processed by such slitter/distributors.
Raw Materials. Brown-Bridge uses a wide array of raw materials to produce its products, including paper stock, silicone and adhesives. These materials are procured from numerous suppliers in the United States and Canada and, while temporary shortages may occur occasionally, these items are currently readily available.
Manufacturing Improvements. Although the Company believes that Brown-Bridge products have a good reputation for quality within the marketplace, Brown-Bridge is continuing an intensive company-wide effort to improve manufacturing and administrative efficiency and product quality. Brown-Bridge management has specifically identified the reduction of scrap and defective products, the improvement of product quality and cycle time, and the reduction of working capital requirements as goals to be addressed in this effort.
Competition, Pricing and Costs. The adhesive coated products industry is highly competitive and Brown-Bridge competes with both national and regional suppliers. A majority of the adhesive coated products market is held by two market leaders, Avery Dennison and Bemis. Competition for many of Brown-Bridges products is based primarily on quality, supplier response time and price.
Industry leaders have historically set general product price levels that influence prices established by mid-sized suppliers such as Brown-Bridge. Brown-Bridge has experienced some flexibility in pricing its products, consistent with general industry-wide price levels, while simultaneously allowing it to maintain its product margins.
Raw materials are the most significant cost components for producers of adhesive backed products: the three most important raw material costs being face stock (paper substrate), adhesives and silicone.
Environmental. Brown-Bridge believes that it operates in compliance with current applicable federal, state and local environmental regulations.
Air. Brown-Bridge operates air contaminant sources at both Troy plants. These sources consist of coaters and boilers, all of which are permitted or registered in compliance with Ohio law. Brown-Bridge continues to monitor anticipated changes in federal and state environmental regulations and intends to comply with such regulations following their approval. To date, Brown-Bridge has complied with all preliminary requirements. The nature of Brown-Bridge's coating operations necessitates the emission of a minimal number of air pollutants that the Environmental Protection Agency has targeted for nationwide reduction through voluntary and/or regulatory programs. Brown-Bridge has voluntarily reduced its use of most of the chemicals and continues to search for effective substitutes for the others.
Wastewater. Brown-Bridge generates sanitary and process wastewater at both of its plants in Troy, Ohio. Both plants discharge sanitary and process wastewater to the City of Troy's publicly owned treatment works and are in compliance with the city's discharge requirements. Additionally, Plant 1 discharges non-contact cooling water and storm water directly to the Great Miami River pursuant to a National Pollutant Discharge Elimination System permit.
Solid and Hazardous Waste. Brown-Bridge generates hazardous waste and nonhazardous solid waste at both plants. Both waste streams are transported by licensed haulers and properly disposed of at facilities permitted to manage said waste streams.
Superfund Involvement. Liability for Brown-Bridge's past off-site disposal practices has been retained by Kimberly-Clark Corporation as provided in the acquisition agreement, pursuant to which the Brown-Bridge unit was acquired.
Employees. As of December 31, 1995, Brown-Bridge employed approximately
371 persons. Brown-Bridge's employees are not covered by a collective bargaining agreement.
CENTRAL PRODUCTS COMPANY
In October 1995, Central Products Company ("Central") acquired the stock and assets of Alco Standard Corporation's Central Products operation for approximately $80 million. Central is the second largest U.S. carton sealing tape manufacturer. Central manufactures water activated tape (also known as "gummed" tape) and pressure sensitive tape. Central offers three types of gummed tape: paper tape, reinforced tape and box tape, and pressure sensitive tape with all three primary adhesive technologies: acrylic, hot melt and natural rubber. Central believes it is the only U.S. supplier to manufacture both gummed tape and pressure sensitive tape, and the only company to produce all three pressure sensitive adhesive technologies. Central also offers tape dispensers and tape application equipment manufactured by unaffiliated companies.
Markets and Customers. Carton sealing tape is used in a broad array of industrial and consumer applications, including the packaging of goods for shipment by manufacturing or distribution companies. Tape competes with other methods for sealing cartons, such as staples, metal or plastic strapping, and hot-melt glues and cold glues. Tape can provide significant advantages to certain end users over other forms of closure in terms of cost, speed, efficiency and security; however, certain industry segments lend themselves to competing technologies.
Over the last several years, pressure sensitive tape has grown rapidly at the expense of water activated tape and non-tape applications such as glue, for carton sealing applications. This has occurred primarily due to advances in performance, strength and versatility, and decreasing prices for pressure sensitive products resulting from increased capacity in the industry. However, pressure sensitive tape does not perform as effectively as water activated tape in certain applications, such as recycled corrugated cartons which are increasing due to environmental concerns. Environmental issues also have benefited the water activated tape segment due to the perception that paper-backed tape is more environmentally-friendly than film-backed tape. Additionally, new and improved equipment for the dispensing and the application of water activated tape is being developed which should make water activated tape more competitive with pressure sensitive tape.
Central's sales strategy emphasizes supplying a full line of both water activated and pressure sensitive tape products. It is the only company in the industry that is capable of providing its customers with "one stop shopping" for their carton sealing tape requirements. Central sells its products primarily to paper distributors, who then resell the products to the final customer. Central possesses a widely diversified customer base, with no single customer accounting for more than 10% of the Company's total sales and only 5% of total sales to the non-U.S. market.
Water Activated Tapes (Also known as Gummed Tapes). Water activated tape is generally manufactured through the application of a thin layer of water activated adhesive to gumming kraft paper. It is available in light, medium and heavy grades of either non-reinforced tape with one layer of kraft, or reinforced tape with two layers of kraft that sandwich glass fibers.
Paper Tape. Paper tape is utilized for less challenging applications such as light loads, retail carry-out and unitized pallets. Paper tape utilizes a consistent and dependable adhesive applied to high tensile strength kraft paper.
Reinforced Tape. Reinforced tape is the strongest and most widely
used water activated tape. It adds an extra measure of strength for applications where durability and reliability are required, such as in two strip carton sealing and non-unitized load.
Box Tape. Box tape is designed specifically for taping the manufacturer's joint on corrugated cartons. It is similar in construction to reinforced tape and is reliable, bonds quickly and is recyclable.
Pressure Sensitive Tapes. Pressure sensitive tape is manufactured primarily through the coating of plastic film with a thin layer of acrylic, hot melt or natural rubber adhesive. Pressure sensitive carton sealing tape generally varies from 1.75 to 3 inches in width and from 1.7 to 3.0 mils (one mil = .001 inches) in thickness. The adhesive is applied to various grades of high-quality, low-stretch polypropylene film for use in all applications as well as PVC and polyester films which are used for certain applications.
Acrylic Adhesive Pressure Sensitive Tape. Acrylic technology is the least complex of those used to manufacture pressure sensitive adhesives and produces tapes with excellent clarity, non-yellowing properties, good temperature resistance and low application cost.
Hot Melt Adhesive Pressure Sensitive Tape. Hot melt adhesive technology produces tape with an aggressive bond that can seal more cartons in less time, making it the most widely used pressure sensitive tape.
Natural Rubber Adhesive Pressure Sensitive Tape. Due to its very strong bonding properties, natural rubber is better suited than other pressure sensitive tapes for more challenging carton sealing applications such as over-filled cartons, cartons exposed to varying temperatures and dusty cartons. Natural rubber tape possesses a firm unwind characteristic which makes it excellent for manual applications. Central is the only manufacturer of natural rubber adhesive tape in the U.S.
Equipment/Specialty and Converter Products. Central supplies tape dispensing equipment manufactured by other companies. It currently offers two types of table top dispensers for water activated tape--a manual dispenser and a more expensive electric dispenser. Central also offers a broad line of carton sealing equipment for pressures sensitive tape which ranges from hand held dispensers to automated random sizing equipment.
To supplement its product offerings, Central also offers specialty tapes for other applications including kraftback pressure sensitive tape, filament tape, masking tape, duct tape and strapping tape, manufactured by other companies. The converter group also develops new non-tape products including an overlaminating film used as a protective barrier over paper labels.
Central offers printed tapes in both its water activated tape and pressure sensitive tape lines. Customers see printed tape as a means of inexpensive advertising.
Manufacturing Facilities. Central currently manufactures tape products at two locations. Water activated tape is manufactured in Menasha, Wisconsin and pressure sensitive tape is manufactured in Brighton, Colorado. Central also maintains three distribution centers across the U.S. to ensure fast and reliable service to its customers.
Competition. The Company competes with other manufacturers of carton sealing tape products as well as manufacturers of alternative carton closure products. Competition in the carton sealing market is based primarily on price
and quality, although other factors may enhance a company's competitive position, including product performance characteristics, technical support, product literature and customer support. There are a wide range of participants in the carton sealing industry, including large diversified corporations (principally in pressure sensitive tape) and small private companies (principally in water activated tape). 3M Company is the largest manufacturer of carton sealing tape in the United States.
Raw Materials. Raw materials are the most significant cost component of carton sealing tape products. The material component accounts for 65% to 70% of the total cost, with the most important raw materials being paper (gumming kraft), polypropylene resin, amorphous polypropylene laminate, fiberglass, and adhesive materials. While prices of these materials vary, Central has not experienced any difficulties in obtaining the materials because they are available from multiple sources.
Environmental. Central Products believes that both its Menasha, WI and Brighton, CO manufacturing facilities operate in compliance with current applicable federal, state, and local environmental laws, regulations and ordinances.
Water Activated Tape. The Menasha production operation has a series of coaters and laminators for applying either water-based or hot melt coatings. Further, there exist steam boilers, boilers for heating fluid and several water-based printing presses. All of the above sources are exempt from obtaining air emission point source permits.
Wastewater discharged from the Menasha facility is a combination of wash-down water from operations, non-contact cooling water and domestic wastewater. Except for a portion of the sanitary water, all wastewater is discharged to the Neenah-Menasha Sewerage Commission with no pretreatment necessary.
The water activated tape plant is currently classified as a small quantity generator of hazardous waste, though during 1996 this site will likely be reclassified as a conditionally-exempt small quantity generator. Waste streams are transported by licensed haulers and disposed of at facilities permitted to manage said waste streams.
Pressure Sensitive Tape. The Brighton production operation is covered under a Bubble Construction Permit covering the entire facility. The permit covers all storage/mix tanks, several coating lines, the film extrusion process, natural gas fired boilers, and fugitive emissions. During the past five years, Central has voluntarily reduced solvent emissions by more than 70%. Due to this significant reduction in hazardous air pollutants, the operation has evolved from a major source to a synthetic minor.
Wastewater in Brighton is generated from the film production process, several cooling towers and other plant processes. The wastewater is discharged to the City of Brighton publicly-owned treatment works and no current compliance issues have been identified.
The pressure sensitive tape plant is currently classified as a large quantity hazardous waste generator. The various waste streams are transported by licensed haulers and disposed of at facilities permitted to manage said waste streams. A significant portion of the solid waste from the operation is sold as by-products and are reclaimed offsite by other manufacturers.
Liability for Central's past off-site disposal practices and involvement with any Superfund sites has been retained by Alco Standard as
provided in the acquisition agreement, pursuant to which Central was acquired.
Employees. Central employed approximately 680 employees at December 31, 1995. The Company has a labor agreement at the Menasha Plant with the United Paperworkers International Union AFL-CIO, which expires in 1998. The Brighton plant is non-union. Central believes it has good relations with its employees.
ENTOLETER, INC.
Entoleter engineers, manufactures and markets a vertically integrated
line of size reduction equipment complemented by a line of pollution control
equipment. Entoleter's products primarily consist of: (a) Centrimil Milling
Equipment for particle size reduction; (b) Central granulators for the plastics
molding industry and precision cutters for the film and non-woven industry; and
(c) Centrifield Scrubbers for the removal of impurities from air, gases and
liquids and for heat recovery, gas absorption, and other mass transfer
functions. The Centrimil product line offers centrifugal impact mills that
utilize a wide range of free flowing materials. Entoleter's line of
granulators is now complemented by a new rotary knife cutter. The Centrifield
Vortex Scrubber is an air pollution control device that removes particulate and
acid gases from exhaust streams.
Competition and Marketing. Entoleter operates in highly competitive worldwide markets. Entoleter has many competitors in these markets, most of which are larger and have greater financial resources than Entoleter. Competitive factors include price and quality of products. Entoleter markets its products directly to users primarily through outside sales representatives.
Employees. As of December 31, 1995, Entoleter had approximately 40 full-time employees. Hourly-paid production employees are represented by the United Electrical, Radio and Machine Workers of America Union. The current collective bargaining agreement expires on April 30, 1996.
B. Lynch Machinery, Inc. ("LM")
LM, a 90% owned subsidiary of Registrant, is a manufacturer of glass-forming machines and packaging machinery. LM also produces replacement parts for various types of glass forming and glass container-making machines, some of which LM does not manufacture, and for machines which package butter, margarine and bacon.
Glass Forming Machinery. There are two different areas for glass-forming machinery: container manufacturing for which LM only supplies spare parts, and pressware manufacturing for which it produces machinery and spare parts. Container-manufacturing machinery, which represents the larger area, consists of machines for the production of "narrow-neck" containers such as soda, beer, and ketchup bottles, and "wide-mouth" jars. Pressware machinery is designed for the production of household items such as glass tumblers, plates, cups, saucers, television and computer screens, and similar items.
The production of glass pressware entails the use of machines which heat glass and, using great pressure, form an item by pressing it into a desired shape. Because of the high cost of bringing the machine and materials up to temperature, a machine for producing glass pressware must be capable of running 24 hours a day, 365 days a year. While certain pressware machines, such as those used for the manufacture of glass tumblers, produce an inexpensive and relatively unrefined product, others, such as those for the manufacture of television face plates, produce a high quality product which meets rigid specifications. LM glass-forming press machines vary as to size of the item produced, productive
capacity per hour, and number and shape of glass-forming molds.
Pressware machines range in price from $200,000 to $3,500,000, including spare parts. Because of the durability of pressware machinery, demand for replacement machinery is low. Recent orders have been originating primarily in countries developing new or additional glassware manufacturing capacity. Since January 1, 1994, LM received orders for 16 extra-large glass pressing machines for the production of very large television picture tubes, including orders for 6 machines in 1995. These machines can be converted to produce picture tubes for high definition television ("HDTV"), which is currently being developed by television manufacturers.
During 1995, LM delivered 15 glass press machines. At December 31, 1995, LM had orders for, and had in various stages of production, 7 glass press machines, at a total sales price of approximately $15,280,000, which are scheduled for delivery in 1996. There can be no assurance that LM can obtain orders for additional large glass pressing orders to replace its existing orders.
LM believes that it is the largest supplier to glass companies that do not manufacture their own pressware machines in the worldwide pressware market. Competitors include various companies in Italy, Japan, France, Germany and elsewhere.
While several of the largest domestic and foreign producers of glass pressware frequently build their own glass-forming machines and produce spare parts in-house, nearly all pressware producers have made purchases of machines and/or spare parts from LM.
Packaging Machinery. Effective in January 1996, LM discontinued the manufacturing of automated case packers and related equipment; however, it will continue to sell parts for existing machines.
Lynch Tri-Can International. In December 1993, LM purchased substantially all of the assets of Tri-Can Systems, Inc. of Alsip, Illinois, a company that had ceased operations. LM established a new company, Lynch Tri-Can International, to produce most of the products formerly supplied by Tri-Can Systems Inc. These products are packaging machines of types that are complementary to LM's existing packaging machinery product lines. At December, 31, 1995, Tri-Can had orders for, and had in various stages of production, several packaging machines with a total sales price of approximately $1,426,000.
Parts for packaging machinery vary from approximately 20% - 35% of the sales associated with the packaging machinery operations.
There are many other United States equipment manufacturers of various sizes that compete with Tri-Can in these product lines.
Foreign Sales. During 1995, approximately 80% of LM's sales were made to foreign customers, and 15 of its 16 large glass pressing machine orders were from foreign customers in East Asia. The profitability of foreign sales is equivalent to that of domestic sales. Because many foreign orders require partial advance deposits, with the balance often secured by irrevocable letters of credit from banks in the foreign country, the Registrant believes that some of the credit risks commonly associated with doing business in foreign countries are minimized. The Registrant avoids currency exchange risk by transacting all foreign sales in United States dollars.
Backlog. LM had an order backlog of approximately $16,633,000 at December 31, 1995, compared with approximately $28,900,000 at December 31, 1994. The decrease in backlog is attributable to the smaller number of orders for large presses booked in 1995. LM believes that all of the December 31, 1995 backlog will be shipped during 1996. LM includes as backlog those orders which are subject to written contract, written purchase orders and telephone orders from long standing customers who maintain satisfactory credit ratings. LM has
historically experienced only insignificant cancellations of the orders included in its backlog.
Raw Materials. Raw materials are generally available to LM in adequate supply from a number of suppliers.
C. M-tron Industries, Inc. ("M-tron")
M-tron, 94% owned subsidiary of the Registrant, is a manufacturer and importer of quartz crystal products and clock oscillator modules used for clocking digital circuits, precision time base references and telecommunications equipment. A quartz crystal is an oscillating component which performs the clocking function in a circuit. Crystals and clock oscillator modules are used primarily in microprocessor-related equipment and telecommunications equipment. Frequency and time related products essentially use crystals or clock oscillators, with the addition of electronic circuitry vertically integrating the product. Crystal and clock oscillators are sold to original equipment manufacturers, both directly and through commissioned representatives and distributors.
For 1995, 1994, and 1993 M-tron's sales consisted of (in thousands):
1995 1994 1993
------ ------ ------
Crystals............................ $13,775 $ 7,179 $7,443
Oscillator Modules.................. 6,343 4,768 5,834
------- -------- -------
Total $20,118 $11,947 $13,277
======= ======= =======
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Competition. Quartz crystals and clock oscillators are sold in a highly competitive industry. There are numerous domestic and foreign manufacturers who are capable of providing quartz crystals and clock oscillators comparable in quality and performance to M-tron's products. Foreign competitors, particularly from the Far East, continue to dominate the United States market. M-tron seeks to manufacture smaller specialty orders of crystals and oscillators, which it believes it can competitively fill based upon price, quality and order response time. M-tron also performs quality control tests on all products it imports from the Far East and resells domestically and internationally.
Foreign Sales. M-tron's foreign sales in 1995 were approximately 10% of total sales and were concentrated in Canada and Western Europe. The profitability of foreign sales is substantially equivalent to that of domestic sales. Because sales are ordinarily spread over a number of customers in a number of developed countries with no individually significant shipments, the Registrant believes that risks commonly associated with doing business in foreign countries are minimized.
Backlog. M-tron had backlog orders of approximately $7,292,000 at December 31, 1995, compared with $3,596,000 at December 31, 1994. M-tron includes as backlog those orders which are subject to specific production release orders under written contracts, verbal and written orders from distributors with which M-tron has had long-standing relationships, as well as written purchase orders from sales representatives. M-tron believes that all of the backlog at December 31, 1995 will be shipped during 1996.
Raw Material. To the extent possible, M-tron's raw materials are purchased from multiple sources. Of primary significance are quartz crystal bars and the bases used for mounting certain finished crystals. M-tron currently has at least two qualified vendors for each of these items. No shortages have occurred in the recent past nor are any anticipated in the near future.
IV. OTHER INFORMATION
While the Registrant holds licenses and patents of various types, Registrant does not believe they are critical to its overall operations, except for (1) the television-broadcasting license of WHBF-TV and WOI-TV; (2) Western's, Inter-Community's, Cuba City's, Belmont's, Bretton Woods', JBN's and Haviland's exclusive franchise certificates to provide local-exchange telephone service within its service areas; (3) Western's FCC licenses to operate point-to-point microwave systems; and (4) partnerships and corporations in which Western and Inter-Community own minority interests in the entities that hold licenses to operate wireline cellular radio systems covering areas in New Mexico and North Dakota and (5) CLR Video's non-exclusive franchises to provide cable television service within its service area.
The Registrant conducts product development activities with respect to each of its major lines of manufacturing business. Currently, such activities are directed principally toward the improvement of existing products, the development of new products and/or diversification. The cost of such activities, which have been funded entirely by the Registrant, amounted to approximately $1,673,000 in 1995, $1,231,000 in 1994, and $622,000 in 1993.
The capital expenditures, earnings and competitive position of Registrant have not been materially affected by compliance with current federal, state, and local laws and regulations relating to the protection of the environment; however, Registrant cannot predict the effect of future laws and regulations. The Registrant has not experienced difficulties relative to fuel or energy shortages but substantial increases in fuel costs or fuel shortages could adversely affect the operations of Morgan.
No portion of the business of the Registrant is regarded as seasonal, except that, in the case of Morgan, fewer shipments are scheduled during the winter months in those parts of the country where weather conditions limit highway use.
There were no customers in 1995 that represents 10% or more of consolidated revenues. In 1994, one of the Morgan Drive Away, Inc. customers, Fleetwood Enterprises, Inc., constituted 13% of consolidated revenues of the Registrant. The Registrant does not believe that it is dependent on any single customer.
Excluding the following for The Morgan Group, Inc.: approximately 1,480 independent owner-operators and 1,475 drive-away drivers, the Registrant had a total of 1,986 employees at December 31, 1995 and 1,173 employees at December 31, 1994.
Additional information with respect to each of the Registrant's lines of business is included in Note 11 to the Consolidated Financial Statements included in the Registrant's 1995 Annual Report to Shareholders and is incorporated herein by reference.
V. EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction G (3) of Form 10-K, the following list of executive officers of the Registrant is included in Part 1 of this Annual Report on Form 10-K in lieu of being included in the Proxy Statement for the Annual Meeting of Shareholders to be held on May 9, 1996. Such list sets forth the names and ages of all executive officers of Registrant indicating all positions and offices with the Registrant held by each such person and each such person's principal occupations or employment during the past five years.
Offices and
Name Positions Held Age
---- -------------- ---
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Mario J. Gabelli Chairman and Chief Executive Officer 53
(since May 1986); Chairman and
Chief Executive Officer (since March,
1980) of Gabelli Funds Inc. (successor
to The Gabelli Group, Inc.),
holding company for subsidiaries
engaged in various aspects of the
securities business
Robert E. Dolan Chief Financial Officer (since February 44
1992) and Controller (since May 1990);
Corporate Controller (1984-1989)
of Plessey North America Corporation,
formerly the United States subsidiary
of a United Kingdom defense electronics/
telecommunications company.
Robert A. Hurwich Vice President-Administration, Secretary 54
& General Counsel (since February 10,
1994); Private Law Practice (1991-1993);
Vice President, Secretary & General
Counsel of Moore McCormack
Resources, Inc. (1975-1989)
Joseph H. Epel Treasurer (since May 1990) and 50
Assistant Treasurer (January to May
1990); Assistant Treasurer (1986-1989)
of SSMC, Inc., manufacturer and
distributor of Singer sewing machines
and other consumer products; Director,
Financial Planning and Analysis
(1983-1986) of the Singer Company
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The executive officers of the Registrant are elected annually by the Board of Directors at its organizational meeting in May and hold office until the organizational meeting in the next subsequent year and until their respective successors are chosen and qualified.
ITEM 2. PROPERTIES
Lynch leases space containing approximately 3,400 square feet for its executive offices in Greenwich, Connecticut.
LM's operations are housed in two adjacent buildings containing approximately 89,000 square feet situated on 3.19 acres of land in Bainbridge, Georgia. LM is in the process of expanding its manufacturing capacity at this site. Finished office area in the two buildings totals approximately 17,000 square feet. All such properties are subject to security deeds relating to a loans. Title is held by two mortgagees and upon repayment in full of the loans, title will revert to LM.
Lynch Tri-Can International operates in a leased facility in Alsip, Illinois; the facility consists of 20,000 square feet of production area and approximately 3,000 square feet of finished office space.
M-tron's operations are housed in two separate facilities in Yankton, South Dakota. These facilities contain approximately 34,000 square feet in the aggregate. One facility owned by M-tron contains approximately 18,000 square feet and is situated on 5.34 acres of land. This land and building are subject to a mortgage executed in support of a bank loan. The other Yankton facility
containing approximately 16,000 square feet is leased, which lease expires on September 30, 1997.
Spinnaker's corporate headquarters is located in Dallas, Texas, where it shares office space with an affiliate of its principal executive officers. In addition, Spinnaker owns approximately 27 acres of unimproved land located in Atlanta, Georgia.
Brown-Bridge owns two manufacturing facilities, Plant One and Plant Two, in Troy, Ohio. Plant One is a 200,000 square foot complex located on approximately five acres of land adjacent to the Miami River and Plant Two is a 98,000 square foot facility located on approximately five aces of land nearby. There are approximately five undeveloped acres of land adjacent to Plant Two that are available for expansion. Both facilities house manufacturing, administrative and shipping operations. All of Brown-Bridge's properties are subject to liens that secure indebtedness owed to its lenders.
Central Products owns two manufacturing facilities, one in Menasha, Wisconsin and the other in Brighton, Colorado. The Menasha facility contains approximately 160,000 square feet and the Brighton facility contains approximately 210,000 square feet. The corporate office and center for administrative services are located in a 20,000 square foot facility adjacent to the Menasha plant. All of Central Products' properties are subject to liens that secure indebtedness owned to its lenders. Central Products also maintain three leased distribution centers in Neenah, WI (90,000 square feet), Linden, NJ (30,000 square feet) and Denver, CO (100,000 square feet).
Entoleter owns a manufacturing plant containing 72,000 square feet located on approximately 5 acres of land in Hamden, Connecticut. The land and building are subject to a mortgage and security agreement executed in support of a bank loan. Entoleter also owns approximately 6 unimproved acres located in Hamden, Connecticut adjacent to its property.
Morgan owns approximately 24 acres of land with improvements in Elkhart, Indiana. The improvements include a 23,000 square foot office building used as Morgan's principal office, a 7,000 square foot leased building containing additional offices leased to one of its customers, a 9,000 square foot building used for Morgan's safety and driver service departments and also for storage and an 8,000 square foot building used as a garage to service company-owned vehicles. Most of Morgan's 11 regional and 109 dispatch offices are situated on leased property. Morgan also owns and leases property for parking and storage of equipment at various locations throughout the United States, usually in proximity to manufacturers of products moved by Morgan. The property leases have lease term commitments of a minimum of thirty days and a maximum of three years, at monthly rental ranging from $100 to $8,600. The Elkhart facility is currently mortgaged to one of Morgan's lenders. In total, Morgan owns 73 acres of land throughout the United States, including the Elkhart facilities.
Western New Mexico Telephone Company owns a total of 16.4 acres at twelve sites located in southwestern New Mexico. Its principal operating facilities are located in Silver City, where Western owns a building comprising a total of 6,480 square feet housing its administrative offices and certain storage facilities. In Cliff, Western owns five buildings with a total of 14,055 square feet in which are located additional offices and storage facilities as well as a vehicle shop, a wood shop, and central office switching equipment. Smaller facilities, used mainly for storage and for housing central office switching equipment, with a total of 8,384 square feet, are located in Lordsburg, Reserve, Magdalena and five other localities. In addition, Western leases 1.28 acres on which it has constructed four microwave towers and a 120 square-foot equipment building. Western has the use of 34 other sites under permits or easements at which it has installed various equipment either in small company-owned buildings (totaling 4,757 square feet) or under protective cover. Western also owns 3,101 miles of buried copper cable and 226 miles of buried fiber optic cable running through rights-of-way within its 15,000 square-mile service area. All Western's
properties described herein are encumbered under mortgages held by the Rural Electrification Administration ("REA").
Inter-Community Telephone Company owns 12 acres of land at 10 sites in North Dakota. Its main office at Nome, North Dakota contains 4,326 square feet of office and storage space. In addition, it has 4,400 square feet of garage space and 5,035 square feet utilized for its switching facilities. Inter-Community has 825 miles of buried copper cable and 105 miles of buried fiber optic cable. All of Inter-Community's properties described herein are encumbered under mortgages held by the REA.
Cuba City Telephone is located in a 3,800 square foot brick building on 0.4 of an acre of land. The building serves as the central office, commercial office, and garage for vehicle and material storage. The company also owns a cement block storage building of 800 square feet on 0.1 of an acre. In Madison, Wisconsin, Cuba City leases 900 square feet for administrative headquarters and financial functions. Belmont company is located in a cement block building of 800 square feet on .5 acre of land in Belmont, Wisconsin. The building houses the central office equipment for Belmont. The companies own a combined total of 217 miles of buried copper cable. All of Cuba City's and Belmont's property described herein are encumbered under mortgages held by the REA and Rural Telephone Bank, respectively.
J.B.N. Telephone Company owns a total of 2.25 acres at fifteen sites located in northeast Kansas. Its administrative and commercial office consisting of 2,820 square feet along with a 1,600 square feet garage and warehouse facility are located in Wetmore, Kansas. In addition, J.B.N. owns thirteen smaller facilities housing central office switching equipment and over 795 miles of buried copper cable. All properties described herein are encumbered under mortgages held by the Rural Utilities Service.
Haviland Telephone Company owns a total of 3.9 acres at 20 sites located in south central Kansas. Its administrative and commercial office consisting of 4,450 square feet is located in Haviland, Kansas. In addition, Haviland owns 19 smaller facilities housing garage, warehouse, and central office switching equipment and over 1,500 miles of buried copper cable. All properties described herein are encumbered under a mortgage to the National Bank for Co-Operatives ("Co-Bank").
CLR has its headquarters in leased space in Wetmore, Kansas. It also owns one small parcel of land and leases 22 small sites, which it uses for its cable receiving and transmission equipment. All properties described herein are encumbered under a mortgage to Co-Bank.
It is the Registrant's opinion that the facilities referred to above are in good operating condition and suitable and adequate for present uses.
ITEM 3. LEGAL PROCEEDINGS
Registrant is a party to certain lawsuits in the ordinary course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required by this Item 5 is incorporated herein by reference heading "Market Price Information and Common Stock Ownership" in Registrant's Annual Report to Shareholders for the year ended December 31, 1995.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item 6 is incorporated herein by reference to "Five Year Summary Selected Financial Data" in Registrant's Annual Report to Shareholders for the year ended December 31, 1995.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The information required by this Item 7 is incorporated herein by reference to "Management Discussion and Analysis" in Registrant's Annual Report to Shareholders for the year ended December 31, 1995.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Report of Independent Auditors and the following Consolidated Financial Statements of the Registrant are incorporated herein by reference to Registrant's Annual Report to Shareholders for the year ended December 31, 1995.
Consolidated Statements of Income - Years ended December 31, 1995, 1994, and 1993.
Consolidated Balance Sheets - December 31, 1995 and 1994.
Consolidated Statements of Shareholders' Equity - Years ended December 31, 1995, 1994, and 1993.
Consolidated Statements of Cash Flows - Years ended December 31, 1995, 1994, and 1993.
Notes to Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
In March 1994, The Morgan Group, Inc., a publicly traded subsidiary of the Registrant, approved Arthur Andersen LLP to replace Ernst & Young LLP as its auditors for 1994 and 1995. For 1996, Ernst & Young LLP, Registrant's auditors, will replace Arthur Andersen LLP as auditors for The Morgan Group, Inc. See Registrant's Form 8-K dated March 19, 1996 which is incorporated herein by reference.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 is included under the caption "Executive Officers of the Registrant" in Item 1 hereof and included under the captions "Election of Directors" and "Section 16(a) Reporting" in Registrant's Proxy Statement for its Annual Meeting of Shareholders to be held on May 9, 1996, which information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is included under the caption "Compensation of Directors," under the captions "Executive Compensation," "Executive Compensation and Benefits Committee Report on Executive Compensation" and "Performance Graph" in Registrant's Proxy Statement for its Annual Meeting of Shareholders to be held on May 9, 1996, which information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is included under the caption "Security Ownership of Certain Beneficial Owners and Management," in the Registrant's Proxy Statement for its Annual Meeting of Shareholders to be held on May 9, 1996, which information is included herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is included under the caption "Executive Compensation", "Transactions with Certain Affiliated Persons" and "Compensation Committee Interlocks and Insider Participants" in the Registrant's Proxy Statement for its Annual Meeting of Shareholders to be held on May 9, 1996, which information is included herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form 10-K Annual Report:
(1) Financial Statements:
The Report of Independent Auditors and the following Consolidated Financial Statements of the Registrant are incorporated herein by reference to the Registrant's Annual Report to Shareholders for the year ended December 31, 1995, as noted in Item 8 hereof:
Consolidated Balance Sheets - December 31, 1995 and 1994
Consolidated Statements of Income - Years ended December 31, 1995, 1994, and 1993.
Consolidated Statements of Shareholders' Equity - Years ended December 31, 1995, 1994, and 1993
Consolidated Statements of Cash Flows - Years ended December 31, 1995, 1994, and 1993
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
Schedule I - Condensed Financial Information of Registrant Schedule II- Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions, or are inapplicable, and therefore have been omitted.
(3) Exhibits:
See the Exhibit Index in this Form 10-K Annual Report. The following Exhibits listed in the Exhibit Index are filed with this Form 10-K Annual Report:
10(b) - Lynch Corporation 401(k) Plan.
10(s) - Directors Stock Program.
10(t) - Phantom Stock Plan.
10(v) - Stock Purchase Agreement, dated as of November 1,
1995, among Brighton Communications Corporation,
Lynch Telephone Corporation VIII and certain others
(excluding exhibits).
10(w) - Loan Agreement, dated as of November 6, 1995, between
PCS Corporation A and Aer Force Communications, L.P.
11 - Computation of Per Share Earnings.
13 - Annual Report to Shareholders for the year ended
December 31, 1995.
21 - Subsidiaries of the Registrant.
23 - Consents of Independent Auditors.
- Ernst & Young LLP
- Arthur Andersen LLP
- McGladrey & Pullen, LLP(2)
- Deloitte & Touche LLP
24 - Powers of Attorney.
27 - Financial Data Schedule
99 - Reports of Independent Auditors.
- Report of Arthur Andersen LLP on the
Consolidated Financial Statements of
The Morgan Group, Inc. for the year
ended December 31, 1995.
- Report of McGladrey & Pullen, LLP on
the Financial
Statements of Capital Communications
Corporation for the year ended December
31, 1995.
- Report of McGladrey & Pullen, LLP on
the Financial
Statements of Coronet Communications
Company for the year ended December 31,
1995.
- Report of Deloitte & Touche LLP on
the Financial Statements of Central
Products Company for the year ended
December 31, 1995.
(b) Reports on Form 8-K: A Report on Form 8-K was filed on
October 19, 1995 to report the acquisition by Registrant of
Central Products Company. Required financial statements
(including proforma financial statements) regarding the
acquisitions were filed on December 18, 1995 as an amendment
thereto and further amendments were filed on January 4,
February 2, March 4 and March 15, 1996. Reports on Form 8-K
were also filed on March 19,1996 to report certain information
on the proposed Dunkirk & Fredonia Telephone Company
acquisition and March 26, 1996 with respect to a change of
auditors at Morgan.
(c) Exhibits:
Exhibits are listed in response to Item 14(a)(3)
(d) Financial Statement Schedules:
|
Financial Statement Schedules are listed in response to Item
14(a)(2)
|
SIGNATURES
|
Pursuant to the requirements of Section 13 or 15(d) 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
ROBERT E. DOLAN
Chief Financial Officer (Principal
Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
--------- -------- ----
* MARIO J. GABELLI Chairman of the Board of
----------------------- Directors and Chief March 30, 1996
MARIO J. GABELLI Executive Officer
(Principal Executive Officer)
* MORRIS BERKOWITZ Director March 30, 1996
-----------------------
MORRIS BERKOWITZ
* E. VAL CERUTTI Director March 30, 1996
-----------------------
E. VAL CERUTTI
* PAUL J. EVANSON Director March 30, 1996
-----------------------
PAUL J. EVANSON
* SALVATORE MUOIO Director March 30, 1996
-----------------------
SALVATORE MUOI0
* RALPH R. PAPITTO Director March 30, 1996
-----------------------
RALPH R. PAPITTO
* PAUL P. WOOLARD Director March 30, 1996
-----------------------
PAUL P. WOOLARD
s/ROBERT E. DOLAN Chief Financial Officer
- ------------------------- (Principal Financial
ROBERT E. DOLAN and Accounting Officer) March 30, 1996
*s/ROBERT A. HURWICH
-------------------
ROBERT A. HURWICH
Attorney-in-fact
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SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
LYNCH CORPORATION
CONDENSED STATEMENT OF INCOME
Year Ended December 31
----------------------
1995 1994 1993
-------- -------- --------
(In Thousands of dollars)
Interest, Dividends & Gain on Sales
of Marketable Securities $ 232 $ 344 $ 365
Net Interest, Dividend & Other
Income from Subsidiaries 715 84 189
Gain on Sale of Subsidiary and
Affiliate Stock:
The Morgan Group, Inc. -- -- 3,851
Tremont Advisors, Inc. -- 190 475
------- ------- -------
TOTAL INCOME 947 618 4,880
Costs and Expenses:
Unallocated Corporate Administrative
Expense $ 2,869 $ 1,454 $ 1,378
Interest Expense 448 858 1,372
------ ------- -------
TOTAL COST AND EXPENSES 3,317 2,312 2,750
------ ------- -------
INCOME (LOSS) BEFORE INCOME TAXES, EQUITY
IN NET INCOME OF SUBSIDIARIES
EXTRAORDINARY ITEM, AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGE (2,370) (1,694) 2,130
Income Tax Benefit (Provision) 779 786 (1,161)
Equity in net income of subsidiaries 6,736 3,500 1,880
------- ------- -------
INCOME BEFORE EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE 5,145 2,592 2,849
Gain (Loss) on early extinguishment of debt -- (264) (206)
Cumulative effect to January 1, 1993
of change in accounting for income taxes -- -- 296
------- ------- ------
NET INCOME $ 5,145 $ 2,328 $ 2,939
======= ======= =======
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NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE A - DIVIDENDS FROM SUBSIDIARIES
Cash dividends paid to Lynch Corporation from the Registrant's consolidated
subsidiaries were $1,166,000 in 1995, $277,000 in 1994, and $1,000,000 in 1993.
No other dividends were received from subsidiaries or investees.
NOTE B - SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR ADDITIONAL INFORMATION
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
LYNCH CORPORATION
CONDENSED BALANCE SHEETS
December 31
-----------
1995 1994
-------- --------
(In Thousands of dollars)
ASSETS
- ------
CURRENT ASSETS
Cash and Cash Equivalents $ 498 $ 106
Marketable Securities and
Short Term Investments 770 1,234
Deferred Income Tax Benefits 479 292
Other Current Assets 44 8
------- -------
Total Current Assets 1,791 1,640
OFFICE EQUIPMENT (Net of Depreciation) 16 11
OTHER ASSETS (Principally Investment in
and Advances to Subsidiaries) 44,498 35,812
------- -------
Total Assets $46,305 $37,463
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES $ 7,935 $ 4,277
DEFERRED INCOME TAX LIABILITIES 1,652 1,637
DEFERRED CHARGES 1,206 1,265
TOTAL SHAREHOLDERS' EQUITY 35,512 30,284
------- -------
Total Liabilities and
Shareholders' Equity $46,305 $ 37,463
======= ========
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SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
LYNCH CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
Year Ended December 31
----------------------
(Thousands of dollars)
1995 1994 1993
-------- -------- --------
Cash provided from (used in)
operating activities ($1,158) $(1,675) $(1,955)
------- ------- -------
INVESTING ACTIVITIES:
Investment in Lynch Manufacturing 781 1,000 6,934
Investment and advances to in
Brighton Communications Corporation -- (1,780) (150)
Loan to Spinnaker Industries, Inc. -- (965) --
Investment in Brown-Bridge
Industries, Inc. -- (407) --
Investment in and advances to LENCO II 2,535 (2,535) (31)
Investment in and advances to
The Morgan Group, Inc. 1,300 -- --
Investment in and advances
to PCS Partnerships (7,010) -- --
Sales (purchases) of current marketable
securities-net -- -- 2,452
Other (13) 25 22
------ ------- -------
NET CASH PROVIDED FROM (USED IN)
INVESTING ACTIVITIES (2,407) (4,662) 9,227
------ ------- -------
FINANCING ACTIVITIES:
Net Borrowings
Line of credit 3,709 3,198 --
Redemption of debentures -- (11,835) (6,144)
Sale of treasury stock -- 2,290 --
conversion of debenture into
common stock -- 1,597 --
Other 248 305 --
------ ------ -------
NET CASH PROVIDED (USED IN)
FINANCING ACTIVITIES 3,957 (4,445) (6,144)
------ ------- -------
TOTAL INCREASE (DECREASE)IN CASH
AND CASH EQUIVALENTS 392 (10,782) 1,128
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 106 10,888 9,760
------- ------- --------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 498 $ 106 $ 10,888
======= ======= ========
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SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
LYNCH CORPORATION AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
------------------------ -------- -------- ---------- ----------
ADDITIONS
-------------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER ACCOUNTS DEDUCTIONS END OF
DESCRIPTION OF PERIOD EXPENSES - DESCRIBE - DESCRIBE PERIOD
------------------------ ---------- --------- ---------- ---------- --------
YEAR ENDED DECEMBER 31, 1995
ALLOWANCE FOR UNCOLLECTIBLE $737,000 $987,000 $1,160,000(D) $1,152,000(A) $1,732,000
YEAR ENDED DECEMBER 31, 1994
ALLOWANCE FOR UNCOLLECTIBLE $305,000 $605,000 $ 240,000(C) $ 413,000(A) $ 737,000
YEAR ENDED DECEMBER 31, 1993
ALLOWANCE FOR UNCOLLECTIBLE $627,000 $268,000 $ 4,000(B) $ 586,000(A) $ 305,000
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(A) UNCOLLECTIBLE ACCOUNTS WRITTEN OFF ARE NET OF RECOVERIES.
(B) RECLASS
(C) RECLASSES ($43,000) AND AMOUNT RECORDED AS PART OF THE ALLOCATION OF PURCHASE PRICE OF ACQUIRED COMPANIES ($197,000).
(D) ALLOCATION OF PURCHASE PRICE OF ACQUIRED COMPANY.
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
3 (a) Restated Articles of Incorporation of Registrant (incorporated
by reference to Exhibit 3(a) of the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1987).
(b) By-Laws of the Registrant, (incorporated by reference to the
Exhibit 3(b) of the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1987).
4 (a) Loan Agreement and Revolving Loan Note of Lynch Telephone
Corporation, dated October 18, 1989, (incorporated by
reference to exhibit 4(d) of the Registrant's Form 10-K for
the year ended December 31, 1989).
(b) Loan Agreement, dated as of September 16, 1994, between
Transamerican Business Credit Corporation and Brown-Bridge
Industries, Inc. (incorporated by reference to Exhibit 4 to
Registrant's Form 10-Q for the Quarter ended September 30,
1994).
(c) Credit Agreement, dated as of September 29, 1995, by and among
Central Products Acquisition Corp., as Borrower, Spinnaker
Industries, Inc., as Pledgor, and Heller Financial, Inc. as
Agent and Lender (incorporated by reference to Exhibit 7.2 to
Registrant's Form 8-K dated October 19, 1995).
(d) Term Note A, dated October 4, 1995, from Central Products
Acquisition Corp. payable to the order of Heller Financial
Inc. in the original principal amount of $10 million
(incorporated by reference to Exhibit 7.3 to Registrant' Form
8-K dated October 18, 1995).
(e) Term Note B, dated October 4,1995, from Central Products
Acquisition Corp. payable to the order of Heller Financial,
Inc. in the principal amount of $16 million (incorporated by
reference to Exhibit 7.4 to Registrant's Form 8-K dated
October 18, 1885).
(f) Revolving Note, dated September 29, 1995, from Central
Products Acquisition Corp. payable to the order of Heller
Financial, Inc. in the maximum principal amount of $24 million
(incorporated by reference to Exhibit 7.5 to Registrant's Form
8-K dated October 18,1995).
(g) Subordinated Promissory Note, dated September 29, 1995, from
Spinnaker Industries, Inc. payable to Also Standard
Corporation in the original principal amount of $25 million
(incorporated by reference to Exhibit 7.6 to Registrant's Form
8-K, dated October 18, 1995.)
(h) The Registrant, by signing this Form 10-K Annual Report,
agrees to furnish to the Securities and Exchange Commission a
copy of any long-term debt instrument where the amount of the
securities authorized thereunder does not exceed 10 percent of
the total assets of the Registrant on a consolidated basis.
10 (a) Partnership Agreement, dated March 11, 1987, between Lombardo
Communications, Inc. and Lynch Entertainment Corporation
(incorporated by reference to Exhibit 10(e) of the Registrant'
|
Annual Report on Form 10-K for the year ended December 31, 1987).
*(b) Lynch Corporation 401(k) Savings Plan.
(c) Stock Purchase Agreement, dated May 13, 1993, whereby Registrant acquired J.B.N. Telephone Company, Inc. (incorporated by reference to Exhibit 2(a) of the Registrant's Form 8-K, dated December 13, 1993).
(d) Stock Purchase Agreement, dated January 19, 1994, between Registrant and Mario J. Gabelli (incorporated by reference to Exhibit II of Amendment Number 36 to Schedule 13D filed by Mario J. Gabelli and affiliated companies on January 19, 1994).
(e) Shareholder Agreement among Capital Communications Company, Inc., Lombardo Communications, Inc. and Lynch Entertainment Corporation II (incorporated by reference to Exhibit 10 of Registrant's form 8-K, dated March 14, 1994).
*(f) Letter Agreement, dated as of January 18, 1994, between Registrant and Michael J. Small (incorporated by reference to Exhibit 10(a) to Registrant's Form 10-Q for the Quarter ended June 30, 1994).
*(g) Stock Option Agreement, dated as of January 18, 1994, between Registrant and Michael J. Small (incorporated by reference to Exhibit 10(b) to Registrant's Form 10-Q for the Quarter ended June 10, 1994).
(h) Acquisition Agreement between Brown-Bridge Acquisition Corporation and Kimberly-Clarke Corporation, dated June 15, 1994 (incorporated by reference to Exhibit 10(c) to Registrant's Form 10-Q for the Quarter ended June 10, 1994).
*(i) Management Agreement, dated as of June 10, 1994, by and among Boyle, Fleming, George & Co., Inc., Safety Railway Service Corporation (incorporated by reference to Exhibit 7.1 to Registrant's Form 8-K dated June 13, 1994).
(k) Warrant Purchase Agreement, dated as of June 10, 1994, by and among Boyle, Fleming, George & Co., Inc. and Safety Railway Service Corporation (incorporated by reference by Exhibit 7.1 to the Registrant's Form 8-K dated June 13, 1994).
(l) A Warrant dated as of June 10, 1994, executed by Safety Railway Service Corporation (incorporated by reference to Exhibit 7.1 to Registrant's Form 8-K dated Juan 13, 1994).
(m)(i) Asset Purchase Agreement, dated as of June 15, 1994, between
Kimberly-Clark Corporation and Brown-Bridge Acquisition Corp.
(Exhibits omitted) (Incorporated by reference to Exhibit 10(c)
to Registrant's Form 10-Q for the quarter ended June 30,
1994). Registrant agrees to furnish supplementally a copy of
any omitted schedule to the Securities and Exchange Commission
upon request.
(m)(ii) Amendments Nos. 1-3 to Asset Purchase Agreement by and between Kimberly-Clark Corporation and Brown-Bridge Industries, Inc. (formerly Brown-Bridge Acquisition Corp.) (incorporated by reference to Registrant's Form 8-K dated September 19, 1994).
(o) Stock Purchase Agreement, dated as of August 26, 1994, among Brighton Communications Corporation, Lynch Telephone Corporation
VII, Universal Service Telephone Company and InterDigital Communications Corporation (Exhibits omitted). (Incorporated by reference to exhibit 7.1 to Registrant's Form 8-K dated September 26, 1994).
(q) Shareholders' and Voting Agreement, dated September 16, 1994, among Safety Railway Service Corporation, Brown-Bridge Industries, Inc. and the other stockholders of Brown-Bridge (incorporated by reference to Exhibit 10(q) to Registrant's Form 10-K for the year ended December 31, 1994).
(r) Put Option Agreements, dated September 16, 1994, among Safety Railway, Brown-Bridge and certain stockholders of Brown-Bridge (incorporated by reference to Exhibit 10(q) to Registrant's Form 10-K for the year ended December 31, 1994).
*(s) Directors Stock Plan.
*(t) Phantom Stock Plan.
(u) Stock and Asset Purchase Agreement, dates as of September 27, 1995, by and among Central Products Acquisition Corp., Unisource Worldwide, Inc. and Alco Standard Corporation (incorporated by reference to Exhibit 7.1 to Registrant's Form 8-K dated October 18, 1995).
(v) Stock Purchase Agreement, dated as of November 1, 1995, among Brighton Communications Corporation, Lynch Telephone Corporation VIII and certain other persons (excluding schedules exhibits). Registrant agrees to furnish supplementally a copy of any omitted schedule or exhibit to the Securities and Exchange Commission.
(w) Loan Agreement, dated as of November 6, 1995, between PCS
Corporation A and Aer Force Communications L.P. (loan
agreements in similar form with four other partnerships
increase the total potential commitment to $41.8 million.
11 Computation of Per Share Earnings.
13 Annual Report to Shareholders for the year ended December 31,
1995.
21 Subsidiaries of the Registrant.
23 Consents of Independent Auditors.
- Ernst & Young LLP
- Arthur Andersen LLP
- McGladrey & Pullen, LLP(2)
- DeLoitte & Touche LLP
24 Powers of Attorney.
99 Report of Independent Auditors.
- Report of Arthur Andersen LLP on the Consolidated Financial
Statements of the Morgan Group, Inc. for the year ended
December 31, 1995.
- Report of McGladrey & Pullen, LLP on the Consolidated
Financial Statements of Capital Communications
Corporation for the year ended December 31, 1995.
- Report of McGladrey & Pullen, LLP on the Consolidated
Financial Statements of Coronet Communications Corporation
for the year ended December 31, 1995.
- Report of Deloitte LLP on the Financial Statements of
Central Products Company for the year ended December 31,
1995.
|
The Exhibits listed above (with the exception of the Annual Report to Shareholders) have been filed separately with the Securities and Exchange Commission in conjunction with this Annual Report on Form 10-K or have been incorporated by reference into this Annual Report on Form 10-K. Lynch Corporation will furnish to each of its shareholders a copy of any such Exhibit for a fee equal to Lynch Corporation's cost in furnishing such Exhibit. Requests should be addressed to the Office of the Secretary, Lynch Corporation, 8 Sound Shore Drive, Greenwich, Connecticut 06830.
EXHIBIT 10(b)
Plan #002
NONSTANDARDIZED
ADOPTION AGREEMENT
PROTOTYPE CASH OR DEFERRED PROFIT-SHARING
PLAN AND TRUST/CUSTODIAL ACCOUNT
Sponsored by
FLEET NATIONAL BANK OF MASSACHUSETTS
The Employer named below hereby establishes a Cash or Deferred Profit-Sharing Plan for eligible Employees as provided in this Adoption Agreement and the accompanying Basic Prototype Plan and Trust/Custodial Account Basic Plan Document #06.
1. EMPLOYER INFORMATION
NOTE: If multiple Employers are adopting the Plan, complete this section based on the lead Employer. Additional Employers may adopt this Plan by attaching executed signature pages to the back of the Employer's Adoption Agreement.
(a) NAME AND ADDRESS:
Lynch Corporation
8 Sound Shore Drive
Greenwich, CT 06830
(b) TELEPHONE NUMBER: (203)629-3333
(c) TAX ID NUMBER: 38-1799862
(d) FORM OF BUSINESS:
/ / (i) Sole Proprietor
/ / (ii) Partnership
/X/ (iii) Corporation
/ / (iv) "S" Corporation (formerly known as Subchapter S)
/ / (v) Other:
(e) NAME OF INDIVIDUAL AUTHORIZED TO ISSUE INSTRUCTIONS TO THE TRUSTEE/CUSTODIAN:
Joseph Epel, Robert E Dolan
(f) NAME OF PLAN: Lynch Corporation 401(k) Savings Plan
(g) THREE DIGIT PLAN NUMBER FOR ANNUAL RETURN/REPORT: 004
2. EFFECTIVE DATE
(a) This is a new Plan having an effective date of .
(b) This is an amended Plan.
The effective date of the original Plan was June 1, 1989 .
The effective date of the amended Plan is April 1, 1995 .
|
(c) If different from above, the Effective Date for the Plan's Elective Deferral provisions shall be .
3. DEFINITIONS
(a) "Collective or Commingled Funds" (Applicable to institutional Trustees only.) Investment in collective or commingled funds as permitted at paragraph 13.3(b) of the Basic Plan Document #06 shall only be made to the following specifically named fund(s):
Attachment A
Funds made available after the execution of this Adoption Agreement will be listed on schedules attached to the end of this Adoption Agreement.
(b) "Compensation" Compensation shall be determined on the basis of the:
/X/ (i) Plan Year.
/ / (ii) Employer's Taxable Year.
/ / (iii) Calendar Year.
Compensation shall be determined on the basis of the following safe-harbor definition of Compensation in IRS Regulation Section 1.414(s)-1(c):
/ / (iv) Code Section 6041 and 6051 Compensation,
/X/ (v) Code Section 3401(a) Compensation, or
/ / (vi) Code Section 415 Compensation.
Compensation, for purposes of allocating Employer Contributions, /X/ shall / / shall not include Employer contributions made pursuant to a Salary Savings Agreement which are not includable in the gross income of the Employee for the reasons indicated in the definition of Compensation at 1.12 of the
Basic Plan Document #06.
For purposes of the Plan, Compensation shall be limited to $ ,
the maximum amount which will be considered for Plan purposes. [If an amount
is specified, it will limit the amount of contributions allowed on behalf of
higher compensated Employees. Completion of this section is not intended to
coordinate with the $200,000 of Code Section 415(d), thus the amount should be
less than $200,000 as adjusted for cost-of- living increases.]
(iii) Exclusions From Compensation:
(1) overtime.
(2)bonuses.
(3) commissions.
(4)
Type of Contribution(s) Exclusion(s)
Elective Deferrals [Section 7(b)]
Matching Contributions [Section 7(c)]
Qualified Non-Elective Contributions [Section 7(d)]
and Non-Elective Contributions [Section 7(e)]
(c) "Entry Date"
/ / (i) The first day of the Plan Year nearest the date on which an
Employee meets the eligibility requirements.
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/ / (ii) The earlier of the first day of the Plan Year or the first day of the seventh month of the Plan Year coinciding with or following the date on which an Employee meets the eligibility requirements.
/ / (iii) The first day of the Plan Year following the date on which the Employee meets the eligibility requirements. If this election is made, the Service requirement at 4(a)(ii) may not exceed 1/2 year and the age requirement at 4(b)(ii) may not exceed 20-1/2.
/ / (iv) The first day of the month coinciding with or following the date on which an Employee meets the eligibility requirements.
/X/ (v) The first day of the Plan Year, or the first day of the fourth month, or the first day of the seventh month or the first day of the tenth month, of the Plan Year coinciding with or following the date on which an Employee meets the eligibility requirements.
(d) "Hours of Service" Shall be determined on the basis of the method selected below. Only one method may be selected. The method selected shall be applied to all Employees covered under the Plan as follows:
/X/ (i) On the basis of actual hours for which an Employee is paid or entitled to payment.
/ / (ii) On the basis of days worked.
An Employee shall be credited with ten (10) Hours of Service
if under paragraph 1.42 of the Basic Plan Document #06 such Employee would be
credited with at least one (1) Hour of Service during the day.
/ / (iii) On the basis of weeks worked.
An Employee shall be credited with forty-five (45) Hours of
Service if under paragraph 1.42 of the Basic Plan Document #06 such Employee
would be credited with at least one (1) Hour of Service during the week.
/ / (iv) On the basis of semi-monthly payroll periods.
An Employee shall be credited with ninety-five (95) Hours of
Service if under paragraph 1.42 of the Basic Plan Document #06 such Em-ployee
would be credited with at least one (1) Hour of Service during the semi-monthly
payroll period.
/ / (v) On the basis of months worked.
An Employee shall be credited with one-hundred-ninety (190)
Hours of Service if under paragraph 1.42 of the Basic Plan Document #006 such
Employee would be credited with at least one (1) Hour of Service during the
month.
(e) "Limitation Year" The 12-consecutive month period commencing on January 1 and ending on December 31.
If applicable, the Limitation Year will be a short Limitation Year commencing on and ending on . Thereafter, the Limitation Year shall end on the date last specified above.
(f) "Net Profit"
/X/ (i) Not applicable (profits will not be required for any contributions to the Plan).
/ / (ii) As defined in paragraph 1.49 of the Basic Plan Document #06.
/ / (iii) Shall be defined as:
(Only use if definition in paragraph 1.49 of the Basic Plan Document #06 is to be superseded.)
(g) "Plan Year" The 12-consecutive month period commencing on January 1 and ending on December 31.
If applicable, the Plan Year will be a short Plan Year commencing on and ending on . Thereafter, the Plan Year shall end on the date last specified above.
(h) "Qualified Early Retirement Age" For purposes of making distributions under the provisions of a Qualified Domestic Relations Order, the Plan's Qualified Early Retirement Age with regard to the Participant against whom the order is entered /X/ shall / / shall not be the date the order is determined to be qualified. If "shall" is elected, this will only allow payout to the alternate payee(s).
(i) "Qualified Joint and Survivor Annuity" The safe-harbor provisions of paragraph 8.7 of the Basic Plan Document #06 /X/ are / / are not applicable. If not applicable, the survivor annuity shall be % (50%, 66-2/3%, 75% or 100%) of the annuity payable during the lives of the Participant and Spouse. If no answer is specified, 50% will be used.
(j) "Taxable Wage Base"
/X/ (i) Not Applicable - Plan is not integrated with Social Security.
/ / (ii) The maximum earnings considered wages for such Plan Year under Code Section 3121(a).
/ / (iii) % (not more than 100%) of the amount considered wages for such Plan Year under Code Section 3121(a).
/ / (iv) $ , provided that such amount is not in excess of the amount determined under paragraph 3(j)(ii) above.
/ / (v) For the 1989 Plan Year $10,000. For all subsequent Plan Years, 20% of the maximum earnings considered wages for such Plan Year under Code Section 3121(a).
NOTE: Using less than the maximum at (ii) may result in a change in the allocation formula in Section 7.
(k) "Valuation Date(s)" Allocations to Participant Accounts will be done in accordance with Article V of the Basic Plan Document #06:
(i) Daily (v) Quarterly
(ii) Weekly (vi) Semi-Annually
(iii) Monthly (vii) Annually
(iv) Bi-Monthly
Indicate Valuation Date(s) to be used by specifying option from list above:
Type of Contribution(s) Valuation Date(s)
After-Tax Voluntary Contributions [Section 6]
Elective Deferrals [Section 7(b)] (i)
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Matching Contributions [Section 7(c)] (i)
Qualified Non-Elective Contributions [Section 7(d)]
Non-Elective Contributions [Section 7(e), (f) and (g)]
Minimum Top-Heavy Contributions [Section 7(i)] (i)
(l) "Year of Service"
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(i) For Eligibility Purposes: The 12-consecutive month period during which an Employee is credited with 1000 (not more than 1,000) Hours of Service.
(ii) For Allocation Accrual Purposes: The 12-consecutive month period during which an Employee is credited with 1000 (not more than 1,000) Hours of Service.
(iii) For Vesting Purposes: The 12-consecutive month period during which an Employee is credited with 0000 (not more than 1,000) Hours of Service.
4. ELIGIBILITY REQUIREMENTS
(a) Service:
/ / (i) The Plan shall have no service requirement.
/X/ (ii) The Plan shall cover only Employees having completed at least one [not more than three (3)] Years of Service. If more than one (1) is specified, for Plan Years beginning in 1989 and later, the answer will be deemed to be one (1).
NOTE: If the eligibility period selected is less than one year, an Employee will not be required to complete any specified number of Hours of Service to receive credit for such period.
(b) Age:
/ / (i) The Plan shall have no minimum age requirement.
/X/ (ii) The Plan shall cover only Employees having attained age 18 (not more than age 21).
(c) Classification:
The Plan shall cover all Employees who have met the age and service requirements with the following exceptions:
/ / (i) No exceptions.
/X/ (ii) The Plan shall exclude Employees included in a unit of Employees covered by a collective bargaining agreement between the Employer and Employee Representatives, if retirement benefits were the subject of good
faith bargaining. For this purpose, the term "Employee Representative" does not include any organization more than half of whose members are Employees who are owners, officers, or executives of the Employer.
/ / (iii) The Plan shall exclude Employees who are nonresident aliens and who receive no earned income from the Employer which constitutes income from sources within the United States.
/ / (iv) The Plan shall exclude from participation any nondiscriminatory classification of Employees determined as follows:
(d) Employees on Effective Date:
/X/ (i) Not Applicable. All Employees will be required to satisfy both the age and Service requirements specified above.
/ / (ii) Employees employed on the Plan's Effective Date do not have to satisfy the Service requirements specified above.
/ / (iii) Employees employed on the Plan's Effective Date do not have to satisfy the age requirements specified above.
5. RETIREMENT AGES
(a) Normal Retirement Age:
If the Employer imposes a requirement that Employees retire upon reaching a specified age, the Normal Retirement Age selected below may not exceed the Employer imposed mandatory retirement age.
/X/ (i) Normal Retirement Age shall be 65 (not to exceed age 65).
/ / (ii) Normal Retirement Age shall be the later of attaining age (not to exceed age 65) or the (not to exceed the 5th) anniversary of the first day of the first Plan Year in which the Participant commenced participation in the Plan.
(b) Early Retirement Age:
/X/ (i) Not Applicable.
/ / (ii) The Plan shall have an Early Retirement Age of (not less than 55) and completion of Years of Service.
6. EMPLOYEE CONTRIBUTIONS
/X/ (a) Participants shall be permitted to make Elective Deferrals in any amount from 1 % up to 15 % of their Compensation.
If (a) is applicable, Participants shall be permitted to amend
their Salary Savings Agreements to change the contribution percentage as provided below:
/ / (i) On the Anniversary Date of the Plan,
/ / (ii) On the Anniversary Date of the Plan and on the first day of the seventh month of the Plan Year,
/X/ (iii) Not more often than once each calendar quarter, or
/ / (iv) Upon 30 days notice to the Employer.
/ / (b) Participants shall be permitted to make after tax Voluntary Contributions.
/ / (c) Participants shall be required to make after tax Voluntary Contributions as follows (Thrift Savings Plan):
/ / (i) % of Compensation.
/ / (ii) A percentage determined by the Employee on his or her enrollment form.
/x/ (d) If necessary to pass the Average Deferral Percentage Test, Participants / / may /x/ may not have Elective Deferrals recharacterized as Voluntary Contributions.
NOTE: The Average Deferral Percentage Test will apply to contributions under (a) above. The Average Contribution Percentage Test will apply to contributions under (b) and (c) above, and may apply to (a).
7. EMPLOYER CONTRIBUTIONS AND ALLOCATION THEREOF
NOTE: The Employer shall make contributions to the Plan in accordance with the formula or formulas selected below. The Employer's contribution shall be subject to the limitations contained in Articles III and X. For this purpose, a contribution for a Plan Year shall be limited for the Limitation Year which ends with or within such Plan Year. Also, the integrated allocation formulas below are for Plan Years beginning in 1989 and later. The Employer's allocation for earlier years shall be as specified in its Plan prior to amendment for the Tax Reform Act of 1986.
(a) Profits Requirement:
(i) Current or Accumulated Net Profits are required for:
/ / (A) Matching Contributions.
/ / (B) Qualified Non-Elective Contributions.
/ / (C) discretionary contributions.
(ii) No Net Profits are required for:
/X/ (A) Matching Contributions.
/ / (B) Qualified Non-Elective Contributions.
/X/ (C) discretionary contributions.
NOTE: Elective Deferrals can always be contributed regardless of profits.
/X/ (b) Salary Savings Agreement:
The Employer shall contribute and allocate to each Participant's account an amount equal to the amount withheld from the Compensation of such Participant pursuant to his or her Salary Savings Agreement. If applicable, the maximum percentage is specified in Section 6 above.
An Employee who has terminated his or her election under the Salary Savings Agreement other than for hardship reasons may not make another Elective Deferral:
/ / (i) until the first day of the next Plan Year.
/ / (ii) until the first day of the next valuation period.
/X/ (iii) for a period of three month(s) (not to exceed 12 months).
/X/ (c) Matching Employer Contribution [See paragraphs (h) and (i)]:
/X/ (i) Percentage Match: The Employer shall contribute and allocate to each eligible Participant's account an amount equal to 25 % of the amount contributed and allocated in accordance with paragraph 7(b) above and (if checked) % of / / the amount of Voluntary Contributions made in accordance with paragraph 4.1 of the Basic Plan Document #06. The Employer shall not match Participant Elective Deferrals as provided above in excess of $800.00 or in excess of % of the Participant's Compensation or if applicable, Voluntary Contributions in excess of $ or in excess of % of the Participant's Compensation. In no event will the match on both Elective Deferrals and Voluntary Contributions exceed a combined amount of $ or %.
/x/ (ii) Discretionary Match: The Employer shall contribute and allocate to each eligible Participant's account a percentage of the Participant's Elective Deferral contributed and allocated in accordance with paragraph 7(b) above. The Employer shall set such percentage prior to the end of the Plan Year. The Employer shall not match Participant Elective Deferrals in excess of $800.00 or in excess of % of the Participant's Compensation.
/ / (iii) Tiered Match: The Employer shall contribute and allocate to each Participant's account an amount equal to % of the first % of the Participant's Compensation, to the extent deferred.
% of the next % of the Participant's
Compensation, to the extent deferred.
% of the next % of the Participant's Compensation,
to the extent deferred.
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NOTE: Percentages specified in (iii) above may not increase as the percentage of Participant's contribution increases.
/ / (iv) Flat Dollar Match: The Employer shall contribute and allocate to each Participant's account $ if the Participant defers at least 1% of Compensation.
/ / (v) Percentage of Compensation Match: The Employer shall contribute and allocate to each Participant's account % of Compensation if the Participant defers at least 1% of Compensation.
/ / (vi) Proportionate Compensation Match: The Employer shall contribute and allocate to each Participant who defers at least 1% of Compensation, an amount determined by multiplying such Employer Matching Contribution by a fraction the numerator of which is the Participant's Compensation and the denominator of which is the Compensation of all Participants eligible to receive such an allocation. The Employer shall set such discretionary contribution prior to the end of the Plan Year.
/X/ (vii) Qualified Match: Employer Matching Contributions will be treated as Qualified Matching Contributions to the extent specified below:
/ / (A) All Matching Contributions.
/ / (B) None.
/ / (C) % of the Employer's Matching Contribution.
/ / (D) Up to % of each Participant's Compensation.
/X/ (E) The amount necessary to meet the / / Average Defer- ral Percentage (ADP) Test, / / Average Contribution Percentage (ACP) Test, /x/ Both the ADP and ACP Tests.
(viii) Matching Contribution Computation Period: The time period upon which matching contributions will be based shall be
/ / (A) weekly
/ / (B) bi-weekly
/ / (C) semi-monthly
/ / (D) monthly
/ / (E) quarterly
/ / (F) semi-annually
/X/ (G) annually
(ix) Eligibility for Match: Employer Matching Contributions, whether or not Qualified, will only be made on Employee Contributions not withdrawn prior to the end of the / / valuation period /X/ Plan Year.
/ / (d) Qualified Non-Elective Employer Contribution - [See paragraphs
(h) and (i)] These contributions are fully vested when contributed.
The Employer shall have the right to make an additional discretionary contribution which shall be allocated to each eligible Employee in proportion to his or her Compensation as a percentage of the Compensation of all eligible Employees. This part of the Employer's contribution and the allocation thereof shall be unrelated to any Employee contributions made hereunder. The amount of Qualified non-Elective Contributions taken into account for purposes of meeting the ADP or ACP test requirements is:
/ / (i) All such Qualified non-Elective Contributions.
/ / (ii) The amount necessary to meet / / the ADP test, / / the ACP test, / / Both the ADP and ACP tests.
Qualified non-Elective Contributions will be made to:
/ / (iii) All Employees eligible to participate.
/ / (iv) Only non-Highly Compensated Employees eligible to participate.
/ / (e) Additional Employer Contribution Other Than Qualified Non-Elective Contributions - Non-Integrated [See paragraphs (h) and (i)]
The Employer shall have the right to make an additional discretionary contribution which shall be allocated to each eligible Employee in proportion to his or her Compensation as a percentage of the Compensation of all eligible Employees. This part of the Employer's contribution and the allocation thereof shall be unrelated to any Employee contributions made hereunder.
/ / (f) Additional Employer Contribution - Integrated Allocation Formula [See paragraphs (h) and (i)]
The Employer shall have the right to make an additional discretionary contribution. The Employer's contribution for the Plan Year plus any forfeitures shall be allocated to the accounts of eligible Participants as follows:
NOTE: If the Plan is not Top-Heavy or if the Top-Heavy minimum contribution or benefit is provided under another Plan [see Section 11(c)(ii)] covering the same Employees, sub-paragraphs (i) and (ii) below may be disregarded and 5.7%, 4.3% or 5.4% may be substituted for 2.7%, 1.3% or 2.4% where it appears in (iii) below.
(i) First, to the extent contributions and forfeitures are sufficient, all Participants will receive an allocation equal to 3% of their
Compensation.
(ii) Next, any remaining Employer Contributions and forfeitures will be allocated to Participants who have Compensation in excess of the Taxable Wage Base (excess Compensation). Each such Participant will receive an allocation in the ratio that his or her excess compensation bears to the excess Compensation of all Participants. Participants may only receive an allocation of 3% of excess Compensation.
(iii) Next, any remaining Employer contributions and forfeitures will be allocated to all Participants in the ratio that their Compensation plus excess Compensation bears to the total Compensation plus excess Compensation of all Participants. Participants may only receive an allocation of up to 2.7% of their Compensation plus excess Compensation, under this allocation method. If the Taxable Wage Base defined at Section 3(j) is less than or equal to the greater of $10,000 or 20% of the maximum, the 2.7% need not be reduced. If the amount specified is greater than the greater of $10,000 or 20% of the maximum Taxable Wage Base, but not more than 80%, 2.7% must be reduced to 1.3%. If the amount specified is greater than 80% but less than 100% of the maximum Taxable Wage Base, the 2.7% must be reduced to 2.4%.
(iv) Next, any remaining Employer contributions and forfeitures will be allocated to all Participants (whether or not they received an allocation under the preceding paragraphs) in the ratio that each Participant's Compensation bears to all Participants' Compensation.
/ / (g) Additional Employer Contribution-Alternative Integrated Allocation Formula. [See paragraph (h) and (i)]
The Employer shall have the right to make an additional discretionary contribution. To the extent that such contributions are sufficient, they shall be allocated as follows:
% of each eligible Participant's Compensation plus % of Compensation in excess of the Taxable Wage Base defined at Section 3(j) hereof. The percentage on excess compensation may not exceed the lesser of (i) the amount first specified in this paragraph or (ii) the greater of 5.7% or the percentage rate of tax under Code Section 3111(a) as in effect on the first day of the Plan Year attributable to the Old Age (OA) portion of the OASDI provisions of the Social Security Act. If the Employer specifies a Taxable Wage Base in Section 3(j) which is lower than the Taxable Wage Base for Social Security purposes (SSTWB) in effect as of the first day of the Plan Year, the percentage contributed with respect to excess Compensation must be adjusted. If the Plan's Taxable Wage Base is greater than the larger of $10,000 or 20% of the SSTWB but not more than 80% of the SSTWB, the excess percentage is 4.3%. If the Plan's Taxable Wage Base is greater than 80% of the SSTWB but less than 100% of the SSTWB, the excess percentage is 5.4%.
NOTE: Only one plan maintained by the Employer may be integrated with Social Security.
(h) Allocation of Excess Amounts (Annual Additions)
In the event that the allocation formula above results in an Excess
Amount, such excess shall be:
/X/ (i) placed in a suspense account accruing no gains or losses for the benefit of the Participant.
/ / (ii) reallocated as additional Employer contributions to all other Participants to the extent that they do not have any Excess Amount.
(i) Minimum Employer Contribution Under Top-Heavy Plans:
For any Plan Year during which the Plan is Top-Heavy, the sum of the contributions and forfeitures as allocated to eligible Employees under paragraphs 7(d), 7(e), 7(f), 7(g) and 9 of this Adoption Agreement shall not be less than the amount required under paragraph 14.2 of the Basic Plan document #06. Top-Heavy minimums will be allocated to:
/ / (i) all eligible Participants.
/X/ (ii) only eligible non-Key Employees who are Participants.
(j) Return of Excess Contributions and/or Excess Aggregate Contributions:
In the event that one or more Highly Compensated Employees is subject to both the ADP and ACP tests and the sum of such tests exceeds the Aggregate Limit, the limit will be satisfied by reducing the:
/ / (i) the ADP of the affected Highly Compensated Employees.
/ / (ii) the ACP of the affected Highly Compensated Employees.
/X/ (iii) a combination of the ADP and ACP of the affected Highly Compensated Employees.
8. ALLOCATIONS TO TERMINATED EMPLOYEES
/X/ (a) The Employer will not allocate Employer related contributions to Employees who terminate during a Plan Year, unless required to satisfy the requirements of Code Section 401(a)(26) and 410(b). (These requirements are effective for 1989 and subsequent Plan Years.)
/ / (b) The Employer will allocate Employer matching and other related contributions as indicated below to Employees who terminate during the Plan Year as a result of:
Matching Other
/ / / / (i) Retirement.
/ / / / (ii) Disability.
/ / / / (iii) Death.
/ / / / (iv) Other termination of employment provided that the Participant has completed a Year of Service as defined for Allocation Accrual
Purposes.
/ / / / (v) Other termination of employment even though the Participant has not completed a Year of Service.
/ / / / (vi) Termination of employment (for any reason) provided that the Participant had completed a Year of Service for Allocation Accrual Purposes.
9. ALLOCATION OF FORFEITURES
NOTE: Subsections (a), (b) and (c) below apply to forfeitures of amounts other than Excess Aggregate Contributions.
(a) Allocation Alternatives:
/X/ (i) Not Applicable. All contributions are always fully vested.
/ / (ii) Forfeitures shall be allocated to Participants in the same manner as the Employer's contribution.
If allocation to other Participants is selected, the allocation shall be as follows:
[1] Amount attributable to Employer discretionary contributions and Top-Heavy minimums will be allocated to:
/ / all eligible Participants under the Plan.
/ / only those Participants eligible for an allocation of Employer contributions in the current year.
/ / only those Participants eligible for an allocation of matching contributions in the cur- rent year.
[2] Amounts attributable to Employer Matching contributions will be allocated to:
/ / all eligible Participants.
/ / only those Participants eligible for allocations of matching contributions in the current year.
/ / (iii) Forfeitures shall be applied to reduce the Employer's contribution for such Plan Year.
/ / (iv) Forfeitures shall be applied to offset administrative expenses of the Plan. If forfeitures exceed these expenses, (iii) above shall apply.
(b) Date for Reallocation:
NOTE: If no distribution has been made to a former Participant,
sub-section (i) below will apply to such Participant even if the Employer elects (ii), (iii) or (iv) below as its normal administrative policy.
/ / (i) Forfeitures shall be reallocated at the end of the Plan Year during which the former Participant incurs his or her fifth consecutive one year Break In Service.
/ / (ii) Forfeitures will be reallocated immediately (as of the next Valuation Date).
/ / (iii) Forfeitures shall be reallocated at the end of the Plan Year during which the former Employee incurs his or her (1st, 2nd, 3rd, or 4th) consecutive one year Break In Service.
/ / (iv) Forfeitures will be reallocated immediately (as of the Plan Year end).
(c) Restoration of Forfeitures:
If amounts are forfeited prior to five consecutive 1-year Breaks in Service, the Funds for restoration of account balances will be obtained from the following resources in the order indicated (fill in the appropriate number):
/ / (i) Current year's forfeitures.
/ / (ii) Additional Employer contribution.
/ / (iii) Income or gain to the Plan.
(d) Forfeitures of Excess Aggregate Contributions shall be:
/ / (i) Applied to reduce Employer contributions.
/ / (ii) Allocated, after all other forfeitures under the Plan, to the Matching Contribution account of each non-highly compensated Participant who made Elective Deferrals or Voluntary Contributions in the ratio which each such Participant's Compensation for the Plan Year bears to the total Compensation of all Participants for such Plan Year. Such forfeitures cannot be allocated to the account of any Highly Compensated Employee.
Forfeitures of Excess Aggregate Contributions will be so applied at the end of the Plan Year in which they occur.
10. CASH OPTION
/ / (a) The Employer may permit a Participant to elect to defer to the Plan, an amount not to exceed % of any Employer paid cash bonus made for such Participant for any year. A Participant must file an election to defer such contribution at least fifteen (15) days prior to the end of the Plan Year. If the Employee fails to make such an election, the entire Employer paid cash bonus to which the Participant would be entitled shall be paid as cash and not to the Plan. Amounts deferred under this section shall be treated for all purposes as Elective Deferrals. Notwithstanding the above,
the election to defer must be made before the bonus is made available to the Participant.
/X/ (b) Not Applicable.
11. LIMITATIONS ON ALLOCATIONS
/ / This is the only Plan the Employer maintains or ever maintained, therefore, this section is not applicable.
/X/ The Employer does maintain or has maintained another Plan (including a
Welfare Benefit Fund or an individual medical account (as defined in Code
Section 415(l)(2)), under which amounts are treated as Annual Additions) and
has completed the proper sections below.
Complete (a), (b) and (c) only if the Employer maintains or ever maintained another qualified plan, including a Welfare Benefit Fund or an individual medical account [as defined in Code Section 415(l)(2)] in which any Participant in this Plan is (or was) a participant or could possibly become a participant.
(a) If the Participant is covered under another qualified Defined
Contribution Plan maintained by the Employer, other than a Master or Prototype
Plan:
/x/ (i) the provisions of Article X of the Basic Plan Document #06
will apply, as if the other plan were a Master or Prototype Plan.
/ / (ii) Attach provisions stating the method under which the plans will limit total Annual Additions to the Maximum Permissible Amount, and will properly reduce any Excess Amounts, in a manner that precludes Employer discretion.
(b) If a Participant is or ever has been a participant in a Defined Benefit Plan maintained by the Employer:
Attach provisions which will satisfy the 1.0 limitation of Code
Section 415(e). Such language must preclude Employer discretion. The Employer
must also specify the interest and mortality assumptions used in determining
Present Value in the Defined Benefit Plan.
(c) The minimum contribution or benefit required under Code Section 416 relating to Top- Heavy Plans shall be satisfied by:
/X/ (i) this Plan.
/ / (ii)
(Name of other qualified plan of the Employer).
/X/ (iii) Attach provisions stating the method under which the minimum contribution and benefit provisions of Code Section 416 will be satisfied. If a Defined Benefit Plan is or was maintained, an attachment must be provided showing interest and mortality assumptions used in the Top-Heavy
Ratio.
12. VESTING
Employees shall have a fully vested and nonforfeitable interest in any Employer contribution and the investment earnings thereon made in accordance with paragraphs (select one or more options) /X/ 7(c), / / 7(e), / / 7(f), / / 7(g) and /X/ 7(i) hereof. Contributions under paragraph 7(b), 7(c)(vii) and 7(d) are always fully vested. If one or more of the foregoing options are not selected, such Employer contributions shall be subject to the vesting table selected by the Employer.
(a) Computation Period:
The computation period for purposes of determining Years of Service and Breaks in Service for purposes of computing a Participant's nonforfeitable right to his or her account balance derived from Employer contributions:
/X/ (i) shall not be applicable since Participants are always fully vested,
/ / (ii) shall commence on the date on which an Employee first performs an Hour of Service for the Employer and each subsequent 12-consecutive month period shall commence on the anniversary thereof, or
/ / (iii) shall commence on the first day of the Plan Year during which an Employee first performs an Hour of Service for the Employer and each subsequent 12-consecutive month period shall commence on the anniversary thereof.
A Participant shall receive credit for a Year of Service if he or she completes at least 1,000 Hours of Service [or if lesser, the number of hours specified at 3(l)(iii) of this Adoption Agreement] at any time during the 12-consecutive month computation period. Consequently, a Year of Service may be earned prior to the end of the 12-consecutive month computation period and the Participant need not be employed at the end of the 12-consecutive month computation period to receive credit for a Year of Service.
(b) Vesting Schedules:
NOTE: The vesting schedules below only apply to a Participant who has at least one Hour of Service during or after the 1989 Plan Year. If applicable, Participants who separated from Service prior to the 1989 Plan Year will remain under the vesting schedule as in effect in the Plan prior to amendment for the Tax Reform Act of 1986.
(i) Full and immediate vesting.
Years of Service
1 2 3 4 5 6 7
(ii) % 100%
(iii) % % 100%
(iv) % 20% 40% 60% 80% 100%
(v) % % 20% 40% 60% 80% 100%
(vi) 10% 20% 30% 40% 60% 80% 100%
(vii) % % % % 100%
(viii) % % % % % % 100%
NOTE: The percentages selected for schedule (viii) may not be less for any year than the percentages shown at schedule (v).
/ / All contributions other than those which are fully vested when contributed will vest under schedule above.
/ / Contributions other than those which are fully vested when contributed will vest as provided below:
Vesting
Option Selected Type Of Employer Contribution
7(c) Employer Match on Salary Savings
7(c) Employer Match on
Employee Voluntary
7(e) Employer Discretionary
7(f) & (g) Employer Discretionary
-Integrated
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(c) Top-Heavy Vesting:
For any Plan Year in which this Plan is Top-Heavy, the following minimum vesting rules will apply:
(i) Schedules (v), (vi), and (viii) above will automatically shift to schedule (iv).
(ii) Schedule (vii) above will automatically shift to schedule (iii).
If a vesting schedule is switched because of Top-Heavy status, the vesting schedule will remain in effect even if the Plan later becomes non-Top-Heavy until the Employer executes an amendment of this Adoption Agreement indicating otherwise.
(d) Service disregarded for Vesting:
/ / (i) Not Applicable. All Service shall be considered.
/ / (ii) Service prior to the Effective Date of this Plan or a predecessor plan shall be disregarded when computing a Participant's vested and nonforfeitable interest.
/ / (iii) Service prior to a Participant having attained age 18 shall be disregarded when computing a Participant's vested and nonforfeitable interest.
13. SERVICE WITH PREDECESSOR ORGANIZATION
For purposes of satisfying the Service requirements for eligibility, Hours
of Service shall include Service with the following predecessor
organization(s):
(These hours will also be used for vesting purposes.)
Any Member Of The Controlled Group
14. ROLLOVER/TRANSFER CONTRIBUTIONS
(a) Rollover Contributions, as described at paragraph 4.3 of the Basic Plan Document #06, /X/ shall / / shall not be permitted. If permitted, Employees /X/ may / / may not make Rollover Contributions prior to meeting the eligibility requirements for participation in the Plan.
(b) Transfer Contributions, as described at paragraph 4.4 of the Basic Plan Document #06 /X/ shall / / shall not be permitted. If permitted, Employees /X/ may / / may not make Transfer Contributions prior to meeting the eligibility requirements for participation in the Plan.
NOTE: Even if available, the Employer may refuse to accept such contributions if its Plan meets the safe-harbor rules of paragraph 8.7 of the Basic Plan Document #06.
15. HARDSHIP WITHDRAWALS
Hardship withdrawals, as provided for in paragraph 6.9 of the Basic Plan Document #06, /X/ are / / are not permitted.
16. PARTICIPANT LOANS
Participant loans, as provided for in paragraph 13.5 of the Basic Plan Document #06, /x/ are / / are not permitted. If permitted, repayments of principal and interest shall be repaid to /x/ the Participant's segregated account or / / the general Fund.
17. INSURANCE POLICIES
The insurance provisions of paragraph 13.6 of the Basic Plan Document #06 / / shall /X/ shall not be applicable.
18. EMPLOYER INVESTMENT DIRECTION
The Employer investment direction provisions, as set forth in paragraph 13.7 of the Basic Plan Document #06, /X/ shall / / shall not be applicable.
19. EMPLOYEE INVESTMENT DIRECTION
(a) The Employee investment direction provisions, as set forth in paragraph 13.8 of the Basic Plan Document #06, /X/ shall / / shall not be applicable.
If applicable, Participants may direct their investments among funds offered by the Trustee.
(b) Participants may direct the following kinds of contributions and the earnings thereon (check all applicable):
/X/ (i) All Contributions
/ / (ii) Elective Deferrals
/ / (iii) Employee Voluntary Contributions (after-tax)
/ / (iv) Employee Mandatory Contributions (after-tax)
/ / (v) Employer Qualified Matching Contributions
/ / (vi) Other Employer Matching Contributions
/ / (vii) Employer Qualified Non-Elective Contributions
/ / (viii) Employer Discretionary Contributions
/ / (ix) Rollover Contributions
/ / (x) Transfer Contributions
/ / (xi) All of above which are checked, but only to the extent that the Participant is vested in those contributions.
NOTE: To the extent that Employee investment direction was previously allowed, it shall continue to be allowed on those amounts and the earnings thereon.
20. EARLY PAYMENT OPTION
(a) A Participant who separates from Service prior to retirement, death or Disability /X/ may / / may not make application to the Employer requesting an early payment of his or her vested account balance.
(b) A Participant who has not separated from Service /X/ may / / may not obtain a distribution of his or her vested Employer contributions.
(c) A Participant who has attained the Plan's Normal Retirement Age and who has not separated from Service /X/ may / / may not receive a distribution of his or her vested account balance.
NOTE: If the Participant has had the right to withdraw his or her account balance in the past, this right may not be taken away. Notwithstanding the above, to the contrary, required minimum distributions will be paid. For timing of distributions, see item 21(a) below.
21. DISTRIBUTION OPTIONS
(a) Timing of Distributions:
In cases of termination for other than death, Disability or retirement, benefits shall be paid:
/ / (i) As soon as administratively feasible, following the close of the valuation period during which a distribution is requested or is otherwise payable.
/ / (ii) As soon as administratively feasible following the close of the Plan Year during which a distribution is requested or is otherwise payable.
/X/ (iii) As soon as administratively feasible, following the date on which a distribution is requested or is otherwise payable.
/ / (iv) As soon as administratively feasible, after the close of the Plan Year during which the Participant incurs consecutive one-year Breaks in Service.
/ / (v) Only after the Participant has achieved the Plan's Normal Retirement Age, or Early Retirement Age, if applicable.
In cases of death, Disability or retirement, benefits shall be paid:
/ / (vi) As soon as administratively feasible, following the close of the valuation period during which a distribution is requested or is otherwise payable.
/ / (vii) As soon as administratively feasible following the
close of the Plan Year during which a distribution is requested or is otherwise
payable.
/X/ (viii) As soon as administratively feasible, following the
date on which a distribution is requested or is otherwise payable.
(b) Optional Forms of Payment:
/X/ (i) Lump Sum.
/ / (ii) Installment Payments.
/ / (iii) Life Annuity*.
/ / (iv) Life Annuity Term Certain*.
Life Annuity with payments guaranteed for years (not to exceed 20 years, specify all applicable).
/ / (v) Joint and / / 50%, / / 66-2/3%, / / 75% or / / 100% survivor annuity* (specify all applicable).
/ / (vi) Other form(s) specified:
*Not available in Plan meeting provisions of paragraph 8.7 of Basic Plan Document #06.
(c) Recalculation of Life Expectancy:
In determining required distributions under the Plan, Participants and/or their Spouse (Surviving Spouse) / / shall /x/ shall not have the right
to have their life expectancy recalculated annually.
If "shall",
/ / only the Participant shall be recalculated.
/ / both the Participant and Spouse shall be recalculated.
/ / who is recalculated shall be determined by the Participant.
22. SPONSOR CONTACT
Employers should direct questions concerning the language contained in and qualification of the Prototype to:
Charlene Fletcher
(Job Title) Installation Officer
(Phone Number) (617) 346-5087
In the event that the Sponsor amends, discontinues or abandons this Prototype Plan, notification will be provided to the Employer's address provided on the first page of this Agreement. 23. SIGNATURES:
Due to the significant tax ramifications, the Sponsor recommends that before you execute this Adoption Agreement, you contact your attorney or tax advisor, if any.
(a) EMPLOYER:
Name and address of Employer if different than specified in Section 1 above.
This agreement and the corresponding provisions of the Plan and Trust/Custodial Account Basic Plan Document #06 were adopted by the Employer the day of , 19 .
Signed for the Employer by:
Title:
Signature:
The Employer understands that its failure to properly complete the Adoption Agreement may result in disqualification of its Plan.
Employer's Reliance: The adopting Employer may not rely on an opinion letter issued by the National Office of the Internal Revenue Service
as evidence that the Plan is qualified under Code Section 401. In order to obtain reliance with respect to Plan qualification, the Employer must apply to the appropriate Key District Office for a determination letter.
This Adoption Agreement may only be used in conjunction with Basic Plan Document #06./ / (b) TRUSTEE:
Name of Trustee:
Shawmut Bank, N.A.
The assets of the Fund shall be invested in accordance with paragraph 13.3 of the Basic Plan Document #06 as a Trust. As such, the Employer's Plan
as contained herein was accepted by the Trustee the day of
, 19 .
Signed for the Trustee by:
Title:
Signature:
/ / (c) CUSTODIAN:
Name of Custodian:
The assets of the Fund shall be invested in accordance with
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paragraph 13.4 of the Basic Plan Document #06 as a Custodial Account. As such, the Employer's Plan as contained herein was accepted by the Custodian the day of , 19 .
Signed for the Custodian by:
Title:
Signature:
PROTOTYPE CASH OR DEFERRED PROFIT-SHARING PLAN
AND TRUST/CUSTODIAL ACCOUNT
Sponsored By
FLEET NATIONAL BANK OF MASSACHUSETTS
BASIC PLAN DOCUMENT #06
DECEMBER 1994
COPYRIGHT 1993 McKAY HOCHMAN CO., INC.
THIS DOCUMENT IS COPYRIGHTED UNDER THE LAWS OF THE UNITED STATES. USE, DUPLICATION OR REPRODUCTION, INCLUDING THE USE OF ELECTRONIC MEANS, IS PROHIBITED BY LAW WITHOUT THE EXPRESS CONSENT OF THE AUTHOR.
TABLE OF CONTENTS
PARAGRAPH PAGE
ARTICLE I
DEFINITIONS
1.1 Actual Deferral Percentage 1
1.2 Adoption Agreement 1
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1.3 Aggregate Limit 1
1.4 Annual Additions 2
1.5 Annuity Starting Date 2
1.6 Applicable Calendar Year 2
1.7 Applicable Life Expectancy 2
1.8 Average Contribution Percentage (ACP) 2
1.9 Average Deferral Percentage (ADP) 2
1.10 Break In Service 2
1.11 Code 2
1.12 Compensation 3
1.13 Contribution Percentage 4
1.14 Custodian 5
1.15 Defined Benefit Plan 5
1.16 Defined Benefit (Plan) Fraction 5
1.17 Defined Contribution Dollar Limitation 5
1.18 Defined Contribution Plan 5
1.19 Defined Contribution (Plan) Fraction 5
1.20 Designated Beneficiary 6
1.21 Disability 6
1.22 Distribution Calendar Year 6
1.23 Early Retirement Age 6
1.24 Earned Income 6
1.25 Effective Date 6
1.26 Election Period 6
1.27 Elective Deferral 6
1.28 Eligible Participant 7
1.29 Employee 7
1.30 Employer 7
1.31 Entry Date 7
1.32 Excess Aggregate Contributions 7
1.33 Excess Amount 7
1.34 Excess Contribution 7
1.35 Excess Elective Deferrals 8
1.36 Family Member 8
1.37 First Distribution Calendar Year 8
1.38 Fund 8
1.39 Hardship 8
1.40 Highest Average Compensation 8
1.41 Highly Compensated Employee 8
1.42 Hour Of Service 9
1.43 Key Employee 9
1.44 Leased Employee 10
1.45 Limitation Year 10
1.46 Master Or Prototype Plan 10
1.47 Matching Contribution 10
1.48 Maximum Permissible Amount 10
1.49 Net Profit 10
1.50 Normal Retirement Age 10
1.51 Owner-Employee 10
1.52 Paired Plans 11
1.53 Participant 11
1.54 Participant's Benefit 11
1.55 Permissive Aggregation Group 11
1.56 Plan 11
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1.57 Plan Administrator 11
1.58 Plan Year 11
1.59 Present Value 11
1.60 Projected Annual Benefit 11
1.61 Qualified Deferred Compensation Plan 11
1.62 Qualified Domestic Relations Order 12
1.63 Qualified Early Retirement Age 12
1.64 Qualified Joint And Survivor Annuity 12
1.65 Qualified Matching Contribution 12
1.66 Qualified Non-Elective Contributions 12
1.67 Qualified Voluntary Contribution 12
1.68 Required Aggregation Group 12
1.69 Required Beginning Date 12
1.70 Rollover Contribution 12
1.71 Salary Savings Agreement 13
1.72 Self-Employed Individual 13
1.73 Service 13
1.74 Shareholder Employee 13
1.75 Simplified Employee Pension Plan 13
1.76 Sponsor 13
1.77 Spouse (Surviving Spouse) 13
1.78 Super Top-Heavy Plan 13
1.79 Taxable Wage Base 13
1.80 Top-Heavy Determination Date 13
1.81 Top-Heavy Plan 13
1.82 Top-Heavy Ratio 14
1.83 Top-Paid Group 15
1.84 Transfer Contribution 15
1.85 Trustee 15
1.86 Valuation Date 15
1.87 Vested Account Balance 15
1.88 Voluntary Contribution 15
1.89 Welfare Benefit Fund 16
1.90 Year Of Service 16
ARTICLE II
ELIGIBILITY REQUIREMENTS
2.1 Participation 17
2.2 Change In Classification Of Employment 17
2.3 Computation Period 17
2.4 Employment Rights 17
2.5 Service With Controlled Groups 17
2.6 Owner-Employees 17
2.7 Leased Employees 18
2.8 Thrift Plans 18
ARTICLE III
EMPLOYER CONTRIBUTIONS
3.1 Amount 19
3.2 Expenses And Fees 19
3.3 Responsibility For Contributions 19
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3.4 Return Of Contributions 19
ARTICLE IV
EMPLOYEE CONTRIBUTIONS
4.1 Voluntary Contributions 20
4.2 Qualified Voluntary Contributions 20
4.3 Rollover Contribution 20
4.4 Transfer Contribution 21
4.5 Employer Approval Of Transfer Contributions 21
4.6 Elective Deferrals 21
4.7 Required Voluntary Contributions 21
4.8 Direct Rollover Of Benefits 22
ARTICLE V
PARTICIPANT ACCOUNTS
5.1 Separate Accounts 23
5.2 Adjustments To Participant Accounts 23
5.3 Allocating Employer Contributions 24
5.4 Allocating Investment Earnings And Losses 24
5.5 Participant Statements 24
ARTICLE VI
RETIREMENT BENEFITS AND DISTRIBUTIONS
6.1 Normal Retirement Benefits 25
6.2 Early Retirement Benefits 25
6.3 Benefits On Termination Of Employment 25
6.4 Restrictions On Immediate Distributions 26
6.5 Normal Form Of Payment 27
6.6 Commencement Of Benefits 27
6.7 Claims Procedures 28
6.8 In-Service Withdrawals 28
6.9 Hardship Withdrawal 29
ARTICLE VII
DISTRIBUTION REQUIREMENTS
7.1 Joint And Survivor Annuity Requirements 31
7.2 Minimum Distribution Requirements 31
7.3 Limits On Distribution Periods 31
7.4 Required Distributions On Or After The
Required Beginning Date 31
7.5 Required Beginning Date 32
7.6 Transitional Rule 33
7.7 Designation Of Beneficiary
For Death Benefit 34
7.8 Nonexistence Of Beneficiary 34
7.9 Distribution Beginning Before Death 34
7.10 Distribution Beginning After Death 34
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7.11 Distribution Of Excess Elective Deferrals 35
7.12 Distributions Of Excess Contributions 35
7.13 Distribution Of Excess
Aggregate Contributions 36
ARTICLE VIII
JOINT AND SURVIVOR ANNUITY REQUIREMENTS
8.1 Applicability Of Provisions 37
8.2 Payment Of Qualified Joint And Survivor
Annuity 37
8.3 Payment Of Qualified Pre-Retirement
Survivor Annuity 37
8.4 Qualified Election 37
8.5 Notice Requirements For Qualified Joint
And Survivor Annuity 38
8.6 Notice Requirements For Qualified Pre-
Retirement Survivor Annuity 38
8.7 Special Safe-Harbor Exception For
Certain Profit-Sharing Plans 38
8.8 Transitional Joint And Survivor
Annuity Rules 39
8.9 Automatic Joint And Survivor Annuity
And Early Survivor Annuity 39
8.10 Annuity Contracts 40
ARTICLE IX
VESTING
9.1 Employee Contributions 41
9.2 Employer Contributions 41
9.3 Computation Period 41
9.4 Requalification Prior To Five Consecutive
One-Year Breaks In Service 41
9.5 Requalification After Five Consecutive
One-Year Breaks In Service 41
9.6 Calculating Vested Interest 41
9.7 Forfeitures 41
9.8 Amendment Of Vesting Schedule 42
9.9 Service With Controlled Groups 42
ARTICLE X
LIMITATIONS ON ALLOCATIONS AND
ANTIDISCRIMINATION TESTING
10.1 Participation In This Plan Only 43
10.2 Disposition Of Excess Annual Additions 43
10.3 Participation In This Plan And Another
Prototype Defined Contribution Plan,
Welfare Benefit Fund, Or Other Medical
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Account Maintained By The Employer 44
10.4 Disposition Of Excess Annual Additions
Under Two Plans 44
10.5 Participation In This Plan And Another
Defined Contribution Plan Which Is Not
A Master Or Prototype Plan 45
10.6 Participation In This Plan And A Defined
Benefit Plan 45
10.7 Average Deferral Percentage (ADP) Test 45
10.8 Special Rules Relating To Application
Of ADP Test 45
10.9 Recharacterization 46
10.10 Average Contribution
Percentage (ACP) Test 46
10.11 Special Rules Relating To Application
Of ACP Test 47
ARTICLE XI
ADMINISTRATION
11.1 Plan Administrator 49
11.2 Trustee/Custodian 49
11.3 Administrative Fees And Expenses 50
11.4 Division Of Duties And Indemnification 50
ARTICLE XII
TRUST FUND/CUSTODIAL ACCOUNT
12.1 The Fund 52
12.2 Control Of Plan Assets 52
12.3 Exclusive Benefit Rules 52
12.4 Assignment And Alienation Of Benefits 52
12.5 Determination Of Qualified Domestic
Relations Order (QDRO) 52
ARTICLE XIII
INVESTMENTS
13.1 Fiduciary Standards 54
13.2 Funding Arrangement 54
13.3 Investment Alternatives Of The Trustee 54
13.4 Investment Alternatives Of The Custodian 55
13.5 Participant Loans 55
13.6 Insurance Policies 57
13.7 Employer Investment Direction 58
13.8 Employee Investment Direction 58
ARTICLE XIV
TOP-HEAVY PROVISIONS
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14.1 Applicability Of Rules 60
14.2 Minimum Contribution 60
14.3 Minimum Vesting 60
14.4 Limitations On Allocations 60
ARTICLE XV
AMENDMENT AND TERMINATION
15.1 Amendment By Sponsor 62
15.2 Amendment By Employer 62
15.3 Termination 62
15.4 Qualification Of Employer's Plan 62
15.5 Mergers And Consolidations 62
15.6 Resignation And Removal 63
15.7 Qualification Of Prototype 63
ARTICLE XVI
GOVERNING LAW 64
PROTOTYPE CASH OR DEFERRED PROFIT-SHARING PLAN AND TRUST/CUSTODIAL ACCOUNT
Sponsored By
FLEET NATIONAL BANK OF MASSACHUSETTS
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The Sponsor hereby establishes the following Prototype Retirement Plan and Trust/Custodial Account for use by those of its customers who qualify and wish to adopt a qualified retirement program. Any Plan and Trust/Custodial Account established hereunder shall be administered for the exclusive benefit of Participants and their beneficiaries under the following terms and conditions:
ARTICLE I
DEFINITIONS
1.1 Actual Deferral Percentage The ratio (expressed as a percentage and calculated separately for each Participant) of:
(a) the amount of Employer contributions [as defined at (c) and (d)] actually paid over to the Fund on behalf of such Participant for the Plan Year to
(b) the Participant's Compensation for such Plan Year. Compensation will only include amounts for the period during which the Employee was eligible to participate.
Employer contributions on behalf of any Participant shall include:
(c) any Elective Deferrals made pursuant to the Participant's deferral election, including Excess Elective Deferrals, but excluding Elective Deferrals that are either taken into account in the Contribution Percentage test (provided the ADP test is satisfied both with and without exclusion of
these Elective Deferrals) or are returned as excess Annual Additions; and
(d) at the election of the Employer, Qualified Non-Elective Contributions and Qualified Matching Contributions.
For purposes of computing Actual Deferral Percentages, an Employee who would be a Participant but for the failure to make Elective Deferrals shall be treated as a Participant on whose behalf no Elective Deferrals are made.
1.2 Adoption Agreement The document attached to this Plan by which an Employer elects to establish a qualified retirement plan and trust/custodial account under the terms of this Prototype Plan and Trust/Custodial Account.
1.3 Aggregate Limit The sum of:
(a) 125 percent of the greater of the ADP of the non-Highly Compensated Employees for the Plan Year or the ACP of non-Highly Compensated Employees under the Plan subject to Code Section 401(m) for the Plan Year beginning with or within the Plan Year of the cash or deferred arrangement as described in Code Section 401(k) or Code Section 402(h)(1)(B), and
(b) the lesser of 200% or two percent plus the lesser of such ADP or ACP.
Alternatively, the aggregate limit can be determined by substituting "the lesser of 200% or 2 percent plus" for "125% of" in (a) above, and substituting "125% of" for "the lesser of 200% or 2 percent plus" in (b) above.
1.4 Annual Additions The sum of the following amounts credited to a Participant's account for the Limitation Year:
(a) Employer Contributions,
(b) Employee Contributions (under Article IV),
(c) forfeitures,
(d) amounts allocated after March 31, 1984 to an individual medical account, as defined in Code Section 415(l)(2), which is part of a pension or annuity plan maintained by the Employer (these amounts are treated as Annual Additions to a Defined Contribution Plan though they arise under a Defined Benefit Plan), and
(e) amounts derived from contributions paid or accrued after 1985, in taxable years ending after 1985, which are either attributable to post-retirement medical benefits allocated to the account of a Key Employee, or to a Welfare Benefit Fund maintained by the Employer, are also treated as Annual Additions to a Defined Contribution Plan. For purposes of this paragraph, an Employee is a Key Employee if he or she meets the requirements of paragraph 1.43 at any time during the Plan Year or any preceding Plan Year. Welfare Benefit Fund is defined at paragraph 1.89.
Excess amounts applied in a Limitation Year to reduce Employer contributions will be considered Annual Additions for such Limitation Year, pursuant to the
provisions of Article X.
1.5 Annuity Starting Date The first day of the first period for which an amount is paid as an annuity or in any other form.
1.6 Applicable Calendar Year The First Distribution Calendar Year, and in the event of the recalculation of life expectancy, such succeeding calendar year. If payments commence in accordance with paragraph 7.4(e) before the Required Beginning Date, the Applicable Calendar Year is the year such payments commence. If distribution is in the form of an immediate annuity purchased after the Participant's death with the Participant's remaining interest, the Applicable Calendar Year is the year of purchase.
1.7 Applicable Life Expectancy Used in determining the required minimum distribution. The life expectancy (or joint and last survivor expectancy) calculated using the attained age of the Participant (or Designated Beneficiary) as of the Participant's (or Designated Beneficiary's) birthday in the Applicable Calendar Year reduced by one for each calendar year which has elapsed since the date life expectancy was first calculated. If life expectancy is being recalculated, the Applicable Life Expectancy shall be the life expectancy as so recalculated. The life expectancy of a non-Spouse Beneficiary may not be recalculated.
1.8 Average Contribution Percentage (ACP) The average of the Contribution Percentages for each Highly Compensated Employee and for each non-Highly Compensated Employee.
1.9 Average Deferral Percentage (ADP) The average of the Actual Deferral Percentages for each Highly Compensated Employee and for each non-Highly Compensated Employee.
1.10 Break In Service A 12-consecutive month period during which an Employee fails to complete more than 500 Hours of Service.
1.11 Code The Internal Revenue Code of 1986, including any amendments.
1.12 Compensation The Employer may select one of the following three safe-harbor definitions of Compensation in the Adoption Agreement. Compensation shall only include amounts earned while a Participant if Plan Year is chosen as the applicable computation period.
(a) Code Section 3401(a) Wages. Compensation is defined as wages within the meaning of Code Section 3401(a) for the purposes of Federal income tax withholding at the source but determined without regard to any rules that limit the remuneration included in wages based on the nature or location of the employment or the services performed [such as the exception for agricultural labor in Code Section 3401(a)(2)].
(b) Code Section 6041 and 6051 Wages. Compensation is defined as wages as defined in Code Section 3401(a) and all other payments of compensation to an Employee by the Employer (in the course of the Employer's trade or business) for which the Employer is required to furnish the employee a written statement under Code Section 6041(d) and 6051(a)(3). Compensation must be determined without regard to any rules under Code Section 3401(a) that
limit the remuneration included in wages based on the nature or location of the
employment or the services performed [such as the exception for agricultural
labor in Code Section 3401(a)(2)].
(c) Code Section 415 Compensation. For purposes of applying the
limitations of Article X and Top-Heavy Minimums, the definition of Compensation
shall be Code Section 415 Compensation defined as follows: a Participant's
Earned Income, wages, salaries, and fees for professional services and other
amounts received (without regard to whether or not an amount is paid in cash)
for personal services actually rendered in the course of employment with the
Employer maintaining the Plan to the extent that the amounts are includible in
gross income [including, but not limited to, commissions paid salesmen,
Compensation for services on the basis of a percentage of profits, commissions
on insurance premiums, tips, bonuses, fringe benefits and reimbursements or
other expense allowances under a nonaccountable plan (as described in
Regulation 1.62-2(c)], and excluding the following:
1. Employer contributions to a plan of deferred compensation which are not includible in the Employee's gross income for the taxable year in which contributed, or Employer contributions under a Simplified Employee Pension Plan or any distributions from a plan of deferred compensation,
2. Amounts realized from the exercise of a non-qualified stock option, or when restricted stock (or property) held by the Employee either becomes freely transferable or is no longer subject to a substantial risk of forfeiture,
3. Amounts realized from the sale, exchange or other disposition of stock acquired under a qualified stock option; and
4. other amounts which received special tax benefits, or
contributions made by the Employer (whether or not under a salary reduction
agreement) towards the purchase of an annuity contract described in Code
Section 403(b) (whether or not the contributions are actually excludible from
the gross income of the Employee).
For purposes of applying the limitations of Article X and Top-Heavy Minimums, the definition of Compensation shall be Code Section 415 Compensation described in this paragraph 1.12(c). Also, for purposes of applying the limitations of Article X, Compensation for a Limitation Year is the Compensation actually paid or made available during such Limitation Year. Notwithstanding the preceding sentence, Compensation for a Participant in a defined contribution plan who is permanently and totally disabled [as defined in Code Section 22(e)(3)] is the Compensation such Participant would have received for the Limitation Year if the Participant had been paid at the rate of Compensation paid immediately before becoming permanently and totally disabled. Such imputed Compensation for the disabled Participant may be taken into account only if the participant is not a Highly Compensated Employee [as defined in Code Section 414(q)] and contributions made on behalf of such Participant are nonforfeitable when made.
If the Employer fails to pick the applicable period in the Adoption Agreement, the Plan Year shall be used. Unless otherwise specified by the Employer in the Adoption Agreement, Compensation shall be determined as provided in Code
Section 3401(a) [as defined in this paragraph 1.12(a)]. In nonstandardized
Adoption Agreement 002, the Employer may choose to eliminate or exclude
categories of Compensation which do not violate the provisions of Code Sections
401(a)(4), 414(s) the regulations thereunder and Revenue Procedure 89-65.
Beginning with 1989 Plan Years, the annual Compensation of each Participant which may be taken into account for determining all benefits provided under the Plan (including benefits under Article XIV) for any year shall not exceed $200,000, as adjusted under Code Section 415(d). In determining the Compensation of a Participant for purposes of this limitation, the rules of Code Section 414(q)(6) shall apply, except in applying such rules, the term "family" shall include only the Spouse of the Participant and any lineal descendants of the Participant who have not attained age 19 before the end of the Plan year. If, as a result of the application of such rules the adjusted $200,000 limitation is exceeded, then (except for purposes of determining the portion of Compensation up to the integration level if this Plan provides for permitted disparity), the limitation shall be prorated among the affected individuals in proportion to each such individual's Compensation as determined under this section prior to the application of this limitation.
If a Plan has a Plan Year that contains fewer than 12 calendar months, then the annual Compensation limit for that period is an amount equal to the $200,000 as adjusted for the calendar year in which the Compensation period begins, multiplied by a fraction the numerator of which is the number of full months in the Short Plan Year and the denominator of which is 12. If Compensation for any prior Plan Year is taken into account in determining an Employee's contributions or benefits for the current year, the Compensation for such prior year is subject to the applicable annual Compensation limit in effect for that prior year. For this purpose, for years beginning before January 1, 1990, the applicable annual Compensation limit is $200,000. For Plan Years beginning on or after January 1, 1994, the annual Compensation of each Participant taken into account for determining all benefits increases in the cost-of-living in accordance with Code Section 401(a)(17). The cost-of-living adjustment in effect for a calendar year applies to any determination period beginning in such calendar year.
Compensation shall not include deferred Compensation other than contributions
through a salary reduction agreement to a cash or deferred plan under Code
Section 401(k), a Simplified Employee Pension Plan under Code Section
402(h)(1)(B), a cafeteria plan under Code Section 125 or a tax-deferred annuity
under Code Section 403(b). Unless elected otherwise by the Employer in the
Adoption Agreement, these deferred amounts will be considered as Compensation
for Plan purposes. These deferred amounts are not counted as Compensation for
purposes of Articles X and XIV. When applicable to a Self-Employed Individual,
Compensation shall mean Earned Income.
1.13 Contribution Percentage The ratio (expressed as a percentage and calculated separately for each Participant) of:
(a) the Participant's Contribution Percentage Amounts [as defined at
(c)-(f)] for the Plan Year, to
(b) the Participant's Compensation for the Plan Year. Compensation
will only include amounts for the period during which the Employee was eligible to participate.
Contribution Percentage Amounts on behalf of any Participant shall include:
(c) the amount of Employee Voluntary Contributions, Matching Contributions, and Qualified Matching Contributions (to the extent not taken into account for purposes of the ADP test) made under the Plan on behalf of the Participant for the Plan Year,
(d) forfeitures of Excess Aggregate Contributions or Matching Contributions allocated to the Participant's account which shall be taken into account in the year in which such forfeiture is allocated,
(e) at the election of the Employer, Qualified Non-Elective Contributions, and
(f) the Employer also may elect to use Elective Deferrals in the Contribution Percentage Amounts so long as the ADP test is met before the Elective Deferrals are used in the ACP test and continues to be met following the exclusion of those Elective Deferrals that are used to meet the ACP test.
Contribution Percentage Amounts shall not include Matching Contributions, whether or not Qualified, that are forfeited either to correct Excess Aggregate Contributions, or because the contributions to which they relate are Excess Deferrals, Excess Contributions, or Excess Aggregate Contributions.
1.14 Custodian The Sponsor of this Prototype, or, if applicable, an affiliate or successor, shall serve as Custodian if a Custodian is appointed in the Adoption Agreement.
1.15 Defined Benefit Plan A Plan under which a Participant's benefit is determined by a formula contained in the Plan and no individual accounts are maintained for Participants.
1.16 Defined Benefit (Plan) Fraction A fraction, the numerator of which is the sum of the Participant's Projected Annual Benefits under all the Defined Benefit Plans (whether or not terminated) maintained by the Employer, and the denominator of which is the lesser of 125 percent of the dollar limitation determined for the Limitation Year under Code Sections 415(b) and (d) or 140 percent of the Highest Average Compensation, including any adjustments under Code Section 415(b).
Notwithstanding the above, if the Participant was a Participant as of the first day of the first Limitation Year beginning after 1986, in one or more Defined Benefit Plans maintained by the Employer which were in existence on May 6, 1986, the denominator of this fraction will not be less than 125 percent of the sum of the annual benefits under such plans which the Participant had accrued as of the close of the last Limitation Year beginning before 1987, disregarding any changes in the terms and conditions of the plan after May 5, 1986. The preceding sentence applies only if the Defined Benefit Plans individually and in the aggregate satisfied the requirements of Section 415 for all Limitation Years beginning before 1987.
1.17 Defined Contribution Dollar Limitation Thirty thousand dollars ($30,000) or if greater, one-fourth of the defined benefit dollar limitation set forth in Code Section 415(b)(1) as in effect for the Limitation Year.
1.18 Defined Contribution Plan A Plan under which individual accounts are maintained for each Participant to which all contributions, forfeitures, investment income and gains or losses, and expenses are credited or deducted. A Participant's benefit under such Plan is based solely on the fair market value of his or her account balance.
1.19 Defined Contribution (Plan) Fraction A Fraction, the numerator of which is the sum of the Annual Additions to the Participant's account under all the Defined Contribution Plans (whether or not terminated) maintained by the Employer for the current and all prior Limitation Years (including the Annual Additions attributable to the Participant's nondeductible Employee contributions to all Defined Benefit Plans, whether or not terminated, maintained by the Employer, and the Annual Additions attributable to all Welfare Benefit Funds, as defined in paragraph 1.89 and individual medical accounts, as defined in Code Section 415(l)(2), maintained by the Employer), and the denominator of which is the sum of the maximum aggregate amounts for the current and all prior Limitation Years of service with the Employer (regardless of whether a Defined Contribution Plan was maintained by the Employer). The maximum aggregate amount in the Limitation Year is the lesser of 125 percent of the dollar limitation determined under Code Sections 415(b) and (d) in effect under Code Section 415(c)(1)(A) or 35 percent of the Participant's Compensation for such year.
If the Employee was a Participant as of the end of the first day of the first Limitation Year beginning after 1986, in one or more Defined Contribution Plans maintained by the Employer which were in existence on May 6, 1986, the numerator of this fraction will be adjusted if the sum of this fraction and the Defined Benefit Fraction would otherwise exceed 1.0 under the terms of this Plan. Under the adjustment, an amount equal to the product of (1) the excess of the sum of the fractions over 1.0 times (2) the denominator of this fraction will be permanently subtracted from the numerator of this fraction. The adjustment is calculated using the fractions as they would be computed as of the end of the last Limitation Year beginning before 1987, and disregarding any changes in the terms and conditions of the Plan made after May 6, 1986, but using the Section 415 limitation applicable to the first Limitation Year beginning on or after January 1, 1987. The Annual Addition for any Limitation Year beginning before 1987, shall not be re-computed to treat all Employee Contributions as Annual Additions.
1.20 Designated Beneficiary The individual who is designated as the beneficiary under the Plan in accordance with Code Section 401(a)(9) and the regulations thereunder.
1.21 Disability An illness or injury of a potentially permanent nature, expected to last for a continuous period of not less than 12 months, certified by a physician selected by or satisfactory to the Employer, which prevents the Employee from engaging in any occupation for wage or profit for which the Employee is reasonably fitted by training, education or experience.
1.22 Distribution Calendar Year A calendar year for which a minimum
distribution is required.
1.23 Early Retirement Age The age set by the Employer in the Adoption Agreement (but not less than 55), which is the earliest age at which a Participant may retire and receive his or her benefits under the Plan.
1.24 Earned Income Net earnings from self-employment in the trade or business
with respect to which the Plan is established, determined without regard to
items not included in gross income and the deductions allocable to such items,
provided that personal services of the individual are a material
income-producing factor. Earned income shall be reduced by contributions made
by an Employer to a qualified plan to the extent deductible under Code Section
404. For tax years beginning after 1989, net earnings shall be determined
taking into account the deduction for one- half of self-employment taxes
allowed to the Employer under Code Section 164(f) to the extent deductible.
1.25 Effective Date The date on which the Employer's retirement plan or amendment to such plan becomes effective. For amendments reflecting statutory and regulatory changes post Tax Reform Act of 1986, the Effective Date will be the earlier of the date upon which such amendment is first administratively applied or the first day of the Plan Year following the date of adoption of such amendment.
1.26 Election Period The period which begins on the first day of the Plan Year in which the Participant attains age 35 and ends on the date of the Participant's death. If a Participant separates from service prior to the first day of the Plan Year in which age 35 is attained, the Election Period shall begin on the date of separation, with respect to the account balance as of the date of separation.
1.27 Elective Deferral Employer contributions made to the Plan at the
election of the Participant, in lieu of cash Compensation. Elective Deferrals
shall also include contributions made pursuant to a Salary Savings Agreement or
other deferral mechanism, such as a cash option contribution. With respect to
any taxable year, a Participant's Elective Deferral is the sum of all Employer
contributions made on behalf of such Participant pursuant to an election to
defer under any qualified cash or deferred arrangement as described in Code
Section 401(k), any simplified employee pension cash or deferred arrangement as
described in Code Section 402(h)(1)(B), any eligible deferred compensation plan
under Code Section 457, any plan as described under Code Section 501(c)(18),
and any Employer contributions made on the behalf of a Participant for the
purchase of an annuity contract under Code Section 403(b) pursuant to a Salary
Savings Agreement. Elective Deferrals shall not include any deferrals
properly distributed as Excess Annual Additions.
1.28 Eligible Participant Any Employee who is eligible to make a Voluntary Contribution, or an Elective Deferral (if the Employer takes such contributions into account in the calculation of the Contribution Percentage), or to receive a Matching Contribution (including forfeitures) or a Qualified Matching Contribution. If a Voluntary Contribution or Elective Deferral is required as a condition of participation in the Plan, any Employee who would be a Participant in the Plan if such Employee made such a contribution shall be treated as an Eligible Participant even though no Voluntary Contributions or Elective Deferrals are made.
1.29 Employee Any person employed by the Employer (including Self-Employed
Individuals and partners), all Employees of a member of an affiliated service
group [as defined in Code Section 414(m)], Employees of a controlled group of
corporations [as defined in Code Section 414(b)], all Employees of any
incorporated or unincorporated trade or business which is under common control
[as defined in Code Section 414(c)], Leased Employees [as defined in Code
Section 414(n)] and any Employee required to be aggregated by Code Section
414(o). All such Employees shall be treated as employed by a single Employer.
1.30 Employer The Self-Employed Individual, partnership, corporation or other
organization which adopts this Plan including any firm that succeeds the
Employer and adopts this Plan. For purposes of Article X, Limitations on
Allocations, Employer shall mean the Employer that adopts this Plan, and all
members of a controlled group of corporations [as defined in Code Section
414(b) as modified by Code Section 415(h)], all commonly controlled trades or
businesses [as defined in Code Section 414(c) as modified by Code Section
415(h)] or affiliated service groups [as defined in Code Section 414(m)] of
which the adopting Employer is a part, and any other entity required to be
aggregated with the Employer pursuant to regulations under Code Section 414(o).
1.31 Entry Date The date on which an Employee commences participation in the Plan as determined by the Employer in the Adoption Agreement.
1.32 Excess Aggregate Contributions The excess, with respect to any Plan Year, of:
(a) The aggregate Contribution Percentage Amounts taken into account in computing the numerator of the Contribution Percentage actually made on behalf of Highly Compensated Employees for such Plan Year, over
(b) The maximum Contribution Percentage Amounts permitted by the ACP test (determined by reducing contributions made on behalf of Highly Compensated Employees in order of their Contribution Percentages beginning with the highest of such percentages).
Such determination shall be made after first determining Excess Elective Deferrals pursuant to paragraph 1.35 and then determining Excess Contributions pursuant to paragraph 1.34.
1.33 Excess Amount The excess of the Participant's Annual Additions for the Limitation Year over the Maximum Permissible Amount.
1.34 Excess Contribution With respect to any Plan Year, the excess of:
(a) The aggregate amount of Employer contributions actually taken into account in computing the ADP of Highly Compensated Employees for such Plan Year, over
(b) The maximum amount of such contributions permitted by the ADP test (determined by reducing contributions made on behalf of Highly Compensated Employees in order of the ADPs, beginning with the highest of such percentages).
1.35 Excess Elective Deferrals Those Elective Deferrals that are includible in a Participant's gross income under Code Section 402(g) to the extent such Participant's Elective Deferrals for a taxable year exceed the dollar limitation under such Code Section. Excess Elective Deferrals shall be treated as Annual Additions under the Plan, unless such amounts are distributed no later than the first April 15th following the close of the Participant's taxable year.
1.36 Family Member The Employee's Spouse, any lineal descendants and ascendants and the Spouse of such lineal descendants and ascendants.
1.37 First Distribution Calendar Year For distributions beginning before the Participant's death, the First Distribution Calendar Year is the calendar year immediately preceding the calendar year which contains the Participant's Required Beginning Date. For distributions beginning after the Participant's death, the First Distribution Calendar Year is the calendar year in which distributions are required to begin pursuant to paragraph 7.10.
1.38 Fund All contributions received by the Trustee/Custodian under this Plan and Trust/Custodial Account, investments thereof and earnings and appreciation thereon.
1.39 Hardship An immediate and heavy financial need of the Employee where such Employee lacks other available resources.
1.40 Highest Average Compensation The average Compensation for the three consecutive Years of Service with the Employer that produces the highest average. A Year of Service with the Employer is the 12-consecutive month period defined in the Adoption Agreement.
1.41 Highly Compensated Employee Any Employee who performs service for the Employer during the determination year and who, during the immediate prior year:
(a) received Compensation from the Employer in excess of $75,000 [as adjusted pursuant to Code Section 415(d)]; or
(b) received Compensation from the Employer in excess of $50,000 [as adjusted pursuant to Code Section 415(d)] and was a member of the Top-Paid Group for such year; or
(c) was an officer of the Employer and received Compensation during such year that is greater than 50 percent of the dollar limitation in effect under Code Section 415(b)(1)(A).
Notwithstanding (a), (b) and (c), an Employee who was not Highly Compensated during the preceding Plan Year shall not be treated as a Highly Compensated Employee with respect to the current Plan Year unless such Employee is a member of the 100 Employees paid the greatest Compensation during the year for which such determination is being made.
(d) Employees who are five percent (5%) Owners at any time during the immediate prior year or determination year.
Highly Compensated Employee includes Highly Compensated active Employees and Highly Compensated former Employees. 1.42 Hour Of Service
(a) Each hour for which an Employee is paid, or entitled to payment, for the performance of duties for the Employer. These hours shall be credited to the Employee for the computation period in which the duties are performed; and
(b) Each hour for which an Employee is paid, or entitled to payment, by the Employer on account of a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence. No more than 501 Hours of Service shall be credited under this paragraph for any single continuous period (whether or not such period occurs in a single computation period). Hours under this paragraph shall be calculated and credited pursuant to Section 2530.200b-2 of the Department of Labor Regulations which are incorporated herein by this reference; and
(c) Each hour for which back pay, irrespective of mitigation of damages, is either awarded or agreed to by the Employer. The same Hours of Service shall not be credited both under paragraph (a) or paragraph (b), as the case may be, and under this paragraph (c). These hours shall be credited to the Employee for the computation period or periods to which the award or agreement pertains rather than the computation period in which the award, agreement or payment is made.
(d) Hours of Service shall be credited for employment with the Employer
and with other members of an affiliated service group [as defined in Code
Section 414(m)], a controlled group of corporations [as defined in Code Section
414(b)], or a group of trades or businesses under common control [as defined in
Code Section 414(c)] of which the adopting Employer is a member, and any other
entity required to be aggregated with the Employer pursuant to Code Section
414(o) and the regulations thereunder. Hours of Service shall also be credited
for any individual considered an Employee for purposes of this Plan under Code
Section 414(n) or Code Section 414(o) and the regulations thereunder.
(e) Solely for purposes of determining whether a Break in Service, as defined in paragraph 1.10, for participation and vesting purposes has occurred in a computation period, an individual who is absent from work for maternity or paternity reasons shall receive credit for the Hours of Service which would otherwise have been credited to such individual but for such absence, or in any case in which such hours cannot be determined, 8 Hours of Service per day of such absence. For purposes of this paragraph, an absence from work for maternity or paternity reasons means an absence by reason of the pregnancy of the individual, by reason of a birth of a child of the individual, by reason of the placement of a child with the individual in connection with the adoption of such child by such individual, or for purposes of caring for such child for a period beginning immediately fol- lowing such birth or placement. The Hours of Service credited under this paragraph shall be credited in the computation period in which the absence begins if the crediting is necessary to prevent a Break in Service in that period, or in all other cases, in the
following computation period. No more than 501 hours will be credited under this paragraph.
(f) Hours of Service shall be determined on the basis of the method selected in the Adoption Agreement.
1.43 Key Employee Any Employee or former Employee (and the beneficiaries of
such employee) who at any time during the determination period was an officer
of the Employer if such individual's annual compensation exceeds 50% of the
dollar limitation under Code Section 415(b)(1)(A) (the defined benefit maximum
annual benefit), an owner (or considered an owner under Code Section 318) of
one of the ten largest interests in the employer if such individual's
compensation exceeds 100% of the dollar limitation under Code Section
415(c)(1)(A), a 5% owner of the Employer, or a 1% owner of the Employer who has
an annual compensation of more than $150,000. For purposes of determining who
is a Key Employee, annual compensation shall mean Compensation as defined for
Article X, but including amounts deferred through a salary reduction agreement
to a cash or deferred plan under Code Section 401(k), a Simplified Employee
Pension Plan under Code Section 408(k), a cafeteria plan under Code Section 125
or a tax-deferred annuity under Code Section 403(b). The determination period
is the Plan Year containing the Determination Date and the four preceding Plan
Years. The determination of who is a Key Employee will be made in accordance
with Code Section 416(i)(1) and the regulations thereunder.
1.44 Leased Employee Any person (other than an Employee of the recipient)
who, pursuant to an agreement between the recipient and any other person
("leasing organization"), has performed services for the recipient [or for the
recipient and related persons determined in accordance with Code Section
414(n)(6)] on a substantially full-time basis for a period of at least one
year, and such services are of a type historically performed by Employees in
the business field of the recipient Employer.
1.45 Limitation Year The calendar year or such other 12-consecutive month period designated by the Employer in the Adoption Agreement for purposes of determining the maximum Annual Addition to a Participant's account. All qualified plans maintained by the Employer must use the same Limitation Year. If the Limitation Year is amended to a different 12-consecutive month period, the new Limitation Year must begin on a date within the Limitation Year in which the amendment is made.
1.46 Master Or Prototype Plan A plan, the form of which is the subject of a favorable opinion letter from the Internal Revenue Service.
1.47 Matching Contribution An Employer contribution made to this or any other defined contribution plan on behalf of a Participant on account of an Employee Voluntary Contribution made by such Participant, or on account of a Participant's Elective Deferral, under a Plan maintained by the Employer.
1.48 Maximum Permissible Amount The maximum Annual Addition that may be contributed or allocated to a Participant's account under the plan for any Limitation Year shall not exceed the lesser of:
(a) the Defined Contribution Dollar Limitation, or
(b) 25% of the Participant's Compensation for the Limitation Year.
The compensation limitation referred to in (b) shall not apply to any
contribution for medical benefits [within the meaning of Code Section 401(h) or
Code Section 419A(f)(2)] which is otherwise treated as an Annual Addition under
Code Section 415(l)(1) or 419(d)(2). If a short Limitation Year is created
because of an amendment changing the Limitation Year to a different
12-consecutive month period, the Maximum Permissible Amount will not exceed the
Defined Contribution Dollar Limitation multiplied by the following fraction:
Number of months in the short Limitation Year divided by 12.
1.49 Net Profit The current and accumulated operating earnings of the Employer before Federal and State income taxes, excluding nonrecurring or unusual items of income, and before contributions to this and any other qualified plan of the Employer. Alternatively, the Employer may fix another definition in the Adoption Agreement.
1.50 Normal Retirement Age The age, set by the Employer in the Adoption Agreement, at which a Participant may retire and receive his or her benefits under the Plan.
1.51 Owner-Employee A sole proprietor, or a partner owning more than 10% of either the capital or profits interest of the partnership.
1.52 Paired Plans Two or more Plans maintained by the Sponsor designed so that a single or any combination of Plans adopted by an Employer will meet the antidiscrimination rules, the contribution and benefit limitations, and the Top-Heavy provisions of the Code.
1.53 Participant Any Employee who has met the eligibility requirements and is participating in the Plan.
1.54 Participant's Benefit The account balance as of the last Valuation Date in the calendar year immediately preceding the Distribution Calendar Year (valuation calendar year) increased by the amount of any contributions or forfeitures allocated to the account balance as of the dates in the valuation calendar year after the Valuation Date and decreased by distributions made in the valuation calendar year after the Valuation Date. A special exception exists for the second distribution Calendar Year. For purposes of this paragraph, if any portion of the minimum distribution for the First Distribution Calendar Year is made in the second Distribution Calendar Year on or before the Required Beginning Date, the amount of the minimum distribution made in the second distribution calendar year shall be treated as if it had been made in the immediately preceding Distribution Calendar Year.
1.55 Permissive Aggregation Group Used for Top-Heavy testing purposes, it is the Required Aggregation Group of plans plus any other plan or plans of the Employer which, when considered as a group with the Required Aggregation Group, would continue to satisfy the requirements of Code Sections 401(a)(4) and 410.
1.56 Plan The Employer's retirement plan as embodied herein and in the Adoption Agreement.
1.57 Plan Administrator The Employer.
1.58 Plan Year The 12-consecutive month period designated by the Employer in the Adoption Agreement.
1.59 Present Value Used for Top-Heavy test and determination purposes, when determining the Present Value of accrued benefits, with respect to any Defined Benefit Plan maintained by the Employer, interest and mortality rates shall be determined in accordance with the provisions of the respective plan. If applicable, interest and mortality assumptions will be specified in Section 11 of the Adoption Agreement.
1.60 Projected Annual Benefit Used to test the maximum benefit which may be obtained from a combination of retirement plans, it is the annual retirement benefit (adjusted to an actuarial equivalent straight life annuity if such benefit is expressed in a form other than a straight life annuity or Qualified Joint and Survivor Annuity) to which the Participant would be entitled under the terms of a Defined Benefit Plan or plans, assuming:
(a) the Participant will continue employment until Normal Retirement Age under the plan (or current age, if later), and
(b) the Participant's Compensation for the current Limitation Year and all other relevant factors used to determine benefits under the plan will remain constant for all future Limitation Years.
1.61 Qualified Deferred Compensation Plan Any pension, profit-sharing, stock bonus, or other plan which meets the requirements of Code Section 401 and includes a trust exempt from tax under Code Section 501(a) or any annuity plan described in Code Section 403(a).
An Eligible Retirement Plan is an individual retirement account (IRA) as
described in Code Section 408(a), an individual retirement annuity (IRA) as
described in Code Section 408(b), an annuity plan as described in Code Section
403(a), or a qualified trust as described in Code Section 401(a), which accepts
Eligible Rollover Distributions. However in the case of an Eligible Rollover
Distribution to a Surviving Spouse, an Eligible Retirement Plan is an
individual retirement account or individual retirement annuity.
1.62 Qualified Domestic Relations Order A QDRO is a signed Domestic Relations Order issued by a State Court which creates, recognizes or assigns to an alternate payee(s) the right to receive all or part of a Participant's Plan benefit and which meets the requirements of Code Section 414(p). An alternate payee is a Spouse, former Spouse, child, or other dependent who is treated as a beneficiary under the Plan as a result of the QDRO.
1.63 Qualified Early Retirement Age For purposes of paragraph 8.9, Qualified Early Retirement Age is the latest of:
(a) the earliest date, under the Plan, on which the Participant may elect to receive retirement benefits, or
(b) the first day of the 120th month beginning before the Participant reaches Normal Retirement Age, or
(c) the date the Participant begins participation.
1.64 Qualified Joint And Survivor Annuity An immediate annuity for the life of the Participant with a survivor annuity for the life of the Participant's Spouse which is at least one-half of but not more than the amount of the annuity payable during the joint lives of the Participant and the Participant's Spouse. The exact amount of the Survivor Annuity is to be specified by the Employer in the Adoption Agreement. If not designated by the Employer, the Survivor Annuity will be 1/2 of the amount paid to the Participant during his or her lifetime. The Qualified Joint and Survivor Annuity will be the amount of benefit which can be provided by the Participant's Vested Account Balance.
1.65 Qualified Matching Contribution Matching Contributions which when made
are subject to the distribution and nonforfeitability requirements under Code
Section 401(k).
1.66 Qualified Non-Elective Contributions Contributions (other than Matching Contributions or Qualified Matching Contributions) made by the Employer and allocated to Participants' accounts that the Participants may not elect to receive in cash until distributed from the Plan; that are nonforfeitable when made; and that are distributable only in accordance with the distribution provisions that are applicable to Elective Deferrals and Qualified Matching Contributions.
1.67 Qualified Voluntary Contribution A tax-deductible voluntary Employee contribution. These contributions may no longer be made to the Plan.
1.68 Required Aggregation Group Used for Top-Heavy testing purposes, it consists of:
(a) each qualified plan of the Employer in which at least one Key Employee participates or participated at any time during the determination period (regardless of whether the plan has terminated), and
(b) any other qualified plan of the Employer which enables a plan described in (a) to meet the requirements of Code Sections 401(a)(4) or 410.
1.69 Required Beginning Date The date on which a Participant is required to take his or her first minimum distribution under the Plan. The rules are set forth at paragraph 7.5.
1.70 Rollover Contribution A contribution made by a Participant of an amount distributed to such Participant from another Qualified Deferred Compensation Plan in accordance with Code Sections 402(a)(5), (6), and (7).
An Eligible Rollover Distribution is any distribution of all or any portion of the balance to the credit of the Participant except that an Eligible Rollover Distribution does not include:
(a) any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the Participant or the joint lives (or joint life
expectancies) of the Participant and the Participant's Designated Beneficiary, or for a specified period of ten years or more;
(b) any distribution to the extent such distribution is required under Code Section 401(a)(9); and
(c) the portion of any distribution that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to Employer securities).
A Direct Rollover is a payment by the plan to the Eligible Retirement Plan specified by the Participant.
1.71 Salary Savings Agreement An agreement between the Employer and a participating Employee where the Employee authorizes the Employer to withhold a specified percentage of his or her Compensation for deposit to the Plan on behalf of such Employee.
1.72 Self-Employed Individual An individual who has Earned Income for the taxable year from the trade or business for which the Plan is established including an individual who would have had Earned Income but for the fact that the trade or business had no Net Profit for the taxable year.
1.73 Service The period of current or prior employment with the Employer. If the Employer maintains a plan of a predecessor employer, Service for such predecessor shall be treated as Service for the Employer.
1.74 Shareholder Employee An Employee or Officer who owns [or is considered as owning within the meaning of Code Section 318(a)(1)], on any day during the taxable year of an electing small business corporation (S Corporation), more than 5% of such corporation's outstanding stock.
1.75 Simplified Employee Pension Plan An individual retirement account which meets the requirements of Code Section 408(k), and to which the Employer makes contributions pursuant to a written formula. These plans are considered for contribution limitation and Top-Heavy testing purposes.
1.76 Sponsor FLEET NATIONAL BANK OF MASSACHUSETTS, or any successor(s) or assign(s).
1.77 Spouse (Surviving Spouse) The Spouse or Surviving Spouse of the Participant, provided that a former Spouse will be treated as the Spouse or Surviving Spouse and a current Spouse will not be treated as the Spouse or Surviving Spouse to the extent provided under a Qualified Domestic Relations Order as described in Code Section 414(p).
1.78 Super Top-Heavy Plan A Plan described at paragraph 1.81 under which the Top-Heavy Ratio [as defined at paragraph 1.82] exceeds 90%.
1.79 Taxable Wage Base For plans with an allocation formula which takes into account the Employer's contribution under the Federal Insurance Contributions Act (FICA), the maximum amount of earnings which may be considered wages for such Plan Year under the Social Security Act [Code Section 3121(a)(1)], or the amount elected by the Employer in the Adoption Agreement.
1.80 Top-Heavy Determination Date For any Plan Year subsequent to the first Plan Year, the last day of the preceding Plan Year. For the first Plan Year of the Plan, the last day of that year.
1.81 Top-Heavy Plan For any Plan Year beginning after 1983, the Employer's Plan is top-heavy if any of the following conditions exist:
(a) If the Top-Heavy Ratio for the Employer's Plan exceeds 60% and this Plan is not part of any required Aggregation Group or Permissive Aggregation Group of Plans.
(b) If the Employer's plan is a part of a Required Aggregation Group of plans but not part of a Permissive Aggregation Group and the Top-Heavy Ratio for the group of plans exceeds 60%.
(c) If the Employer's plan is a part of a Required Aggregation Group and part of a Permissive Aggregation Group of plans and the Top-Heavy Ratio for the Permissive Aggregation Group exceeds 60%.
1.82 Top-Heavy Ratio
(a) If the Employer maintains one or more Defined Contribution plans (including any Simplified Employee Pension Plan) and the Employer has not maintained any Defined Benefit Plan which during the 5-year period ending on the Determination Date(s) has or has had accrued benefits, the Top-Heavy Ratio for this Plan alone, or for the Required or Permissive Aggregation Group as appropriate, is a fraction,
(1) the numerator of which is the sum of the account balances of all Key Employees as of the Determination Date(s) [including any part of any account balance distributed in the 5-year period ending on the Determination Date(s)], and
(2) the denominator of which is the sum of all account balances
[including any part of any account balance distributed in the 5-year period
ending on the Determination Date(s)], both computed in accordance with Code
Section 416 and the regulations thereunder.
Both the numerator and denominator of the Top-Heavy Ratio are
increased to reflect any contribution not actually made as of the Determination
Date, but which is required to be taken into account on that date under Code
Section 416 and the regulations thereunder.
(b) If the Employer maintains one or more Defined Contribution Plans (including any Simplified Employee Pension Plan) and the Employer maintains or has maintained one or more Defined Benefit Plans which during the 5-year period ending on the Determination Date(s) has or has had any accrued benefits, the Top-Heavy Ratio for any Required or Permissive Aggregation Group as appropriate is a fraction, the numerator of which is the sum of account balances under the aggregated Defined Contribution Plan or Plans for all Key Employees, determined in accordance with (a) above, and the Present Value of accrued benefits under the aggregated Defined Benefit Plan or Plans for all Key Employees as of the Determination Date(s), and the denominator of which is the sum of the account balances under the aggregated Defined Contribution
Plan or Plans for all Participants, determined in accordance with (a) above, and the Present Value of accrued benefits under the Defined Benefit Plan or Plans for all Participants as of the Determination Date(s), all determined in accordance with Code Section 416 and the regulations thereunder. The accrued benefits under a Defined Benefit Plan in both the numerator and denominator of the Top-Heavy Ratio are increased for any distribution of an accrued benefit made in the 5-year period ending on the Determination Date.
(c) For purposes of (a) and (b) above, the value of account balances
and the Present Value of accrued benefits will be determined as of the most
recent Valuation Date that falls within or ends with the 12-month period ending
on the Determination Date, except as provided in Code Section 416 and the
regulations thereunder for the first and second plan years of a Defined Benefit
Plan. The account balances and accrued benefits of a participant (1) who is
not a Key Employee but who was a Key Employee in a prior year, or (2) who has
not been credited with at least one hour of service with any Employer
maintaining the Plan at any time during the 5-year period ending on the
Determination Date, will be disregarded. The calculation of the Top-Heavy
Ratio, and the extent to which distributions, rollovers, and transfers are
taken into account will be made in accordance with Code Section 416 and the
regulations thereunder. Qualified Voluntary Employee Contributions will not
be taken into account for purposes of computing the Top-Heavy Ratio. When
aggregating plans the value of account balances and accrued benefits will be
calculated with reference to the Determination Dates that fall within the same
calendar year. The accrued benefit of a Participant other than a Key Employee
shall be determined under (1) the method, if any, that uniformly applies for
accrual purposes under all Defined Benefit Plans maintained by the Employer, or
(2) if there is no such method, as if such benefit accrued not more rapidly
than the slowest accrual rate permitted under the fractional rule of Code
Section 411(b)(1)(C).
1.83 Top-Paid Group The group consisting of the top 20% of Employees when ranked on the basis of Compensation paid during such year. For purposes of determining the number of Employees in the group (but not who is in it), the following Employees shall be excluded:
(a) Employees who have not completed 6 months of Service.
(b) Employees who normally work less than 17-1/2 hours per week.
(c) Employees who normally do not work more than 6 months during any year.
(d) Employees who have not attained age 21.
(e) Employees included in a collective bargaining unit, covered by an agreement between employee representatives and the Employer, where retirement benefits were the subject of good faith bargaining and provided that 90% or more of the Employer's Employees are covered by the agreement.
(f) Employees who are nonresident aliens and who receive no earned income which constitutes income from sources within the United States.
1.84 Transfer Contribution A non-taxable transfer of a Participant's benefit
directly from a Qualified Deferred Compensation Plan to this Plan.
1.85 Trustee The individual(s) or institution appointed by the Employer to invest the Fund.
1.86 Valuation Date The last day of the Plan Year or such other date as agreed to by the Employer and the Trustee/Custodian on which Participant accounts are revalued in accordance with Article V hereof. For Top-Heavy purposes, the date selected by the Employer as of which the Top-Heavy Ratio is calculated.
1.87 Vested Account Balance The aggregate value of the Participant's Vested Account Balances derived from Employer and Employee contributions (including Rollovers), whether vested before or upon death, including the proceeds of insurance contracts, if any, on the Participant's life. The provisions of Article VIII shall apply to a Participant who is vested in amounts attributable to Employer contributions, Employee contributions (or both) at the time of death or distribution.
1.88 Voluntary Contribution An Employee contribution made to the Plan by or on behalf of a Participant that is included in the Participant's gross income in the year in which made and that is maintained under a separate account to which earnings and losses are allocated.
1.89 Welfare Benefit Fund Any fund that is part of a plan of the Employer, or has the effect of a plan, through which the Employer provides welfare benefits to Employees or their beneficiaries. For these purposes, Welfare Benefits means any benefit other than those with respect to which Code Section 83(h) (relating to transfers of property in connection with the performance of services), Code Section 404 (relating to deductions for contributions to an Employee's trust or annuity and Compensation under a deferred payment plan), Code Section 404A (relating to certain foreign deferred compensation plans) apply. A "Fund" is any social club, voluntary employee benefit association, supplemental unemployment benefit trust or qualified group legal service organization described in Code Section 501(c)(7), (9), (17) or (20); any trust, corporation, or other organization not exempt from income tax, or to the extent provided in regulations, any account held for an Employer by any person.
1.90 Year Of Service A 12-consecutive month period during which an Employee
is credited with not less than 1,000 (or such lesser number as specified by the
Employer in the Adoption Agreement) Hours of Service.
ARTICLE II
ELIGIBILITY REQUIREMENTS
2.1 Participation Employees who meet the eligibility requirements in the Adoption Agreement on the Effective Date of the Plan shall become Participants as of the Effective Date of the Plan. If so elected in the Adoption Agreement, all Employees employed on the Effective Date of the Plan may participate, even if they have not satisfied the Plan's specified eligibility requirements. Other Employees shall become Participants on the Entry Date coinciding with or immediately following the date on which they meet the
eligibility requirements. The Employee must satisfy the eligibility requirements specified in the Adoption Agreement and be employed on the Entry Date to become a Participant in the Plan. In the event an Employee who is not a member of the eligible class of Employees becomes a member of the eligible class, such Employee shall participate immediately if such Employee has satisfied the minimum age and service requirements and would have previously become a Participant had he or she been in the eligible class. A former Participant shall again become a Participant upon returning to the employ of the Employer at the next Entry Date or if earlier, the next Valuation Date. For this purpose, Participant's Compensation and Service shall be considered from date of rehire.
2.2 Change In Classification Of Employment In the event a Participant becomes ineligible to participate because he or she is no longer a member of an eligible class of Employees, such Employee shall participate upon his or her return to an eligible class of Employees.
2.3 Computation Period To determine Years of Service and Breaks in Service for purposes of eligibility, the 12- consecutive month period shall commence on the date on which an Employee first performs an Hour of Service for the Employer and each anniversary thereof, such that the succeeding 12-consecutive month period commences with the employee's first anniversary of employment and so on. If, however, the period so specified is one year or less, the succeeding 12-consecutive month period shall commence on the first day of the Plan Year prior to the anniversary of the date they first performed an Hour of Service regardless of whether the Employee is entitled to be credited with 1,000 (or such lesser number as specified by the Employer in the Adoption Agreement) Hours of Service during their first employment year.
2.4 Employment Rights Participation in the Plan shall not confer upon a Participant any employment rights, nor shall it interfere with the Employer's right to terminate the employment of any Employee at any time.
2.5 Service With Controlled Groups All Years of Service with other members of a controlled group of corporations [as defined in Code Section 414(b)], trades or businesses under common control [as defined in Code Section 414(c)], or members of an affiliated service group [as defined in Code Section 414(m)] shall be credited for purposes of determining an Employee's eligibility to participate.
2.6 Owner-Employees If this Plan provides contributions or benefits for one or more Owner-Employees who control both the business for which this Plan is established and one or more other trades or businesses, this Plan and the Plan established for other trades or businesses must, when looked at as a single Plan, satisfy Code Sections 401(a) and (d) for the Employees of this and all other trades or businesses.
If the Plan provides contributions or benefits for one or more Owner-Employees who control one or more other trades or businesses, the Employees of the other trades or businesses must be included in a Plan which satisfies Code Sections 401(a) and (d) and which provides contributions and benefits not less favorable than provided for Owner- Employees under this Plan.
If an individual is covered as an Owner-Employee under the plans of two or
more trades or businesses which are not controlled, and the individual controls a trade or business, then the contributions or benefits of the Employees under the plan of the trades or businesses which are controlled must be as favorable as those provided for him or her under the most favorable plan of the trade or business which is not controlled.
For purposes of the preceding sentences, an Owner-Employee, or two or more Owner-Employees, will be considered to control a trade or business if the Owner-Employee, or two or more Owner-Employees together:
(a) own the entire interest in an unincorporated trade or business, or
(b) in the case of a partnership, own more than 50% of either the capital interest or the profits interest in the partnership.
For purposes of the preceding sentence, an Owner-Employee, or two or more Owner-Employees shall be treated as owning any interest in a partnership which is owned, directly or indirectly, by a partnership which such Owner- Employee, or such two or more Owner-Employees, are considered to control within the meaning of the preceding sentence.
2.7 Leased Employees Any Leased Employee shall be treated as an Employee of the recipient Employer; however, contributions or benefits provided by the leasing organization which are attributable to services performed for the recipient Employer shall be treated as provided by the recipient Employer. A Leased Employee shall not be considered an Employee of the recipient if such Employee is covered by a money purchase pension plan providing:
(a) a non-integrated Employer contribution rate of at least 10% of Compensation, [as defined in Code Section 415(c)(3) but including amounts contributed by the Employer pursuant to a salary reduction agreement, which are excludable from the Employee's gross income under a cafeteria plan covered by Code Section 125, a cash or deferred profit-sharing plan under Section 401(k) of the Code, a Simplified Employee Pension Plan under Code Section 402(h)(1)(B ) and a tax-sheltered annuity under Code Section 403(b)],
(b) immediate participation, and
(c) full and immediate vesting.
This exclusion is only available if Leased Employees do not constitute more than twenty percent (20%) of the recipient's non-highly compensated work force.
2.8 Thrift Plans If the Employer makes an election in the Adoption Agreement to require Voluntary Contributions to participate in this Plan, the Employer shall notify each eligible Employee in writing of his or her eligibility for participation at least 30 days prior to the appropriate Entry Date. The Employee shall indicate his or her intention to join the Plan by authorizing the Employer to withhold a percentage of his or her Compensation as provided in the Plan. Such authorization shall be returned to the Employer at least 10 days prior to the Employee's Entry Date. The Employee may decline participation by so indicating on the enrollment form or by failure to return the enrollment form to the Employer prior to the Employee's Entry Date. If
the Employee declines to participate, such Employee shall be given the opportunity to join the Plan on the next Entry Date. The taking of a Hardship Withdrawal under the provisions of paragraph 6.9 will impact the Participant's ability to make these contributions. ARTICLE III
EMPLOYER CONTRIBUTIONS
3.1 Amount The Employer intends to make periodic contributions to the Plan in accordance with the formula or formulas selected in the Adoption Agreement. However, the Employer's contribution for any Plan Year shall be subject to the limitations on allocations contained in Article X.
3.2 Expenses And Fees The Employer shall also be authorized to reimburse the Fund for all expenses and fees incurred in the administration of the Plan or Trust/Custodial Account and paid out of the assets of the Fund. Such expenses shall include, but shall not be limited to, fees for professional services, printing and postage. Brokerage commissions may not be reimbursed.
3.3 Responsibility For Contributions Neither the Trustee/Custodian nor the Sponsor shall be required to determine if the Employer has made a contribution or if the amount contributed is in accordance with the Adoption Agreement or the Code. The Employer shall have sole responsibility in this regard. The Trustee/Custodian shall be accountable solely for contributions actually received by it, within the limits of Article XI.
3.4 Return Of Contributions Contributions made to the Fund by the Employer shall be irrevocable except as provided below:
(a) Any contribution forwarded to the Trustee/Custodian because of a mistake of fact, provided that the contribution is returned to the Employer within one year of the contribution.
(b) In the event that the Commissioner of Internal Revenue determines that the Plan is not initially qualified under the Internal Revenue Code, any contribution made incident to that initial qualification by the Employer must be returned to the Employer within one year after the date the initial qualification is denied, but only if the application for the qualification is made by the time prescribed by law for filing the Employer's return for the taxable year in which the Plan is adopted, or such later date as the Secretary of the Treasury may prescribe.
(c) Contributions forwarded to the Trustee/Custodian are presumed to be deductible and are conditioned on their deductibility. Contributions which are determined to not be deductible will be returned to the Employer.
ARTICLE IV
EMPLOYEE CONTRIBUTIONS
4.1 Voluntary Contributions An Employee may make Voluntary Contributions to the Plan established hereunder if so authorized by the Employer in a uniform
and nondiscriminatory manner. Such contributions are subject to the limitations on Annual Additions and are subject to antidiscrimination testing.
4.2 Qualified Voluntary Contributions A Participant may no longer make Qualified Voluntary Contributions to the Plan. Amounts already contributed may remain in the Trust Fund/Custodial Account until distributed to the Participant. Such amounts will be maintained in a separate account which will be nonforfeitable at all times. The account will share in the gains and losses of the Trust in the same manner as described at paragraph 5.4 of the Plan. No part of the Qualified Voluntary Contribution account will be used to purchase life insurance. Subject to Article VIII, Joint and Survivor Annuity Requirements (if applicable), the Participant may withdraw any part of the Qualified Voluntary Contribution account by making a written application to the Plan Administrator.
4.3 Rollover Contribution Unless provided otherwise in the Adoption Agreement, a Participant may make a Rollover Contribution to any Defined Contribution Plan established hereunder of all or any part of an amount distributed or distributable to him or her from a Qualified Deferred Compensation Plan provided:
(a) the amount distributed to the Participant is deposited to the Plan no later than the sixtieth day after such distribution was received by the Participant,
(b) the amount distributed is not one of a series of substantially equal periodic payments made for the life (or life expectancy) of the Participant or the joint lives (or joint life expectancies) of the Participant and the Participant's Designated Beneficiary, or for a specified period of ten years or more;
(c) the amount distributed is not required under Code Section 401(a)(9);
(d) if the amount distributed included property such property is rolled over, or if sold the proceeds of such property may be rolled over,
(e) the amount distributed is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities).
In addition, if the Adoption Agreement allows Rollover Contributions, the Plan will also accept any Eligible Rollover Distribution (as defined at paragraph 1.70) directly to the Plan.
Rollover Contributions, which relate to distributions prior to January 1, 1993, must be made in accordance with paragraphs (a) through (e) and additionally meet the requirements of paragraph (f):
(f) The distribution from the Qualified Deferred Compensation Plan constituted the Participant's entire interest in such Plan and was distributed within one taxable year to the Participant:
(1) on account of separation from Service, a Plan termination, or
in the case of a profit-sharing or stock bonus plan, a complete discontinuance
of contributions under such plan within the meaning of Code Section
402(a)(6)(A), or
(2) in one or more distributions which constitute a qualified lump sum distribution within the meaning of Code Section 402(e)(4)(A), determined without reference to subparagraphs (B) and (H).
Such Rollover Contribution may also be made through an individual retirement account qualified under Code Section 408 where the IRA was used as a conduit from the Qualified Deferred Compensation Plan, the Rollover Contribution is made in accordance with the rules provided under paragraphs (a) through (e) and the Rollover Contribution does not include any regular IRA contributions, or earnings thereon, which the Participant may have made to the IRA. Rollover Contributions, which relate to distributions prior to January 1, 1993, may be made through an IRA in accordance with paragraphs (a) through (f) and additional requirements as provided in the previous sentence. The Trustee/Custodian shall not be held responsible for determining the tax-free status of any Rollover Contribution made under this Plan.
4.4 Transfer Contribution Unless provided otherwise in the Adoption Agreement a Participant may, subject to the provisions of paragraph 4.5, also arrange for the direct transfer of his or her benefit from a Qualified Deferred Compensation Plan to this Plan. For accounting and record keeping purposes, Transfer Contributions shall be treated in the same manner as Rollover Contributions.
In the event the Employer accepts a Transfer Contribution from a Plan in which the Employee was directing the investments of his or her account, the Employer may continue to permit the Employee to direct his or her investments in accordance with paragraph 13.7 with respect only to such Transfer Contribution. Notwithstanding the above, the Employer may refuse to accept such Transfer Contributions.
4.5 Employer Approval Of Transfer Contributions The Employer maintaining a Safe-Harbor Profit-Sharing Plan in accordance with the provisions of paragraph 8.7, acting in a nondiscriminatory manner, may in its sole discretion refuse to allow Transfer Contributions to its profit-sharing plan, if such contributions are directly or indirectly being transferred from a defined benefit plan, a money purchase pension plan (including a target benefit plan), a stock bonus plan, or another profit-sharing plan which would otherwise provide for a life annuity form of payment to the Participant.
4.6 Elective Deferrals A Participant may enter into a Salary Savings Agreement with the Employer authorizing the Employer to withhold a portion of such Participant's Compensation not to exceed $7,000 per calendar year as adjusted under Code Section 415(d) or, if lesser, the percentage of Compensation specified in the Adoption Agreement and to deposit such amount to the Plan. No Participant shall be permitted to have Elective Deferrals made under this Plan or any other qualified plan maintained by the Employer, during any taxable year, in excess of the dollar limitation contained in Code Section 402(g) in effect at the beginning of such taxable year. Thus, the $7,000 limit may be reduced if a Participant contributes pre-tax contributions to qualified plans of this or other Employers. Any such contribution shall be
credited to the Employee's Salary Savings Account. Unless otherwise specified
in the Adoption Agreement, a Participant may amend his or her Salary Savings
Agreement to increase, decrease or terminate the percentage upon 30 days
written notice to the Employer. If a Participant terminates his or her
agreement, such Participant shall not be permitted to put a new Salary Savings
Agreement into effect until the first pay period in the next Plan Year, unless
otherwise stated in the Adoption Agreement. The Employer may also amend or
terminate said agreement on written notice to the Participant. If a
Participant has not authorized the Employer to withhold at the maximum rate and
desires to increase the total withheld for a Plan Year, such Participant may
authorize the Employer upon 30 days notice to withhold a supplemental amount up
to 100% of his or her Compensation for one or more pay periods. In no event
may the sum of the amounts withheld under the Salary Savings Agreement plus the
supplemental withholding exceed 25% of a Participant's Compensation for a Plan
Year. The Employer may also recharacterize as after-tax Voluntary
Contributions all or any portion of amounts previously withheld under any
Salary Savings Agreement within the Plan Year as provided for at paragraph
10.9. This may be done to insure that the Plan will meet one of the
antidiscrimination tests under Code Section 401(k). Elective Deferrals shall
be deposited in the Trust within 30 days after being withheld from the
Participant's pay.
4.7 Required Voluntary Contributions If the Employer makes a thrift election in the Adoption Agreement, each eligible Participant shall be required to make Voluntary Contributions to the Plan for credit to his or her account as provided in the Adoption Agreement. Such Voluntary Contributions shall be withheld from the Employee's Compensation and shall be transmitted by the Employer to the Trustee/Custodian as agreed between the Employer and Trustee/Custodian. A Participant may discontinue participation or change his or her Voluntary Contribution percentage by so advising the Employer at least 10 days prior to the date on which such discontinuance or change is to be effective. If a Participant discontinues his or her Voluntary Contributions, such Participant may not again authorize Voluntary Contributions for a period of one year from the date of discontinuance. A Participant may voluntarily change his or her Voluntary Contribution percentage once during any Plan Year and may also agree to have a reduction in his or her contribution, if required to satisfy the requirements of the ACP test.
4.8 Direct Rollover Of Benefits Notwithstanding any provision of the Plan to
the contrary that would otherwise limit a Participant's election under this
paragraph, for distributions made on or after January 1, 1993, a Participant
may elect, at the time and in the manner prescribed by the Plan Administrator,
to have any portion of an Eligible Rollover Distribution paid directly to an
Eligible Retirement Plan specified by the Participant in a Direct Rollover.
Any portion of a distribution which is not paid directly to an Eligible
Retirement Plan shall be distributed to the Participant. For purposes of this
paragraph, a Surviving Spouse or a Spouse or former Spouse who is an alternate
payee under a Qualified Domestic Relations Order as defined in Code Section
414(p), will be permitted to elect to have any Eligible Rollover Distribution
paid directly to an individual retirement account (IRA) or an individual
retirement annuity (IRA).
The plan provisions otherwise applicable to distributions continue to apply to Rollover and Transfer Contributions.
ARTICLE V
PARTICIPANT ACCOUNTS
5.1 Separate Accounts The Employer shall establish a separate bookkeeping account for each Participant showing the total value of his or her interest in the Fund. Each Participant's account shall be separated for bookkeeping purposes into the following sub-accounts:
(a) Employer contributions.
(1) Matching Contributions.
(2) Qualified Matching Contributions.
(3) Qualified Non-Elective Contributions.
(4) Discretionary Contributions.
(5) Elective Deferrals.
(b) Voluntary Contributions (and additional amounts including required contributions and, if applicable, either repayments of loans previously defaulted on and treated as "deemed distributions" on which a tax report has been issued, and amounts paid out upon a separation from service which have been included in income and which are repaid after being re-hired by the Employer).
(c) Qualified Voluntary Contributions (if the Plan previously accepted these).
(d) Rollover Contributions and Transfer Contributions.
5.2 Adjustments To Participant Accounts As of each Valuation Date of the Plan, the Employer shall add to each account:
(a) the Participant's share of the Employer's contribution and forfeitures as determined in the Adoption Agreement,
(b) any Elective Deferrals, Voluntary, Rollover or Transfer Contributions made by the Participant,
(c) any repayment of amounts previously paid out to a Participant upon a separation from Service and repaid by the Participant since the last Valuation Date, and
(d) the Participant's proportionate share of any investment earnings and increase in the fair market value of the Fund since the last Valuation Date, as determined at paragraph 5.4.
The Employer shall deduct from each account:
(e) any withdrawals or payments made from the Participant's account
since the last Valuation Date, and
(f) the Participant's proportionate share of any decrease in the fair market value of the Fund since the last Valuation Date, as determined at paragraph 5.4.
5.3 Allocating Employer Contributions The Employer's contribution shall be allocated to Participants in accordance with the allocation formula selected by the Employer in the Adoption Agreement, and the minimum contribution and allocation requirements for Top-Heavy Plans. Beginning with the 1990 Plan Year and thereafter, for plans on Standardized Adoption Agreement 001, Participants who are credited with more than 500 Hours of Service or are employed on the last day of the Plan Year must receive a full allocation of Employer contributions. In Nonstandardized Adoption Agreement 002, Employer contributions shall be allocated to the accounts of Participants employed by the Employer on the last day of the Plan Year unless indicated otherwise in the Adoption Agreement. In the case of a non-Top-Heavy, Nonstandardized Plan, Participants must also have completed a Year of Service unless otherwise specified in the Adoption Agreement. For Nonstandardized Adoption Agreement 002, the Employer may only apply the last day of the Plan Year and Year of Service requirements if the Plan satisfies the requirements of Code Sections 401(a)(26) and 410(b) and the regulations thereunder including the exception for 401(k) plans. If, when applying the last day and Year of Service requirements, the Plan fails to satisfy the aforementioned requirements, additional Participants will be eligible to receive an allocation of Employer Contributions until the requirements are satisfied. Participants who are credited with a Year of Service, but not employed at Plan Year end, are the first category of additional Participants eligible to receive an allocation. If the requirements are still not satisfied, Participants credited with more than 500 Hours of Service and employed at Plan Year end are the next category of Participants eligible to receive an allocation. Finally, if necessary to satisfy the said requirements, any Participant credited with more than 500 Hours of Service will be eligible for an allocation of Employer Contributions. The Service requirement is not applicable with respect to any Plan Year during which the Employer's Plan is Top-Heavy.
5.4 Allocating Investment Earnings And Losses A Participant's share of investment earnings and any increase or decrease in the fair market value of the Fund shall be based on the proportionate value of all active accounts (other than accounts with segregated investments) as of the last Valuation Date less withdrawals since the last Valuation Date. If Employer and/or Employee contributions are made monthly, quarterly, or on some other systematic basis, the adjusted value of such accounts for allocation of investment income and gains or losses shall include one-half the Employer contributions for such period. If Employer and/or Employee contributions are not made on a systematic basis, it is assumed that they are made at the end of the valuation period and therefore will not receive an allocation of investment earnings and gains or losses for such period.
Alternatively, at the Plan Administrator's option, all Employer contributions will be credited with an allocation of the actual investment earnings and gains and losses from the actual date of deposit of each such contribution until the end of the period. Accounts with segregated investments shall receive only the income or loss on such segregated investments. In no event
shall the selection of a method of allocating gains and losses be used to discriminate in favor of the Highly Compensated Employees.
5.5 Participant Statements Upon completing the allocations described above
for the Valuation Date coinciding with the end of the Plan Year, the Employer
shall prepare a statement for each Participant showing the additions to and
subtractions from his or her account since the last such statement and the fair
market value of his or her account as of the current Valuation Date. Employers
so choosing may prepare Participant statements for each Valuation Date.
ARTICLE VI
RETIREMENT BENEFITS AND DISTRIBUTIONS
6.1 Normal Retirement Benefits A Participant shall be entitled to receive the balance held in his or her account from Employer contributions upon attaining Normal Retirement Age or at such earlier dates as the provisions of this Article VI may allow. If the Participant elects to continue working past his or her Normal Retirement Age, he or she will continue as an active Plan Participant and no distribution shall be made to such Participant until his or her actual retirement date unless the employer elects otherwise in the Adoption Agreement, or a minimum distribution is required by law. Settlement shall be made in the normal form, or if elected, in one of the optional forms of payment provided below.
6.2 Early Retirement Benefits If the Employer so provides in the Adoption Agreement, an Early Retirement Benefit will be available to individuals who meet the age and Service requirements. An individual who meets the Early Retirement Age requirements and separates from Service, will become fully vested, regardless of any vesting schedule which otherwise might apply. If a Participant separates from Service before satisfying the age requirements, but after having satisfied the Service requirement, the Participant will be entitled to elect an Early Retirement benefit upon satisfaction of the age requirement.
6.3 Benefits On Termination Of Employment
(a) If a Participant terminates employment prior to Normal Retirement Age, such Participant shall be entitled to receive the vested balance held in his or her account payable at Normal Retirement Age in the normal form, or if elected, in one of the optional forms of payment provided hereunder. If applicable, the Early Retirement Benefit provisions may be elected. Notwithstanding the preceding sentence, a former Participant may, if allowed in the Adoption Agreement, make application to the Employer requesting early payment of any deferred vested and nonforfeitable benefit due.
(b) If a Participant terminates employment, and the value of that Participant's Vested Account Balance derived from Employer and Employee contributions is not greater than $3,500, the Participant may receive a lump sum distribution of the value of the entire vested portion of such account balance and the non-vested portion will be treated as a forfeiture. The Employer shall continue to follow their consistent policy, as may be established, regarding immediate cash-outs of Vested Account Balances of
$3,500 or less. For purposes of this Article, if the value of a Participant's Vested Account Balance is zero, the Participant shall be deemed to have received a distribution of such Vested Account Balance immediately following termination. Likewise, if the Participant is reemployed prior to incurring 5 consecutive 1-year Breaks in Service they will be deemed to have immediately repaid such distribution. For Plan Years beginning prior to 1989, a Participant's Vested Account Balance shall not include Qualified Voluntary Contributions. Notwithstanding the above, if the Employer maintains or has maintained a policy of not distributing any amounts until the Participant's Normal Retirement Age, the Employer can continue to uniformly apply such policy.
(c) If a Participant terminates employment with a Vested Account Balance derived from Employer and Employee contributions in excess of $3,500, and elects (with his or her Spouse's consent, if required) to receive 100% of the value of his or her Vested Account Balance in a lump sum, the non-vested portion will be treated as a forfeiture. The Participant (and his or her Spouse, if required) must consent to any distribution, when the Vested Account Balance described above exceeds $3,500 or if at the time of any prior distribution it exceeded $3,500. For purposes of this paragraph, for Plan Years beginning prior to 1989, a Participant's Vested Account Balance shall not include Qualified Voluntary Contributions.
(d) Distribution of less than 100% of the Participant's Vested Account Balance shall only be permitted if the Participant is fully vested upon termination of employment.
(e) If a Participant who is not 100% vested receives or is deemed to receive a distribution pursuant to this paragraph and resumes employment covered under this Plan, the Participant shall have the right to repay to the Plan the full amount of the distribution attributable to Employer contributions on or before the earlier of the date that the Participant incurs 5 consecutive 1-year Breaks in Service following the date of distribution or five years after the first date on which the Participant is subsequently reemployed. In such event, the Participant's account shall be restored to the value thereof at the time the distribution was made and may further be increased by the Plan's income and investment gains and/or losses on the undistributed amount from the date of distribution to the date of repayment.
(f) A Participant shall also have the option, to postpone payment of his or her Plan benefits until the first day of April following the calendar year in which he or she attains age 70- 1/2. Any balance of a Participant's account resulting from his or her Employee contributions not previously withdrawn, if any, may be withdrawn by the Participant immediately following separation from Service.
(g) If a Participant ceases to be an active Employee as a result of a Disability as defined at paragraph 1.21, such Participant shall be able to make an application for a disability retirement benefit payment. The Participant's account balance will be deemed "immediately distributable" as set forth in paragraph 6.4, and will be fully vested pursuant to paragraph 9.2.
6.4 Restrictions On Immediate Distributions
(a) An account balance is immediately distributable if any part of the account balance could be distributed to the Participant (or Surviving Spouse) before the Participant attains (or would have attained if not deceased) the later of the Normal Retirement Age or age 62.
(b) If the value of a Participant's Vested Account Balance derived from Employer and Employee Contributions exceeds (or at the time of any prior distribution exceeded) $3,500, and the account balance is immediately distributable, the Participant and his or her Spouse (or where either the Participant or the Spouse has died, the survivor) must consent to any distribution of such account balance. The consent of the Participant and the Spouse shall be obtained in writing within the 90-day period ending on the annuity starting date, which is the first day of the first period for which an amount is paid as an annuity or any other form. The Plan Administrator shall notify the Participant and the Participant's Spouse of the right to defer any distribution until the Participant's account balance is no longer immediately distributable. Such notification shall include a general description of the material features, and an explanation of the relative values of, the optional forms of benefit available under the plan in a manner that would satisfy the notice requirements of Code Section 417(a)(3), and shall be provided no less than 30 days and no more than 90 days prior to the annuity starting date.
(c) Notwithstanding the foregoing, only the Participant need consent to the commencement of a distribution in the form of a qualified Joint and Survivor Annuity while the account balance is immediately distributable. Furthermore, if payment in the form of a Qualified Joint and Survivor Annuity is not required with respect to the Participant pursuant to paragraph 8.7 of the Plan, only the Participant need consent to the distribution of an account balance that is immediately distributable. Neither the consent of the Participant nor the Participant's Spouse shall be required to the extent that a distribution is required to satisfy Code Section 401(a)(9) or Code Section 415. In addition, upon termination of this Plan if the Plan does not offer an annuity option (purchased from a commercial provider), the Participant's account balance may, without the Participant's consent, be distributed to the Participant or transferred to another Defined Contribution Plan [other than an employee stock ownership plan as defined in Code Section 4975(e)(7)] within the same controlled group.
(d) For purposes of determining the applicability of the foregoing consent requirements to distributions made before the first day of the first Plan Year beginning after 1988, the Participant's Vested Account Balance shall not include amounts attributable to Qualified Voluntary Contributions.
(e) If a distribution is one to which Code Sections 401(a)(11) and 417 do not apply, such distribution may commence less than 30 days after the notice required under Regulations Section 1.411(a)-11(c) is given, provided that:
(1) the Participant is clearly informed of his or her right to a period of at least 30 days after receiving the notice to consider the decision of whether or not to elect a distribution (and, if applicable, a particular distribution option), and
(2) the Participant, after receiving the notice, affirmatively
elects to receive a distribution.
6.5 Normal Form Of Payment The normal form of payment for a profit- sharing plan satisfying the requirements of paragraph 8.7 hereof shall be a lump sum with no option for annuity payments. For all other plans, the normal form of payment hereunder shall be a Qualified Joint and Survivor Annuity as provided under Article VIII. A Participant whose Vested Account Balance derived from Employer and Employee contributions exceeds $3,500, or if at the time of any prior distribution it exceeded $3,500, shall (with the consent of his or her Spouse) have the right to receive his or her benefit in a lump sum or in monthly, quarterly, semi-annual or annual payments from the Fund over any period not extending beyond the life expectancy of the Participant and his or her Beneficiary. For purposes of this paragraph, for Plan Years prior to 1989, a Participant's Vested Account Balance shall not include Qualified Voluntary Contributions. The normal form of payment shall be automatic, unless the Participant files a written request with the Employer prior to the date on which the benefit is automatically payable, electing a lump sum or installment payment option. No amendment to the Plan may eliminate one of the optional distribution forms listed above.
6.6 Commencement Of Benefits
(a) Unless the Participant elects otherwise, distribution of benefits will begin no later than the 60th day after the close of the Plan Year in which the latest of the following events occurs:
(1) the Participant attains age 65 (or normal retirement age if earlier),
(2) the 10th anniversary of the year in which the Participant commenced participation in the Plan, or
(3) the Participant terminates Service with the Employer.
(b) Notwithstanding the foregoing, the failure of a Participant and Spouse (if necessary) to consent to a distribution while a benefit is immediately distributable, within the meaning of paragraph 6.4 hereof, shall be deemed an election to defer commencement of payment of any benefit sufficient to satisfy this paragraph.
6.7 Claims Procedures Upon retirement, death, or other severance of employment, the Participant or his or her representative may make application to the Employer requesting payment of benefits due and the manner of payment. If no application for benefits is made, the Employer shall automatically pay any vested benefit due hereunder in the normal form at the time prescribed at paragraph 6.4. If an application for benefits is made, the Employer shall accept, reject, or modify such request and shall notify the Participant in writing setting forth the response of the Employer and in the case of a denial or modification the Employer shall:
(a) state the specific reason or reasons for the denial,
(b) provide specific reference to pertinent Plan provisions on which the denial is based,
(c) provide a description of any additional material or information necessary for the Participant or his representative to perfect the claim and an explanation of why such material or information is necessary, and
(d) explain the Plan's claim review procedure as contained in this Plan.
In the event the request is rejected or modified, the Participant or his or her representative may within 60 days following receipt by the Participant or representative of such rejection or modification, submit a written request for review by the Employer of its initial decision. Within 60 days following such request for review, the Employer shall render its final decision in writing to the Participant or representative stating specific reasons for such decision. If the Participant or representative is not satisfied with the Employer's final decision, the Participant or representative can institute an action in a federal court of competent jurisdiction; for this purpose, process would be served on the Employer.
6.8 In-Service Withdrawals An Employee may withdraw all or any part of the fair market value of his or her Mandatory Contributions, Voluntary Contributions, Qualified Voluntary Contributions, Rollover Contributions, or Transfer Contributions upon written request to the Employer. Such request shall include the Participant's address, social security number, birthdate, and amount of the withdrawal. If at the time a distribution of Qualified Voluntary Contributions is received the Participant has not attained age 59-1/2 and is not disabled, as defined at Code Section 22(e)(3), the Participant will be subject to a federal income tax penalty, unless the distribution is rolled over to a qualified plan or individual retirement plan within 60 days of the date of distribution. A Participant may withdraw all or any part of the fair market value of his or her pre-1987 Voluntary Contributions with or without withdrawing the earnings attributable thereto. Post-1986 Voluntary Contributions may only be withdrawn along with a portion of the earnings thereon. The amount of the earnings to be withdrawn is determined by using the formula: DA[1- (V / V + E)], where DA is the distribution amount, V is the amount of Voluntary Contributions and V + E is the amount of Voluntary Contributions plus the earnings attributable thereto. A Participant withdrawing his or her other contributions prior to attaining age 59-1/2, will be subject to a federal tax penalty to the extent that the withdrawn amounts are includible in income. Unless the Employer provides otherwise in the Adoption Agreement, any actively employed Participant in a profit-sharing plan who has completed at least 60 months of Service as a Participant may withdraw all or any part of his or her vested account balance from Employer contributions. If not a Participant for at least 60 months of Service any Participant may withdraw such vested contributions that have been in the account at least two years. No withdrawal shall be made by a Participant in an amount which is less than (i) $1,000 or (ii) the Participant's Account balance, whichever is less. Not more than one such withdrawal shall be permitted during any twelve (12) month period. Such distributions shall not be eligible for redeposit to the Fund. A withdrawal under this paragraph shall not prohibit such Participant from sharing in any future Employer Contribution he or she would otherwise be eligible to share in. A request to withdraw amounts pursuant to this paragraph must if applicable, be consented to by the Participant's Spouse. The consent shall
comply with the requirements of paragraph 6.4 relating to immediate distributions.
Elective Deferrals, Qualified Non-elective Contributions, and Qualified Matching Contributions, and income allocable to each are not distributable to a Participant or his or her Beneficiary or Beneficiaries, in accordance with such Participant's or Beneficiary's or Beneficiaries' election, earlier than upon separation from Service, death, or Disability. Such amounts may also be distributed upon:
(a) Termination of the Plan without the establishment of another Defined Contribution Plan.
(b) The disposition by a corporation to an unrelated corporation of substantially all of the assets [within the meaning of Code Section 409(d)(2)] used in a trade or business of such corporation if such corporation continues to maintain this Plan after the disposition, but only with respect to Employees who continue employment with the corporation acquiring such assets.
(c) The disposition by a corporation to an unrelated entity of such
corporation's interest in a subsidiary [within the meaning of Code Section
409(d)(3)] if such corporation continues to maintain this plan, but only with
respect to Employees who continue employment with such subsidiary.
(d) The attainment of age 59-1/2.
(e) The Hardship of the Participant as described in paragraph 6.9.
All distributions that may be made pursuant to one or more of the foregoing distributable events are subject to the Spousal and Participant consent requirements, if applicable, contained in Code Sections 401(a)(11) and 417.
6.9 Hardship Withdrawal If permitted by the Trustee/Custodian and the Employer in the Adoption Agreement, a Participant may request a Hardship withdrawal prior to attaining age 59-1/2. If the Participant has not attained age 59-1/2, the Participant may be subject to a federal income tax penalty. Such request shall be in writing to the Employer who shall have sole authority to authorize a Hardship withdrawal, pursuant to the rules below. Hardship withdrawals may include Elective Deferrals regardless of when contributed and any earnings accrued and credited thereon as of the last day of the Plan Year ending before July 1, 1989 and Employer related contributions, including but not limited to Employer Matching Contributions, plus the investment earnings thereon to the extent vested. Qualified Matching Contributions, Qualified Non-Elective Contributions and Elective Deferrals reclassified as Voluntary Contributions plus the investment earnings thereon are only available for Hardship withdrawal prior to age 59-1/2 to the extent that they were credited to the Participant's Account as of the last day of the Plan Year ending prior to July 1, 1989. The Plan Administrator may limit withdrawals to Elective Deferrals and the earnings thereon as stipulated above. Hardship withdrawals are subject to the Spousal consent requirements contained in Code Sections 401(a)(11) and 417. Only the following reasons are valid to obtain Hardship withdrawal:
(a) medical expenses [within the meaning of Code Section 213(d)],
incurred or necessary for the medical care of the Participant, his or her Spouse, children and other dependents,
(b) the purchase (excluding mortgage payments) of the principal residence for the Participant,
(c) payment of tuition and related educational expenses for the next twelve (12) months of post-secondary education for the Participant, his or her Spouse, children or other dependents, or
(d) the need to prevent eviction of the Employee from or a foreclosure on the mortgage of, the Employee's principal residence.
Furthermore, the following conditions must be met in order for a withdrawal to be authorized:
(e) the Participant has obtained all distributions, other than hardship distributions, and all nontaxable loans under all plans maintained by the Employer,
(f) all plans maintained by the Employer, other than flexible benefit plans under Code Section 125 providing for current benefits, provide that the Employee's Elective Deferrals and Voluntary Contributions will be suspended for twelve months after the receipt of the Hardship distribution,
(g) the distribution is not in excess of the amount of the immediate and heavy financial need [(a) through (d) above], including amounts necessary to pay any federal, state or local income tax or penalties reasonably anticipated to result from the distribution, and
(h) all plans maintained by the Employer provide that an Employee may not make Elective Deferrals for the Employee's taxable year immediately following the taxable year of the Hardship distribution in excess of the applicable limit under Code Section 402(g) for such taxable year, less the amount of such Employee's pre-tax contributions for the taxable year of the Hardship distribution.
If a distribution is made at a time when a Participant has a nonforfeitable right to less than 100% of the account balance derived from Employer contributions and the Participant may increase the nonforfeitable percentage in the account:
(a) A separate account will be established for the Participant's interest in the Plan as of the time of the distribution, and
(b) At any relevant time the Participant's nonforfeitable portion of the separate account will be equal to an amount ("X") determined by the formula:
X = P [AB + (R X D)] - (R X D)
For purposes of applying the formula: "P" is the nonforfeitable percentage at the relevant time, "AB" is the account balance at
the relevant time, "D" is the amount of the distribution and "R" is the ratio of the account balance at the relevant time to the account balance after distribution.
ARTICLE VII
DISTRIBUTION REQUIREMENTS
7.1 Joint And Survivor Annuity Requirements All distributions made under the terms of this Plan must comply with the provisions of Article VIII including, if applicable, the safe harbor provisions thereunder.
7.2 Minimum Distribution Requirements All distributions required under this Article shall be determined and made in accordance with the minimum distribution requirements of Code Section 401(a)(9) and the regulations thereunder, including the minimum distribution incidental benefit rules found at Regulations Section 1.401(a)(9)-2. The entire interest of a Participant must be distributed or begin to be distributed no later than the Participant's Required Beginning Date. Life expectancy and joint and last survivor life expectancy are computed by using the expected return multiples found in Tables V and VI of Regulations Section 1.72-9.
7.3 Limits On Distribution Periods As of the First Distribution Calendar Year, distributions if not made in a single-sum, may only be made over one of the following periods (or a combination thereof):
(a) the life of the Participant,
(b) the life of the Participant and a Designated Beneficiary,
(c) a period certain not extending beyond the life expectancy of the participant, or
(d) a period certain not extending beyond the joint and last survivor expectancy of the Participant and a designated beneficiary.
7.4 Required Distributions On Or After The Required Beginning Date
(a) If a participant's benefit is to be distributed over (1) a period not extending beyond the life expectancy of the Participant or the joint life and last survivor expectancy of the Participant and the Participant's Designated Beneficiary or (2) a period not extending beyond the life expectancy of the Designated Beneficiary, the amount required to be distributed for each calendar year, beginning with distributions for the First Distribution Calendar Year, must at least equal the quotient obtained by dividing the Participant's benefit by the Applicable Life Expectancy.
(b) For calendar years beginning before 1989, if the Participant's Spouse is not the Designated Beneficiary, the method of distribution selected must have assured that at least 50% of the Present Value of the amount available for distribution was to be paid within the life expectancy of the Participant.
(c) For calendar years beginning after 1988, the amount to be distributed each year, beginning with distributions for the First Distribution
Calendar Year shall not be less than the quotient obtained by dividing the
Participant's benefit by the lesser of (1) the Applicable Life Expectancy or
(2) if the Participant's Spouse is not the Designated Beneficiary, the
applicable divisor determined from the table set forth in Q&A-4 of Regulations
Section 1.401(a)(9)-2. Distributions after the death of the Participant shall
be distributed using the Applicable Life Expectancy as the relevant divisor
without regard to Regulations Section 1.401(a)(9)-2.
(d) The minimum distribution required for the Participant's First Distribution Calendar Year must be made on or before the Participant's Required Beginning Date. The minimum distribution for other calendar years, including the minimum distribution for the Distribution Calendar Year in which the Participant's Required Beginning Date occurs, must be made on or before December 31 of that Distribution Calendar Year.
(e) If the Participant's benefit is distributed in the form of an annuity purchased from an insurance company, distributions thereunder shall be made in accordance with the requirements of Code Section 401(a)(9) and the Regulations thereunder.
(f) For purposes of determining the amount of the required distribution for each Distribution Calendar Year, the account balance to be used is the account balance determined as of the last valuation preceding the Distribution Calendar Year. This balance will be increased by the amount of any contributions or forfeitures allocated to the account balance after the valuation date in such preceding calendar year. Such balance will also be decreased by distributions made after the Valuation Date in such preceding Calendar Year.
(g) For purposes of subparagraph 7.4(f), if any portion of the minimum distribution for the First Distribution Calendar Year is made in the second Distribution Calendar Year on or before the Required Beginning Date, the amount of the minimum distribution made in the second Distribution Calendar Year shall be treated as if it had been made in the immediately preceding Distribution Calendar Year.
7.5 Required Beginning Date
(a) General Rule. The Required Beginning Date of a Participant is the first day of April of the calendar year following the calendar year in which the Participant attains age 70- 1/2.
(b) Transitional Rules. The Required Beginning Date of a Participant who attains age 70-1/2 before 1988, shall be determined in accordance with (1) or (2) below:
(1) Non-5-percent owners. The Required Beginning Date of a Participant who is not a 5-percent owner is the first day of April of the calendar year following the calendar year in which the later of retirement or attainment of age 70-1/2 occurs. In the case of a Participant who is not a 5-percent owner who attains age 70-1/2 during 1988 and who has not retired as of January 1, 1989, the Required Beginning Date is April 1, 1990.
(2) 5-percent owners. The Required Beginning Date of a
Participant who is a 5-percent owner during any year beginning after 1979, is the first day of April following the later of:
(i) the calendar year in which the Participant attains age 70-1/2, or
(ii) the earlier of the calendar year with or within which ends the plan year in which the Participant becomes a 5-percent owner, or the calendar year in which the Participant retires.
(c) A Participant is treated as a 5-percent owner for purposes of this
Paragraph if such Participant is a 5-percent owner as defined in Code Section
416(i) (determined in accordance with Code Section 416 but without regard to
whether the Plan is Top-Heavy) at any time during the Plan Year ending with or
within the calendar year in which such Owner attains age 66-1/2 or any
subsequent Plan Year.
(d) Once distributions have begun to a 5-percent owner under this paragraph, they must continue to be distributed, even if the Participant ceases to be a 5-percent owner in a subsequent year.
7.6 Transitional Rule
(a) Notwithstanding the other requirements of this Article and subject to the requirements of Article VIII, Joint and Survivor Annuity Requirements, distribution on behalf of any Employee, including a 5-percent owner, may be made in accordance with all of the following requirements (regardless of when such distribution commences):
(1) The distribution by the Trust is one which would not have disqualified such Trust under Code Section 401(a)(9) as in effect prior to amendment by the Deficit Reduction Act of 1984.
(2) The distribution is in accordance with a method of distribution designated by the Employee whose interest in the Trust is being distributed or, if the Employee is deceased, by a beneficiary of such Employee.
(3) Such designation was in writing, was signed by the Employee or the beneficiary, and was made before 1984.
(4) The Employee had accrued a benefit under the Plan as of December 31, 1983.
(5) The method of distribution designated by the Employee or the beneficiary specifies the time at which distribution will commence, the period over which distributions will be made, and in the case of any distribution upon the Employee's death, the beneficiaries of the Employee listed in order of priority.
(b) A distribution upon death will not be covered by this transitional rule unless the information in the designation contains the required information described above with respect to the distributions to be made upon the death of the Employee.
(c) For any distribution which commences before 1984, but continues after 1983, the Employee or the beneficiary, to whom such distribution is being made, will be presumed to have designated the method of distribution under which the distribution is being made if the method of distribution was specified in writing and the distribution satisfies the requirements in subparagraphs (a)(1) and (5) above.
(d) If a designation is revoked, any subsequent distribution must satisfy the requirements of Code Section 401(a)(9) and the regulations thereunder. If a designation is revoked subsequent to the date distributions are required to begin, the Trust must distribute by the end of the calendar year following the calendar year in which the revocation occurs the total amount not yet distributed which would have been required to have been distributed to satisfy Code Section 401(a)(9) and the regulations thereunder, but for the section 242(b)(2) election of the Tax Equity and Fiscal Responsibility Act of 1982. For calendar years beginning after 1988, such distributions must meet the minimum distribution incidental benefit requirements in section 1.401(a)(9)-2 of the Income Tax Regulations. Any changes in the designation will be considered to be a revocation of the designation. However, the mere substitution or addition of another beneficiary (one not named in the designation) under the designation will not be considered to be a revocation of the designation, so long as such substitution or addition does not alter the period over which distributions are to be made under the designation, directly or indirectly (for example, by altering the relevant measuring life). In the case in which an amount is transferred or rolled over from one plan to another plan, the rules in Q&A J-2 and Q&A J-3 of the regulations shall apply.
7.7 Designation Of Beneficiary For Death Benefit Each Participant shall file a written designation of beneficiary with the Employer upon qualifying for participation in this Plan. Such designation shall remain in force until revoked by the Participant by filing a new beneficiary form with the Employer. The Participant may elect to have a portion of his or her account balance invested in an insurance contract. If an insurance contract is purchased under the Plan, the Trustee must be named as Beneficiary under the terms of the contract. However, the Participant shall designate a Beneficiary to receive the proceeds of the contract after settlement is received by the Trustee. Under a profit-sharing plan satisfying the requirements of paragraph 8.7, the Designated Beneficiary shall be the Participant's Surviving Spouse, if any, unless such Spouse properly consents otherwise.
7.8 Nonexistence Of Beneficiary Any portion of the amount payable hereunder which is not disposed of because of the Participant's or former Participant's failure to designate a beneficiary, or because all of the Designated Beneficiaries predeceased the Participant, shall be paid to his or her Spouse. If the Participant had no Spouse at the time of death, payment shall be made to the personal representative of his or her estate in a lump sum.
7.9 Distribution Beginning Before Death If the Participant dies after distribution of his or her interest has begun, the remaining portion of such interest will continue to be distributed at least as rapidly as under the method of distribution being used prior to the Participant's death.
7.10 Distribution Beginning After Death If the Participant dies before distribution of his or her interest begins, distribution of the Participant's entire interest shall be completed by December 31 of the calendar year containing the fifth anniversary of the Participant's death except to the extent that an election is made to receive distributions in accordance with (a) or (b) below:
(a) If any portion of the Participant's interest is payable to a Designated Beneficiary, distributions may be made over the life or over a period certain not greater than the life expectancy of the Designated Beneficiary commencing on or before December 31 of the calendar year immediately following the calendar year in which the Participant died;
(b) If the Designated Beneficiary is the Participant's surviving
Spouse, the date distributions are required to begin in accordance with (a)
above shall not be earlier than the later of (1) December 31 of the calendar
year immediately following the calendar year in which the participant died or
(2) December 31 of the calendar year in which the Participant would have
attained age 70-1/2.
If the Participant has not made an election pursuant to this paragraph 7.10 by the time of his or her death, the Participant's Designated Beneficiary must elect the method of distribution no later than the earlier of (1) December 31 of the calendar year in which distributions would be required to begin under this section, or (2) December 31 of the calendar year which contains the fifth anniversary of the date of death of the participant. If the Participant has no Designated Beneficiary, or if the Designated Beneficiary does not elect a method of distribution, then distribution of the Participant's entire interest must be completed by December 31 of the calendar year containing the fifth anniversary of the Participant's death.
For purposes of this paragraph if the Surviving Spouse dies after the Participant, but before payments to such Spouse begin, the provisions of this paragraph with the exception of paragraph (b) therein, shall be applied as if the Surviving Spouse were the Participant. For the purposes of this paragraph and paragraph 7.9, distribution of a Participant's interest is considered to begin on the Participant's Required Beginning Date (or, if the preceding sentence is applicable, the date distribution is required to begin to the Surviving Spouse). If distribution in the form of an annuity described in paragraph 7.4(e) irrevocably commences to the Participant before the Required Beginning Date, the date distribution is considered to begin is the date distribution actually commences.
For purposes of paragraph 7.9 and this paragraph, if an amount is payable to either a minor or an individual who has been declared incompetent, the benefits shall be paid to the legally appointed guardian for the benefit of said minor or incompetent individual, unless the court which appointed the guardian has ordered otherwise.
7.11 Distribution Of Excess Elective Deferrals
(a) Notwithstanding any other provision of the Plan, Excess Elective Deferrals plus any income and minus any loss allocable thereto, shall be distributed no later than April 15, 1988, and each April 15 thereafter, to
Participants to whose accounts Excess Elective Deferrals were allocated for the preceding taxable year, and who claim Excess Elective Deferrals for such taxable year. Excess Elective Deferrals shall be treated as Annual Additions under the Plan, unless such amounts are distributed no later than the first April 15th following the close of the Participant's taxable year. A Participant is deemed to notify the Plan Administrator of any Excess Elective Deferrals that arise by taking into account only those Elective Deferrals made to this Plan and any other plans of this Employer.
(b) Furthermore, a Participant who participates in another plan
allowing Elective Deferrals may assign to this Plan any Excess Elective
Deferrals made during a taxable year of the Participant, by notifying the Plan
Administrator of the amount of the Excess Elective Deferrals to be assigned.
The Participant's claim shall be in writing; shall be submitted to the Plan
Administrator not later than March 1 of each year; shall specify the amount of
the Participant's Excess Elective Deferrals for the preceding taxable year; and
shall be accompanied by the Participant's written statement that if such
amounts are not distributed, such Excess Elective Deferrals, when added to
amounts deferred under other plans or arrangements described in Code Sections
401(k), 408(k) [Simplified Employee Pensions], or 403(b) [annuity programs for
public schools and charitable organizations] will exceed the $7,000 limit as
adjusted under Code Section 415(d) imposed on the Participant by Code Section
402(g) for the year in which the deferral occurred.
(c) Excess Elective Deferrals shall be adjusted for any income or loss up to the end of the taxable year, during which such excess was deferred. Income or loss will be calculated under the method used to calculate investment earnings and losses elsewhere in the Plan.
(d) If the Participant receives a return of his or her Elective Deferrals, the amount of such contributions which are returned must be brought into the Employee's taxable income.
7.12 Distributions of Excess Contributions
(a) Notwithstanding any other provision of this Plan, Excess
Contributions, plus any income and minus any loss allocable thereto, shall be
distributed no later than the last day of each Plan Year to Participants to
whose accounts such Excess Contributions were allocated for the preceding Plan
Year. If such excess amounts are distributed more than 2-1/2 months after the
last day of the Plan Year in which such excess amounts arose, a ten (10)
percent excise tax will be imposed on the Employer maintaining the Plan with
respect to such amounts. Such distributions shall be made to Highly
Compensated Employees on the basis of the respective portions of the Excess
Contributions attributable to each of such Employees. Excess Contributions of
Participants who are subject to the Family Member aggregation rules of Code
Section 414(q)(6) shall be allocated among the Family Members in proportion to
the Elective Deferrals (and amounts treated as Elective Deferrals) of each
Family Member that is combined to determine the Average Deferral Percentage.
(b) Excess Contributions (including the amounts recharacterized) shall be treated as Annual Additions under the Plan.
(c) Excess Contributions shall be adjusted for any income or loss up
to the end of the Plan Year. Income or loss will be calculated under the method used to calculate investment earnings and losses elsewhere in the Plan.
(d) Excess Contributions shall be distributed from the Participant's Elective Deferral account and Qualified Matching Contribution account (if applicable) in proportion to the Participant's Elective Deferrals and Qualified Matching Contributions (to the extent used in the ADP test) for the Plan Year. Excess Contributions shall be distributed from the Participant's Qualified Non-Elective Contribution account only to the extent that such Excess Contributions exceed the balance in the Participant's Elective Deferral account and Qualified Matching Contribution account.
7.13 Distribution Of Excess Aggregate Contributions
(a) Notwithstanding any other provision of this Plan, Excess Aggregate Contributions, plus any income and minus any loss allocable thereto, shall be forfeited, if forfeitable, or if not forfeitable, distributed no later than the last day of each Plan Year to Participants to whose accounts such Excess Aggregate Contributions were allocated for the preceding Plan Year. Excess Aggregate Contributions shall be allocated to Participants who are subject to the Family Member aggregation rules of Code Section 414(q)(6) in the manner prescribed by the regulations. If such Excess Aggregate Contributions are distributed more than 2-1/2 months after the last day of the Plan Year in which such excess amounts arose, a ten (10) percent excise tax will be imposed on the Employer maintaining the Plan with respect to those amounts. Excess Aggregate Contributions shall be treated as Annual Additions under the plan.
(b) Excess Aggregate Contributions shall be adjusted for any income or loss up to the end of the Plan Year. The income or loss allocable to Excess Aggregate Contributions is the sum of income or loss for the Plan Year allocable to the Participant's Voluntary Contribution account, Matching Contribution account (if any, and if all amounts therein are not used in the ADP test) and, if applicable, Qualified Non-Elective Contribution account and Elective Deferral account. Income or loss will be calculated under the method used to calculate investment earnings and losses elsewhere in the Plan.
(c) Forfeitures of Excess Aggregate Contributions may either be reallocated to the accounts of non-Highly Compensated Employees or applied to reduce Employer contributions, as elected by the employer in the Adoption Agreement.
(d) Excess Aggregate Contributions shall be forfeited if such amount is
not vested. If vested, such excess shall be distributed on a pro-rata basis
from the Participant's Voluntary Contribution account (and, if applicable, the
Participant's Qualified Non-Elective Contribution account, Matching
Contribution account, Qualified Matching Contribution account, or Elective
Deferral account, or both).
ARTICLE VIII
JOINT AND SURVIVOR ANNUITY REQUIREMENTS
8.1 Applicability Of Provisions The provisions of this Article shall apply
to any Participant who is credited with at least one Hour of Service with the Employer on or after August 23, 1984 and such other Participants as provided in paragraph 8.8.
8.2 Payment Of Qualified Joint And Survivor Annuity Unless an optional form of benefit is selected pursuant to a Qualified Election within the 90-day period ending on the Annuity Starting Date, a married Participant's Vested Account Balance will be paid in the form of a Qualified Joint and Survivor Annuity and an unmarried Participant's Vested Account Balance will be paid in the form of a life annuity. The Participant may elect to have such annuity distributed upon attainment of the Early Retirement Age under the Plan.
8.3 Payment Of Qualified Pre-Retirement Survivor Annuity Unless an optional form of benefit has been selected within the Election Period pursuant to a Qualified Election, if a Participant dies before benefits have commenced then the Participant's Vested Account Balance shall be paid in the form of an annuity for the life of the Surviving Spouse. The Surviving Spouse may elect to have such annuity distributed within a reasonable period after the Participant's death.
A Participant who does not meet the age 35 requirement set forth in the Election Period as of the end of any current Plan Year may make a special qualified election to waive the qualified Pre-retirement Survivor Annuity for the period beginning on the date of such election and ending on the first day of the Plan Year in which the Participant will attain age 35. Such election shall not be valid unless the Participant receives a written explanation of the Qualified Pre-retirement Survivor Annuity in such terms as are comparable to the explanation required under paragraph 8.5. Qualified Pre-retirement Survivor Annuity coverage will be automatically reinstated as of the first day of the Plan Year in which the Participant attains age 35. Any new waiver on or after such date shall be subject to the full requirements of this Article.
8.4 Qualified Election A Qualified Election is an election to either waive a Qualified Joint and Survivor Annuity or a qualified pre-retirement survivor annuity. Any such election shall not be effective unless:
(a) the Participant's Spouse consents in writing to the election;
(b) the election designates a specific beneficiary, including any class of beneficiaries or any contingent beneficiaries, which may not be changed without spousal consent (or the Spouse expressly permits designations by the Participant without any further spousal consent);
(c) the Spouse's consent acknowledges the effect of the election; and
(d) the Spouse's consent is witnessed by a Plan representative or notary public.
Additionally, a Participant's waiver of the Qualified Joint and Survivor Annuity shall not be effective unless the election designates a form of benefit payment which may not be changed without spousal consent (or the Spouse expressly permits designations by the Participant without any further spousal consent). If it is established to the satisfaction of the Plan Administrator that there is no Spouse or that the Spouse cannot be located, a
waiver will be deemed a Qualified Election. Any consent by a Spouse obtained under this provision (or establishment that the consent of a Spouse may not be obtained) shall be effective only with respect to such Spouse. A consent that permits designations by the Participant without any requirement of further consent by such Spouse must acknowledge that the Spouse has the right to limit consent to a specific beneficiary, and a specific form of benefit where applicable, and that the Spouse voluntarily elects to relinquish either or both of such rights. A revocation of a prior waiver may be made by a Participant without the consent of the Spouse at any time before the commencement of benefits. The number of revocations shall not be limited. No consent obtained under this provision shall be valid unless the Participant has received notice as provided in paragraphs 8.5 and 8.6 below.
8.5 Notice Requirements For Qualified Joint And Survivor Annuity In the case of a Qualified Joint and Survivor Annuity, the Plan Administrator shall, no less than 30 days and no more than 90 days prior to the Annuity Starting date, provide each Participant a written explanation of:
(a) the terms and conditions of a Qualified Joint and Survivor Annuity;
(b) the Participant's right to make and the effect of an election to waive the Qualified Joint and Survivor Annuity form of benefit;
(c) the rights of a Participant's Spouse; and
(d) the right to make, and the effect of, a revocation of a previous election to waive the Qualified Joint and Survivor Annuity.
8.6 Notice Requirements For Qualified Pre-Retirement Survivor Annuity In the case of a qualified pre- retirement survivor annuity as described in paragraph 8.3, the Plan Administrator shall provide each Participant within the applicable period for such Participant a written explanation of the qualified pre-retirement survivor annuity in such terms and in such manner as would be comparable to the explanation provided for meeting the requirements of paragraph 8.5 applicable to a Qualified Joint and Survivor Annuity. The applicable period for a Participant is whichever of the following periods ends last:
(a) the period beginning with the first day of the Plan Year in which the Participant attains age 32 and ending with the close of the Plan Year preceding the Plan Year in which the Participant attains age 35;
(b) a reasonable period ending after the individual becomes a Participant;
(c) a reasonable period ending after this Article first applies to the Participant. Notwithstanding the foregoing, notice must be provided within a reasonable period ending after separation from Service in the case of a Participant who separates from Service before attaining age 35.
For purposes of applying the preceding paragraph, a reasonable period ending after the events described in (b) and (c) is the end of the two-year period beginning one-year prior to the date the applicable event occurs, and ending
one-year after that date. In the case of a Participant who separates from Service before the Plan Year in which age 35 is attained, notice shall be provided within the two-year period beginning one year prior to separation and ending one year after separation. If such a Participant subsequently returns to employment with the Employer, the applicable period for such Participant shall be re-determined.
8.7 Special Safe-Harbor Exception For Certain Profit-Sharing Plans
(a) This paragraph shall apply to a Participant in a profit-sharing plan, and to any distribution, made on or after the first day of the first plan year beginning after 1988, from or under a separate account attributable solely to Qualified Voluntary contributions, as maintained on behalf of a Participant in a money purchase pension plan, (including a target benefit plan) if the following conditions are satisfied:
(1) the Participant does not or cannot elect payments in the form of a life annuity; and
(2) on the death of a Participant, the Participant's Vested Account Balance will be paid to the Participant's Surviving Spouse, but if there is no Surviving Spouse, or if the Surviving Spouse has consented in a manner conforming to a Qualified Election, then to the Participant's Designated Beneficiary.
The Surviving Spouse may elect to have distribution of the Vested Account Balance commence within the 90-day period following the date of the Participant's death. The account balance shall be adjusted for gains or losses occurring after the Participant's death in accordance with the provisions of the Plan governing the adjustment of account balances for other types of distributions. These safe-harbor rules shall not be operative with respect to a Participant in a profit-sharing plan if that plan is a direct or indirect transferee of a Defined Benefit Plan, money purchase plan, a target benefit plan, stock bonus plan, or profit-sharing plan which is subject to the survivor annuity requirements of Code Section 401(a)(11) and Code Section 417, and would therefore have a Qualified Joint and Survivor Annuity as its normal form of benefit.
(b) The Participant may waive the spousal death benefit described in this paragraph at any time provided that no such waiver shall be effective unless it satisfies the conditions (described in paragraph 8.4) that would apply to the Participant's waiver of the Qualified Pre-Retirement Survivor Annuity.
(c) If this paragraph 8.7 is operative, then all other provisions of this Article other than paragraph 8.8 are inoperative.
8.8 Transitional Joint And Survivor Annuity Rules Special transition rules apply to Participants who were not receiving benefits on August 23, 1984.
(a) Any living Participant not receiving benefits on August 23, 1984, who would otherwise not receive the benefits prescribed by the previous paragraphs of this Article, must be given the opportunity to elect to have the prior paragraphs of this Article apply if such Participant is credited with at
least one Hour of Service under this Plan or a predecessor Plan in a Plan Year beginning on or after January 1, 1976 and such Participant had at least 10 Years of Service for vesting purposes when he or she separated from Service.
(b) Any living Participant not receiving benefits on August 23, 1984, who was credited with at least one Hour of Service under this Plan or a predecessor Plan on or after September 2, 1974, and who is not otherwise credited with any Service in a Plan Year beginning on or after January 1, 1976, must be given the opportunity to have his or her benefits paid in accordance with paragraph 8.9.
(c) The respective opportunities to elect [as described in (a) and (b) above] must be afforded to the appropriate Participants during the period commencing on August 23, 1984 and ending on the date benefits would otherwise commence to said Participants.
8.9 Automatic Joint And Survivor Annuity And Early Survivor Annuity Any Participant who has elected pursuant to paragraph 8.8(b) and any Participant who does not elect under paragraph 8.8(a) or who meets the requirements of paragraph 8.8(a), except that such Participant does not have at least 10 years of vesting Service when he or she separates from Service, shall have his or her benefits distributed in accordance with all of the following requirements if benefits would have been payable in the form of a life annuity.
(a) Automatic Joint and Survivor Annuity. If benefits in the form of a life annuity become payable to a married Participant who:
(1) begins to receive payments under the Plan on or after Normal Retirement Age, or
(2) dies on or after Normal Retirement Age while still working for the Employer, or
(3) begins to receive payments on or after the Qualified Early Retirement Age, or
(4) separates from Service on or after attaining Normal Retirement (or the Qualified Early Retirement Age) and after satisfying the eligibility requirements for the payment of benefits under the Plan and thereafter dies before beginning to receive such benefits, then such benefits will be received under this Plan in the form of a Qualified Joint and Survivor Annuity, unless the Participant has elected otherwise during the Election Period. The Election Period must begin at least 6 months before the Participant attains Qualified Early Retirement Age and end not more than 90 days before the commencement of benefits. Any election will be in writing and may be changed by the Participant at any time.
(b) Election of Early Survivor Annuity. A Participant who is employed after attaining the Qualified Early Retirement Age will be given the opportunity to elect, during the Election Period, to have a survivor annuity payable on death. If the Participant elects the survivor annuity, payments under such annuity must not be less than the payments which would have been made to the Spouse under the Qualified Joint and Survivor Annuity if the Participant had retired on the day before his or her death. Any election
under this provision will be in writing and may be changed by the Participant at any time. The Election Period begins on the later of:
(1) the 90th day before the Participant attains the Qualified Early Retirement Age, or
(2) the date on which participation begins,
and ends on the date the Participant terminates employment.
8.10 Annuity Contracts Any annuity contract distributed under this Plan must be nontransferable. The terms of any annuity contract purchased and distributed by the Plan to a Participant or Spouse shall comply with the requirements of this Plan.
ARTICLE IX
VESTING
9.1 Employee Contributions A Participant shall always have a 100% vested and nonforfeitable interest in his or her Elective Deferrals, Voluntary Contributions, Qualified Voluntary Contributions, Rollover Contributions, and Transfer Contributions plus the earnings thereon. No forfeiture of Employer related contributions (including any minimum contributions made under paragraph 14.2) will occur solely as a result of an Employee's withdrawal of any Employee contributions.
9.2 Employer Contributions A Participant shall acquire a vested and nonforfeitable interest in his or her account attributable to Employer contributions in accordance with the table selected in the Adoption Agreement, provided that if a Participant is not already fully vested, he or she shall become so upon attaining Normal Retirement Age, Early Retirement Age, on death prior to normal retirement, on retirement due to Disability, or on termination of the Plan.
9.3 Computation Period The computation period for purposes of determining Years of Service and Breaks in Service for purposes of computing a Participant's nonforfeitable right to his or her account balance derived from Employer contributions shall be determined by the Employer in the Adoption Agreement. In the event a former Participant with no vested interest in his or her Employer contribution account requalifies for participation in the Plan after incurring a Break in Service, such Participant shall be credited for vesting with all pre-break and post- break Service.
9.4 Requalification Prior To Five Consecutive One-Year Breaks In Service The account balance of such Participant shall consist of any undistributed amount in his or her account as of the date of re-employment plus any future contributions added to such account plus the investment earnings on the account. The Vested Account Balance of such Participant shall be determined by multiplying the Participant's account balance (adjusted to include any distribution or redeposit made under paragraph 6.3) by such Participant's vested percentage. All Service of the Participant, both prior to and following the break, shall be counted when computing the Participant's vested
percentage.
9.5 Requalification After Five Consecutive One-Year Breaks In Service If such Participant is not fully vested upon re-employment, a new account shall be established for such Participant to separate his or her deferred vested and nonforfeitable account, if any, from the account to which new allocations will be made. The Participant's deferred account to the extent remaining shall be fully vested and shall continue to share in earnings and losses of the Fund. When computing the Participant's vested portion of the new account, all pre-break and post-break Service shall be counted. However, notwithstanding this provision, no such former Participant who has had five consecutive one-year Breaks in Service shall acquire a larger vested and nonforfeitable interest in his or her prior account bal- ance as a result of requalification hereunder.
9.6 Calculating Vested Interest A Participant's vested and nonforfeitable interest shall be calculated by multiplying the fair market value of his or her account attributable to Employer contributions on the Valuation Date preceding distribution by the decimal equivalent of the vested percentage as of his or her termination date. The amount attributable to Employer contributions for purposes of the calculation includes amounts previously paid out pursuant to paragraph 6.3 and not repaid. The Participant's vested and nonforfeitable interest, once calculated above, shall be reduced to reflect those amounts previously paid out to the Participant and not repaid by the Participant. The Participant's vested and nonforfeitable interest so determined shall continue to share in the investment earnings and any increase or decrease in the fair market value of the Fund up to the Valuation Date preceding or coinciding with payment.
9.7 Forfeitures Any balance in the account of a Participant who has separated from Service to which he or she is not entitled under the foregoing provisions, shall be forfeited and applied as provided in the Adoption Agreement. A forfeiture may only occur if the Participant has received a distribution from the Plan or if the Participant has incurred five consecutive 1-year Breaks in Service. Furthermore, a Highly Compensated Employee's Matching Contributions may be forfeited, even if vested, if the contributions to which they relate are Excess Deferrals, Excess Contributions or Excess Aggregate Contributions.
9.8 Amendment Of Vesting Schedule No amendment to the Plan shall have the effect of decreasing a Participant's vested interest determined without regard to such amendment as of the later of the date such amendment is adopted or the date it becomes effective. Further, if the vesting schedule of the Plan is amended, or the Plan is amended in any way that directly or indirectly affects the computation of any Participant's nonforfeitable percentage or if the Plan is deemed amended by an automatic change to or from a Top-Heavy vesting schedule, each Participant with at least three Years of Service with the Employer may elect, within a reasonable period after the adoption of the amendment, to have his or her nonforfeitable percentage computed under the Plan without regard to such amendment. For Participants who do not have at least one Hour of Service in any Plan Year beginning after 1988, the preceding sentence shall be applied by substituting "Five Years of Service" for "Three Years of Service" where such language appears. The period during which the election may be made shall commence with the date the amendment is adopted and
shall end on the later of:
(a) 60 days after the amendment is adopted;
(b) 60 days after the amendment becomes effective; or
(c) 60 days after the Participant is issued written notice of the amendment by the Employer or the Trustee/Custodian. If the Trustee/Custodian is asked to so notify, the Fund will be charged for the costs thereof.
No amendment to the Plan shall be effective to the extent that it has the effect of decreasing a Participant's accrued benefit. Notwithstanding the preceding sentence, a Participant's account balance may be reduced to the extent permitted under section 412(c)(8) of the Code (relating to financial hardships). For purposes of this paragraph, a Plan amendment which has the effect of decreasing a Participant's account balance or eliminating an optional form of benefit, with respect to benefits attributable to service before the amendment, shall be treated as reducing an accrued benefit.
9.9 Service With Controlled Groups All Years of Service with other members of
a controlled group of corporations [as defined in Code Section 414(b)], trades
or businesses under common control [as defined in Code Section 414(c)], or
members of an affiliated service group [as defined in Code Section 414(m)]
shall be considered for purposes of determining a Participant's nonforfeitable
percentage.
ARTICLE X
LIMITATIONS ON ALLOCATIONS
AND ANTIDISCRIMINATION TESTING
10.1 Participation In This Plan Only If the Participant does not participate in and has never participated in another qualified plan, a Welfare Benefit Fund (as defined in paragraph 1.89) or an individual medical account, as defined in Code Section 415(l)(2), maintained by the adopting Employer, which provides an Annual Addition as defined in paragraph 1.4, the amount of Annual Additions which may be credited to the Participant's account for any Limitation Year will not exceed the lesser of the Maximum Permissible Amount or any other limitation contained in this Plan. If the Employer contribution that would otherwise be contributed or allocated to the Participant's account would cause the Annual Additions for the Limitation Year to exceed the Maximum Permissible Amount, the amount contributed or allocated will be reduced so that the Annual Additions for the Limitation Year will equal the Maximum Permissible Amount. Prior to determining the Participant's actual Compensation for the Limitation Year, the Employer may determine the Maximum Permissible Amount for a Participant on the basis of a reasonable estimate of the Participant's Compensation for the Limitation Year, uniformly determined for all Participants similarly situated. As soon as is administratively feasible after the end of the Limitation Year, the Maximum Permissible Amount for the Limitation Year will be determined on the basis of the Participant's actual Compensation for the Limitation Year.
10.2 Disposition Of Excess Annual Additions If, pursuant to paragraph 10.1 or as a result of the allocation of forfeitures, there is an Excess Amount,
the excess will be disposed of under one of the following methods as determined in the Adoption Agreement. If no election is made in the Adoption Agreement then method "(a)" below shall apply.
(a) Suspense Account Method
(1) Any nondeductible Employee Voluntary, Required Voluntary Contributions and unmatched Elective Deferrals to the extent they would reduce the Excess Amount will be returned to the Participant. To the extent necessary to reduce the Excess Amount, non-Highly Compensated Employees will have all Elective Deferrals returned whether or not there was a corresponding match.
(2) If after the application of paragraph (1) an Excess Amount still exists, and the Participant is covered by the Plan at the end of the Limitation Year, the Excess Amount in the Participant's account will be used to reduce Employer contributions (including any allocation of forfeitures) for such Participant in the next Limitation Year, and each succeeding Limitation Year if necessary.
(3) If after the application of paragraph (1) an Excess Amount still exists, and the Participant is not covered by the Plan at the end of the Limitation Year, the Excess Amount will be held unallocated in a suspense account. The suspense account will be applied to reduce future Employer contributions (including allocation of any forfeitures) for all remaining Participants in the next Limitation Year, and each succeeding Limitation Year if necessary.
(4) If a suspense account is in existence at any time during the Limitation Year pursuant to this paragraph, it will not participate in the allocation of investment gains and losses. If a suspense account is in existence at any time during a particular Limitation Year, all amounts in the suspense account must be allocated and reallocated to Participants' accounts before any Employer contributions or any Employee Contributions may be made to the Plan for that Limitation Year. Excess amounts may not be distributed to Participants or former Participants.
(b) Spillover Method
(1) Any nondeductible Employee Voluntary, Required Voluntary Contributions and unmatched Elective Deferrals to the extent they would reduce the Excess Amount will be returned to the Participant. To the extent necessary to reduce the Excess Amount, non-Highly Compensated Employees will have all Elective Deferrals returned whether or not there was a corresponding match.
(2) Any Excess Amount which would be allocated to the account of an individual Participant under the Plan's allocation formula will be reallocated to other Participants in the same manner as other Employer contributions. No such reallocation shall be made to the extent that it will result in an Excess Amount being created in such Participant's own account.
(3) To the extent that amounts cannot be reallocated under (1) above, the suspense account provisions of (a) above will apply.
10.3 Participation In This Plan And Another Master and Prototype Defined Contribution Plan, Welfare Benefit Fund Or Individual Medical Account Maintained By The Employer The Annual Additions which may be credited to a Participant's account under this Plan for any Limitation Year will not exceed the Maximum Permissible Amount reduced by the Annual Additions credited to a Participant's account under the other Master or Prototype Defined Contribution Plans, Welfare Benefit Funds, and individual medical accounts as defined in Code Section 415(l)(2), maintained by the Employer, which provide an Annual Addition as defined in paragraph 1.4 for the same Limitation Year. If the Annual Additions, with respect to the Participant under other Defined Contribution Plans and Welfare Benefit Funds maintained by the Employer, are less than the Maximum Permissible Amount and the Employer contribution that would otherwise be contributed or allocated to the Participant's account under this Plan would cause the Annual Additions for the Limitation Year to exceed this limitation, the amount contributed or allocated will be reduced so that the Annual Additions under all such plans and funds for the Limitation Year will equal the Maximum Permissible Amount. If the Annual Additions with respect to the Participant under such other Defined Contribution Plans and Welfare Benefit Funds in the aggregate are equal to or greater than the Maximum Permissible Amount, no amount will be contributed or allocated to the Participant's account under this Plan for the Limitation Year. Prior to determining the Participant's actual Compensation for the Limitation Year, the Employer may determine the Maximum Permissible Amount for a Participant in the manner described in paragraph 10.1. As soon as administratively feasible after the end of the Limitation Year, the Maximum Permissible Amount for the Limitation Year will be determined on the basis of the Participant's actual Compensation for the Limitation Year.
10.4 Disposition Of Excess Annual Additions Under Two Plans If, pursuant to paragraph 10.3 or as a result of forfeitures, a Participant's Annual Additions under this Plan and such other plans would result in an Excess Amount for a Limitation Year, the Excess Amount will be deemed to consist of the Annual Additions last allocated except that Annual Additions attributable to a Welfare Benefit Fund or Individual Medical Account as defined in Code Section 415(l)(2) will be deemed to have been allocated first regardless of the actual allocation date. If an Excess Amount was allocated to a Participant on an allocation date of this Plan which coincides with an allocation date of another plan, the Excess Amount attributed to this Plan will be the product of:
(a) the total Excess Amount allocated as of such date, times
(b) the ratio of:
(1) the Annual Additions allocated to the Participant for the Limitation Year as of such date under the Plan, to
(2) the total Annual Additions allocated to the Participant for the Limitation Year as of such date under this and all the other qualified Master or Prototype Defined Contribution Plans.
Any Excess Amount attributed to this Plan will be disposed of in the manner described in paragraph 10.2.
10.5 Participation In This Plan And Another Defined Contribution Plan Which Is Not A Master Or Prototype Plan If the Participant is covered under another qualified Defined Contribution Plan maintained by the Employer which is not a Master or Prototype Plan, Annual Additions which may be credited to the Participant's account under this Plan for any Limitation Year will be limited in accordance with paragraphs 10.3 and 10.4 as though the other plan were a Master or Prototype Plan, unless the Employer provides other limitations in the Adoption Agreement.
10.6 Participation In This Plan And A Defined Benefit Plan If the Employer maintains, or at any time maintained, a qualified Defined Benefit Plan covering any Participant in this Plan, the sum of the Participant's Defined Benefit Plan Fraction and Defined Contribution Plan Fraction will not exceed 1.0 in any Limitation Year. For any Plan Year during which the Plan is Top-Heavy, the Defined Benefit and Defined Contribution Plan Fractions shall be calculated in accordance with Code Section 416(h). The Annual Additions which may be credited to the Participant's account under this Plan for any Limitation Year will be limited in accordance with the provisions set forth in the Adoption Agreement.
10.7 Average Deferral Percentage (ADP) Test With respect to any Plan Year, the Average Deferral Percentage for Participants who are Highly Compensated Employees and the Average Deferral Percentage for Participants who are non-Highly Compensated Employees must satisfy one of the following tests:
(a) Basic Test - The Average Deferral Percentage for Participants who are Highly Compensated Employees for the Plan Year is not more than 1.25 times the Average Deferral Percentage for Participants who are non-Highly Compensated Employees for the same Plan Year, or
(b) Alternative Test - The Average Deferral Percentage for Participants who are Highly Compensated Employees for the Plan Year does not exceed the Average Deferral Percentage for Participants who are non-Highly Compensated Employees for the same Plan Year by more than 2 percentage points provided that the Average Deferral Percentage for Participants who are Highly Compensated Employees is not more than 2.0 times the Average Deferral Percentage for Participants who are non-Highly Compensated Employees.
10.8 Special Rules Relating To Application Of ADP Test
(a) The Actual Deferral Percentage for any
Participant who is a Highly Compensated Employee for the Plan Year and who is
eligible to have Elective Deferrals (and Qualified Non-Elective Contributions
or Qualified Matching Contributions, or both, if treated as Elective Deferrals
for purposes of the ADP test) allocated to his or her accounts under two or
more arrangements described in Code Section 401(k), that are maintained by the
Employer, shall be determined as if such Elective Deferrals (and, if
applicable, such Qualified Non-Elective Contributions or Qualified Matching
Contributions, or both) were made under a single arrangement. If a Highly
Compensated Employee participates in two or more cash or deferred arrangements
that have different Plan Years, all cash or deferred arrangements ending with
or within the same calendar year shall be treated as a single arrangement.
(b) In the event that this Plan satisfies the requirements of Code Sections 401(k), 401(a)(4), or 410(b), only if aggregated with one or more
other plans, or if one or more other plans satisfy the requirements of such Code Sections only if aggregated with this Plan, then this Section shall be applied by determining the Actual Deferral Percentage of Employees as if all such plans were a single plan. For Plan Years beginning after 1989, plans may be aggregated in order to satisfy Code Section 401(k) only if they have the same Plan Year.
(c) For purposes of determining the Actual Deferral Percentage of a Participant who is a 5- percent owner or one of the ten most highly-paid Highly Compensated Employees, the Elective Deferrals (and Qualified Non-Elective Contributions or Qualified Matching Contributions, or both, if treated as Elective Deferrals for purposes of the ADP test) and Compensation of such Participant shall include the Elective Deferrals (and, if applicable, Qualified Non-Elective Contributions and Qualified Matching Contributions, or both) for the Plan Year of Family Members as defined in paragraph 1.36 of this Plan. Family Members, with respect to such Highly Compensated Employees, shall be disregarded as separate Employees in determining the ADP both for Participants who are non-Highly Compensated Employees and for Participants who are Highly Compensated Employees. In the event of repeal of the family aggregation rules under Code Section 414(q)(6), all applications of such rules under this Plan will cease as of the effective date of such repeal.
(d) For purposes of determining the ADP test, Elective Deferrals, Qualified Non-Elective Contributions and Qualified Matching Contributions must be made before the last day of the twelve-month period immediately following the Plan Year to which contributions relate.
(e) The Employer shall maintain records sufficient to demonstrate satisfaction of the ADP test and the amount of Qualified Non-Elective Contributions or Qualified Matching Contributions, or both, used in such test.
(f) The determination and treatment of the Actual Deferral Percentage amounts of any Participant shall satisfy such other requirements as may be prescribed by the Secretary of the Treasury.
10.9 Recharacterization If the Employer allows for Voluntary Contributions in the Adoption Agreement, a Participant may treat his or her Excess Contributions as an amount distributed to the Participant and then contributed by the Participant to the Plan. Recharacterized amounts will remain nonforfeitable and subject to the same distribution requirements as Elective Deferrals. Amounts may not be recharacterized by a Highly Compensated Employee to the extent that such amount in combination with other Employee Contributions made by that Employee would exceed any stated limit under the Plan on Voluntary Contributions. Recharacterization must occur no later than two and one-half months after the last day of the Plan Year in which such Excess Contributions arose and is deemed to occur no earlier than the date the last Highly Compensated Employee is informed in writing of the amount recharacterized and the consequences thereof. Recharacterized amounts will be taxable to the Participant for the Participant's tax year in which the Participant would have received them in cash.
10.10 Average Contribution Percentage (ACP) Test If the Employer makes Matching Contributions or if the Plan allows Employees to make Voluntary Contributions the Plan must meet additional nondiscrimination requirements
provided under Code Section 401(m). If Employee Contributions (including any Elective Deferrals recharacterized as Voluntary Contributions) are made pursuant to this Plan, then in addition to the ADP test referenced in paragraph 10.7, the Average Contribution Percentage test is also applicable. The Average Contribution Percentage for Participants who are Highly Compensated Employees for each Plan Year and the Average Contribution Percentage for Participants who are Non-Highly Compensated Employees for the same Plan Year must satisfy one of the following tests:
(a) Basic Test - The Average Contribution Percentage for Participants who are Highly Compensated Employees for the Plan Year shall not exceed the Average Contribution Percentage for Participants who are non-Highly Compensated Employees for the same Plan Year multiplied by 1.25; or
(b) Alternative Test - The ACP for Participants who are Highly Compensated Employees for the Plan Year shall not exceed the Average Contribution Percentage for Participants who are non-Highly Compensated Employees for the same Plan Year multiplied by two (2), provided that the Average Contribution Percentage for Participants who are Highly Compensated Employees does not exceed the Average Contribution Percentage for Participants who are non-Highly Compensated Employees by more than two (2) percentage points.
10.11 Special Rules Relating To Application Of ACP Test
(a) If one or more Highly Compensated Employees participate in both a cash or deferred arrangement and a plan subject to the ACP test maintained by the Employer and the sum of the ADP and ACP of those Highly Compensated Employees subject to either or both tests exceeds the Aggregate Limit, then the ADP or ACP of those Highly Compensated Employees who also participate in a cash or deferred arrangement will be reduced (beginning with such Highly Compensated Employee whose ADP or ACP is the highest) as set forth in the Adoption Agreement so that the limit is not exceeded. The amount by which each Highly Compensated Employee's Contribution Percentage Amounts is reduced shall be treated as an Excess Aggregate Contribution. The ADP and ACP of the Highly Compensated Employees are determined after any corrections required to meet the ADP and ACP tests. Multiple use does not occur if both the ADP and ACP of the Highly Compensated Employees does not exceed 1.25 multiplied by the ADP and ACP of the non-Highly Compensated Employees.
(b) For purposes of this Article, the Contribution Percentage for any
Participant who is a Highly Compensated Employee and who is eligible to have
Contribution Percentage Amounts allocated to his or her account under two or
more plans described in Code Section 401(a), or arrangements described in Code
Section 401(k) that are maintained by the Employer, shall be determined as if
the total of such Contribution Percentage Amounts was made under each Plan. If
a Highly Compensated Employee participates in two or more cash or deferred
arrangements that have different plan years, all cash or deferred arrangements
ending with or within the same calendar year shall be treated as a single
arrangement.
(c) In the event that this Plan satisfies the requirements of Code Sections 401(a)(4), 401(m), or 410(b) only if aggregated with one or more other plans, or if one or more other plans satisfy the requirements of such
Code Sections only if aggregated with this Plan, then this Section shall be applied by determining the Contribution Percentage of Employees as if all such plans were a single plan. For plan years beginning after 1989, plans may be aggregated in order to satisfy Code Section 401(m) only if the aggregated plans have the same Plan Year.
(d) For purposes of determining the Contribution percentage of a Participant who is a five- percent owner or one of the ten most highly-paid, Highly Compensated Employees, the Contribution Percentage Amounts and Compensation of such Participant shall include the Contribution Percentage Amounts and Compensation for the Plan Year of Family Members as defined in Paragraph 1.36 of this Plan. Family Members, with respect to Highly Compensated Employees, shall be disregarded as separate Employees in determining the Contribution Percentage both for Participants who are non-Highly Compensated Employees and for Participants who are Highly Compensated Employees. In the event of repeal of the family aggregation rules under Code Section 414(q)(6), all applications of such rules under this Plan will cease as of the effective date of such repeal.
(e) For purposes of determining the Contribution Percentage test, Employee Contributions are considered to have been made in the Plan Year in which contributed to the trust. Matching Contributions and Qualified Non-Elective Contributions will be considered made for a Plan Year if made no later than the end of the twelve-month period beginning on the day after the close of the Plan Year.
(f) The Employer shall maintain records sufficient to demonstrate satisfaction of the ACP test and the amount of Qualified Non-Elective Contributions or Qualified Matching Contributions, or both, used in such test.
(g) The determination and treatment of the Contribution Percentage of any Participant shall satisfy such other requirements as may be prescribed by the Secretary of the Treasury.
(h) Qualified Matching Contributions and Qualified Non-Elective
Contributions used to satisfy the ADP test may not be used to satisfy the ACP
test.
ARTICLE XI
ADMINISTRATION
11.1 Plan Administrator The Employer shall be the named fiduciary and Plan Administrator. These duties shall include:
(a) appointing the Plan's attorney, accountant, actuary, or any other party needed to administer the Plan,
(b) directing the Trustee/Custodian with respect to payments from the Fund,
(c) communicating with Employees regarding their participation and benefits under the Plan, including the administration of all claims procedures,
(d) filing any returns and reports with the Internal Revenue Service, Department of Labor, or any other governmental agency,
(e) reviewing and approving any financial reports, investment reviews, or other reports prepared by any party appointed by the Employer under paragraph (a),
(f) establishing a funding policy and investment objectives consistent with the purposes of the Plan and the Employee Retirement Income Security Act of 1974, and
(g) construing and resolving any question of Plan interpretation. The Plan Administrator's interpretation of Plan provisions including eligibility and benefits under the Plan is final, and unless it can be shown to be arbitrary and capricious will not be subject to "de novo" review.
11.2 Trustee/Custodian The Trustee/Custodian shall be responsible for the administration of investments held in the Fund. These duties shall include:
(a) receiving contributions under the terms of the Plan,
(b) making distributions from the Fund in accordance with written instructions received from an authorized representative of the Employer,
(c) keeping accurate records reflecting its administration of the Fund and making such records available to the Employer for review and audit. Within 120 days after each Plan Year, and within 120 days after its removal or resignation, the Trustee/Custodian shall file with the Employer an accounting of its administration of the Fund during such year or from the end of the preceding Plan Year to the date of removal or resignation. Such accounting shall include a statement of cash receipts and disbursements since the date of its last accounting and shall contain an asset list showing the fair market value of investments held in the Fund as of the end of the Plan Year. The value of marketable investments shall be determined using the most recent price quoted on a national securities exchange or over the counter market. The value of non-marketable investments shall be determined in the sole judgement of the Trustee/Custodian which determination shall be binding and conclusive. The value of investments in securities or obligations of the Employer in which there is no market shall be determined in the sole judgement of the Employer and the Trustee/Custodian shall have no responsibility with respect to the valuation of such assets. The Employer shall review the Trustee/Custodian's accounting and notify the Trustee/Custodian in the event of its disapproval of the report within 90 days, providing the Trustee/Custodian with a written description of the items in question. The Trustee/Custodian shall have 60 days to provide the Employer with a written explanation of the items in question. If the Employer again disapproves, the Trustee/Custodian shall file its accounting in a court of competent jurisdiction for audit and adjudication, and
(d) employing such agents, attorneys or other professionals as the Trustee may deem necessary or advisable in the performance of its duties.
The Trustee's/Custodian's duties shall be limited to those described above.
The Employer shall be responsible for any other administrative duties required under the Plan or by applicable law.
11.3 Administrative Fees And Expenses All reasonable costs, charges and expenses incurred by the Trustee/Custodian in connection with the administration of the Fund and all reasonable costs, charges and expenses incurred by the Plan Administrator in connection with the administration of the Plan (including fees for legal services rendered to the Trustee/Custodian or Plan Administrator) may be paid by the Employer, but if not paid by the Employer when due, shall be paid from the Fund. Such reasonable compensation to the Trustee/Custodian as may be agreed upon from time to time between the Employer and the Trustee/Custodian and such reasonable compensation to the Plan Administrator as may be agreed upon from time to time between the Employer and Plan Administrator may be paid by the Employer, but if not paid by the Employer when due shall be paid by the Fund. The Trustee shall have the right to liquidate trust assets to cover its fees. Notwithstanding the foregoing, no compensation other than reimbursement for expenses shall be paid to a Plan Administrator who is the Employer or a full-time Employee of the Employer. In the event any part of the Trust/Custodial Account becomes subject to tax, all taxes incurred will be paid from the Fund unless the Plan Administrator advises the Trustee/Custodian not to pay such tax.
11.4 Division Of Duties And Indemnification
(a) The Trustee/Custodian shall have the authority and discretion to manage and govern the Fund to the extent provided in this instrument, but does not guarantee the Fund in any manner against investment loss or depreciation in asset value, or guarantee the adequacy of the Fund to meet and discharge all or any liabilities of the Plan.
(b) The Trustee/Custodian shall not be liable for the making, retention or sale of any investment or reinvestment made by it, as herein provided, or for any loss to, or diminution of the Fund, or for any other loss or damage which may result from the discharge of its duties hereunder except to the extent it is judicially determined that the Trustee/Custodian has failed to exercise the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character with like aims.
(c) The Employer warrants that all directions issued to the Trustee/Custodian by it or the Plan Administrator will be in accordance with the terms of the Plan and not contrary to the provisions of the Employee Retirement Income Security Act of 1974 and regulations issued thereunder.
(d) The Trustee/Custodian shall not be answerable for any action taken pursuant to any direction, consent, certificate, or other paper or document on the belief that the same is genuine and signed by the proper person. All directions by the Employer, Participant or the Plan Administrator shall be in writing. The Employer shall deliver to the Trustee/Custodian certificates evidencing the individual or individuals authorized to act as set forth in the Adoption Agreement or as the Employer may subsequently inform the Trustee/Custodian in writing and shall deliver to the Trustee/Custodian specimens of their signatures.
(e) The duties and obligations of the Trustee/Custodian shall be limited to those expressly imposed upon it by this instrument or subsequently agreed upon by the parties. Responsibility for administrative duties required under the Plan or applicable law not expressly imposed upon or agreed to by the Trustee/Custodian, shall rest solely with the Employer.
(f) The Trustee shall be indemnified and saved harmless by the Employer from and against any and all liability to which the Trustee/Custodian may be subjected, including all expenses reasonably incurred in its defense, for any action or failure to act resulting from compliance with the instructions of the Employer, the employees or agents of the Employer, the Plan Administrator, or any other fiduciary to the Plan, and for any liability arising from the actions or non-actions of any predecessor Trustee/Custodian or fiduciary or other fiduciaries of the Plan.
(g) The Trustee/Custodian shall not be responsible in any way for the
application of any payments it is directed to make or for the adequacy of the
Fund to meet and discharge any and all liabilities under the Plan.
ARTICLE XII
TRUST FUND/CUSTODIAL ACCOUNT
12.1 The Fund The Fund shall consist of all contributions made under Article III and Article IV of the Plan and the investment thereof and earnings thereon. All contributions and the earnings thereon less payments made under the terms of the Plan, shall constitute the Fund. The Fund shall be administered as provided in this document.
12.2 Control Of Plan Assets The assets of the Fund or evidence of ownership shall be held by the Trustee/Custodian under the terms of the Plan and Trust/Custodial Account. If the assets represent amounts transferred from another trustee/custodian under a former plan, the Trustee/Custodian named hereunder shall not be responsible for the propriety of any investment under the former plan.
12.3 Exclusive Benefit Rules No part of the Fund shall be used for, or diverted to, purposes other than for the exclusive benefit of Participants, former Participants with a vested interest, and the beneficiary or beneficiaries of deceased Participants having a vested interest in the Fund at death.
12.4 Assignment And Alienation Of Benefits No right or claim to, or interest in, any part of the Fund, or any payment from the Fund, shall be assignable, transferable, or subject to sale, mortgage, pledge, hypothecation, commutation, anticipation, garnishment, attachment, execution, or levy of any kind. The Trustee/Custodian shall not recognize any attempt to assign, transfer, sell, mortgage, pledge, hypothecate, commute, or anticipate the same, except to the extent required by law. The preceding sentences shall also apply to the creation, assignment, or recognition of a right to any benefit payable with respect to a Participant pursuant to a domestic relations order, unless such order is determined to be a qualified domestic relations order, as defined in Code Section 414(p), or any domestic relations order entered before January 1, 1985 which the Plan attorney and Plan Administrator
deem to be qualified.
12.5 Determination Of Qualified Domestic Relations Order (QDRO) A Domestic Relations Order shall specifically state all of the following in order to be deemed a Qualified Domestic Relations Order ("QDRO"):
(a) The name and last known mailing address (if any) of the Participant and of each alternate payee covered by the QDRO. However, if the QDRO does not specify the current mailing address of the alternate payee, but the Plan Administrator has independent knowledge of that address, the QDRO will still be valid.
(b) The dollar amount or percentage of the Participant's benefit to be paid by the Plan to each alternate payee, or the manner in which the amount or percentage will be determined.
(c) The number of payments or period for which the order applies.
(d) The specific plan (by name) to which the Domestic Relations Order applies.
The Domestic Relations Order shall not be deemed a QDRO if it requires the Plan to provide:
(e) any type or form of benefit, or any option not already provided for in the Plan;
(f) increased benefits, or benefits in excess of the Participant's vested rights;
(g) payment of a benefit earlier than allowed by the Plan's earliest retirement provisions or in the case of a profit-sharing plan, prior to the allowability of in-service withdrawals, or
(h) payment of benefits to an alternate payee which are required to be paid to another alternate payee under another QDRO.
Promptly, upon receipt of a Domestic Relations Order ("Order") which may or may not be "Qualified", the Plan Administrator shall notify the Participant and any alternate payee(s) named in the Order of such receipt, and include a copy of this paragraph 12.5. The Plan Administrator shall then forward the Order to the Plan's legal counsel for an opinion as to whether or not the Order is in fact "Qualified" as defined in Code Section 414(p). Within a reasonable time after receipt of the Order, not to exceed 60 days, the Plan's legal counsel shall make a determination as to its "Qualified" status and the Participant and any alternate payee(s) shall be promptly notified in writing of the determination.
If the "Qualified" status of the Order is in question, there will be a delay in any payout to any payee including the Participant, until the status is resolved. In such event, the Plan Administrator shall segregate the amount that would have been payable to the alternate payee(s) if the Order had been deemed a QDRO. If the Order is not Qualified, or the status is not resolved (for example, it has been sent back to the Court for clarification or
modification) within 18 months beginning with the date the first payment would have to be made under the Order, the Plan Administrator shall pay the segregated amounts plus interest to the person(s) who would have been entitled to the benefits had there been no Order. If a determination as to the Qualified status of the Order is made after the 18-month period described above, then the Order shall only be applied on a prospective basis. If the Order is determined to be a QDRO, the Participant and alternate payee(s) shall again be notified promptly after such determination. Once an Order is deemed a QDRO, the Plan Administrator shall pay to the alternate payee(s) all the amounts due under the QDRO, including segregated amounts plus interest which may have accrued during a dispute as to the Order's qualification.
Unless specified otherwise in the Adoption Agreement, the earliest retirement age with regard to the Participant against whom the order is entered shall be the date the order is determined to be qualified. This will only allow payouts to alternate payee(s) and not the Participant.
ARTICLE XIII
INVESTMENTS
13.1 Fiduciary Standards The Trustee/Custodian shall invest and reinvest principal and income in the same Fund in accordance with the investment objectives established by the Employer, provided that:
(a) such investments are prudent under the Employee Retirement Income Security Act of 1974 and the regulations thereunder,
(b) such investments are sufficiently diversified or otherwise insured or guaranteed to minimize the risk of large losses, and
(c) such investments are similar to those which would be purchased by another professional money manager for a like plan with similar investment objectives.
13.2 Funding Arrangement The Employer shall appoint the Sponsor or an individual or individuals as Trustee under the Employer's Plan. Such appointment shall be made in the Adoption Agreement. If the Sponsor is not named Trustee it will serve as Custodian under the Plan as provided at paragraph 13.4.
13.3 Investment Alternatives Of The Trustee As Trustee, the Sponsor shall, unless such powers are delegated to another party in accordance with paragraph 13.7 or 13.8 hereof, implement an investment program based on the Employer's investment objectives and the Employee Retirement Income Security Act of 1974. In addition to powers given by law, the Trustee may:
(a) invest the Fund in any form of property, including common and preferred stocks, exchange traded put and call options, bonds, money market instruments, mutual funds (including funds for which the Trustee or its affiliates serve as investment advisor), savings accounts, certificates of deposit, Treasury bills, insurance policies and contracts, or in any other property, real or personal, having a ready market. The Trustee may invest in
time deposits (including, if applicable, its own or those of affiliates) which bear a reasonable interest rate. No portion of any Qualified Voluntary Contribution, or the earnings thereon, may be invested in life insurance contracts or, as with any Participant-directed investment, in tangible personal property characterized by the IRS as a collectible,
(b) transfer any assets of the Fund to a group or collective trust established to permit the pooling of funds of separate pension and profit-sharing trusts, provided the Internal Revenue Service has ruled such group or collective trust to be qualified under Code Section 401(a) and exempt under Code Section 501(a) (or the applicable corresponding provision of any other Revenue Act) or to any other common, collective, or commingled trust fund which has been or may hereafter be established and maintained by the Trustee and/or affiliates of the Trustee. Such commingling of assets of the Fund with assets of other qualified trusts is specifically authorized, and to the extent of the investment of the Fund in such a group or collective trust, the terms of the instrument establishing the group or collective trust shall be a part hereof as though set forth herein,
(c) invest up to 100% of the Fund in the common stock, debt
obligations, or any other security issued by the Employer or by an affiliate of
the Employer within the limitations provided under Sections 406, 407, and 408
of the Employee Retirement Income Security Act of 1974 and further provided
that such investment does not constitute a prohibited transaction under Code
Section 4975. Any such investment in Employer securities shall only be made
upon written direction of the Employer who shall be solely responsible for
propriety of such investment,
(d) hold cash uninvested and deposit same with any banking or savings institution, including its own banking department,
(e) join in or oppose the reorganization, recapitalization, consolidation, sale or merger of corporations or properties, including those in which it is interested as Trustee, upon such terms as it deems wise,
(f) hold investments in nominee or bearer form,
(g) vote proxies and, if appropriate, pass them on to any investment manager which may have directed the investment in the equity giving rise to the proxy,
(h) exercise all ownership rights with respect to assets held in the Fund.
13.4 Investment Alternatives Of The Custodian As Custodian, the Sponsor shall be depository of all or part of the Fund and shall, at the direction of the Trustee hold any assets received from the Trustee or its agents. The Custodian shall receive and deliver assets as instructed by the Trustee or its agents. To the extent that the Custodian holds title to Plan assets and such ownership requires action on the part of the registered owner, such action will be taken by the Custodian only upon receipt of specific instructions from the Trustee or its agents. Proxies shall be voted by or pursuant to the express direction of the Trustee or authorized agent of the Trustee. As Custodian, the Sponsor shall not give any investment advice, including any
opinion on the prudence of directed investments. The Employer and Trustee and the agents thereof assume all responsibility for adherence to fiduciary standards under the Employee Retirement Income Security Act of 1974 (ERISA) and all amendments thereof, and regulations thereunder.
13.5 Participant Loans If agreed upon by the Trustee and permitted by the Employer in the Adoption Agreement, a Plan Participant may make application to the Employer requesting a loan from the Fund. The Employer shall have the sole right to approve or disapprove a Participant's application provided that loans shall be made available to all Participants on a reasonably equivalent basis. Loans shall not be made available to Highly Compensated Employees [as defined in Code Section 414(q)] in an amount greater than the amount made available to other Employees. Any loan granted under the Plan shall be made subject to the following rules:
(a) No loan, when aggregated with any outstanding Participant loan(s),
shall exceed the lesser of (i) $50,000 reduced by the excess, if any, of the
highest outstanding balance of loans during the one year period ending on the
day before the loan is made, over the outstanding balance of loans from the
Plan on the date the loan is made or (ii) one-half of the fair market value of
a Participant's Vested Account Balance built up from Em- ployer Contributions,
Voluntary Contributions, and Rollover Contributions. If the Participant's
Vested Account Balance is $20,000 or less, the maximum loan shall not exceed
the lesser of $10,000 or 100% of the Participant's Vested Account Balance. For
the purpose of the above limitation, all loans from all plans of the Employer
and other members of a group of employers described in Code Sections 414(b),
414(c), and 414(m) are aggregated. An assignment or pledge of any portion of
the Participant's interest in the Plan and a loan, pledge, or assignment with
respect to any insurance contract purchased under the Plan, will be treated as
a loan under this paragraph.
(b) All applications must be made on forms provided by the Employer and must be signed by the Participant.
(c) Any loan shall bear interest at a rate reasonable at the time of application, considering the purpose of the loan and the rate being charged by representative commercial banks in the local area for a similar loan unless the Employer sets forth a different method for determining loan interest rates in its loan procedures. The loan agreement shall also provide that the payment of principal and interest be amortized in level payments not less than quarterly.
(d) The term of such loan shall not exceed five years except in the case of a loan for the purpose of acquiring any house, apartment, condominium, or mobile home (not used on a transient basis) which is used or is to be used within a reasonable time as the principal residence of the Participant. The term of such loan shall be determined by the Employer considering the maturity dates quoted by representative commercial banks in the local area for a similar loan.
(e) The principal and interest paid by a Participant on his or her loan shall be credited to the Fund in the same manner as for any other Plan investment. If elected in the Adoption Agreement, loans may be treated as segregated investments of the individual Participants. This provision is not
available if its election will result in discrimination in operation of the Plan.
(f) If a Participant's loan application is approved by the Employer, such Participant shall be required to sign a note, loan agreement, and assignment of 50% of his or her interest in the Fund as collateral for the loan. The Participant, except in the case of a profit-sharing plan satisfying the requirements of paragraph 8.7 must obtain the consent of his or her Spouse, if any, within the 90 day period before the time his or her account balance is used as security for the loan. A new consent is required if the account balance is used for any renegotiation, extension, renewal or other revision of the loan, including an increase in the amount thereof. The consent must be written, must acknowledge the effect of the loan, and must be witnessed by a plan representative or notary public. Such consent shall subsequently be binding with respect to the consenting Spouse or any subsequent Spouse.
(g) If a valid Spousal consent has been obtained, then, notwithstanding any other provision of this Plan, the portion of the Participant's Vested Account Balance used as a security interest held by the Plan by reason of a loan outstanding to the Participant shall be taken into account for purposes of determining the amount of the account balance payable at the time of death or distribution, but only if the reduction is used as repayment of the loan. If less than 100% of the Participant's Vested Account Balance (determined without regard to the preceding sentence) is payable to the Surviving Spouse, then the account balance shall be adjusted by first reducing the Vested Account Balance by the amount of the security used as repayment of the loan, and then determining the benefit payable to the Surviving Spouse.
(h) The Employer may also require additional collateral in order to adequately secure the loan.
(i) A Participant's loan shall immediately become due and payable if such Participant terminates employment for any reason or fails to make a principal and/or interest payment as provided in the loan agreement. If such Participant terminates employment, the Employer shall immediately request payment of principal and interest on the loan. If the Participant refuses payment following termination, the Employer shall reduce the Participant's Vested Account Balance by the remaining principal and interest on his or her loan. If the Participant's Vested Account Balance is less than the amount due, the Employer shall take whatever steps are necessary to collect the balance due directly from the Participant. However, no foreclosure on the Participant's note or attachment of the Participant's account balance will occur until a distributable event occurs in the Plan.
(j) No loans will be made to Owner-Employees (as defined in paragraph 1.51) or Shareholder-Employees (as defined in paragraph 1.74), unless the Employer obtains a prohibited transaction exemption from the Department of Labor.
13.6 Insurance Policies If agreed upon by the Trustee and permitted by the Employer in the Adoption Agreement, Employees may elect the purchase of life insurance policies under the Plan. If elected, the maximum annual premium for
a whole life policy must be less than 50% of the aggregate Employer contributions allocated to the account of a Participant. For profit-sharing plans the 50% test need only be applied against Employer contributions allocated in the last two years. Whole life policies are policies with both nondecreasing death benefits and nonincreasing premiums. The maximum annual premium for term contracts or universal life policies and all other policies which are not whole life shall not exceed 25% of aggregate Employer contributions allocated to the account of a Participant. The two-year rule for profit-sharing plans again applies. The maximum annual premiums for a Participant with both a whole life and a term contract or universal life policies shall be limited to one-half of the whole life premium plus the term premium, but shall not exceed 25% of the aggregate Employer contributions allocated to the account of a Participant, subject to the two year rule for profit-sharing plans. Any policies purchased under this Plan shall be held subject to the following rules:
(a) The Trustee shall be applicant and owner of any policies issued.
(b) All policies or contracts purchased hereunder, shall be endorsed as nontransferable, and must provide that proceeds will be payable to the Trustee; however, the Trustee shall be required to pay over all proceeds of the contracts to the Participant's Designated Beneficiary in accordance with the distribution provisions of this Plan. Under no circumstances shall the Trust retain any part of the proceeds.
(c) Each Participant shall be entitled to designate a beneficiary under the terms of any contract issued; however, such designation will be given to the Trustee which must be the named beneficiary on any policy. Such designation shall remain in force, until revoked by the Participant, by filing a new beneficiary form with the Trustee. A Participant's Spouse will be the Designated Beneficiary of the proceeds in all circum- stances unless a Qualified Election has been made in accordance with paragraph 8.4. The beneficiary of a deceased Participant shall receive, in addition to the proceeds of the Participant's policy or policies, the amount credited to such Participant's investment account.
(d) A Participant who is uninsurable or insurable at substandard rates, may elect to receive a reduced amount of insurance, if available, or may waive the purchase of any insurance.
(e) All dividends or other returns received on any policy purchased shall be applied to reduce the next premium due on such policy, or if no further premium is due, such amount shall be credited to the Fund as part of the account of the Participant for whom the policy is held.
(f) If Employer contributions are inadequate to pay all premiums on all insurance policies, the Trustee may, at the option of the Employer, utilize other amounts remaining in each Participant's account to pay the premiums on his or her respective policy or policies, allow the policies to lapse, reduce the policies to a level at which they may be maintained, or borrow against the policies on a prorated basis, provided that the borrowing does not discriminate in favor of the policies on the lives of Officers, Shareholders, and highly compensated Employees.
(g) On retirement or termination of employment of a Participant, the Employer shall direct the Trustee to cash surrender the Participant's policy and credit the proceeds to his or her account for distribution under the terms of the Plan. However, before so doing, the Trustee shall first offer to transfer ownership of the policy to the Participant in exchange for payment by the Participant of the cash value of the policy at the time of transfer. Such payment shall be credited to the Participant's account for distribution under the terms of the Plan. All distributions resulting from the application of this paragraph shall be subject to the Joint and Survivor Annuity Rules of Article VIII, if applicable.
(h) The Employer shall be solely responsible to see that these insurance provisions are administered properly and that if there is any conflict between the provisions of this Plan and any insurance contracts issued that the terms of this Plan will control.
13.7 Employer Investment Direction If agreed upon by the Trustee and approved by the Employer in the Adoption Agreement, the Employer shall have the right to direct the Trustee with respect to investments of the Fund, may appoint an investment manager (registered as an investment advisor under the Investment Advisors Act of 1940) to direct investments, or may give the Trustee sole investment management responsibility. The right to direct investments shall include the exercise of all ownership rights in connection with such investments. The Employer may purchase and sell interests in a registered investment company (i.e., mutual funds) for which the Sponsor, its parent, affiliates, or successors, may serve as investment advisor and receive compensation from the registered investment company for its services as investment advisor. The Employer shall advise the Trustee in writing regarding the retention of investment powers, the appointment of an investment manager, or the delegation of investment powers to the Trustee. Any investment directive under this Plan shall be made in writing by the Employer or investment manager, as the case may be. In the absence of such written directive, the Trustee shall automatically invest the available cash in its discretion in an appropriate interim investment until specific investment directions are received. Such instructions regarding the delegation of investment responsibility shall remain in force until revoked or amended in writing. The Trustee shall not be responsible for the propriety of any directed investment made and shall not be required to consult with or advise the Employer regarding the investment quality of any directed investment held hereunder. If the Employer fails to designate an investment manager, the Trustee shall have full investment authority. If the Employer does not issue investment directions, the Trustee shall have authority to invest the Fund in its sole discretion. While the Employer may direct the Trustee with respect to Plan investments, the Employer may not:
(a) borrow from the Fund or pledge any of the assets of the Fund as security for a loan,
(b) buy property or assets from or sell property or assets to the Fund,
(c) charge any fee for services rendered to the Fund, or
(d) receive any services from the Fund on a preferential basis.
13.8 Employee Investment Direction If agreed to by the Trustee and approved by the Employer in the Adoption Agreement, Participants shall be given the option to direct the investment of their personal contributions and their share of the Employer's contribution among alternative investment funds established as part of the overall Fund. Unless otherwise specified by the Employer in the Adoption Agreement, such investment funds shall be restricted to funds offered by the Trustee. In this connection, Participants shall exercise all ownership rights as required by applicable law in connection with such investments and if any Participant does not exercise any of his or her ownership rights, the Trustee shall vote shares. Notwithstanding otherwise, the Trustee shall vote shares unless the parties agree otherwise in writing. Also, if investments outside the Trustee's control are allowed, Participant's right to direct the investment of any contribution shall apply only to selection of the desired fund. The following rules shall apply to the administration of such funds.
(a) At the time an Employee becomes eligible for the Plan, he or she shall complete an investment designation form stating the percentage of his or her contributions to be invested in the available funds or by using a telephone exchange privilege offered by an investment fund in which the Participants' balance is invested (provided a telephone exchange privilege has been previously selected by the Trustee) in accordance with the procedures established by the Plan Administrator.
(b) A Participant may change his or her election with respect to future contributions by filing a new investment designation form with the Employer or by using a telephone exchange privilege offered by an investment fund in which the Participants' balance is invested (provided a telephone exchange privilege has been previously selected by the Trustee) in accordance with the procedures established by the Plan Administrator.
(c) A Participant may elect to transfer all or part of his or her balance from one investment fund to another by filing an investment designation form with the Employer or by using a telephone exchange privilege offered by an investment fund in which the Participants' balance is invested (provided a telephone exchange privilege has been previously selected by the Trustee) in accordance with the procedures established by the Plan Administrator.
(d) The Employer shall be responsible when transmitting Employee and Employer contributions to show the dollar amount to be credited to each investment fund for each Employee. If a telephone exchange privilege has been selected by the Trustee, the Trustee may rely upon directions provided in such format provided the Participant is afforded an opportunity to obtain written confirmation of the direction. The Trustee may always decline to implement the directions of any Participant which may result in a prohibited transaction or generate income that would be taxable to the Trust Fund.
(e) Except as otherwise provided in the Plan, neither the Trustee, nor
the Employer, nor any fiduciary of the Plan shall be liable to the Participant
or any of his or her beneficiaries for any loss resulting from action taken at
the direction of the Participant.
ARTICLE XIV
TOP-HEAVY PROVISIONS
14.1 Applicability Of Rules If the Plan is or becomes Top-Heavy in any Plan Year beginning after 1983, the provisions of this Article will supersede any conflicting provisions in the Plan or Adoption Agreement.
14.2 Minimum Contribution Notwithstanding any other provision in the Employer's Plan, for any Plan Year in which the Plan is Top-Heavy or Super Top-Heavy, the aggregate Employer contributions and forfeitures allocated on behalf of any Participant (without regard to any Social Security contribution) under this Plan and any other Defined Contribution Plan of the Employer shall be lesser of 3% of such Participant's Compensation or the largest percentage of Employer contributions and forfeitures, as a percentage of the first $200,000, as adjusted under Code Section 415(d), of the Key Employee's Compensation, allocated on behalf of any Key Employee for that year.
Each Participant who is employed by the Employer on the last day of the Plan Year shall be entitled to receive an allocation of the Employer's minimum contribution for such Plan Year. The minimum allocation applies even though under other Plan provisions the Participant would not otherwise be entitled to receive an allocation, or would have received a lesser allocation for the year because the Participant fails to make Mandatory Contributions to the Plan, the Participant's Compensation is less than a stated amount, or the Participant fails to complete 1,000 Hours of Service (or such lesser number designated by the Employer in the Adoption Agreement) during the Plan Year. A Paired profit-sharing plan designated to provide the minimum Top-Heavy contribution must do so regardless of profits. An Employer may make the minimum Top-Heavy contribution available to all Participants or just non-Key Employees.
For purposes of computing the minimum allocation, Compensation shall mean Compensation as defined in paragraph 1.12(c) of the Plan.
The Top-Heavy minimum contribution does not apply to any Participant to the extent the Participant is covered under any other plan(s) of the Employer and the Employer has provided in Section 11 of the Adoption Agreement that the minimum allocation or benefit requirements applicable to Top-Heavy Plans will be met in the other plan(s).
If a Key Employee makes an Elective Deferral or has an allocation of Matching Contributions made to his or her account, a Top-Heavy minimum will be required for non-Key Employees who are Participants, however, neither Elective Deferrals by nor Matching Contributions to non-Key Employees may be taken into account for purposes of satisfying the top-heavy Minimum Contribution requirement.
14.3 Minimum Vesting For any Plan Year in which this Plan is Top-Heavy, the minimum vesting schedule elected by the Employer in the Adoption Agreement will automatically apply to the Plan. If the vesting schedule selected by the Employer in the Adoption Agreement is less liberal than the allowable schedule, the schedule will automatically be modified. If the vesting schedule under the Employer's Plan shifts in or out of the Top-Heavy schedule for any Plan Year, such shift is an amendment to the vesting schedule and the election in paragraph 9.8 of the Plan applies. The minimum vesting schedule
applies to all accrued benefits within the meaning of Code Section 411(a)(7) except those attributable to Employee contributions, including benefits accrued before the effective date of Code Section 416 and benefits accrued before the Plan became Top-Heavy. Further, no reduction in vested benefits may occur in the event the Plan's status as Top-Heavy changes for any Plan Year. However, this para- graph does not apply to the account balances of any Employee who does not have an Hour of Service after the Plan initially becomes Top-Heavy and such Employee's account balance attributable to Employer contributions and forfeitures will be determined without regard to this paragraph.
14.4 Limitations On Allocations In any Plan Year in which the Top-Heavy Ratio
exceeds 90% (i.e., the Plan becomes Super Top-Heavy), the denominators of the
Defined Benefit Fraction (as defined in paragraph 1.16) and Defined
Contribution Fraction (as defined in paragraph 1.19) shall be computed using
100% of the dollar limitation instead of 125%.
ARTICLE XV
AMENDMENT AND TERMINATION
15.1 Amendment By Sponsor The Sponsor may amend any or all provisions of this Plan and Trust/Custodial Account at any time without obtaining the approval or consent of any Employer which has adopted this Plan and Trust/Custodial Account provided that no amendment shall authorize or permit any part of the corpus or income of the Fund to be used for or diverted to purposes other than for the exclusive benefit of Participants and their beneficiaries, or eliminate an optional form of distribution. In the case of a mass-submitted plan, the mass-submitter shall amend the Plan on behalf of the Sponsor.
15.2 Amendment By Employer The Employer may amend any option in the Adoption Agreement, and may include language as permitted in the Adoption Agreement,
(a) to satisfy Code Section 415, or
(b) to avoid duplication of minimums under Code Section 416
because of the required aggregation of multiple plans.
The Employer may add certain model amendments published by the Internal Revenue Service which specifically provide that their adoption will not cause the Plan to be treated as an individually designed plan for which the Employer must obtain a separate determination letter.
If the Employer amends the Plan and Trust/Custodial Account other than as provided above, the Employer's Plan shall no longer participate in this Prototype Plan and will be considered an individually designed plan.
15.3 Termination Employers shall have the right to terminate their Plans upon 60 days notice in writing to the Trustee/Custodian. If the Plan is terminated, partially terminated, or if there is a complete discontinuance of contributions under a profit-sharing plan maintained by the Employer, all amounts credited to the accounts of Participants shall vest and become
nonforfeitable. In the event of a partial termination, only those who are affected by such partial termination shall be fully vested. In the event of termination, the Employer shall direct the Trustee/Custodian with respect to the distribution of accounts to or for the exclusive benefit of Participants or their beneficiaries. The Trustee/Custodian shall dispose of the Fund in accordance with the written directions of the Plan Administrator, provided that no liquidation of assets and payment of benefits, (or provision therefor), shall actually be made by the Trustee/Custodian until after it is established by the Employer in a manner satisfactory to the Trustee/Custodian, that the applicable requirements, if any, of the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code governing the termination of employee benefit plans, have been or are being, complied with, or that appropriate authorizations, waivers, exemptions, or variances have been, or are being obtained.
15.4 Qualification Of Employer's Plan If the adopting Employer fails to attain or retain Internal Revenue Service qualification, such Employer's Plan shall no longer participate in this Prototype Plan and will be considered an individually designed plan.
15.5 Mergers And Consolidations
(a) In the case of any merger or consolidation of the Employer's Plan with, or transfer of assets or liabilities of the Employer's Plan to, any other plan, Participants in the Employer's Plan shall be entitled to receive benefits immediately after the merger, consolidation, or transfer which are equal to or greater than the benefits they would have been entitled to receive immediately before the merger, consolidation, or transfer if the Plan had then terminated.
(b) Any corporation into which the Trustee/Custodian or any successor trustee/custodian may be merged or with which it may be consolidated, or any corporation resulting from any merger or consolidation to which the Trustee/Custodian or any successor trustee/custodian may be a party, or any corporation to which all or substantially all the trust business of the Trustee/Custodian or any successor trustee/custodian may be transferred, shall be the successor of such Trustee/Custodian without the filing of any instrument or performance of any further act, before any court.
15.6 Resignation And Removal The Trustee/Custodian may resign by written notice to the Employer which shall be effective 60 days after delivery. The Employer may discontinue its participation in this Prototype Plan and Trust/Custodial Account effective upon 60 days written notice to the Sponsor. In such event the Employer shall, prior to the effective date thereof, amend the Plan to eliminate any reference to this Prototype Plan and Trust/Custodial Account and appoint a successor trustee or custodian or arrange for another funding agent. The Trustee/Custodian shall deliver the Fund to its successor on the effective date of the resignation or removal, or as soon thereafter as practicable, provided that this shall not waive any lien the Trustee/Custodian may have upon the Fund for its compensation or expenses. If the Employer fails to amend the Plan and appoint a successor trustee, custodian, or other funding agent within the said 60 days, or such longer period as the Trustee/Custodian may specify in writing, the Plan shall be deemed individually designed and the Employer shall be deemed the successor
trustee/custodian. The Employer must then obtain its own determination letter.
15.7 Qualification Of Prototype The Sponsor intends that this Prototype Plan
will meet the requirements of the Code as a qualified Prototype Retirement Plan
and Trust/Custodial Account. Should the Commissioner of Internal Revenue or
any delegate of the Commissioner at any time determine that the Plan and
Trust/Custodial Account fails to meet the requirements of the Code, the Sponsor
will amend the Plan and Trust/Custodial Account to maintain its qualified
status.
ARTICLE XVI
GOVERNING LAW
Construction, validity and administration of the Prototype Plan and Trust/Custodial Account, and any Employer Plan and Trust/Custodial Account as embodied in the Prototype document and accompanying Adoption Agreement, shall be governed by Federal law to the extent applicable and to the extent not applicable by the laws of the State/Commonwealth in which the principal office
of the Sponsor is located.
LYNCH CORPORATION
DIRECTORS STOCK PLAN (THE "PLAN")
1. Each person who is a director of Lynch Corporation (the "Corporation") (but is not an employee of the Corporation) on the first business day of each year (except that the date of grant for 1996 shall be February 1, 1996) shall be granted as of said business day a number of shares of common stock of the Corporation ("Common Stock") equal to $15,000 divided by the average closing price of the Common Stock on the American Stock Exchange for the 30 trading days preceding the date of grant of the shares (January 2, 1996 in the case of the 1996 grant) (whether or not the Common Stock traded on said day). Unless otherwise determined by the Board of Directors, if a director receiving a grant in a particular year is not a director on March 31, June 30, September 30 and December 31 of said year, the director shall promptly transfer to the Corporation 100%, 75%, 50%, or 25%, respectively, of the shares received for that year. Certificates issued by the Corporation may contain (i) an appropriate legend as to the foregoing obligation and (ii) an appropriate securities laws legend.
2. The Plan may be amended in any respect or discontinued at any time by action of the Board of Directors of the Corporation; provided, however, that any such action shall not affect any shares of Common Stock previously granted and provided further that the Plan provisions may not be amended more than once every six months, other than to comply with changes in the Internal Revenue Code, the Employee Retirement Income Security Act or the rules therewith. Adoption of the Plan does not create any limitation on the power of the Board of Directors to create other plans or programs for directors.
LYNCH CORPORATION
PHANTOM STOCK PLAN
1. Participants: Any officer or employee of the Lynch Corporation (the "Corporation") designated by a committee (the "Committee") appointed by the Board of Directors of the Corporation (the "Board of Directors").
2. Share Unit/Grant Price: The Committee may, from time to time, grant to any officer or employee of the Corporation (a "Grantee") such number of "Share Units" as it in its discretion deems appropriate. Each Share Unit shall, for purposes of the Plan, be deemed to be the equivalent of one share of Common Stock of the Corporation ("Common Stock"). The Grant Price shall be average closing price of the Common Stock on the American Stock Exchange ("AMEX") for the 30 trading days prior to the date of grant (January 1, 1996, in the case of grants as of February 29, 1996) (whether or not the stock traded on said day).
3. Vesting: Share Units shall vest and become exercisable on the first anniversary of the date of grant if the Grantee is on such first anniversary an officer or employee of the Corporation(and notwithstanding the reason that Grantee is no longer an officer or employee); provided, however, that if the Grantee ceases to be either an officer or employee of the Corporation prior to such first anniversary by reason of death or permanent disability, the Share Units shall vest and become exercisable proportionally over the portion of first year after the date of grant that the Grantee is an officer or employee.
4. Cash Dividends: If cash dividends are declared on the Common Stock, additional Share Units shall be granted to Grantees equal to the dividends that would be payable on the Share Units (if they were shares of Common Stock) divided by the closing price of the Common Stock on the AMEX on the date of payment of the cash dividends (or if there was no trade on such date, the closing price on the last preceding date on which the stock traded). Such additional Share Units shall be deemed granted for vesting and other purposes as of date of grant of the related Share Units.
5. Exercise of Share Units: At any time and from time to time after the Share Units vest and become exercisable and prior to the earlier of (i) the fifth anniversary of the date of grant or (ii) 30 days after the Grantee is no longer either an officer or employee of the Corporation (notwithstanding the reason that Grantee is no longer an officer or employee), a Grantee may exercise the Share Units by giving written notice thereof to the Corporation. Within 30 days after receipt of the written notice of exercise, the Corporation shall pay to the Grantee an amount equal to the closing price of the Common Stock on the AMEX on the date of exercise (or if there was no trade on such date, the closing price on the last preceding date on which the stock traded) ("Exercise Price") less the Grant Price multiplied by the number of Share Units exercised. At its option, the Corporation may pay up to 50% of the value of the Share Units exercised in shares of Common Stock, valued at Exercise Price.
6. Adjustments Upon Changes in Capitalization: The number of Share Units and/or the Grant Price shall be adjusted by the Committee for stock splits, stock or other non-cash dividends, spinoffs, recapitalizations, combinations or
exchanges of shares, merger, consolidation or liquidation, or the like.
7. Taxes: The Corporation may withhold cash from any payment to satisfy Federal, state or local withholding or similar taxes.
8. No Transfer: Unless the Committee determines otherwise, Share Units granted pursuant to the Plan shall not be transferable by the Grantee other than by will or the laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the Internal Revenue Code of 1986, as amended, 26 V.S.C. Section 1 et seq or Title I of the Employee Retirement Security Act or the rules thereunder. A designation of a beneficiary by a Grantee shall not constitute a transfer.
9. Plan Termination: No grants under the Plan shall be made after December 31, 2000, unless extended by action of the Board of Directors of the Corporation.
10. Share Units Not Stock: Grantees shall not have any rights (including the right to vote) of a shareholder of stock in respect of Share Units.
11. No Right to Employment: Nothing contained herein shall give any Grantee any right to remain as an officer or in the employ of the Corporation or any of its subsidiaries or shall limit the right of the Corporation or any of its subsidiaries to terminate, with or without cause, a Grantee's employment or officer status.
12. Lynch Stock: Any shares of Common Stock issued to a Grantee upon exercise
of Share Units shall be held by the Grantee for investment and without a view to sale or distribution. Such shares may only be transferred or sold (i) in compliance with the Securities Act of 1933, as amended (the "Securities Act") and any state securities laws and (ii) if in the opinion of counsel satisfactory to the Corporation, the transfer or sale complies with clause (i). The Corporation has no obligation to register any shares issued to any Grantee. Certificates for shares issued to Grantees shall contain such legend to the foregoing effect as the Committee shall determine.
13. Plan Agreement: The Committee may require Grantees, as a condition of the grant, to execute such agreement with the Corporation (which agreements need not be the same) relating to Share Units granted to such Grantee as the Committee shall determine.
14. Amendment/Discontinuance of Plan: The Plan may be amended in any respect or discontinued at any time by action of the Board of Directors; provided, however, that any such action shall not affect any Share Units previously granted without the consent of the Grantee of such Units.
15. Administration/Interpretation: The Plan shall be administered by the Committee. The Committee may (but need not be) be an existing committee of the Board of Directors. Subject to the express provisions of the Plan, the Committee is authorized to interpret the Plan and to make such determinations as it deems necessary or advisable for the administration of the Plan. Neither the members of the Committee nor any other director, officer or employee of the Corporation shall have any liability to any party for any action taken or not taken, in good
faith, under the Plan or based on or arising out of a determination of any question under the Plan, made in good faith.
16. Effective Date: The Plan shall be effective as of February 29, 1996.
17. Non-Exclusive: Adoption of the Plan shall not be construed as creating any limitations on the power of the Board to adopt such other incentive arrangements as it may deem desirable, either generally or applicable only in specific cases.
18. Governing Law: The Plan shall be governed by the laws of the State of Indiana.
STOCK PURCHASE AGREEMENT
STOCK PURCHASE AGREEMENT (this "Agreement") dated as of November 1, 1995 ("Execution Date") by and among Lynch Telephone Corporation VIII, a Delaware corporation ("Purchaser"), Brighton Communications Corporation, a Delaware corporation ("Parent" or "BCC"), Dunkirk & Fredonia Telephone Co., a New York corporation ("DFT"), and the persons listed on Schedule A hereto who own 92.94% of the issued and outstanding stock of DFT (collectively "Sellers").
In consideration of the representations, warranties, agreements and conditions herein contained, and intending to be legally bound, Purchaser and Parent and DFT and Sellers (individually a "party"; collectively the "parties") hereby agree as follows:
ARTICLE I
REPRESENTATIONS OF SELLERS
Section 1. Representations of Sellers. Sellers represent and warrant to Purchaser as follows:
Section 1.1 Existence and Good Standing of DFT and Cassadaga. Each of DFT, and each Subsidiary (as defined herein), including without limitation Cassadaga Telephone Corporation, a New York corporation, ("CTC"), MACOM, Inc.,
a New York corporation ("MACOM"), Comantel, Inc., a New York corporation ("CI"), and D&F Cellular Telephone, Inc., a New York corporation ("DFC"), is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, and each has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted. DFT and each Subsidiary is each qualified or licensed as a foreign corporation to do business in any other jurisdiction (listed on Schedule 1.1 hereto) where such qualification is required or appropriate. The term "Subsidiary" as used in this Agreement shall mean any Person (as defined in Section 10.4) of which DFT (either alone or together with other Subsidiaries) owns directly or indirectly more than 20% of the stock or other equity interests that are generally entitled to vote for the election of the Board of Directors or governing body of such Person, other than New York RSA Funding Corporation, a New York corporation more fully described in Schedule 1.2(a).
Section 1.2 Capital Stock.
(a) DFT has an authorized capitalization consisting of 12,400 shares of common stock ("Common Stock"), no par value, and _8,500 shares of preferred stock, par value $100 per share ("Preferred Stock"). 11,733 shares of Common Stock are issued and outstanding, and no shares are held in the DFT treasury. No shares of Preferred Stock are issued and outstanding, and 4,250 shares are held in the DFT treasury. All such outstanding Shares have been duly authorized and validly issued and are fully paid and nonassessable. There are no outstanding subscriptions, options, warrants, rights, calls, commitments,
conversion rights, rights of exchange, plans or other agreements providing for the purchase, issuance or sale of any shares of the capital stock of DFT. All of the outstanding securities of each Subsidiary are owned by DFT, except as set forth on Schedule 1.2(a) hereto. All of the outstanding shares of stock of each Subsidiary have been duly authorized and validly issued and are fully paid and nonassessable. Except as described in Schedule 1.2(a), there are no outstanding subscriptions, options, warrants, rights, calls, commitments, conversion rights, rights of exchange, plans or other agreements providing for the purchase, issuance or sale of any shares of capital stock of other securities of any Subsidiary.
(b) Except as otherwise indicated on Schedule A, each Seller is the lawful record and beneficial owner of the Shares set forth opposite its, his or her name on Schedule A hereto, and such shares of Common Stock are owned free and clear of all liens, pledges, charges, security interests, encumbrances, privileges, restrictions or other claims of every kind or character (collectively, the "Liens"), except for restrictions on transfer imposed by federal and state securities law. Each Seller has full legal right, power and authority to enter into this Agreement and to consummate the transactions contemplated by this Agreement. The representations and warranties contained in this Paragraph (b) are made by each Seller only with respect to shares of Common Stock owned by he, she or it and his, her or its right, power and authority.
Section 1.3 Subsidiaries. DFT is the direct and indirect record and beneficial owner of the number of shares of capital stock of each of the Subsidiaries as set forth in Schedule 1.3. Except as set forth on Schedule 1.3,
no securities of any of the Subsidiaries are or may become required to be issued, transferred or sold for any reason and all of the outstanding securities of each Subsidiary are validly issued, fully paid and nonassessable and are owned of record and beneficially by DFT, free and clear of any Lien with respect thereto, except for restrictions on transfer imposed by federal and state securities laws.
Section 1.4 No Violations. Schedule 1.4 sets forth all governmental and other consents and approvals necessary to permit the consummation of the transactions contemplated by this Agreement. Except as set forth in Schedule 1.4 attached hereto and subject to obtaining the necessary consents or approvals, the execution and delivery of this Agreement by DFT and Sellers and the consummation of the transactions contemplated hereby (a) will not violate any provision of the Articles of Incorporation or By-Laws, as the case may be, of DFT or any Subsidiary, (b) will not violate any statute, rule, regulation, judgement, order, injunction or decree of any public body or authority by which any Seller, DFT, or any Subsidiary is bound or which is binding upon any of their respective properties or assets and (c) will not result in a violation or breach of, or constitute a default under, any license, franchise, permit, indenture, agreement or other instrument to which any Seller, DFT, or any Subsidiary is a party, or by which any Seller, DFT, or any Subsidiary or any of their respective assets or properties is bound, (d) result in the creation or imposition of any Lien or other encumbrance or restriction upon any Shares or upon any of the assets or properties of DFT or any Subsidiary or (e) have a material adverse effect on the business, franchises, licenses, condition (financial or otherwise), results of operations, EBITDA (earnings before interest, taxes based on income, depreciation and amortization), financial or business prospects, liabilities, or assets
("Business or Condition") of DFT, or any of its Subsidiaries. The representations and warranties as to "any Seller" in clauses (b) and (c) of this Section are made by each Seller only with respect to he, she or it.
Section 1.5 Financial Statements.
(a) DFT has heretofore furnished Purchaser with the audited and unaudited financial statements for the periods and as of the period endings listed on Schedule 1.5 hereto (the "Financial Statements"). The Financial Statements (and the financial statements ("Section 4.2 Financial Statements") to be furnished Purchaser pursuant to Section 4.2 hereof), including the footnotes thereto, except as indicated therein, have been prepared in accordance with generally accepted accounting principles ("GAAP") and the uniform system of accounts of the Federal Communications Commission as set forth in 47 C.F.R. Part 32 and fairly present in all material respects the financial condition and results of the operations of entities included therein and the changes in their financial position at such dates and for such periods; provided however, that the Section 4.2 Financial Statements shall be subject to normal year end adjustments. The term "Balance Sheet" shall mean (i) the balance sheets of DFT and its Subsidiaries as of June 30, 1995 and (ii) the balance sheets of DFT and its Subsidiaries to be included in the Section 4.2 Financial Statements.
(b) There are no material liabilities or obligations of any nature, whether absolute, accrued, fixed, contingent, matured or unmatured, against, relating to or affecting DFT, or any Subsidiary, except (i) as and to the extent reflected or reserved against on the Balance Sheet, (ii) described or
identified in any of the Schedules delivered to Purchaser pursuant to or in connection with this Agreement, or (iii) incurred since the date of the latest Balance Sheet in the ordinary course of business consistent with prior practice and consistent with Section 4.1 hereof and which individually or in the aggregate do not have and are not expected to have a material adverse effect on the Business or Condition of DFT or any of its Subsidiaries.
(c) Since December 31, 1994, DFT and its Subsidiaries have operated only in the ordinary course of business and consistent with past practices. Since December 31, 1994, there has been no material adverse change in the Business or Condition (including without limitation any material damage, destruction or loss to any material assets, whether or not covered by insurance), financial condition or results of operations of DFT or any of its Subsidiaries.
(d) At June 30, 1995, DFT and each of its Subsidiaries had the right to freely dividend, without permission from any other Person, up to the amounts set forth on Schedule 1.5(d) hereto without violating any restrictions, whether contractual, regulatory or otherwise, applicable to DFT or any of its Subsidiaries or any of their respective properties and assets. At the Closing Time and except as otherwise limited by this Agreement and by the Escrow Agreement (referred to in Section 3.2(e)), DFT and each of its Subsidiaries shall have the right to freely dividend without restrictions, as provided in the preceding sentence, at least the dollar amounts set forth opposite their respective names on Schedule 1.5(d).
(e) (i) The revenues attributable to long distance network
access that are included in the revenues stated in the Financial Statements
(and in the Section 4.2 Financial Statements) have been calculated in a manner
consistent with prior years, as modified by and in accordance with, all
applicable federal and state rules and regulations; (ii) the cost separation
studies for the exchanges of DFT and its Subsidiaries upon which the access
settlement revenues set forth in the Financial Statement (and in the Section
4.2 Financial Statements) have been prepared in a manner consistent with prior
years, as modified by and in accordance with, all applicable federal and state
rules and regulations; (iii) the toll and access revenues reflected in the
Financial Statements (and in the Section 4.2 Financial Statements have been
calculated in a manner consistent with prior years, as modified by and in
accordance with, all applicable federal and state tariffs; and (iv) all local
service rates currently utilized by DFT and its Subsidiaries are in compliance
with tariffs, to the extent such tariffs are applicable.
(f) The offer and sale of the demand notes of DFT aggregate $1,551,160, was exempt from registration under the Securities Act of 1933, as amended, and their issuance and continuing to be outstanding are in compliance with all Federal, state and local securities and other laws and consummation of the transactions contemplated by this Agreement will not affect their continuing to be in such compliance after the Closing.
(g) Except as set forth in Schedule 4.8, neither DFT, CI or any other Subsidiary has provided funds or other assets to the Quantum Marine operation.
Section 1.6 Title to Properties: Encumbrances.
(a) Real Property Schedule 1.6(a) attached hereto sets forth an accurate and complete list or summary description of all real property owned in whole or in part by DFT or any of its Subsidiaries and includes the name of the record title holder thereof. Except as set forth in Schedule 1.6(a) attached hereto and for matters which would not have a material adverse effect on the Business or Condition of DFT or any of its Subsidiaries, each of DFT and its Subsidiaries has good, marketable and indefeasible title to all such properties and assets, including, without limitation, all the properties and assets reflected in the Balance Sheet, subject to no Lien or other restriction of any kind or character, other than (i) Liens for taxes not yet due and payable, which have been fully accrued on the Financial Statements and Section 4.2 Financial Statements, and (ii) Liens that would not interfere in any material respect with the present or contemplated use of such real property, and (iv)Liens noted in Schedule 1.6(a). Except as set forth in Schedule 1.6(a), DFT and its Subsidiaries' material properties and assets are in substantially good working order, repair and condition, ordinary wear and tear excepted, and suitable for their current or contemplated use. Contemplated use or contemplated to be conducted shall mean as contemplated currently or within the past 12 months by DFT or any of its Subsidiaries.
(b) Easements/Rights of Way Except as set forth on Schedule 1.6(b), each of DFT and its Subsidiaries has a valid leasehold interest in or right to use, free and clear of all Liens and payments, each real property easement, right of way, and lease that is required for its business, operations,
and affairs as currently being or contemplated to be conducted. Each such easement, right of way, and lease is set forth on Schedule 1.6(b), is in full force and effect and constitutes a legal, valid, and binding obligation of DFT or its Subsidiaries and (to the knowledge of DFT and Sellers) each other party thereto, enforceable against the parties thereto in accordance with the terms thereof.
(c) Personal Property. Schedule 1.6(c) sets forth an accurate and complete list or summary description of all material tangible personal property by category owned in whole or part by DFT or any of its Subsidiaries. Except as set forth in Schedule 1.6(c) attached hereto and for matters which would not have a material adverse effect on the Business or Condition of DFT or any of its Subsidiaries, DFT and its Subsidiaries own good and indefeasible title to, or have a valid leasehold interest in or right under contract to use, free and clear of all Liens or other restrictions of any kind or character, other than (i) Liens for taxes not yet due and payable which have been fully accrued on the Financial Statements and Section 4.2 Financial Statements, (ii) Liens that would not interfere in any material respect with the present or contemplated use of such personal property, and (iii) those Liens indicated on Schedule 1.6(c) attached hereto, all tangible personal property that individually or in the aggregate is material to the Business or Condition of DFT or any of its Subsidiaries. All such personal property is in substantially good working order, repair and condition, ordinary wear and tear excepted, and suitable for its current or contemplated uses.
Section 1.7 Leases. Schedule 1.7 attached hereto contains a list of all leases (including without limitation any leases providing for total payments or receipts in excess of $25,000) to which DFT or any Subsidiary is a party. Except as set forth in Schedule 1.7 hereto, each lease set forth in Schedule 1.7 is in full force and effect; all rents and additional rents due to date on each such lease have been paid; in each case, neither DFT nor any Subsidiary has received notice that it is in default thereunder and, to the knowledge of DFT and Sellers, no other party thereto is in default thereunder; and, except as set forth on Schedule 1.7, there exists no event, occurrence, condition or act (including without limitation the purchase of the Shares hereunder) which, with the giving of notice, the lapse of time or the happening of any further event or condition, would become a default by DFT or any Subsidiary or, to the knowledge of DFT and Sellers, any other party to any such lease, under any such lease.
Section 1.8 Material Contracts: Material Licenses.
(a) Material Contracts. Schedule 1.8(a) contains a true and complete list and brief description of each material contract (including without limitation any franchise whether or not from a governmental entity and whether or not in contract form and any contracts providing for total payments or receipts in excess of $25,000) to which DFT or any Subsidiary is a party or by which any of their assets or properties is or may be bound. Each contract disclosed on Schedule 1.8(a) is in full force and effect and constitutes a legal, valid, and binding obligation of DFT or any Subsidiary, and (to the knowledge of DFT and Sellers) of each other party thereto, enforceable against DFT or any Subsidiary and (to the knowledge of Sellers) each other party in accordance with
its terms, except as such enforcement may be limited by applicable bankruptcy, insolvency, moratorium, or similar laws affecting the enforcement of creditors' rights generally, or by general principals of equity (regardless of whether such enforceability is considered in a proceeding in law or in equity). Neither DFT or any Subsidiary nor (to the knowledge of DFT and Sellers) any other party to any such contract is in violation or breach of or default under any such contract (with or without notice or lapse of time or both). Except as disclosed on Schedule 1.8(a), since December 31, 1994, no such contract has been amended or supplemented in any material respect. Neither DFT nor any Subsidiary is a party to any employment or similar agreement with any of its employees, except as set forth on Schedule 1.8(a) or as disclosed in Section 1.14 and Section 1.14(e). For purposes of this Section 1.8(a), the term "material contract" shall also include any agreement, contract, or understanding involving the payment or receipt by DFT or any Subsidiary of $10,000 or more per year.
(b) Material Licenses. Schedule 1.8(b) contains a true and complete list and brief description of all franchises, permits, licenses, approvals, and other authorizations that are necessary for the business, operations, and affairs of DFT or its Subsidiaries as currently being or contemplated to be conducted and that the failure to so own or hold, individually or in the aggregate with other such failures, has or may reasonably be expected to have a material adverse effect on the Business or Condition of DFT or any of its Subsidiaries. DFT or its Subsidiaries owns or validly holds each such franchise, permit, license, approval, and other authorization. To the
knowledge of Sellers, each such franchise, permit, license, approval, and other authorization is valid, in good standing, and in full force and effect. To the knowledge of DFT and Sellers, no basis exists for the termination, suspension, restriction, or limitation of any such franchise, permit, license, approval, or other authorization.
Section 1.9 Litigation. Except as set forth in Schedule 1.9 attached hereto, there is no action, suit, investigation or proceeding at law or in equity by any Person or any arbitration or any administrative or other proceeding by or before any governmental or other instrumentality or agency, pending, or, to the knowledge of DFT and Sellers, threatened against DFT or any Subsidiary.
Section 1.10 Taxes.
For purposes of this Agreement, "Tax Return" means a report, return or other information required to be supplied to a governmental entity with respect to Taxes including, where permitted or required, combined or consolidated returns for any group of entities that includes DFT or any of its Subsidiaries.
(a) All Tax Returns required to be filed with respect to DFT and its Subsidiaries have been duly and timely filed, and all such Tax Returns were true, complete and correct in all material respects (and, as to Tax Returns not filed as of the Execution Date, but filed on or before the Closing Date, will be true, complete and correct in all material respects). Except as set forth in Schedule 1.10(a) hereto, DFT and its Subsidiaries (i) have duly and timely paid (and until the Closing Time will pay within the time and manner prescribed by law) all federal, state, local, county, and, if applicable, foreign income, gross receipts, excise, import, property, franchise, ad valorem, license, sales, use, employment (including without limitation withholding taxes, Federal Insurance Contribution Act taxes, and state and local wage disability, unemployment, and
similar taxes), and other taxes, together with all deficiencies, penalties,
interest, additions to tax, assessments, and other governmental charges
(collectively, "Taxes") that are due, or claimed or asserted by any taxing
authority to be due, from DFT or its Subsidiaries for the periods covered by
such Tax Returns or (ii) has duly and fully provided for such Taxes, in
accordance with GAAP, in the books and records of DFT or its Subsidiaries,
including without limitation in the financial statements and Balance Sheet
described in Section 1.5 hereof. As of the Execution Date hereof, there are
no, and of the Closing Time, there will be no, Liens with respect to Taxes upon
any of the assets or properties of DFT or any of its Subsidiaries, except for
Liens for current taxes not yet due and payable or being contested in good
faith which have been fully accrued on the Financial Statements and the Section
4.2 Financial Statements.
(b) The Balance Sheet includes due and sufficient accruals for Taxes in accordance with GAAP in all material respects with respect to any period for which tax returns for DFT or its Subsidiaries were not filed or for which Taxes were not then due and owing.
(c) True and complete copies of any and all Tax Returns for the last five years and all tax audit reports with respect to DFT and its Subsidiaries have been furnished to Purchaser. Except as set forth in Schedule 1.10(a), any deficiencies proposed in tax audits have been duly and fully paid, settled, or reserved against in the financial statements described in Section 1.5. Tax Returns have been audited through the tax years as provided in Schedule 1.10(a).
(d) Except as set forth in Schedule 1.10(a), there are no waivers, contracts, or arrangements by or with respect to DFT or any of its Subsidiaries for the extension of (i) the statutory limitation period applicable to any claim for Taxes, or (ii) the time for the assessment or collection of Taxes.
(e) No election under Section 338 (or any predecessor
provision) of the Internal Revenue Code of 1986 (the "Code") has been made or
filed by or with respect to DFT or any of its Subsidiaries. No consent to the
application of Section 341(f)(2) of the Code (or any predecessor provision) has
been made or filed by or with respect to DFT or any of its Subsidiaries or any
of its assets or properties. None of the assets or properties of DFT or any of
its Subsidiaries is an asset or property that Purchaser is or will be required
to treat as being (i) owned by any other person pursuant to the provisions of
Section 168(f)(8) of the Internal Revenue Code of 1954, as amended and in
effect before the enactment of the Tax Reform Act of 1986, or (ii) tax-exempt
use property within the meaning of Section 168(h)(1) of the Code. No closing
agreement pursuant to Section 7121 of the Code (or any predecessor provision)
or any similar provision of any state, local, or, if applicable, foreign Law
has been entered into by or with respect to DFT or any of its Subsidiaries or
any of its assets or properties.
(f) Neither DFT nor any of its Subsidiaries has agreed to make any adjustment pursuant to Section 481(a) of the Code (or any predecessor provision) by reason of any change in any accounting method of DFT or any of its Subsidiaries, and neither DFT nor any of its Subsidiaries has any application
pending with any governmental authority requesting permission for any changes in any accounting method of DFT or its Subsidiaries. To the knowledge of DFT and Sellers, the Internal Revenue Service has not proposed any such adjustment or change in accounting method.
(g) Except as set forth in Schedule 1.10(a), neither DFT nor its Subsidiaries has been or is in violation (with or without notice or lapse of time or both) of any applicable law relating to the payment or withholding of Taxes. Except as set forth in Schedule 1.10(a), DFT and its Subsidiaries have duly and timely withheld from employee salaries, wages, and other compensation and paid over to the appropriate taxing authorities all amounts required to be so withheld and paid over for all periods due and payable under all applicable Laws.
(h) No audit is pending or, to the knowledge of DFT and Sellers, threatened with respect to any Taxes due from, or Tax Return filed by or relating to, DFT or its Subsidiaries. Except as set forth in Schedule 1.10(a), no assessment of Tax has been proposed in connection with any audit or other proceeding by any governmental authority with respect to any Taxes due from DFT or its Subsidiaries or any Tax Return filed by or relating to DFT or its Subsidiaries.
(i) Except as set forth in Schedule 1.10(a), neither DFT nor any of its Subsidiaries is party to any agreement, contract, or arrangement that would require DFT or any of its Subsidiaries to make any gross-up payments with respect to any Taxes or otherwise indemnify or hold harmless any employee with respect to Taxes.
(j) Prior to the Closing Date, DFT and Sellers shall notify Purchaser in writing of any power of attorney granted by DFT or any of its Subsidiaries concerning any Tax matter that will be in force as of the Closing Time.
(k) DFT and its Subsidiaries have no deferred
intercompany gains or losses (as such term is defined in Treas. Reg.
Section 1.1502-13) other than those that will be restored as a result of the
transactions contemplated herein and reported in full on the consolidated
federal income tax returns of the affiliated group of which DFT is the common
parent for the taxable year of such group which includes the Closing Date.
Section 1.11 Conduct of Business. Since December 31, 1994, and except as set forth in Schedule 1.11 attached hereto or as expressly contemplated, required or permitted by this Agreement, neither DFT nor any of its Subsidiaries has taken any action which, if taken subsequent to the Execution Date and at or prior to the Closing Time, would constitute a breach of Sellers's agreements set forth in Article IV.
Section 1.12 Intellectual Properties. Set forth in Schedule 1.12 attached hereto is a list of all (i) domestic and foreign patents, patent applications, patent licenses, software licenses, trade names, trademarks, service marks, trademark registrations and applications, service mark registrations and applications, copyright registrations and applications owned by, licensed to, or used by DFT or any of its Subsidiaries and (ii) all computer software programs that are owned by or licensed to DFT or its Subsidiaries or are used in the
conduct of the business, operations or affairs of DFT or its Subsidiaries (collectively, the "Intellectual Property") as currently being or proposed to be conducted. Unless otherwise indicated in Schedule 1.12, DFT or such Subsidiary owns the entire right, title and interest in and to the Intellectual Property (including, without limitation, the exclusive right to use and license the same) and each item constituting part of the Intellectual Property has been, to the extent indicated in Schedule 1.12, duly registered with, filed in or issued by, as the case may be, the United States Patent and Trademark Office or such other government entity, domestic or foreign, as is indicated in Schedule 1.12 and, to the knowledge of DFT and Sellers, such registrations, filings and issuances remain in full force and effect. Except as disclosed in Schedule 1.12, each of DFT and its Subsidiaries has the right to use, free and clear of any royalty or other payment obligations, claims of infringement or alleged infringement, or other liens or encumbrances, all Intellectual Property. Except as disclosed in Schedule 1.12 and for matters which would not have a material adverse effect on DFT or any of its Subsidiaries, neither DFT nor its Subsidiaries is in conflict with or is in violation or infringement of, and neither DFT or its Subsidiaries has received any notice of any conflict with or violation or infringement of or any claimed conflict with, any asserted rights of any other Person or entity with respect to any Intellectual Property or any computer software, programs, or similar systems.
Section 1.13 Compliance with Laws.
(a) Except as disclosed in Schedule 1.13, neither DFT nor its Subsidiaries is in violation (with or without notice or lapse of time or both)
of any statutes, regulations, ordinances, rules or laws, whether Federal, state, or local ("Laws") or any unit, judgement, decree, injunction or similar order ("Order") (including without limitation any Law or Order regulating the telephone or other services provided by DFT or its Subsidiaries or the rates charged for such services) applicable to DFT or its Subsidiaries or any of its assets or properties, the result of which violation individually or violations in the aggregate has or is likely to have a material adverse effect on the Business or Condition of DFT or any of its Subsidiaries.
(b) DFT and its Subsidiaries have made, or have caused to be made, all material federal, state and local governmental filings necessary for the conduct of their respective businesses as currently conducted. To the best of Sellers' knowledge, the information reflected on all such filings reflected all information required of DFT and its Subsidiaries to be included in such reports and filings.
Section 1.14 Benefit Plans.
(a) Employee Welfare Benefit Plans.
(i) The Plans listed on Schedule 1.14 are the only "Welfare Plans" (within the meaning of Section 3 (1) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) maintained by DFT or its Subsidiaries. Except as specifically provided otherwise on Schedule 1.14, the benefits provided under such Welfare Plans are provided to employees of DFT or its Subsidiaries solely through the insurance policies listed on Schedule 1.14.
(ii) DFT or its Subsidiaries has made all required payments under the Welfare Plans and to the insurance companies listed on Schedule 1.14, and has operated and administrated each Welfare Program in accordance with ERISA and the Internal Revenue Code of 1986, as amended (the "Code") in all material respects. Each welfare benefit provided under the Welfare Plans is intended to meet and meets the requirements for tax-favored treatment under Subchapter B of Chapter 1 of the Code.
(iii) The Welfare Plans do not provide, and are not obligated to provide, benefits to former employees of DFT or its Subsidiaries other than continued medical benefits as required under Sections 601 through 608 of ERISA or Section 4980B of the Code or as set forth on Schedule 1.14, and DFT and its Subsidiaries has complied with such medical benefit continuation requirements set forth in all material respects.
(b) Employee Pension Benefit Plans.
(i) Dunkirk & Fredonia Telephone Company 401(k) Profit Sharing Plan (the "Retirement Program") and the associated trust thereto (the "Trust") is the only "Pension Plan" (within the meaning of Section 3(2) of ERISA) maintained by DFT or its Subsidiaries.
(ii) The Retirement Program and Trust, now meet,
and since their inception have met, the requirements for qualification under
Section 401(a) of the Code and are now, and since their inception have been
exempt from taxation under Section 501(a) of the Code. The Internal Revenue
Service ("IRS") has
issued a favorable determination letter with respect to the Retirement Program and Trust that is valid for all matters and amendments and has not taken any action to revoke such letter.
(iii) Reserved
(iv) There has been no reportable event (as defined in Section 4043(b) of ERISA) with respect to the Retirement Program for which notice to the Pension Benefit Guaranty Corporation ("PBGC") has not, by rule or regulation, been waived or which individually or in the aggregate with other reportable events has or may reasonably be expected to have a material adverse effect on the Retirement Program or on the Business or Condition of DFT nor its Subsidiaries. Neither DFT or its Subsidiaries has any material liability (including without limitation any premium liability) to the PBGC. No complete or partial termination of the Retirement Program has occurred as of the Execution Date, or, as a result of the execution or delivery of this Agreement or the consummation of the transactions contemplated by this Agreement, will occur.
(v) DFT or its Subsidiaries has made each contribution required to be made to the Retirement Program and has operated and administrated such program in accordance with ERISA and the Code in all material respects. To the knowledge of DFT and Sellers, no fact or facts exist that could affect adversely the status of the Retirement Program as a plan qualified under ERISA and the Code.
(vi) To the extent that the Retirement Program constitutes a "multiple employer pension plan" under Section 413(c) or the Code, neither DFT nor its Subsidiaries has incurred, and is expected to incur, any withdrawal liability under Section 4064 of ERISA. To the knowledge of DFT and Sellers, no other employer participating in such multiple employer pension plan has taken any act which would result in the disqualification of such plan or create a material adverse effect on the business of DFT or its Subsidiaries.
(c) Controlled Group Plans. With respect to each "employee benefit plan" (as defined in ERISA) maintained or contributed to or required to be contributed to, currently or in the past, by any trade or business with which DFT or its Subsidiaries is required by any of the rules contained in the Code or ERISA to be treated as a single employer (the "Controlled Group Plan"):
(i) All Controlled Group Plans which are "group health plans" (as defined in the Code and ERISA) have been and will be operated to the Closing such that failures to operate such group health plans in full compliance with Part 6 of Subtitle B of Title 1 of ERISA and Section 4980B of the Code would not subject the Purchaser to liability in excess of $10,000 in the aggregate.
(ii) The PBGC has not instituted proceedings to terminate any Controlled Group Plan that is a defined benefit plan (as defined in Section 3(35) of ERISA) (a "Defined Benefit Plan") or to appoint a trustee or administrator of any Defined Benefit Plan, no circumstances exist that constitute grounds under Section 4042 of ERISA entitling the PBGC to institute any such proceeding, no liability to the PBGC or under Title IV of ERISA has been incurred or is expected with respect to any Defined Benefit Plan that could result in liability to the
Company, no Defined Benefit Plan has or has incurred an accumulated funding deficiency within the meaning of Section 302 of ERISA and Section 412 of the Code, and no waiver of the minimum funding standards of Section 302 of ERISA and Section 412 of the Code has been requested of or granted by the IRS with respect to any Defined Benefit Plan. As of the Closing Date, each Defined Benefit Plan could be terminated in a standard termination under Section 4041(b) of ERISA without any additional contributions.
(iii) There is no Controlled Group Plan that is (A) a multiple employer plan within the meaning of Code Section 413(c), or (B) a multiemployer plan within the meaning of ERISA Section 3 (37).
(d) Prohibited Transactions and Fiduciary Matters. There has been no transaction, action, or omission involving DFT or its Subsidiaries, any plan fiduciary, trustee, or administrator of the Welfare Plans or Retirement Program or any other person or entity dealing with any such programs or the related trusts, that in any manner violates Section 404 or 406 of ERISA or constitutes a prohibited transaction (as defined in Section 4975(c)(1) of the Code or Section 406 of ERISA) for which there exists neither a statutory nor a regulatory exemption and which may or will subject DFT or its Subsidiaries or any "party in interest" (as defined in Section 3(14) of ERISA) to criminal or civil sanctions under Section 501 or 502 of ERISA or excise taxes under Section 4975 of the Code or to any other material liability.
(e) Other Employee Plans: Set forth on Schedule 1.14(e) is a complete and correct list of all other bonus, incentive compensation, deferred
compensation, profit sharing, stock option, stock appreciation right, stock bonus, stock purchase, employee stock ownership, savings, severance, supplemental unemployment, layoff, salary continuation, retirement, pension, health, life insurance, disability, group insurance, vacation, holiday, sick leave, fringe benefit or welfare plan, or any other similar plan, agreement, policy or understanding (whether written or oral, qualified or nonqualified, currently effective or terminated), and any trust, escrow or other agreement related thereto, which (a) is maintained or contributed to by DFT or its Subsidiaries, or with respect to which DFT or its Subsidiaries has any liability, and (b) provides benefits, or describes policies or procedures applicable to any officer, employee, service provider, former officer or former employee of DFT or its Subsidiaries, or the dependents of any thereof, regardless of whether funded.
(f) Cobra. DFT and its Subsidiaries have complied in all material respects with the requirements of Code Section 4980 (Cobra).
Section 1.15 Insurance. Schedule 1.15 attached hereto contains a list of all liability, property, workers compensation, directors and officers liability and other insurance policies and contracts currently maintained by DFT and its Subsidiaries or insuring their properties, risks or liabilities. Except as set forth on Schedule 1.15 hereto, all of such policies cover only DFT or its Subsidiaries and do not have provisions providing for retroactive price adjustments. All such policies are in full force and effect. DFT shall use commercially reasonable efforts to keep or cause to be kept such policies (or
substantial equivalents) in such amounts duly in force until the Closing Time and shall give Purchaser notice of any material change in such policies.
Section 1.16 Broker's or Finder's Fees. No agent, broker, person or firm acting on behalf of DFT or any Seller is, or will be, entitled to any commission or broker's or finder's fees from any Person other than a Seller, in connection with any of the transactions contemplated herein.
Section 1.17 Rights of Way Fees. Except as set forth in Schedule 1.17 and except for immaterial defects, each of DFT and its Subsidiaries has valid rights of way for its telephone and cables and lines to conduct its business as presently conducted. Schedule 1.17 sets forth a list of all disputes concerning rights of way in which DFT or any of its Subsidiaries has been involved during the last five years. To the knowledge of DFT and Sellers, there are no events or circumstances that would materially and adversely affect DFT or any of its Subsidiaries' rights of way for its telephone and cable television cables and lines to conduct its business as presently conducted. To the best knowledge of DFT and Sellers, DFT and its Subsidiaries have duly and timely paid all copyright fees, franchise fees, pay service fees, satellite fees, exchange fees, transmission fees, pole attachment fees, cable, wire, and pole easements and fees, and all other fees and charges payable that affect or relate to the ownership, use, or operation of any of the assets or properties of DFT or its Subsidiaries, other than such fees or charges not yet due and payable or being contested in good faith which have been fully accrued on the Financial Statements and Section 4.2 Financial Statements.
Section 1.18 Transactions with Affiliates. Except as disclosed on Schedule 1.18 or as expressly contemplated, required or permitted by this Agreement, neither DFT nor its Subsidiaries have made any payments or distribution to any Seller or any Affiliate of any Seller (as defined in Rule 405 of the Securities Act of 1933), other than DFT and its Subsidiaries, and there have been or are no outstanding liabilities or contracts between or among DFT and its Subsidiaries and any Seller and its Affiliates (other than DFT and its Subsidiaries).
Section 1.19 Employment Relations: Key Employees.
(a) DFT and each of its Subsidiaries are in material compliance with all applicable laws respecting employment and employment practices (including, without limitation, terms and conditions of employment, wages and hours) and are not, and has not, engaged in any unfair labor practice. Except as set forth in Schedule 1.19(a) (i) DFT or its Subsidiaries are not a party to or bound by any collective bargaining agreement and no collective bargaining agreement is currently being negotiated by them, there are no labor unions or other organizations representing or purporting to represent or attempting to represent the employees of DFT or its Subsidiaries, none of the employees of DFT or its Subsidiaries are a member of, or represented by, a labor union, and there are no attempts being made to organize any of such employees, and there are no pending or, to the knowledge of DFT and Sellers, threatened representation campaigns, elections or proceedings concerning union representation or collective
bargaining efforts with respect to the employees of DFT or its Subsidiaries (Sellers agree to deliver immediately to Buyer any notice of any representation campaign, election or proceeding concerning union representation or collective bargaining effort with respect to employees of DFT or its Subsidiaries); (ii) there are no material labor controversies, disputes, strikes, or work slowdowns or stoppages pending or, to the knowledge of DFT and Sellers, threatened against DFT or its Subsidiaries; and (iii) there are no material grievances outstanding, or unfair labor practices complaints pending or, to the knowledge of DFT and Sellers, threatened before the National Labor Relations Board or state or local agencies, against DFT or its Subsidiaries.
(b) Schedule 1.19(b) contains an accurate and complete list of the name of each officer and employee of DFT and its Subsidiaries with an annual base salary of $50,000 or more, current base salary, title, and a summary description of such officers' and employees' benefits, including, without limitation, accrued bonus, accrued vacation benefits and similar benefits.
Section 1.20 Environmental Matters.
(a) (i) Each of DFT and its Subsidiaries possesses and has possessed all necessary licenses, permits and other approvals and authorizations that are required prior to the Closing Time under Existing Environmental Laws (defined below) and each is and has been in material compliance with, all federal, regional, state, county and local laws, statutes, ordinances, decisional law, rules, regulations, codes, orders decrees, directives or common law (collectively "Laws") relating to pollution, or damage to or the protection of the environment, that are both in effect and required to be met by DFT prior to the Closing Time, including, without limitation, all such Laws governing the generation, manufacture, processing, use, collection, treatment, recycling,
reclamation, storage, transportation, housing, recovery, removal, release (or threatened release), discharge or disposal of petroleum products and any derivatives thereof and of hazardous substances or wastes, and all such Laws imposing recordkeeping, maintenance, testing, inspection, notification and reporting requirements with respect to petroleum products and any derivatives thereof and hazardous substances or wastes that are both in effect and required to be met by DFT or any of its Subsidiaries prior to the Closing Time (collectively the "Existing Environmental Laws), including, without limitation, all such laws specified below to the extent applicable prior to the Closing Time; except where such failure to obtain or possess such licenses, permits, other approvals and authorizations, or noncompliance with Existing Environmental Laws, would not have a material adverse effect on the Business or Condition of DFT or any of its Subsidiaries.
(ii) For purposes of this Section 1.20, "hazardous substances" and "hazardous wastes" are (A) any hazardous wastes as defined under the Solid Waste Disposal Act, 42 U.S.C. 6901 et seq., as amended ("SWDA," also known as "RCRA" for a subsequent amending act), (B) any hazardous substances as defined under the Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. Section 9601 et seq., as amended ("CERCLA" or "Superfund"), (C) any toxic pollutants as defined under the Clean Water Act, 33 U.S.C. Section 1251 et seq., as amended ("CWA"), (D) any hazardous air pollutants as defined under the Clean Air Act, 42 U.S.C. 7401 et seq., as amended ("CAA"), (E) any hazardous chemicals as defined under the Toxic Substances Control Act, 15 U.S.C. Section 2601 et seq., as amended ("TSCA"), (F) any hazardous substances as defined under the Emergency Planning and Community Right to Know Act, 15 U.S.C. Section 2601 et seq., as amended
("EPCRKA"), (G) asbestos, (H) lead, (I) polychlorinated biphenyls, (J)
underground storage tanks, whether empty, filled or partially filled with any
substance, (K) any substance the presence of which on the property in question
is prohibited under any existing Environmental Law; or (L) any other substance
which under any Existing Environmental Law requires special handling or
notification of or reporting to any federal, state or local governmental entity
in its generation, use, handling, collection, treatment, storage, re-cycling,
treatment, transportation, recovery, removal, discharge or disposal.
(b) Except as set forth on Schedule 1.20(b), no real property owned, used, or leased by DFT or any of its Subsidiaries has been used for the storage, treatment, transportation, manufacture, processing, recycling, handling deposit, burial, use, or disposal of any hazardous substances or hazardous wastes, and, to the best knowledge of Sellers, there has been no release, spilling, discharging, emitting, dumping, or other disposal ("Release") into the air, ground or surface water, land, or other parts of the environment of any hazardous substance or hazardous wastes on or from any real property owned, used, or leased by DFT or any of its Subsidiaries.
(c) None of DFT or any of its Subsidiaries is or has been subject to any administrative or judicial proceeding pursuant to, nor has DFT or any of its Subsidiaries received any written notice (or to the knowledge of DFT or Sellers any other notice) of any violation of, or claim alleging liability under, any of the environmental laws, and DFT and Sellers have no knowledge of any facts or circumstances upon which a material claim, citation or allegation
against DFT or any of its Subsidiaries for a violation of, or alleging liability under, any Existing Environmental Laws is likely to be brought against DFT.
(d) Except as set forth in Schedule 1.20(d), to the knowledge of Sellers there are no existing laws or regulations relating to pollution or protection of the environment which are not required to be met by DFT or any of its Subsidiaries prior to the Closing Time but which will be required to be met by DFT or any of its Subsidiaries by December 31, 1998, except for any such laws or regulations which would not have a material adverse effect on the Business or Condition of DFT or any of its Subsidiaries.
Section 1.21 Authority. DFT and Sellers have the legal capacity to enter into this Agreement. This Agreement has been duly authorized, executed and delivered by DFT and Sellers and, assuming the due execution of this Agreement by Purchaser, constitutes a legal, valid, and binding obligation of DFT and Sellers and is enforceable against DFT and Sellers in accordance with its terms, except to the extent that (a) the governmental approvals described in Schedule 1.4 and Sections 4.5 and 5.6 and the approval of any telephone utility authority, or the Federal Communications Commission ("Regulatory Approval") are required to consummate the sale of the Shares to Purchaser, (b) enforcement may be limited by or subject to any Laws now or hereafter in effect that relate to bankruptcy, insolvency, reorganization or moratorium and that relate to or limit creditors' rights generally, and (c) the remedy of specific performance and injunctive and other forms of equitable relief are subject to certain equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. The representations and warranties contained in this Paragraph 1.21 are made by
each Seller only with respect to DFT and his, her or its capacity, authorization, execution and delivery.
Section 1.22 Accuracy of Information Furnished. To the knowledge of DFT and Sellers no written representation, warranty or statement made by DFT and Sellers in this Agreement or any document, exhibit or schedule provided by DFT and Sellers pursuant to this Agreement (including without limitation the Annual Reports for 1994 of DFT and CTC to the New York Public Service Commission) contains or will contain any untrue statement of a material fact necessary to make such representation, warranty or statement not misleading, in light of the circumstances in which it is made.
Section 1.23 Investment Representation Statement.
(a) Each Seller receiving Promissory Notes (as defined in Section 3.2 hereto) pursuant to this Agreement represents and warrants for himself, herself or itself, only, that such Seller will acquire any Promissory Notes at the Closing for its, his or her own account, for investment and not with a view to the distribution thereof.
(b) Each Seller receiving Promissory Notes understands that the Promissory Notes that he, she or it will receive have not been registered or qualified under the Securities Act of 1933, as amended (the "Securities Act") or any state securities laws, by reason of their issuance and sale in transactions exempt from the registration or qualification requirements of the Securities Act and applicable state securities laws, and will bear a legend to that effect as
set forth on the forms of Promissory Notes attached hereto as Exhibits 3.2(b)(i) and 3.2(b)(ii). Each Seller acknowledges and agrees that the Promissory Notes being acquired by he, she or it hereunder must be held by such Seller indefinitely unless a subsequent disposition thereof is registered or qualified under the Securities Act and applicable state securities laws or is exempt from registration or in accordance with Section 7.5(c) hereof; and that Purchaser is not required so to register or qualify any such Notes or to take any action to make such an exemption available except as otherwise provided herein. Each Seller acknowledges that (i) there may be no public market for such Promissory Notes, and (ii) there can be no assurance that any such market will ever develop.
(c) Each Seller receiving Promissory Notes further
understands that the exemption from registration afforded by Rules 144 and 144A
(the provisions of which have been disclosed to each Seller by Purchaser)
issued under the Securities Act depends on the satisfaction of various
conditions and that, if applicable, Rules 144 and 144A afford the basis for
sales under certain circumstances only in limited amounts.
(d) Each Seller receiving Promissory Notes represents and warrants for himself, herself or itself, only, that he, she or it (i) is familiar with the Business and Condition of DFT and its Subsidiaries, (ii) has read and is familiar with the terms of this Agreement (including Exhibits and Schedules), (iii) has such knowledge and experience in financial and business matters as is necessary to enable he, she or it to evaluate the merits and risks of the Promissory Notes; (iv) is able to bear the economic risk and lack of liquity inherent in holding a Promissory Note or Notes for an indefinite period and to
afford a complete loss thereof; and (v) has been informed that Purchaser was formed for the specific purpose of acquiring the stock of DFT and will have substantial debt used by Purchaser to purchase said stock, which debt will be senior to the Promissory Notes and may be secured by the assets of DFT and Purchaser.
(e) Each Seller receiving Promissory Notes represents and warrants for himself, herself or itself, only, that he, she or it has been furnished with all information he, she or it has requested from the DFT and Purchaser and has had an opportunity to review all of the books and records of DFT and Purchaser and to discuss with management of DFT and Purchaser all of the business and financial affairs of DFT and Purchaser.
ARTICLE II
REPRESENTATIONS OF PURCHASER
Section 2. Representations of Purchaser. Purchaser repre-sents and warrants to each Seller as follows:
Section 2.1(a) Capital Stock of Purchaser.
(a) Purchaser has an authorized capitalization consisting of common stock ("Purchaser Stock"), par value $0.01 per share. All issued and outstanding shares of Common Stock are owned by BCC free and clear of any Liens except restrictions on transfer imposed by federal and state securities laws and
as contemplated in the Escrow Agreement. All shares of Purchaser Stock have been duly authorized and validly issued and are fully paid and nonassessable. There are no outstanding subscriptions, options, warrants, rights, calls, commitments, conversion rights, rights of exchange, plans or other agreements providing for the purchase, issuance or sale of any shares of the capital stock of Purchaser except as contemplated in the Escrow Agreement.
Section 2.1(b) Existence and Good Standing of Purchaser. Each of Purchaser and BCC is a corporation duly organized, validly existing and in good standing, under the laws of the State of Delaware. Each of Purchaser and BCC has the requisite corporate power and authority to own, lease or otherwise hold the assets owned leased or held by it, to make, execute, deliver and perform this Agreement, and to fulfill all its other obligations under this Agreement, and this Agreement has been duly authorized and approved by all required corporate action of Purchaser and BCC. This Agreement has been duly executed and delivered by Purchaser and BCC, and assuming due execution and delivery by DFT and Sellers, is a valid and binding obligation of Purchaser and BCC enforceable against Purchaser and BCC in accordance with its terms. Purchaser has the requisite legal capacity to purchase, own or hold the Shares upon the consummation of the transactions contemplated by this Agreement.
Section 2.2 No Restrictions. The execution and delivery of this Agreement by Purchaser and BCC and the consummation of the transactions contemplated hereby (a) will not violate any provision of the Certificate of Incorporation or By-Laws of Purchaser or BCC, (b) will not violate any statute, rule, regulation, order or decree of any public body or authority by which
Purchaser or BCC or any of their respective properties or assets is bound, assuming that any Regulatory Approval is obtained and (c) will not result in a violation or breach of, or constitute a default under, any license, franchise, permit, indenture, agreement or other instrument to which Purchaser or BCC is a party, or by which Purchaser or BCC or any of their respective properties or assets are bound, excluding from the foregoing clauses (b) and (c) violations, breaches or defaults which either individually or in the aggregate, would not prevent Purchaser or BCC from performing its obligations under this Agreement or consummation of the transactions contemplated by this Agreement, and (d) subject to the next sentence, will not violate any Law. No material consent, approval, order or authorization of, registration, declaration or filing with, any governmental authority is required to be obtained or made by or with respect to Purchaser or BCC in connection with the execution and delivery of this Agreement by Purchaser or BCC, or the fulfillment by Purchaser or BCC of their respective obligations under this Agreement, except the filings and approvals described in Schedule 1.4 and Sections 4.5 and 5.6.
Section 2.3 Broker's or Finder's Fees. No agent, broker, person or firm acting on behalf of Purchaser or BCC is, or will be, entitled to any commission or broker's or finder's fees from any Person other than Purchaser or Lynch Corporation ("Lynch") in connection with any of the transactions contemplated herein.
Section 2.4 Investment Representation Statement.
(a) Purchaser represents and warrants that Purchaser will acquire the Shares at the Closing for its own account, for investment and not with a view to the distribution thereof.
(b) Purchaser understands that the Shares that it will receive have not been registered or qualified under the Securities Act or any state securities laws, by reason of their issuance and sale in transactions exempt from the registration or qualification requirements of the Securities Act and applicable state securities laws. Purchaser acknowledges that reliance on said exemptions is predicated in part on the accuracy of Purchaser's representations and warranties herein. Purchaser acknowledges and agrees that the Shares being acquired by it hereunder must be held by Purchaser indefinitely unless a subsequent disposition thereof is registered or qualified under the Securities Act and applicable state securities laws or is exempt from registration; and that DFT is not required so to register or qualify any such Shares or to take any action to make such an exemption available except as otherwise provided herein. Purchaser acknowledges that (i) there may be no public market for such Shares, (ii) there can be no assurance that any such market will ever develop and (iii) there can be no assurance that Purchaser will be able to liquidate its investment in DFT.
(c) Purchaser further understands that the exemption from registration afforded by Rules 144 and 144A (the provisions of which are known to Purchaser) issued under the Securities Act depends on the satisfaction of various conditions and that, if applicable, Rules 144 and 144A afford the basis for sales under certain circumstances only in limited amounts.
(d) Purchaser represents and warrants that (i) it has
such knowledge and experience in financial and business matters as is necessary
to enable it to evaluate the merits and risks of an investment in DFT and is
not utilizing any other person to be its purchaser representative in connection
with evaluating such merits and risks; (ii) it has no present need for
liquidity in its investment in DFT and is able to bear the risk of that
investment for an indefinite period and to afford a complete loss thereof; and
(iii) Purchaser was formed for the specific purpose of making an investment in
DFT; and (iv) it has read or is familiar with the terms of this Agreement
(including Exhibits and Schedules) and based thereon and its other
investigation is generally familiar with the Business and Condition of DFT and
its Subsidiaries.
(e) Purchaser represents and warrants that it is an "accredited investor" as defined in Regulation D promulgated under the Securities Act.
(f) Purchaser represents and warrants that it has been furnished with all information it has requested from DFT and Seller and has had an opportunity to review all of the books and records of DFT and to discuss with management of DFT all of the business and financial affairs of DFT.
Section 2.5 Accuracy of Information Furnished. To the knowledge of Purchaser and BCC, no written representation, warranty or statement made by Purchaser or BCC in this Agreement or any document, exhibit or schedule provided by Purchaser pursuant to the Agreement contains any untrue statement of a material fact necessary to make such representation, warranty or statement not misleading, in light of the circumstances in which it is made.
Section 2.6 Litigation. There is no action, suit, investigation or proceeding at law or in equity by any Person or any arbitration or any administrative or other proceeding by or before any governmental or other instrumentality or agency, pending, or, to the knowledge of Purchaser, threatened against Purchaser, Lynch or BCC which, if determined adversely to Purchaser, Lynch or BCC, would have a material adverse effect on the Business or Condition of Purchaser, or Purchaser's ability to fulfill its obligations under this Agreement.
Section 2.7 FCC Licenses. Purchaser is legally qualified to own Federal Communications Commission licenses.
ARTICLE III
PURCHASE AND SALE OF STOCK
Section 3.1 Purchase and Sale. Subject to the terms
and conditions hereof, and in reliance upon the representations, warranties,
covenants and agreements set forth herein, at the Closing provided for in
Section 3.4, each Seller shall sell to Purchaser, and Purchaser shall purchase
from each Seller for the purchase price provided in Section 3.2, the Shares set
forth opposite such Seller's name on Schedule A hereto, free and clear of all
liens, except for restrictions on transfers imposed by federal and state
securities laws (the "Stock Sale").
Section 3.2 Purchase Price.
(a) The purchase price for the Shares is $1,875.05 per share (as adjusted pursuant to Subsection (f) below) payable in cash and/or Promissory Notes as provided opposite said Seller's name on Schedule A hereto (as adjusted pursuant to Subsection (f) below).
(b) The Promissory Notes-A in the aggregate principal amount of $10,000,000 shall be in the form of Schedule 3.2(b)(i) hereto.
(c) The Promissory Notes-B in the aggregate principal amount of $2,000,000 shall be in the form of Schedule 3.2(b)(ii) hereto. Promissory Notes-A and B are collectively referred to as the Promissory Notes.
(d) The Promissory Notes shall be subordinated
only to indebtedness to financing institutions lending funds for the
acquisition by Purchaser of the stock of DFT (and any refinancings of such
debt) on such terms as such financing institutions shall request. Subject to
Section 6.6, each Seller receiving Promissory Notes will enter into
subordination agreement(s) in the forms requested by such financing (or
refinancing institutions) institutions.
(e) The Promissory Notes shall be secured by a first lien on the stock of Purchaser pursuant to an Escrow Agreement substantially in the form of Schedule 3.2(e) hereto, with such additions and changes thereto as the escrow agent shall require.
(f) If the proceeds from the sale by DFC (as contemplated in Section 4.8) of its 11.25% partnership interest in New York RSA 3 Cellular
Partnership, net of all expenses of sale and all taxes (Federal, state and local), plus interest earned on said proceeds (which shall be held in a separate account) to the Closing, net of all taxes with respect to said interest plus the amount of any retroactive tax (Federal, state or local) relief with respect to the sale that lowers the applicable tax rate applied (or to be applied) or tax paid (or to be paid) or results in a refund of taxes paid or a credit against taxes to be paid, is more or less than $3.5 million, the difference shall be divided by 11,733 (the "Per Share Cellular Adjustment") and the purchase price of $1,875.05 per share shall be increased by the Per Share Cellular Adjustment if the net proceeds is more than $3.5 million or reduced by the Per Share Cellular Adjustment if the net proceeds is less than $3.5 million. The Per Share Cellular Adjustment to the purchase price shall be allocated to cash, Subordinated Promissory Notes A and Subordinated Promissory Notes B in proportion to which each Seller is to receive the same as set forth in Schedule A. If at the Closing there is a question as to the final Adjustment contemplated by this Section 3.2 (f), the parties shall agree on what the amount in question is and Purchaser may withhold payment of the cash portion in question. When the amount in question is finally determined, any additional cash amounts owing Sellers shall be paid promptly with interest at 7% per annum, and Promissory Notes A and Promissory Notes B shall be appropriately adjusted.
Section 3.3 Payment of the Purchase Price. The Purchase Price shall be paid by Purchaser to each Seller at the Closing Time by cashier or certified check or wire transfer as requested by Seller as to the cash portion and delivery of Promissory Notes of Purchaser payable to each Seller receiving Promissory Notes. To the extent any payment of the Purchase Price is to be made by wire
transfer, such bank wire transfer(s) shall be made to an account or accounts that each Seller receiving the cash portion of the Purchase Price shall designate in writing to Purchaser at least two business days prior to the Closing Time.
Section 3.4 Closing. The closing of the Stock Sale (the "Closing") shall take place at 10:00 a.m. at the offices of DFT in Fredonia, New York, within ten days after all of the conditions precedent set forth in Articles V and VI have been satisfied or waived, or at such other time, date and place (not later than June 30, 1996) as Purchaser and DFT Sellers (as defined in Section 5.3 hereof) shall by written instrument designate. Such time and date are herein referred to as the "Closing Time."
Section 3.5 Transactions at the Closing Time. (a) At the Closing, Sellers shall deliver to Purchaser the following:
(i) stock certificates, in form suitable for transfer, registered in the name of the respective Sellers, evidencing the Shares purchased hereunder, with executed blank stock transfer powers attached, and with all necessary stock transfer tax stamps attached thereto;
(ii) all stock books, stock transfer ledgers, minute books and the corporate seals of DFT and its Subsidiaries, together with the resignations of all directors of DFT and its Subsidiaries other than Robert Maytum, Robert A. Maytum, Mark Maytum and Kurt Maytum;
(iii) the Escrow Agreement duly executed by each Seller receiving Promissory Notes;
(iv) subordination agreement(s) in the forms requested by the financial institution(s) lending funds for the acquisition by Purchaser of the stock of DFT, executed (subject to Section 6.6) by each Seller receiving Promissory Notes; and
(v) each of the certificates and documents contemplated by Article V.
(b) At the Closing, Purchaser shall deliver to Sellers the following:
(i) the Purchase Price as required and in the manner indicated in Section 3.3;
(ii) the Escrow Agreement duly executed by it; and
(iii) each of the certificates and documents contemplated by Article VI.
ARTICLE IV
CONDUCT OF BUSINESS: EXCLUSIVE DEALING; REVIEW; REASONABLE EFFORTS
Section 4.1 Conduct of Business of the Company.
(a) Except as contemplated by this Agreement or as
otherwise disclosed to Purchaser in writing prior to the execution of this
Agreement, during the period from the Execution Date to the Closing Time,
Sellers shall cause DFT and its Subsidiaries: (i) to conduct their respective
operations in the ordinary course of business, (ii) to maintain DFT and its
Subsidiaries' respective Articles of Incorporation and By-Laws in their
respective forms on the Execution Date, (iii) not to increase the compensation
payable or to become payable by DFT and its Subsidiaries to any director,
officer, employee, consultant or agent, other than in the ordinary course of
business, except as provided in Section 4.9 hereof, (iv) to refrain from making
any bonus, pension, retirement or insurance payment or arrangement to or with
any such persons except those that have been accrued or accrue in the ordinary
course of business, (v) to use their respective best efforts to preserve their
respective business organizations intact except as otherwise contemplated by
Section 4.8 hereof, to retain the services of their respective present
directors, officers, employees, consultants and agents, and to preserve the
good will of their respective regulators, lenders and customers, (vi) not to
incur any material liability, or enter into any other transaction, except in
the ordinary and usual course of business or as otherwise contemplated by this
Agreement or Section 4.8, (vii) not to declare, pay or set aside for payment,
any dividend or make any other
distribution upon their respective capital stocks except as contemplated in
this Agreement or Section 4.6 hereto, (viii) not to, directly or indirectly,
purchase or redeem any shares of its capital stock, (ix) not to enter into any
transaction with any Seller or its Affiliates, except as otherwise contemplated
by this Agreement or Section 4.8, (x) to refrain from canceling or waiving any
claims or rights of value or which individually or in the aggregate are
material to DFT and its Subsidiaries taken as a whole, (xi) to maintain in full
force and effect all contracts disclosed or required to be disclosed in
Schedule 1.8(a) consistent with sound business practice, (xii) to maintain in
good standing all franchises, permits, licenses, approvals, and other
authorizations owned or held by DFT or its Subsidiaries, (xiii) to comply in
all material respects with all Laws (including Existing Environmental Laws)
applicable to the business, operations and affairs of DFT or its Subsidiaries,
(xiv) maintain in normal operating condition all material tangible assets of
DFT and its Subsidiaries, (xv) to refrain from changing any current prices or
rates with respect to telephone or other services provided by DFT or its
Subsidiaries to its customers except for changes in the ordinary course of
business or as otherwise required by regulatory authorities (Purchaser being
promptly advised of any material changes in rates including any rates subject
to regulation) (xvi) not to agree, whether or not in writing, to do anything
which DFT or its Subsidiaries is restricted from doing in this Article IV.
(b) Except as contemplated by this Agreement, Sellers will use commercially reasonable efforts to cause DFT and its Subsidiaries to refrain from violating, breaching, or defaulting, and from taking or failing to take any action that (with or without notice or lapse of time or both) would constitute
a violation, breach, or default, under any contract to which DFT or its Subsidiaries is a party or by which any of the assets or properties of DFT or its Subsidiaries is or may be bound and which violation, breach, or default individually or in the aggregate has or may reasonably be expected to have a material adverse effect on the Business or Condition of DFT or its Subsidiaries.
(c) Except as contemplated by this Agreement, Sellers will use commercially reasonable efforts to cause DFT and its Subsidiaries to refrain from creating, incurring, assuming, guaranteeing, or otherwise becoming liable for, and from canceling, paying, agreeing to cancel or pay, or otherwise providing for a complete or partial discharge in advance of a scheduled payment date with respect to, any money borrowed or (other than in the ordinary course of business and consistent with past practice) any other liability of DFT or its Subsidiaries, and from waiving any right of DFT or its Subsidiaries to receive any direct or indirect payment or other benefit under any liability owing to DFT or its Subsidiaries.
(d) Except as contemplated by this Agreement, Sellers will cause DFT and its Subsidiaries to refrain from (i) merging, consolidating, or otherwise combining or agreeing to merge, consolidate, or otherwise combine with any other person or entity, (ii) acquiring or agreeing to acquire all or substantially all the assets or properties or capital stock or other equity securities of any other person or entity, or (iii) otherwise acquiring or agreeing to acquire control or ownership of any other person or entity.
(e) Except as contemplated by this Agreement, Sellers will cause DFT and its Subsidiaries to refrain from (a) selling, transferring or otherwise disposing of any assets having a GAAP book value (individually or in the aggregate with other such assets) in excess of $50,000; or (b) purchasing or acquiring any asset having a GAAP book value (individually or in the aggregate with other such assets) in excess of $25,000, other than (i) capital projects listed in Tab 10 of the Confidential Information Memorandum dated March 1, 1995 (to the extent of the amounts set forth therein) and (ii) capital expenditures as agreed to in writing after the date hereof between Purchaser and DFT as to a proposed cable television system in the village of Fredonia.
(f) Sellers will cause DFT and its Subsidiaries to invest its future cash flow, any cash from matured and maturing investments, any cash proceeds from the permitted sale of DFT or its Subsidiaries assets or properties, and any cash funds currently held by DFT or its Subsidiaries, exclusively in cash, in cash equivalent assets, or in short-term investments (consisting of securities issued or fully guaranteed, as to principal and interest, by the United States, or certificates of deposit fully insured by the Federal Deposit Insurance Corporation), except as otherwise required by Law or except as required to provide cash (in the ordinary course of business and consistent with past practice) to meet DFT or its Subsidiaries reasonably anticipated current obligations.
(g) Sellers will cause DFT and its Subsidiaries to refrain from (a) issuing to any Person or entity other than Purchaser any shares of DFT or its Subsidiaries capital stock or other debt or equity securities or (b) entering
into any contract (or granting any option, warrant, or right) calling for the issuance of any such shares or other debt or equity securities, or creating or issuing any securities directly or indirectly convertible into or exchangeable for any such shares or other equity securities, or issuing any option, warrant or right to purchase any such convertible securities.
Section 4.2 Financials. During the period from the Execution Date until the Closing Time, as soon as practical but in any event no later than 60 days after the close of each calendar month of DFT and its Subsidiaries, the Sellers shall deliver or cause to be delivered to Purchaser the unaudited balance sheets of DFT and each of its Subsidiaries as of the end of such month, and the unaudited statements of income, cash flow and stockholders' equity of DFT and each of its Subsidiaries for such month and for the period from the beginning of the fiscal year to the close of such month. No later then 90 days after December 31, 1995, the Sellers shall deliver or cause to be delivered to Purchaser full audited financial statements (including notes) of DFT and its subsidiaries for the year ended December 31, 1995.
Section 4.3 Exclusive Dealing. From the date of this Agreement until June 30, 1996 or the termination of this Agreement, whatever is first to occur, DFT and Sellers and their Affiliates shall not take any action to, directly or indirectly, encourage, initiate or engage in discussions or negotiations with, or provide any information to, any Person other than Purchaser concerning any purchase of the Shares or any merger, sale of substantial assets or similar transaction involving DFT or any Subsidiary.
Section 4.4 Review of DFT and its Subsidiaries. Purchaser may, prior to the Closing Time, through its officers, employees, consultants, agents, accountants and attorneys (the "Representatives"), review the properties, books and records of DFT and its Subsidiaries to familiarize itself with such properties and the business of DFT and its Subsidiaries. Without limiting the foregoing, Purchaser intends to cause environmental investigations relating to DFT and its Subsidiaries to be undertaken and Seller will cause DFT to cooperate in such investigations. DFT and Sellers shall permit Purchaser and its Representatives to have reasonable access to the premises and to the books and records of DFT and its Subsidiaries during normal working hours and shall furnish Purchaser with such financial and operating data and other information with respect to the business and properties of DFT and its Subsidiaries as Purchaser shall from time to time reasonably request. For purposes of any and all Purchaser requests under this Section 4.4, such requests shall be directed to Robert A. Maytum, President of DFT, or such other person or persons as Robert A. Maytum shall designate in writing to Purchaser.
Section 4.5 Reasonable Efforts. Each of the parties agrees to use commercially reasonable efforts to take, or cause to be taken, all action to do, or cause to be done, and to assist and cooperate with the other parties hereto in doing, all things necessary, proper or advisable to consummate and make effective, in the most expeditious manner practicable, the transactions contemplated by this Agreement, including, but not limited to, (a) the obtaining of all necessary waivers, consents and approvals from governmental or regulatory agencies
or authorities and the making of all necessary registrations and filings (including, but not limited to, filings with governmental or regulatory agencies or authorities, if any) and the taking of all reasonable steps as may be necessary to obtain any approval or waiver from, or to avoid any action or proceeding by, any governmental agency or authority, and (b) the obtaining of all necessary consents, approvals or waivers from third parties, all as described in Schedule 1.4.
Section 4.6 Dividends to Sellers. Notwithstanding the covenant in Section 4.1(a)(vii), DFT may declare and pay dividends of up to $15 per share in February 1996 and $5 per share in May 1996; provided that DFT has earned (exclusive of any earnings on the sale of the cellular interest as contemplated in Section 4.8) at least $35 per share between January 1, 1995 and December 31, 1995, in the case of the February 1996 dividend and $5 per share since January 1, 1996 in the case of the May 1996 dividend.
Section 4.7 Confidentiality. The Confidentiality Agreement dated March 1, 1995, with DFT shall be deemed part of this Agreement, and each of Sellers and Purchaser (and Purchaser's officers, directors, employees and representatives) shall comply with the Confidentiality Agreement.
Section 4.8 Quantum Marine; NY 3 Sale.
Notwithstanding the covenants in Sections 4.1(a)(vi), 4.1(a)(ix), 4.1(e) and
4.3, (A) Sellers shall cause CI at or prior to Closing to transfer the assets
and liabilities (including without limitation debt, but other than the Property
defined below) associated with the operation called Quantum Marine listed on
Schedule 4.8 hereof (which schedule
will be updated monthly as agreed to by Purchaser), to one or more Sellers or their designee ("Quantum Purchaser") by structural mechanics and other terms acceptable to Purchaser, DFT and Comantel, which terms shall be set forth in an Agreement acceptable to Purchaser, DFT and Comantel and shall include the following:
(1) Quantum Purchaser will pay DFT or CI, as the case may be,
$1;
(2) DFT will lease (the "Lease") to the Quantum Purchaser the
space in the 2374 West Lake Road, Ashville, New York (the
"Property"), currently used by the Quantum Marine operation
on the same terms and conditions as Quantum Marine is
currently leasing said space (i.e., $1,200 per month);
(3) The Lease shall be (i) for a minimum term to be three years
from the Closing, with an option to renew under the then
existing terms and conditions for an additional three
years, and (ii) terminable at will by the Quantum
Purchaser;
(4) Quantum Purchaser to be granted a 10 day right of first
negotiation to attempt to lease the Property space ("ERT
Space") currently occupied by Eagle Radio Technologies
("ERT") on such terms as the parties may agree to, in the
event ERT vacates the ERT Space during the term (including
renewals) of the Lease and neither DFT or any Subsidiary or
Affiliate wants the ERT Space, which negotiation shall be
in good faith;
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(5) Quantum Purchaser to be granted a 30 day right of first
negotiation to attempt to purchase the Property on such
terms as the parties may agree to, in the event DFT desires
to sell, transfer or otherwise exchange the Property (other
than to or with a Subsidiary or Affiliate) during the term
(including renewals) of the Lease, which negotiation shall
be in good faith;
(6) Such transfer shall be without any cost, tax or other
liability accruing to or remaining with DFT or any of its
subsidiaries (except as to the Property as set forth
above); and
(7) Neither DFT, CI or any other Subsidiary has provided funds
or other assets to Quantum Marine nor will they hereafter
provide any funds or other assets to Quantum Marine other
than funds provided in the ordinary course of business,
which funds have been or shall be repaid in full prior to
the transfer to the extent that the cash advances shown on
Schedule 4.8 as ($217,737) estimated as of October 31, 1995
exceed ($250,000); and
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(B) Sellers shall cause DFC to fulfill its obligations pursuant to the Agreement entered into by DFC to sell its 11.25% partnership interest in New York RSA 3 Cellular Partnership and with respect to the disposition of New York RSA Funding Corporation as described in Schedule 1.2(a), upon satisfaction of all conditions precedent thereto.
Section 4.9 Employment Contracts. Immediately prior to the Closing, (i) DFT and Robert A. Maytum shall enter into an amendment to the Employment Agreement dated as of January 8, 1990 in the form of Schedule 4.09(i) hereto, (ii) DFT and Robert Maytum shall enter into an amendment to the Employment
Agreement dated as of August 10, 1972, as amended January 3, 1995 in the form of Schedule 4.9(ii) hereto, and (iii) DFT and each of Kurt Maytum and Mark Maytum shall enter into Employment Agreements in the forms of Schedule 4.9(iii) and 4.9(iv), respectively.
Section 4.10 Purchaser Financing. Purchaser will use its best efforts to obtain necessary financing for the acquisition. When Purchaser has entered into a commitment letter with one or more financing institutions for the financing of the purchase of the stock of DFT, Purchaser will (i) transmit a copy of the commitment letter to Robert A. Maytum and (ii) use its best efforts to maintain either the commitment letter in full force and effect until the Closing or to obtain a substitute commitment letter. When Purchaser obtains from such financing institutions the form of subordination agreements for the Promissory Notes, it will send copies thereof to the Sellers and their counsel. Purchaser will request that the financing institution(s) permit Sellers to purchase the senior loan(s) in the event that such financing institutions declare a default under the senior loans, but makes no representation or warranty to Sellers as to whether the financing institution(s) would be willing to agree to that.
Section 4.11 Directorships. At the Closing, Purchaser shall enter into an agreement with DFT to vote its shares of stock of DFT to elect Robert Maytum, Robert A. Maytum, Kurt Maytum and Mark Maytum to the Board of Directors of DFT as provided in the Agreements referred to in Section 4.09 hereof.
Section 4.12 Supplemental Income Benefit. Immediately prior to the Closing, DFT and Robert A. Maytum shall enter into an amendment to the Supplemental Income
Benefit Agreement ("Supplemental Income Agreement") for Robert A. Maytum dated as of January 14, 1991 to (a) add "as amended" to the end of Section 1 therein and (b) change the payment commencement date set forth in Section 2 therein to the earlier of age 70 or retirement, provided, however, that in no event shall the payment commencement date under Section 2 begin before Robert A. Maytum attains 65 years of age.
Section 4.13. Additional Information. It is agreed that Sellers have until November 14, 1995 to complete the following Schedules:
Schedule 1.5 Provide CI Third Quarter 1995 Financial Statements;
Schedule 1.6(a) Provide information on (i) Materialman and Other Liens and
(ii) Title Insurance Policies;
Schedule 1.6(b) Provides information on (i) Materialman and Other Liens,
(ii) Title Insurance Policies and (iii) a list of
Easements; and
Schedule 1.6(c) Provide information on (i) Materialman and Other Liens.
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Purchaser and BCC shall have until November 28, 1995 to review any additional information provided pursuant to the preceding sentence and if in their opinion such information might have a material adverse effect on the Business or Condition of DFT or any of its Subsidiaries, any of their respective properties, or the value that Purchaser is willing to pay for DFT, Purchaser and Seller may, by written notice to DFT, terminate this Agreement without any liability to any of the parties, notwithstanding any other provision of this Agreement.
ARTICLE V
CONDITIONS TO PURCHASER'S OBLIGATIONS
Section 5. Conditions to Purchaser's Obligations. The obligation of Purchaser to purchase the Shares from Sellers at the Closing Time is conditioned upon the satisfaction or waiver, at or prior to the Closing, of the following conditions:
Section 5.1 Opinion of Sellers's Counsel. Purchaser shall have received an opinion, dated as of the Closing Time, of (i) Sellers' counsel, to the effect set forth in Schedule 5.1 attached hereto, and (ii) of Sellers' securities counsel, reasonably satisfactory to Purchaser, in form and substance satisfactory to Purchaser, to the effect set forth Section 1.5(f) hereof.
Section 5.2 No Material Adverse Change. From December 31, 1994 to the Closing Time there shall not have been a material adverse change in the Business, Condition, financial condition, results of operations or labor situation of DFT and its Subsidiaries taken as a whole.
Section 5.3 Truth of Representations and Warranties. The representations and warranties of DFT and Sellers contained in this Agreement or in any Schedule delivered pursuant hereto shall be true and correct in all material respects at and as of the Closing Time with the same effect as though such representations and warranties had been made on and as of such time and DFT and "DFT Sellers" (i.e., Robert Maytum, Robert A. Maytum, Kurt Maytum and Mark
Maytum) shall have delivered to Purchaser a certificate in substantially the form set forth in Schedule 5.3 attached hereto, dated the day of the Closing to such effect.
Section 5.4 Performance of Agreements. Each and all of the agreements of DFT and Sellers to be performed at or prior to the Closing pursuant to the terms hereof shall have been duly performed in all material respects, and DFT and DFT Sellers shall have delivered to Purchaser a certificate in substantially the form set forth in Schedule 5.4 attached hereto, dated the day of the Closing Time, to such effect.
Section 5.5 No Injunction. No court or other government body or public authority shall have issued an order which shall then be in effect restraining or prohibiting the completion of the transactions contemplated hereby, and no action, suit or proceding seeking to restrain, prohibit or seek monetary damages or other relief relating to the transactions contemplated hereby are pending or threatened.
Section 5.6 Governmental Approvals. All governmental and other consents and approvals necessary or appropriate to permit the consummation of the transactions contemplated by this Agreement, including without limitation expiration of the Hart-Scott-Radino waiting period if required and those, if any, necessary because of other telephone operations of or attributable to Affiliates of Purchaser, or in order to obtain the financing in connection with Purchaser's purchase of the stock of DFT (including without limitation the right to secure such financing with the stock and assets of DFT and its subsidiaries), shall have
been received and become final in form and substance satisfactory to Purchaser and any Person providing financing in connection with Purchaser's purchase of the stock of DFT and have not been appealed or, if appealed, finally resolved, and all statutory waiting or appeal periods with respect to such consents shall have lapsed or expired, and such consents and approvals shall permit the continued operation of the respective businesses of DFT and its Subsidiaries in substantially the same manner after the Closing Time as theretofore conducted (as modified in the "including" clause above) without the imposition of any term, condition or provision which is burdensome on, or restrictive of or otherwise adverse to Purchaser or DFT or any of their respective Subsidiaries or Affiliates or their respective properties and assets.
Section 5.7 Environmental Investigation. All environmental investigations relating to DFT and its Subsidiaries undertaken by Purchaser shall be satisfactory in all respects to Purchaser and any Person providing financing to Purchaser in connection with the acquisition.
Section 5.8 All Sellers Shares. All Shares shall be tendered to and purchased by Purchaser as provided in this Agreement.
Section 5.9 Other Shareholders. All other shareholders of DFT (other than Sellers), which are listed on Schedule 5.9(a) hereof together with their shareholdings, shall have entered into agreements with Purchaser substantially in the form of Schedule 5.9(b) hereto to sell their shares of DFT to Purchaser and such shareholders shall have tendered their shares to, and such shares shall be purchased by, Purchaser as provided in said agreements.
Section 5.11 Escrow/Subordination Agreements. Each Seller receiving Promissory Notes shall have duly executed and delivered (i) the Escrow Agreement and (ii) subordination agreements in the forms requested by the financial institution(s) lending funds for the acquisition by Purchaser of the stock of DFT.
Section 5.12. Section 10.2 Cost. The estimated amount payable by DFT pursuant to Section 10.2 shall not exceed $100,000, unless Sellers shall agree to pay the excess over $100,000.
ARTICLE VI
CONDITIONS TO SELLERS' OBLIGATIONS
Section 6. Conditions to the Sellers' Obligations. The sale of the Shares by Sellers to Purchaser at the Closing Time is conditioned upon satisfaction or waiver, at or prior to the Closing, of the following conditions:
Section 6.1 Opinions of Purchaser's Counsel. Purchaser shall have furnished the Sellers with an opinion, dated the day of the Closing, from Robert A. Hurwich, their General Counsel, to the effect set forth in Schedule 6.1 hereto.
Section 6.2 Truth of Representations and Warranties. The representations and warranties of Purchaser contained in this Agreement shall be true and correct in all material respects at and as of the Closing Time with the same effect as though such representations and warranties had been made at and as of such time, and Purchaser shall have delivered to Sellers a certificate, dated the day of the Closing to such effect in substantially the form set forth in Schedule 6.2 attached hereto.
Section 6.3 Performance of Agreements. Each and all of the agreements of Purchaser to be performed at or prior to the Closing pursuant to the terms hereof shall have been duly performed in all material respects, and Purchaser shall have delivered to Sellers a certificate in substantially the form set forth in Schedule 6.3 attached hereto, dated the day of the Closing to such effect.
Section 6.4 No Injunction. No court or other government body or public authority shall have issued an order which shall then be in effect restraining or prohibiting the completion of the transactions contemplated hereby.
Section 6.5 Governmental and Other Third Party Approvals. All governmental and other third party consents and approvals, if any, necessary to permit the consummation of the transactions contemplated by this Agreement, including without limitation expiration of the Hart-Scott-Radino waiting period if required, shall have been received and become final and have not been appealed or, if appealed, finally resolved, and all statutory waiting or appeal periods with respect to such consents shall have lapsed or expired.
Section 6.6 Subordination Agreement. The terms of the form of Subordination Agreement to be executed by Sellers receiving Promissory Notes shall be commercially reasonable and reasonable to those Sellers in those Sellers' discretion; provided, however, that this condition shall be deemed to be satisfied if the Subordination Agreement (i) does not prohibit such Sellers from exercising their rights under the Escrow Agreement and (ii) permits interest payments to be made under the Promissory Notes so long as no default or event of default has occurred under the senior indebtedness.
ARTICLE VII
INDEMNIFICATION
Section 7.1 Indemnification by Sellers. Subject to the provisions of this Article VII and of Article VIII hereof, Sellers, jointly and severally, shall indemnify BCC, Purchaser and DFT and its Subsidiaries and any Affiliate of BCC, Purchaser and DFT and any officer, director, or employee of BCC, Purchaser or DFT or any Affiliate of BCC, Purchaser or DFT ("Purchaser Party") in respect of, and hold each Purchaser Party harmless against, any and all damages, obligations, losses, lost profits, expenses (including reasonable attorneys' fees), liabilities, costs (including environmental response, remediation, and cleanup costs resulting from a material breach of Sellers' Representations), fines, and fees ("Damages") resulting from or relating to any one or more of the following:
(a) any misrepresentation, breach of warranty, or nonfulfillment of or failure to perform any material covenant or agreement made by DFT or any Sellers included in the Agreement or the certificates delivered by DFT or DFT Sellers pursuant to Article V hereof; and
(b) any action, suit, investigation, arbitration, or proceeding against any Purchaser Party (whether as a defendant, counterclaim or third party defendant, intervenor, or otherwise) resulting from or relating to any act or failure to act before the Closing Time by any Sellers or DFT or its Subsidiaries,
which if determined adversely to any Purchaser Party would entitle the Purchaser Party to indemnification pursuant to this Agreement.
Section 7.2 Indemnification by Purchaser. Subject to the provisions of this Article VII and of Article VIII hereof, BCC and Purchaser, will, jointly and severally, indemnify each Seller and any Affiliate of each Seller ("Seller Party") in respect of, and hold each Sellers Party harmless against, any and all Damages (as defined in Section 7.1 hereof) resulting from or relating to any misrepresentation, breach of warranty, or nonfulfillment of or failure to perform any covenant or agreement made by Purchaser included in this Agreement or the certificates delivered by Purchaser pursuant to Article VI hereof.
Section 7.3 Representations and Warranties. All represen-tations, warranties, covenants, and agreements made herein or pursuant hereto will be deemed to be material and to have been relied upon by the parties hereto.
Section 7.4 Indemnification Procedure. Any person or entity entitled to indemnification under Section 7.1 or 7.2 hereof that asserts a claim under Sections 7.1 or 7.2 hereof is hereinafter referred to as the "Indemnitee," and the party against whom such claim is asserted under Section 7.1 or 7.2 hereof is hereinafter referred to as the "Indemnifying Party."
(a) If an Indemnitee becomes aware of any matter that it believes is indemnificable pursuant to this Article VII and such matter involves (i) any claim made against the Indemnitee by any person or entity other than a Purchaser Party or a Sellers Party or (ii) the commencement of any action, suit,
investigation, arbitration, or similar proceeding against Indemnitee by any
person or entity other than a Purchaser Party or a Sellers Party, Indemnitee
will give the Indemnifying Party prompt written notice of such claim or the
commencement of such action, suit, investigation, arbitration, or similar
proceeding. Such notice will (A) provide (with reasonable specificity) the
bases on which indemnification is being asserted, (B) set forth the actual or
estimated amount of Damages for which indemnification is being asserted, and
(C) be accompanied by copies of all relevant pleadings, demands, and other
papers served on Indemnitee. If Indemnifying Party's ability to defend against
any such claim, action, suit, investigation, arbitration, or similar proceeding
is irrevocably prejudiced by the failure of Indemnitee to provide prompt
written notice, as provided above, then Indemnifying Party will not be
obligated to indemnify Indemnitee with respect to such prejudiced claim,
action, suit, investigation, arbitration, or similar proceeding.
(b) Indemnifying Party will have a period of the
earlier of (i) thirty calendar days or (ii) three days prior to the date of the
earliest statutory response (after the delivery of each notice required by
Section 7.4(a) hereof) within which to respond to such notice. If Indemnifying
Party accepts full responsibility for the claim described in such notice or
does not respond within such response period, Indemnifying Party will be
obligated to compromise or defend (and will control the defense of) such claim,
at its own expense and by counsel chosen by Indemnitee and reasonably
satisfactory to Indemnifying Party, and Indemnifying Party will provide the
Indemnitee with such assurances as may be reasonably required by the Indemnitee
to assure that Indemnifying Party will assume, and be responsible for, the
entire liability for such claim, subject
to the limitations set forth in this Article VII. Indemnitee will cooperate reasonably with Indemnifying Party and counsel for Indemnifying Party in the defense against any such claim, and the Indemnitee will have the right to participate at its own expense in the defense of any such claim. If Indemnifying Party responds within such response period denying or rejecting responsibility for such claim in whole or in part or fails to promptly provide Indemnitee with such assurances as may be reasonably required by Indemninater as provided above, Indemnitee will be free, without prejudice to any of Indemnitee's rights hereunder, to compromise or settle or defend (and control the defense of) such claim and to pursue such remedies as may be available to Indemnitee under applicable Law.
(c) Any compromise or settlement of any claim (whether
defended by Indemnitee or by the Indemnifying Party) will require the prior
written consent of Indemnitee and, except as provided in the last sentence of
Section 7.4(b), Indemnifying Party. If, however, Indemnitee refuses to consent
to a bona fide offer of compromise or settlement that (i) Indemnifying Party
desires to accept and (ii) imposes no obligation or liability on Indemnitee and
does not adversely restrict Indemnitee in its Business or Condition, Indemnitee
may continue to pursue such claim, free of any participation by Indemnifying
Party, at the sole expense of Indemnitee. In such event, the obligation of
Indemnifying Party to Indemnitee will equal the lesser of (i) the amount of the
offer of compromise or settlement that Indemnifying Party desired to accept,
plus the reasonable out-of-pocket expenses (except for expenses resulting from
Indemnitee's participation in any defense controlled by Indemnifying Party)
incurred by Indemnitee before the date the Indemnifying Party notified
Indemnitee
of the offer of compromise or settlement, or (ii) the actual out-of-pocket amount that Indemnitee is obligated to pay as a result of Indemnitee's continuing to pursue such claim, plus the reasonable out-of-pocket expenses (except for expenses resulting from Indemnitee's participation in any defense controlled by Indemnifying Party) incurred by Indemnitee before the date Indemnifying Party notified Indemnitee of the offer of compromise or settlement, minus the reasonable out-of-pocket expenses incurred by Indemnifying Party after such notice date.
(d) If an Indemnitee becomes aware of any matter that
it believes is indemnifiable pursuant to VII hereof and such matter involves a
claim made by any Purchaser Party or Sellers Party, Indemnitee will give
Indemnifying Party prompt written notice of such claim. Such notice will (i)
provide (with reasonable specificity) the bases for which indemnification is
being asserted and (ii) set forth the actual or estimated amount of Damages for
which indemnification is being asserted. Indemnifying Party will have a period
of thirty calendar days (after the delivery of each notice required by this
Section 7.4(d)) within which to respond to such notice. If Indemnifying party
accepts full responsibility for the claim described in such notice or does not
respond within such thirty-day period, the actual or estimated amount of
Damages reflected in such notice will be conclusively deemed a liability that
Indemnifying Party owes, and will pay (in cash) upon demand, to Indemnitee. If
Indemnifying Party has timely disputed such claim, as provided above,
Indemnifying Party and Indemnitee agree to proceed in good faith to negotiate a
resolution of such dispute. If all such disputes are not resolved through
negotiations, either Indemnifying Party or Indemnitee may initiate litigation to resolve such disputes.
Section 7.5 Limitations on Seller's Indemnification Obligations.
(a) Threshold/Maximum Amount. Sellers shall not be liable for, or otherwise be required to indemnify against, any Damages sustained, suffered or incurred by any Purchaser Party unless Damages in the aggregate for all Purchaser Parties equal or exceed $150,000, in which event, any and all Purchaser Parties who sustained, suffered or incurred the Damages shall be entitled to be indemnified with respect to the full amount of its Damages, up to a maximum of $4 million dollars.
(b) Reduction of Damages. In computing the amount of Damages which are sustained, suffered or incurred by an Indemnitee, the Indemnifying Party or Parties be given the benefit of (i) insurance proceeds, if any (up to the maximum amount of Damages), that the Indemnitee shall have the right to receive.
(c) No Seller shall be required to pay Damages in excess of the purchase price (both cash and Promissory Notes) for his, her or its Shares of DFT as set forth on Schedule A. In addition, any Seller receiving Promissory Notes may pay for his, hers or its indemnification obligation by surrendering Promissory Notes issued to him, her or it, which will be valued for payment purposes at the principal amount thereof, plus accrued but unpaid interest. If the Damages are less than the Promissory Note, the outstanding principal balance
of Promissory Note shall remain outstanding as to that portion thereof exceeding the Damages. Purchaser will give such Seller notice of the adjusted outstanding principal amount of such Promissory Note.
(d) Exceptions. The threshold and maximum amounts in subparagraph (a) and (c) hereof shall not apply to any misrepresentation, breach of warranty, or nonfulfillment of or failure to perform any covenant or agreement made by any Seller included in this Agreement or the certificates delivered by Sellers pursuant to Article V hereof that relates to the capitalization of DFT (Section 1.2(a)) or its Subsidiaries (Section 1.3), the ownership of DFT securities by Sellers (Section 1.2(b)) or transactions (or omissions or failures to act) between or among DFT (and its Subsidiaries) and any Seller (and its Affiliates). Notwithstanding anything to the contrary in this Agreement, if the Closing occurs, no claim for indemnification may be asserted by any Purchaser Party with respect to any matter discovered by or known to Purchaser Party on or before the Closing Time.
Section 7.6 Limitations on Purchaser's Indemnification Obligations.
(a) Threshold Amount. Purchaser shall not be liable for, or otherwise be required to indemnify against, any Damages sustained, suffered or incurred by any Sellers Party unless damages in the aggregate for all Sellers Parties, equal or exceed $150,000, in which event, the Sellers Party who sustained, suffered or incurred the Damages shall be entitled to be indemnified with respect to the full amount of its Damages up to a maximum of $4 million.
(b) Exceptions. The threshold and maximum amounts in subparagraph (a) hereof shall not apply to any misrepresentation, breach of warranty, or nonfulfillment of or failure to perform any covenant or agreement made by Purchaser or BCC included in this Agreement, or the certificates delivered by Purchaser pursuant to Article VI hereof that relates to the capitalization of Purchaser. Notwithstanding anything to the contrary in this Agreement, if the Closing occurs, no claim for indemnification may be asserted by any Seller Party with respect to any matter discovered by or known to Seller Party on or before the Closing Time.
ARTICLE VIII
SURVIVAL OF REPRESENTATION
Section 8.1 Survival of Representations. All representations and warranties of DFT, Sellers, and Purchaser contained in this Agreement shall survive the Closing Time and shall continue for a period of three years after the Closing Time, at which time such representations and warranties (except for Sections 1.2, 1.10, 1.13 and 1.20) shall expire and become null and void, unless prior to the expiration of the three-year period beginning at the Closing Time, written notice of a claim for the inaccuracy or breach of such representations and warranties shall be made to Sellers or Purchaser, as the case may be. Sections 1.2, 1.10, 1.13 and 1.20 shall survive until sixty calendar days after the expiration of all applicable statutes of limitations (including all periods of extension, whether automatic or permissive), at which time they shall expire and become null and void, unless prior to the expiration thereof, written notice of a claim for the
inaccuracy or breach of Sections 1.2, 1.10, 1.13, and 1.20 shall be made to Sellers.
ARTICLE IX
EVENTS OF TERMINATION
Section 9.1 Events of Termination. This Agreement may be terminated (a) by mutual written agreement of Purchaser and Sellers holding a majority of the Shares, or (b) by Purchaser by written notice to Sellers, if the conditions set forth in Article V hereof shall not have been complied with or performed at or prior to the Closing Time in any material respect, or (c) by Sellers holding a majority of the Shares by written notice to Purchaser, if the conditions set forth in Article VI hereof shall not have been complied with or performed at or prior to the Closing Time in any material respect, and, in case of (b) and (c), such noncompliance or nonperformance shall not have been cured or eliminated (or by its nature cannot be cured or eliminated) on or before June 30, 1996.
Section 9.2 Effect of Termination. In the event that this Agreement shall be terminated pursuant to Section 9.1, all further obligations of the parties hereto under this Agreement (other than pursuant to Sections 1.16, 2.3, 4.7 and 10.1) shall terminate without further liability or obligation of either party to the other party hereunder.
ARTICLE X
MISCELLANEOUS
Section 10.1 Expenses. Except as otherwise provided in Article
IX, whether or not the transactions contemplated by this Agreement are
consummated, Purchaser, Sellers and DFT shall pay all of their respective
expenses relating to the transactions contemplated by this Agreement, except
that the reasonable costs and expenses of (i) Kraskin & Lesse not exceeding
$80,000, (ii) obtaining any Federal, state or local consents or approvals, and
(iii) any environmental investigations shall be borne by DFT. The reasonable
costs and expenses of (ii) and (iii) above shall initially be borne by
Purchaser but shall be ultimately borne by DFT if the Closing occurs.
Section 10.2 Transfer Taxes. All stock transfer and other stamps, transfer, documentary, sales, use, registration and other such taxes and fees (including any penalties and interest) incurred in connection with this Agreement and the transactions contemplated hereby (other than those imposed on or measured by the income of any Person) (collectively, the "Transfer Taxes") shall be paid by DFT, and DFT shall, at its own expense, properly file on a timely basis all necessary tax returns and other documentation with respect to any Transfer Taxes. Purchaser shall prepare such returns and other documentation for filing, and Sellers shall cooperate with Purchaser in connection therewith, including without limitation signing such returns and other documents as may be necessary or appropriate.
Section 10.3 Governing Law. The interpretation and construction of this Agreement, and all matters relating hereto, shall be governed by the laws of the
State of New York applicable to contracts made and to be performed entirely within the State of New York.
Section 10.4 "Person", "best efforts", "knowledge of Sellers" defined. "Person" shall mean and include an individual, a partnership, a joint venture, a corporation, a trust, an unincorporated organization and a government or other department or agency thereof. "Knowledge" shall mean the actual knowledge of such Person, and to the knowledge of Sellers means to the knowledge of Robert Maytum, Robert A. Maytum, Kurt Maytum or Mark Maytum. Whenever in this Agreement a party agrees to use its "best efforts" toward a certain end, such term shall mean such party's best efforts in accordance with reasonable commercial practice and without the incurring of unreasonable expenses.
Section 10.5 Captions. The Article and Section captions used herein are for reference purposes only, and shall not in any way affect the meaning or interpretation of this Agreement.
Section 10.6 Publicity. Except as otherwise required by law or regulation, neither of the parties hereto shall issue any press release or make any other public statement, in each case relating to or connected with or arising out of this Agreement or the matters contained herein, without obtaining the prior approval of the other party to the contents and the manner of presentation and publication thereof.
Section 10.7 Notices. Any notice or other communication required or permitted hereunder shall be sufficiently given if delivered in person or sent by facsimile
transmission or by registered or certified mail, postage prepaid, addressed as
follows: if to Purchaser, c/o Lynch Corporation, Eight Sound Shore Drive, Suite
290, Greenwich, Connecticut 06830, facsimile number: (203) 629-3718, Attention:
Chief Financial Officer; and if to Sellers, at the address, telephone number
and fax number set forth opposite Seller's name on Schedule A or such other
address or number as shall be furnished in writing by any such party, and such
notice or communication shall be deemed to have been given as of the date so
delivered, sent by facsimile transmission or mailed.
Section 10.8 Parties in Interest. This Agreement may not be transferred, assigned, pledged or hypothecated by any party hereto, other than by operation of law. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, executors, administrators, successors and permitted assigns.
Section 10.9 No Presumption against Draftsman. Because the parties fully negotiated the terms of this Agreement and Purchaser and DFT and Sellers had equal opportunity to influence its language, there shall be no presumption against any party on the grounds that such party was responsible for preparing this Agreement or any part thereof.
Section 10.10 Counterparts. This Agreement may be executed in two or more counterparts, all of which taken together shall constitute one instrument. The parties agree also that this Agreement shall be binding upon the transmission by facsimile by each party of a signed signature page thereof to the other party. If such a transmission occurs, the parties agree that they will each also
immediately post, by a nationally recognized overnight courier, a fully executed original counterpart of the Agreement to the other party.
Section 10.11 Entire Agreement. This Agreement, including the Exhibits, Schedules and other documents referred to herein which form a part hereof contain the entire understanding of the parties hereto with respect to the subject matter contained herein and therein. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter.
Section 10.12 Amendments. This Agreement may not be changed orally, but only by an agreement in writing signed by the parties hereto. Any provision of this Agreement can be waived, amended, supplemented or modified by written agreement of the parties hereto. A written agreement executed by Sellers holding a majority of the Shares shall be deemed to be action of all Sellers for all purposes of this Section and this Agreement.
Section 10.13 Severability. In case any provision in this Agreement shall be held invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions hereof will not in any way be affected or impaired thereby.
Section 10.14 Third Party Beneficiaries. Each party hereto intends that, except for Article VII hereof, this Agreement shall not benefit or create any right or cause of action in or on behalf of any Person other than the parties hereto.
IN WITNESS WHEREOF, Purchaser, BCC, DFT and Sellers have each duly executed this Agreement all as of the Execution Date.
BRIGHTON COMMUNICATIONS LYNCH TELEPHONE CORPORATION VIII
CORPORATION
By: By:
-------------------- ---------------------------
Name: Name:
------------------
Title: Title:
-----------------
DUNKIRK & FREDONIA TELEPHONE CO.
By:
---------------------------
Name:
Title:
SELLERS
L.S. L.S.
- ------------------------ -------------------------
Robert Maytum Robert A. Maytum
L.S. L.S.
- ------------------------ --------------------------
Robert A. Maytum Robert A. Maytum
Trustee of Robert Maytum IRR Trustee of Robert Maytum
Trust Insurance Trust
L.S. L.S.
- ------------------------ --------------------------
Robert A. Maytum Marilyn S. Maytum
Trustee of Marjorie Hardin
Trust
L.S. L.S.
- ------------------------ --------------------------
Mark R. Maytum Kurt W. Maytum
L.S. L.S.
- ------------------------ --------------------------
Laurie L. Weatherlow Wade A. & Laurie Weatherlow
L.S.
- ------------------------
Peter M. Strong
|
LOAN AGREEMENT
dated as of November 6, 1995
by and
between
AER FORCE COMMUNICATIONS, L.P.,
as "Borrower,"
and
LYNCH PCS CORPORATION A,
as "Lender"
LOAN AGREEMENT
This Loan Agreement (this "Agreement") dated as of November 6, 1995 is entered into by and between Aer Force Communications, L.P., a Delaware limited partnership ("Borrower"), and LYNCH PCS CORPORATION A, a Delaware corporation ("Lender").
RECITALS:
WHEREAS, Borrower desires Lender to extend a loan to Borrower in such amount and on such terms as set forth herein to acquire PCS Licenses pursuant to the C-Block Auction in the BTA's listed on Schedule B to the Partnership Agreement; and
WHEREAS, Lender is prepared to make such Loan upon the terms and subject to the conditions set forth herein only for the purposes of the Partnership acquiring and operating PCS Licenses in the BTA's listed on Schedule B to the Partnership Agreement.
AGREEMENT:
NOW, THEREFORE, the parties agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.01. Defined Terms. As used in this Agreement, the following terms have the following meanings:
"Applicable Rate": An interest rate, compounded annually, equal to 15% per annum.
"Business Day": A day other than a Saturday, Sunday or other day on which commercial banks in New York are authorized or required by law to close.
"Loan Documents": This Agreement, the Note, and all other documents executed in connection with this Agreement and/or the Loan.
"Maturity Date": The Seventh (7th) Anniversary of the date hereof.
"Note": The promissory note substantially in the form of Exhibit A hereto to be executed by Borrower, payable to the order of Lender.
"Partnership Agreement": The Partnership Agreement of Borrower dated as of July 27, 1995.
"Subsidiary": Any corporation of which fifty percent (50%) or more of the issued and outstanding voting securities are, directly or indirectly, owned by Borrower or any Subsidiary of Borrower or any other entity of which fifty percent (50%) or more of the ownership interests are owned, directly or indirectly, by Borrower or any Subsidiary of Borrower.
SECTION 1.02. Incorporation of Certain Terms By Reference. Capitalized terms used herein but not otherwise defined shall have the meanings specified in the Partnership Agreement as in effect on the date hereof.
ARTICLE II
THE LOAN
SECTION 2.01. The Initial Loan.
(a) The Loan. Lender agrees, on the terms and conditions hereinafter set forth, to make a loan (the "Initial Loan") to Borrower in the aggregate principal amount of Three Million Five Hundred and One Thousand, Three Hundred and Ninety-seven Dollars ($3,501,397). The Initial Loan shall be made immediately prior to the date that the Borrower is required to make up-front deposits to the FCC for the C-Block Auction and shall be used by Borrower for such purpose and for the purposes set forth in Paragraph (b) of this Section 2.01.
(b) Mandatory Prepayment.
(1) If after the termination of the C-Block Auction, Borrower has any funds, including Initial Capital Contributions as provided in the Partnership Agreement, which are not being used, or reasonably held for use, to fund initial 5% down payments (due
within 5 business days after the C-Block Auction closes) for any PCS Licenses won by Borrower in the C-Block Auction, Borrower shall, upon the written demand of Lender, immediately prepay the Initial Loan in an amount equal to such unused proceeds.
(2) If the FCC shall not grant any PCS Licenses to Borrower in respect of any PCS Licenses won in the C-Block Auction or if any PCS License granted to Borrower pursuant to the C-Block Auction is either transferred or revoked, Borrower shall, upon the demand of Lender, immediately prepay all amounts owed by Borrower to Lender under the Loan Documents. If no PCS Licenses are granted to Borrower, Borrower shall not have to pay any interest or commitment fees, but only to pay the principal of the Loan.
(3) The net proceeds from the sale by the Partnership of any assets shall be used to prepay promptly a portion of the Loan equal to said net proceeds.
(4) Any prepayment under (b)(1) and (b)(3) hereof shall be applied to the payment of any accrued and unpaid principal before any application to principal.
(c) Supplemental Loans. After the grant of any PCS Licenses to Borrower pursuant to the C-Block Auction, Lender agrees, on the terms and conditions set forth, to make loans ("Supplemental Loans") to Borrower from time to time in an aggregate principal amount up to Twenty-one Million, Four Hundred and Ninety-eight Thousand, Six Hundred and Three Dollars ($21,498,603); provided, however, that the total of the Initial Loan and Supplemental Loans shall not exceed 60% of the cost (net of any bidding credits) of all PCS Licenses granted to Borrower pursuant to the C-Block Auction, in each case reduced by any amounts deemed to be Supplemental Loans pursuant to the second succeeding sentence. Supplemental Loans shall only be used for the following purposes:
(i) to fund the remaining 5% down payments due after PCS Licenses are granted;
(ii) to make installment interest payments on any PCS Licenses granted to Borrower pursuant to Section 24.711 of the FCC Rules;
(iii) to make payments pursuant to the next to last sentence of Section 1 and the proviso clause of
Section 2 of the Expenses Agreement (the "Expenses Agreement") dated as of July 27, 1995 among the Partnership, the General Partner and the Initial Limited Partner; and
(iv) any other business purposes approved in writing by Lender.
Supplemental Loans shall also include (1) all reasonable out-of-pocket expenses (including reasonable attorneys' fees) of the Initial Limited Partner pursuant to Section 1(b) of the Expenses Agreement and (2) all reasonable costs and expenses (including reasonable attorneys fees) incurred by Lender in connection with the negotiation and preparation of this Agreement and each of the other Loan Documents; provided, however, that the amounts deemed Supplemental Loans under this sentence shall not exceed $75,000. Lender's obligation to make Supplemental Loans (1) is conditional on Borrower being in full compliance with all the representations, warranties and covenants of Borrower contained in the Loan Documents, no Event of Default hereunder having occurred, and the FCC not having threatened to revoke any PCS Licenses granted to Borrower in the C-Block Auction and (2) shall terminate on the earlier of the maturity of the Loan (whether at the Maturity Date, by acceleration or otherwise) or the payment in full of the Loan. The term "Loan" shall include the Initial Loan, the Supplemental Loans, interest (including compounded interest) and all other amounts payable to Lender under the Loan Documents.
(d) Commitment Fees. Borrower shall pay to Lender a
commitment fee of 20% per annum from the date of the Initial Loan on the total
Twenty-five Million Dollars ($25,000,000) commitment to make Loans (including
any used portion); provided, however, that the total dollar amount of such
commitment shall not exceed 60% of the cost (net of any bidding credits) of all
PCS Licenses granted to Borrower pursuant to the C-Block Auction (in each case
reduced by any amounts deemed to be the Supplemental Loans pursuant to the
third sentence of Section 2.01(c)). The commitment fees shall be due and
payable, without interest, on the date when the commitment to make Supplemental
Loans shall terminate pursuant to clause (2) of the next to last sentence of
Section 2.01(c). If the commitment fees are not paid when so due and payable,
the commitment fees shall be deemed to bear interest at twice the Applicable
Rate until the date of payment. The commitment fees shall cease to accrue on
the earlier of the Maturity Date or the payment in full of the Loan.
SECTION 2.02. The Note. The Loan made by Lender pursuant hereto shall be evidenced by the Note, representing the obligation of Borrower to pay the aggregate unpaid principal amount of the Loan made by Lender, with interest thereon as prescribed in Section 2.05.
SECTION 2.03. Payment of Principal. The entire unpaid principal amount of the Loan, together with all accrued and unpaid interest thereon, shall be due and payable on the Maturity Date.
SECTION 2.04. Optional Prepayment. Borrower may, at its option, prepay the Loan, without premium except as provided in the Note, in whole or in part at any time and from time to time; provided that Lender shall have received from Borrower notice of any such prepayment at least five (5) Business Days prior to the date of the proposed prepayment, in each case specifying the date and the amount of prepayment. Partial payments hereunder shall be in an aggregate principal amount of $50,000 or any integral multiple thereof. Any such prepayments shall be applied to the payment of any accrued and unpaid interest before any application to principal.
SECTION 2.05. Interest Rate and Payment Dates.
(a) Interest Rate and Payment. The Loan shall bear interest on the unpaid principal amount thereof from the date made through maturity (whether at the Maturity Date, by acceleration or otherwise) at the Applicable Rate. All accrued and unpaid interest on the Loan shall be compounded annually and payable on the Maturity Date. Interest on the Loan shall be computed on the basis of a 360-day year for the actual number of days elapsed. In computing interest on the Loan, the date of the making of the Loan shall be included and the date of payment of the Loan shall be excluded.
(b) Default Interest. Upon the occurrence, and during the continuation of, any Event of Default, the principal amount of the Loan and any interest accrued and unpaid thereon shall bear interest at the Applicable Rate plus 3% per annum.
SECTION 2.06. Security, Other.
(a) Security. All amounts payable pursuant to the Loan Documents shall be secured to the extent permitted by law by a security interest in all the assets of Borrower.
(b) Not Exceed Maximum Rate. Notwithstanding the foregoing, neither interest on the Loan nor commitment and other fees shall exceed the highest rate permitted by applicable law.
ARTICLE III
GENERAL PROVISIONS CONCERNING THE LOAN
SECTION 3.01. Payments. Borrower shall make each payment of principal, interest and fees hereunder and under the Note, without setoff or counterclaim, not later than 11:00 a.m. New York City time, on the day when due, in lawful money of the United States of America to Lender by wire transfer sent to an account designated in writing from time to time by Lender, in immediately available funds. Payments received after such time shall be deemed to have been paid by Borrower on the next succeeding Business Day.
SECTION 3.02. Payment on Non-Business Days. If any payment to be made hereunder or under the Note shall be stated to be due on a day which is not a Business Day, such payment may be made on the next succeeding Business Day, and with respect to payments of principal, interest thereon shall be payable at the then applicable rate during such extension.
SECTION 3.03. Conditions; Documentation. As a condition to the making of the Loan, Borrower will execute and deliver or cause to be executed and delivered to Lender such documents, instruments and certificates as Lender may reasonably request.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants as follows:
SECTION 4.01. Organization. Borrower is a limited partnership duly formed and validly existing and in good standing under the laws of the State of Delaware, is duly qualified to transact business in all jurisdictions in which the conduct of its business requires such qualification, and has full partnership power and authority to conduct its business and to enter into and perform its obligations under the Loan Documents.
SECTION 4.02. Authorization. The execution, delivery and performance of the Loan Documents by Borrower has been duly authorized by all necessary partnership action on the part of Borrower. Each Loan Document has been duly executed by Borrower and delivered by Borrower to Lender and constitutes the legal, valid and binding obligation of Borrower, enforceable in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency or other laws affecting creditors' rights generally and the exercise of judicial discretion in accordance with general equitable principles.
SECTION 4.03. No Conflict. The execution, delivery and
performance of each Loan Document by Borrower, and the compliance with the
terms and conditions hereof and thereof by Borrower, does not, with or without
the giving of notice or the lapse of time or both, conflict with, breach the
terms or conditions of, constitute a default under, or violate the (i)
Partnership Agreement, (ii) any agreement to which Borrower is a party, or
(iii) any judgment, decree, order, law, rule or regulation applicable to
Borrower.
SECTION 4.04. Litigation. There is no unsatisfied judgment, award, order, writ, injunction, arbitration decision or decree outstanding or any litigation, proceeding, claim or investigation pending or, to the best knowledge of Borrower, threatened against Borrower which may adversely affect the ability of Borrower to enter into and perform its obligations under Loan Documents.
SECTION 4.05. Accuracy of Representations and Warranties; Disclosure. The representations and warranties of the General Partner set forth in the Partnership Agreement are true and correct in all material respects. No representation or warranty of Borrower set forth in this Agreement, or any certificate or written statement furnished by Borrower or Lender for use in connection with the transactions contemplated hereby, and no representation or warranty of the General Partner set forth in the Partnership Agreement, contains any untrue statement of material fact or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading.
ARTICLE V
AFFIRMATIVE COVENANTS
Borrower covenants that so long as any of the Loan or any obligation of Borrower under the Loan Documents remains outstanding, and until payment in full of all obligations of Borrower subject hereto, Borrower shall:
SECTION 5.01. Punctual Payments. Punctually pay the interest and principal in respect of the Loan and all other obligations under any of the Loan Documents at the times and place and in the manner specified in the Loan Documents.
SECTION 5.02. Accounting Records. Maintain adequate books and records in accordance with generally accepted accounting principles consistently applied ("GAAP"), and permit any representative of Lender, at any reasonable time, to inspect, audit and examine such books and records, to make copies of the same, and to inspect the properties of Borrower.
SECTION 5.03. Financial Statements and Reports. Provide to Lender the following, in form and detail satisfactory to Lender:
(a) not later than ninety (90) days after the end of each fiscal year of Borrower, an audited balance sheet of Borrower as of the end of such fiscal year, and the related audited statements of operations and cash flows of Borrower for the twelve-month period ended on the last day of such fiscal year, in each case, prepared in accordance with GAAP, together with an auditor's report thereon prepared by a nationally recognized firm of certified public accountants;
(b) not later than thirty (30) days after the end of each fiscal quarter of Borrower, an unaudited balance sheet of Borrower as of the last day of such fiscal quarter and the related unaudited statements of operations and cash flows of Borrower for the three (3) month period ended on the last day of such fiscal quarter, in each case, prepared in accordance with GAAP (subject to normal year-end adjustments and the absence of footnotes);
(c) within five (5) days of receipt by members of the Partnership Committee, any written report (including any Business Plan or any amendment thereto) provided to the members of the Partnership Committee concerning the business, assets, condition (financial or otherwise) or prospects of the Borrower or its business; and
(d) from time to time such other information as Lender may reasonably request.
SECTION 5.04. Compliance. Maintain all PCS Licenses and all other licenses, permits, governmental approvals, rights, privileges and franchises necessary for the conduct of Borrower's business; conduct its business in an orderly and regular manner and in a manner consistent with the terms of the Partnership Agreement; and comply with the provisions of the Partnership Agreement and all laws, rules, regulations and orders of any governmental authority applicable to Borrower or its business.
SECTION 5.05. Insurance. Maintain and keep in force insurance of the types and in amounts customarily carried in lines of business similar to Borrower's, including but not limited to fire, extended coverage, public liability, property damage and workers' compensation, carried with companies and in amounts satisfactory to Lender, and deliver to Lender from time to time at Lender's request schedules setting forth all insurance then in effect.
SECTION 5.06. Facilities. Keep all Borrower's properties useful or necessary to Borrower's business in good repair and condition, and from time to time make necessary repairs, renewals and replacements thereto so that Borrower's properties shall be fully and efficiently preserved and maintained.
SECTION 5.07. Taxes and Other Liabilities. Pay and discharge when due any and all indebtedness, obligations, assessments and taxes, both real or personal and including federal and state income taxes, except such as Borrower may in good faith contest or as to which a bona fide dispute may arise, provided provision is made to the satisfaction of Lender for eventual payment thereof in the event that it is found that the same is an obligation of Borrower.
SECTION 5.08. Notification. Promptly give notice in writing to Lender of (i) the occurrence of any Event of Default or any event reasonably likely to result in the occurrence of an Event of Default, or (ii) any material adverse change in the business, assets, condition (financial or otherwise) or prospects of Borrower.
SECTION 5.09. Supplemental Loans Replacement. At the request of Lender, Borrower will use its best efforts to refinance the Loan.
ARTICLE VI
NEGATIVE COVENANTS
Borrower further covenants that so long as the Loan or any obligation under the Loan Documents remains outstanding, and until payment in full of all obligations of Borrower subject hereto, Borrower will not without the prior written consent of Lender:
SECTION 6.01. Use of Proceeds. Use any of the proceeds of the Loan except for the purposes stated in Section 3.01 hereof.
SECTION 6.02. Conduct of Business. Conduct any business other than the Partnership Business.
SECTION 6.03. Merger; Consolidation, Etc.. Merge, consolidate or combine with any other Person or sell all or substantially all of Borrower's assets or properties.
SECTION 6.04. Acquisition and Disposition of Assets. Acquire, sell, lease, exchange, transfer, mortgage, pledge, license or dispose of assets in any transaction or series of related transactions involving consideration of a value in excess of $100,000 in any 12-month period or $300,000 in the aggregate.
SECTION 6.05. Incurrence of Indebtedness. Incur indebtedness for borrowed money, or refinance, modify or extend any indebtedness of Borrower for borrowed money.
SECTION 6.06. Capital Expenditure; Investments. Make any capital expenditure, investment or capital contribution, or any commitment to make any capital expenditure, investment or capital contribution in an amount in excess of $100,000 in any 12-month period or $300,000 in the aggregate.
SECTION 6.07. Loans; Guarantees. Make any loan or guarantee any indebtedness or liability of any other Person.
SECTION 6.08. Partnership Distributions. Distribute any assets or property of Borrower to any Partner of Borrower or
redeem, repurchase or otherwise retire for value any partnership interest of any Partner of Borrower.
SECTION 6.09. Material Agreements. Enter into (i) any Affiliation Agreement, (ii) any joint venture, partnership or other similar agreement or (iii) any agreement, contract or lease that is entered into other than in the ordinary course of business or that involves the furnishing or receipt of consideration to or by Borrower with value in excess of $100,000 in any 12-month period or $300,000 in the aggregate.
SECTION 6.10. Related Party Transaction. Enter into any Related Party Transaction.
SECTION 6.11. Modification of PCS Licenses. Surrender, not seek renewal, or seek the transfer, of any PCS License held by Borrower or agree to any material modification to any PCS License held by Borrower.
SECTION 6.12. Pledge of Assets. Mortgage, pledge, grant or permit to exist a security interest in, or lien upon, any of its assets of any kind, now owned or hereafter acquired.
SECTION 6.13. Subsidiary. Create or acquire any interest in any Subsidiary.
SECTION 6.14. Change in Benefits. Continue to Partici- pate
in the C-Block Auction process or acquire any PCS License awarded to Borrower
pursuant to the C-Block Auction, if for any reason any of the benefits
(including without limitation bidding credits and instalment payment terms)
available to a small business as provided in the FCC Rules as of the date
hereof shall cease to be available to the Borrower.
ARTICLE VII
EVENTS OF DEFAULT
SECTION 7.01. Events of Default. The occurrence of any of the following events shall constitute an event of default hereunder (an "Event of Default"):
(a) Borrower shall fail to pay any portion of the principal or interest of the Loan or other amount payable hereunder or under the Note when due; or
(b) Any representation or warranty made by Borrower herein or in connection with any other Loan Document, shall prove to have been incorrect in any material respect when made; or
(c) Borrower shall default in any material respect in the
timely performance of or compliance with any term or condition contained in any
Loan Document, and such default shall not have been remedied or waived for
twenty (20) Business Days after such failure, or any Partner (other then
Lender) shall default in any material respect in the performance of or
compliance with any term or condition of the Partnership Agreement or the
Expenses Agreement, and such default shall not have been remedied within ten
(10) Business Days of such default; or
(d) Borrower shall (i) have an order for relief entered with
respect to it under any federal or state bankruptcy law or any similar law
relating to the enforcement of creditors rights generally (a "Bankruptcy Law")
(ii) not pay, or admit in writing his inability to pay its debts generally as
they become due, (iii) make an assignment for the benefit of its creditors, (v)
apply for, seek, consent to, or acquiesce in, the appointment of a receiver,
custodian, conservator, trustee, examiner, liquidator or similar official for
his or any substantial part of his property, (vi) institute any proceeding
seeking an order for relief under any Bankruptcy Law or seeking to adjudicate
it a bankrupt or insolvent, or seeking dissolution, winding up, liquidation,
reorganization, arrangement, adjustment or composition of it or its debts under
any law relating to bankruptcy, insolvency or reorganization or relief of
debtors or fail to file an answer or other pleading denying the material
allegations of any such proceeding filed against it, (vii) take any action to
authorize or effect any of the foregoing actions, or (viii) fail to contest in
good faith any appointment or proceeding described in this Subsection 7.01(d);
or
(e) A receiver, custodian, conservator, trustee, examiner, liquidator or similar official shall be appointed for Borrower or any substantial part of its property, or a proceeding described in Subsection 7.01(d)(v) shall be instituted against Borrower and such appointment continues undischarged or such proceeding continues undismissed or unstayed for a period of 60 consecutive days;
(f) There shall have occurred an event of dissolution of the Partnership within the meaning of Section 9.1 of the Partnership Agreement; or
(g) The FCC shall have revoked, or has instituted proceedings to revoke, any PCS Licenses granted to the Borrower in the C-Block Auction;
(h) The General Partner shall have Transferred any of its interest in the Partnership; or
(i) There shall have occurred a Change of Ownership of the General Partner within the meaning of Section 7.4 of the Partnership Agreement.
SECTION 7.02. Acceleration; Remedies Upon Occurrence of Event of Default. Upon the occurrence of any Event of Default described in clause (d), (e), (f), (g), (h) or (i) of Section 7.01, the Loan (together with accrued interest thereon) and all other amounts owing under this Agreement, the Note and the other Loan Documents shall automatically become due and payable, and upon the occurrence of any other Event of Default, Lender may, by notice to Borrower, declare the Loan (together with accrued interest thereon) and all other amounts owing under this Agreement and the other Loan Documents to be due and payable forthwith, whereupon the same shall immediately become due and payable. Except as expressly provided above in this Section, presentment, demand, protest and all other notices of any kind are hereby expressly waived.
ARTICLE VIII
MISCELLANEOUS
SECTION 8.01. Costs, Expenses and Attorneys' Fees. Borrower shall pay to Lender immediately upon demand the full amount of all reasonable costs and expenses (including reasonable attorneys' fees) incurred by Lender in connection with (a) the preparation of amendments and waivers to the Loan Documents, (b) the enforcement of Lender's rights and/or the collection of any amounts which become due to Lender under any of the Loan Documents, and (c) the prosecution or defense of any action in any way related to any of the Loan Documents, including without limitation any action for declaratory relief.
SECTION 8.02. Amendments, Etc. No amendment or waiver of any provision of the Loan Documents nor consent to any departure by Borrower or Lender therefrom, shall in any event be effective unless the same shall be in writing and signed by the other party, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given.
SECTION 8.03. Notices, Etc. Except as otherwise set forth in this Agreement, all notices and other communications provided for hereunder shall be in writing (including telegraphic, telex or facsimile communication) and mailed or telegraphed or telexed or sent by facsimile or delivered, to Borrower or Lender at their respective addresses set forth on the signature page hereof; or, as to any other Person, at such other address as shall be designated by such Person in a written notice to the other parties. All such notices and communications shall be effective when deposited in the mails, sent by telex or sent by facsimile, respectively, except that notices and communications to Lender pursuant to Article II or VII shall not be effective until received by Lender.
SECTION 8.04. Indemnification. Borrower agrees to indemnify and hold harmless Lender and the Collateral Agent and their respective affiliates, directors, officers, employees, agents and advisors (each, an "Indemnified Party") from and against any and all claims, damages, losses, liabilities and expenses (including without limitation reasonable fees and expenses of counsel) that may be incurred by or asserted or awarded against any Indemnified Party, in each case arising out of or in connection with or by reason of, the preparation for a defense of, any investigation, litigation or proceeding arising out of, related to or in connection with the Loan Documents, the proposed or actual use of the proceeds therefrom or any of the other transactions contemplated hereby or thereby, whether or not such investigation, litigation or proceeding is brought by Borrower, creditors of Borrower, an Indemnified Party or any other Person or an Indemnified Party is otherwise a party thereto, and whether or not the transactions contemplated hereby or by any other Loan Document are consummated, except to the extent such claim, damage, loss, liability or expenses is found in a final, non-appealable judgment by a court of competent jurisdiction to have resulted from such Indemnified Party's gross negligence or willful misconduct.
SECTION 8.05. No Waiver; Remedies. No failure on the part of Lender or Borrower to exercise, and no delay in exercising,
any right under any of the Loan Documents shall operate as a waiver thereof, nor shall any single or partial exercise of any right under any of the Loan Documents preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law.
SECTION 8.06. Assignments and Participation. Lender may sell, assign, transfer, negotiate or grant participation to any other party in all or part of the obligations of Borrower outstanding under the Loan Documents without Borrower's prior written consent. Lender may, in connection with any actual or proposed assignment or participation, disclose to the actual or proposed assignee or participant, any information relating to Borrower.
SECTION 8.07. Effectiveness; Binding Effect; Governing Law. This Agreement and each other Loan Document shall be binding upon and inure to the benefit of Borrower, Lender and their respective successors and assigns, except that Borrower shall not have the right to assign his rights hereunder or any interest herein without the prior written consent of Lender. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF DELAWARE WITHOUT GIVING EFFECT TO ITS CHOICE OF LAW DOCTRINE.
SECTION 8.08. WAIVER OF JURY TRIAL. BORROWER AND LENDER HEREBY AGREE TO WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS LOAN TRANSACTION AND THE LENDER/BORROWER RELATIONSHIP THAT IS BEING ESTABLISHED. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL-ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS TRANSACTION, INCLUDING, WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS. LENDER AND BORROWER EACH ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH HAS ALREADY RELIED ON THE WAIVER IN ENTERING INTO THIS AGREEMENT, AND THAT EACH WILL CONTINUE TO RELY ON THE WAIVER IN THEIR RELATED FUTURE DEALINGS. LENDER AND BORROWER FURTHER WARRANT AND REPRESENT THAT EACH HAS REVIEWED THIS WAIVER WITH LEGAL COUNSEL, AND THAT EACH KNOWINGLY AND VOLUNTARILY WAIVES JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED
EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT, THE LOAN DOCUMENTS, OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THE LOAN.
SECTION 8.09. Consent to Jurisdiction; Venue; Agent for
Service of Process. All judicial proceedings brought against Borrower with
respect to the Loan Documents may be brought in any state or Federal court of
competent jurisdiction in the State of Delaware, and by execution and delivery
of this Agreement, Borrower accepts for itself and in connection with its
properties, generally and unconditionally, the nonexclusive jurisdiction of the
aforesaid courts, and irrevocably agrees to be bound by any judgment rendered
thereby in connection with the Loan Documents. Borrower irrevocably waives any
right it may have to assert the doctrine of forum non conveniens or to object
to venue to the extent any proceeding is brought in accordance with this
Section 6.09.
SECTION 8.10. Entire Agreement. The Loan Documents embody the entire agreement and understanding between the parties hereto with respect to the subject matter hereof and supersede all prior agreements and understandings between the parties hereto relating to the subject matter hereof.
SECTION 8.11. Separability of Provisions. In case any one or more of the provisions contained in this Agreement should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby.
SECTION 8.12. Execution in Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement.
SECTION 8.13. Independence of Covenants. All covenants hereunder shall be given independent effect so that if a particular action or condition is not permitted by any of such covenants, the fact that it would be permitted by an exception to, or be otherwise within the limitations of, another covenant shall not avoid the occurrence of an Event of Default if such action is taken or condition exists.
SECTION 8.14. Survival of Representations. All representations and warranties of Borrower contained in any Loan
Document shall survive delivery of the Note and the making of the Loan herein contemplated.
SECTION 8.15. Non-Recourse to General Partner. Lender shall have no recourse against the Partnership Committee members, any Partner, any member of the General Partner Control Group, nor any of their respective officers, directors, employees, agents, shareholders, partners or controlling persons, nor any of their respective assets (except to the extent such assets are also assets of the Borrower), for the payment of any principal of or interest on the Loan, commitment fees, or any other amount due under any Loan Document, or for the breach of any representation, warranty, covenant or agreement (other than any covenant or agreement set forth in Sections 6.2 and 6.4 of the Partnership Agreement) under any Loan Document.
IN WITNESS OF THEIR AGREEMENT, the parties have executed this Agreement as of the date first set forth above.
LYNCH PCS CORPORATION A
AER FORCE COMMUNICATIONS, L.P.
By: Aer Force Communications Inc., its
General Partner
EXHIBIT A
PROMISSORY NOTE
$25,000,000 November 21, 1995
FOR VALUE RECEIVED, Aer Force Communications, L.P., a Delaware limited
partnership ("Borrower"), promises to pay to Lynch PCS Corporation A ("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 Twenty-five Million Dollars ($25,000,000) or so much
thereof as may have been loaned or deemed loaned by Lender to Borrower pursuant
to the Loan Agreement, with interest from the date hereof on the unpaid
principal balance hereunder at the rate of interest set forth in that certain
Loan Agreement of even date herewith between Borrower and Lender (the "Loan
Agreement"), including, without limitation, default interest as set forth in
Section 2.04 of the Loan Agreement. (Capitalized terms used herein and not
otherwise defined shall have the meanings given to such terms in the Loan
Agreement). The principal amount under this Note, and all accrued and unpaid
interest thereon, shall be due and payable on the Maturity Date, unless the
Maturity Date is extended or otherwise modified pursuant to the Loan Agreement.
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.
Upon the occurrence of an Event of Default under the Loan Agreement the holder hereof may, at its option, without notice to or demand upon Borrower or any other party, except as otherwise provided in the Loan Agreement, declare immediately due and payable the entire principal balance hereof together with all accrued and unpaid interest hereon, plus any other amounts then owing pursuant to this Note or the Loan Agreement, whereupon the same shall be immediately due and payable. On each anniversary of the date of any default hereunder and while such default is continuing, all interest which has become payable and is then delinquent shall, without curing the default hereunder by reason of such delinquency, be added to the principal amount due under this Note, and shall thereafter bear interest at the same rate as is applicable to principal. 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 the Loan Documents shall be secured by a security interest in all of the assets of Borrower. Lender's recourse against any Partner of the Lender (and certain others) for the payment of the principal of, interest on or other sums payable under this Note shall be limited as set forth in Section 8.15 of the Loan Agreement.
Each Loan, or other credit extension made under this Note will be evidenced by a written record made by Lender indicating the amount and date of such transaction. Such records of Lender shall be deemed by Borrower and Lender to be sufficient evidence of loans made, or credit extended under this Note.
This Note shall be governed by, and construed in accordance with, the laws of the State of Delaware 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.
AER FORCE COMMUNICATIONS, L.P.
By: Aer Force Communications Inc., its
General Partner
TABLE OF CONTENTS
PAGE
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ARTICLE I
DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SECTION 1.01. Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
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SECTION 1.02. Incorporation of Certain Terms By Reference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
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ARTICLE II
THE LOAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
SECTION 2.01. The Initial Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
----------------
SECTION 2.03. Payment of Principal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
--------------------
SECTION 2.04. Optional Prepayment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
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SECTION 2.05. Interest Rate and Payment Dates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
-------------------------------
ARTICLE III
GENERAL PROVISIONS CONCERNING THE LOAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
SECTION 3.01. Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
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SECTION 3.02. Payment on Non-Business Days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
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SECTION 3.03. Conditions; Documentation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
SECTION 4.01. Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
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SECTION 4.02. Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
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SECTION 4.03. No Conflict . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
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SECTION 4.04. Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
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SECTION 4.05. Accuracy of Representations and Warranties; Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . 6
-------------------------------------------------------
ARTICLE VAFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
SECTION 5.01. Punctual Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
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SECTION 5.02. Accounting Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
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SECTION 5.03. Financial Statements and Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
--------------------------------
SECTION 5.04. Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
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SECTION 5.05. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
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|
Page
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SECTION 5.06. Facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
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SECTION 5.07. Taxes and Other Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
---------------------------
SECTION 5.08. Notification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
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SECTION 6.01. Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
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SECTION 6.02. Conduct of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
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SECTION 6.04. Acquisition and Disposition of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
-------------------------------------
SECTION 6.05. Incurrence of Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
--------------------------
SECTION 6.06. Capital Expenditure; Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
--------------------------------
SECTION 6.07. Loans; Guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 9
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SECTION 6.08. Partnership Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 9
-------------------------
SECTION 6.09. Material Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 9
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SECTION 6.10. Related Party Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 9
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ARTICLE VII
EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 9
SECTION 7.01. Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
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SECTION 7.02. Acceleration; Remedies Upon Occurrence of Event of Default . . . . . . . . . . . . . . . . . . . . . . . . 11
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ARTICLE VIII
MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
SECTION 8.01. Costs, Expenses and Attorneys' Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
-----------------------------------
SECTION 8.02. Amendments, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
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SECTION 8.03. Notices, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
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SECTION 8.04. Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
---------------
SECTION 8.05. No Waiver; Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
-------------------
SECTION 8.06. Assignments and Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
-----------------------------
SECTION 8.07. Effectiveness; Binding Effect; Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
--------------------------------------------
SECTION 8.08. Waiver of Jury Trial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
--------------------
SECTION 8.09. Consent to Jurisdiction; Venue; Agent for Service of Process . . . . . . . . . . . . . . . . . . . . . . . 13
------------------------------------------------------------
SECTION 8.10. Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
----------------
SECTION 8.11. Separability of Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
--------------------------
SECTION 8.12. Execution in Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
-------------------------
SECTION 8.13. Independence of Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
-------------------------
SECTION 8.14. Survival of Representations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
---------------------------
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LYNCH CORPORATION
EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS
In Thousands, Except Per Share Data
Year ended December 31,
-----------------------
1995 1994 1993
---- ---- ----
PRIMARY
- --------------
EARNINGS:
INCOME BEFORE EXTRAORDINARY ITEM AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE $5,145 $2,592 $4,116
Loss on early extinguishment of debt (264) (206)
Cumulative effect of change in accounting principle (977)
--------------------------
NET INCOME $5,145 $2,328 $2,953
==========================
SHARES:
Weighted average common shares outstanding 1,379 1,330 1,226
Net effect of average options to acquire common
shares, based upon the Treasury Stock Method
using the average stock price 28 7
--------------------------
TOTAL 1,407 1,337 1,226
==========================
EARNINGS PER SHARE:
INCOME BEFORE EXTRAORDINARY ITEM AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE $3.66 $1.94 $3.36
Loss on early extinguishment of debt 0.00 (0.20) (0.17)
Cumulative effect of change in accounting principle (0.78)
--------------------------
NET INCOME $3.66 $1.74 $2.41
==========================
ASSUMING FULLY DILUTION
- ---------------------------
EARNINGS:
INCOME BEFORE EXTRAORDINARY ITEM AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE $5,145 $2,592 $4,116
Add after tax interest expense applicable to
Convertible Debentures 481 869
--------------------------
5,145 3,073 4,985
Gain (loss) on early extinguishment of debt (264) (206)
Cumulative effect of change in accounting principle (957)
NET INCOME $5,145 $2,809 $3,822
==========================
SHARES:
Weighted average common shares outstanding 1,379 1,330 1,226
Weighted average number of common stock assuming
conversion of convertible debentures 294 447
Net effect of average options to acquire common
shares, based upon the Treasury Stock Method
using the year end stock price 28 13
-------------------------
TOTAL 1,407 1,637 1,673
=========================
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EARNINGS PER SHARE:
INCOME BEFORE EXTRAORDINARY ITEM AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE $3.66 $1.88 $2.98
Loss on early extinguishment of debt (0.16) (0.12)
Cumulative effect of change in accounting principle (0.57)
-------------------------
NET INCOME $3.66 $1.72 $2.29
=========================
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LYNCH CORPORATION
ANNUAL REPORT--1995
MORRIS BERKOWITZ
Business Consultant
E. VAL CERUTTI
Business Consultant
PAUL J. EVANSON
President of Florida Power & Light Company
MARIO J. GABELLI
Chairman of the Board and Chief Executive Officer of
Lynch Corporation and Chairman and Chief Executive
Officer of The Gabelli Funds Inc.
SALVATORE MUOIO
Vice President of Lazard Freres & Co.
RALPH R. PAPITTO
Chairman of AFC Cable Systems
PAUL P. WOOLARD
Business Consultant
MARIO J. GABELLI
Chairman of the Board and Chief Executive Officer
ROBERT E. DOLAN
Chief Financial Officer
ROBERT A. HURWICH
Vice President of Administration,
Secretary & General Counsel
JOSEPH H. EPEL
Treasurer
CARMINE P. CERAOLO
Assistant Controller
WESTERN NEW MEXICO TELEPHONE COMPANY
314 Yankee Street
Silver City, New Mexico 88062
INTER-COMMUNITY TELEPHONE COMPANY
P.O. Box A
Nome, North Dakota 58062
CUBA CITY TELEPHONE EXCHANGE COMPANY
BELMONT TELEPHONE COMPANY
2801 International Lane
Madison, Wisconsin 53704
BRETTON WOODS TELEPHONE COMPANY
Mount Washington Place
Bretton Woods, New Hampshire 03575
J.B.N. TELEPHONE COMPANY
CLR VIDEO, L.L.C.
Second & Kansas
Wetmore, Kansas 66550
HAVILAND TELEPHONE COMPANY
106 N. Main Street
Haviland, Kansas 67059
THE MORGAN GROUP, INC.
MORGAN DRIVE AWAY INC.
28651 US 20, West
Elkhart, Indiana 46515
SPINNAKER INDUSTRIES, INC.
600 N. Pearl Street
Dallas, Texas 75201
BROWN-BRIDGE INDUSTRIES, INC.
518 E. Water Street
Troy, Ohio 45373
CENTRAL PRODUCTS COMPANY
748 Fourth Street
Menasha, WI 54952
ENTOLETER, INC.
251 Welton Street
Hamden, Connecticut 06517
LYNCH MACHINERY, INC.
601 Independent Street
Bainbridge, Georgia 31717
M-TRON INDUSTRIES, INC.
100 Douglas Avenue
Yankton, South Dakota 57078
INVESTOR RELATIONS CONTACT
Robert E. Dolan
(203) 629-3333
TRANSFER AGENT & REGISTRAR
FOR COMMON STOCK
Chemical Mellon Shareholder Services
New York, New York
TRADING INFORMATION
American Stock Exchange
Securities Symbol ---------- ------ Common Stock LGL |
The Annual Meeting of Shareholders of Lynch Corporation will be held at 3:00 PM, May 9,1996 at Greenwich Library, 101 West Putnam Avenue, Greenwich, Connecticut.
FORM 10-K
COPIES OF THE CORPORATION'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1995 MAY BE OBTAINED, WITHOUT CHARGE, BY WRITING TO LYNCH CORPORATION, 8 SOUND SHORE DRIVE, GREENWICH, CT 06830, ATTENTION: ROBERT E. DOLAN.
FINANCIAL HIGHLIGHTS
(IN THOUSANDS OF DOLLARS, EXCEPT FOR SHARE AMOUNTS)
For the Year Ended December 31,
-------------------------------------------------------
1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------
Sales and Revenues:
Multimedia $ 23,597 $ 20,144 $ 16,206 $ 15,368
Services 122,303 101,880 82,829 67,141
Manufacturing 192,266 66,678 28,004 26,148
---------- ---------- ---------- ----------
Total $ 338,166 $ 188,702 $ 127,039 $ 108,657
========== ========== ========== ==========
- --------------------------------------------------------------------------------------------------
Earnings Before Interest, Taxes,
Depreciation and Amortization (EBITDA):
Multimedia $ 12,342 $ 10,858 $ 8,965 $ 8,522
Services 4,635 4,349 3,013 2,713
Manufacturing 16,542 4,606 1,899 3,181
Corporate Expenses-Net (2,928) (1,521) (1,366) (1,065)
---------- ---------- ---------- ----------
Total $ 30,591 $ 18,292 $ 12,511 $ 13,351
========== ========== ========== ==========
- --------------------------------------------------------------------------------------------------
Depreciation/Amortization:
Multimedia $ 7,350 $ 5,651 $ 4,400 $ 3,643
Services 1,264 915 803 971
Manufacturing 2,662 931 690 454
---------- ---------- ---------- ----------
Total $ 11,276 $ 7,497 $ 5,893 $ 5,068
========== ========== ========== ==========
- --------------------------------------------------------------------------------------------------
Capital Expenditures 19,569 11,598 4,356 3,244
- --------------------------------------------------------------------------------------------------
Net Earnings From Operations - Total $ 5,086* $ 2,402* $ 1,392* $ 2,151
- Per Share $ 3.62* $ 1.80* $ 1.14* $ 1.71
Net Income - Total 5,145 2,328 2,953 2,169
- Per Share - Primary 3.66 1.74 2.41 1.72
- Fully Diluted 3.66 1.72 2.29 1.72
- --------------------------------------------------------------------------------------------------
Working Capital $ 626 $ 22,713 $ 47,529 $ 49,449
Current Ratio 1 to 1 1.3 to 1 3.3 to 1 3.9 To 1
Total Assets $ 302,439 $ 185,910 $ 129,972 $ 111,374
Shareholders' Equity $ 35,512 $ 30,531 $ 24,316 $ 21,272
Per Share $ 25.76 $ 22.15 $ 19.84 $ 17.36
- --------------------------------------------------------------------------------------------------
Shares Outstanding (at year end) $1,378,663 $1,378,658 $1,225,677 $1,225,660
Price Per Share: High 84 3/4 32 7/8 26 3/8 26
Low 30 22 20 3/4 15 3/4
- --------------------------------------------------------------------------------------------------
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* Net Earnings per share From Operations excludes the following unusual items in 1995: gain of $0.04 on sale of Morgan stock; 1994: gain of $0.14 on sale of Tremont Stock and an extraordinary loss of ($0.20) from early extinguishment of debt; 1993: gain of $1.84 on Morgan IPO, gain of $0.39 on sale of Tremont Stock, extraordinary loss of ($0.17) from early extinguishment of debt, and cumulative effect charge of ($0.78) from change in accounting for income taxes; and in 1992: extraordinary gain ($0.01) from early extinguishment of debt, which are included in Net Income per share.
Another way to look at the company is to examine each of our businesses and to look at what share of those businesses we own. This methodology is know as "proportional ownership." Simply stated, what are the businesses Lynch owns, what are the revenues, EBITDA, cash, debt and values. Those who are familiar with cable TV and the oil industries are knowledgeable about the concept. We expect 1996 will unfold into another significant increase in these measures.
1995 DATA
Traditional Proportional
Accounting Ownership
- ----------------------------------------------------------------------------------------------------------------------------------
(000's) (000's)
Revenues -
Multimedia $ 23,597 $ 26,061
Services 122,303 60,601
Manufacturing 192,266 155,499
-------- --------
$338,166 $242,161
======== ========
EBITDA - Before Corporate Management
Fees and Expenses
Multimedia $ 12,907 $ 12,707
Services 4,735 2,346
Manufacturing 16,842 14,190
-------- --------
$ 34,484 $ 29,243
======== ========
Cash -
Multimedia $ 17,818 $ 15,639
Services 2,851 1,453
Manufacturing 5,403 4,662
-------- --------
$ 26,072 $ 21,754
======== ========
Debt -
Multimedia $ 72,197 $ 70,926
Services 3,275 1,669
Manufacturing 102,265 83,359
-------- --------
$177,737 $155,954
======== ========
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The proportional ownership amounts noted above, represent the reported revenues, EBITDA ("earnings before interest, taxes, depreciation and amortization"), cash (including marketable securities) and debt of the subsidiaries included in Lynch Corporation's consolidated financial statements and other significant minority-owned entities accounted for in the consolidated financial statements under the equity method.
Accordingly, the above proportional ownership amounts represent Lynch's percentage interest in the entities full reported amounts for the respective period or date. That is, the proportional ownership of revenues represents the entity's reported revenues for the year ended December 31, 1995, times Lynch's ownership of that entity throughout the year ended December 31, 1995. Proportional ownership of cash represents all cash, including marketable securities, of that entity, times Lynch's ownership of that entity at December 31, 1995.
CHAIRMAN'S LETTER
TO OUR SHAREHOLDERS:
By all standards, Lynch had another creditable year in 1995. The public price of our shares opened the year at $30 per share and closed at $581 1/42 per share. More importantly, we again increased the intrinsic value of our enterprise by substantially more than 25%, the annual hurdle we set as our long term corporate goal. In this annual sharing of our results and our philosophy with you, we thought we would step back from the day-to-day details and talk about our ten year involvement with Lynch. But first a look in brief at 1995.
THE LAST TWELVE MONTHS
Important dynamics in 1995 to enhance our intrinsic value were:
- - MULTIMEDIA--during the year, we added to our telephony holdings
- DUNKIRK & FREDONIA TELEPHONE COMPANY--we announced a relationship with the Maytum family to structure a transaction that will provide for management continuity, family participation in the ongoing operations particularly with a sensitivity to the needs of the local community.
- KANSAS EXPANSION--we took ourselves to the goal line with a transaction with Sprint in August, 1995 whereby we will add the communities of Haddam and Morrowville, Kansas to the service area of JBN Telephone Company.
- NORTH DAKOTA--we built on the existing Inter-Community operation with the purchase from US West of 1,400 telephone lines expected to close in mid-1996. The management of Inter-Community Telephone Company awaits the opportunity to enhance the service areas of Hope, Page, Sanborn, and Tower City. All was not rosy as the Department of Defense announced its intention to shut down our Autovon operation in that market.
- CLR VIDEO--we entered cable with the creation of CLR Video and the purchase of 4,500 cable subscribers from Douglas Cable Communications, L.L.C. in northeast Kansas. Lynch is the majority partner in a three way owner partnership including Robert Carson and Rainbow Telephone Company.
- - SPINNAKER BLOSSOMS--Spinnaker purchased Alco Standard's Central Products division which manufactures and markets a variety of adhesive-backed carton sealing tapes and is the second largest U.S. carton sealing tape manufacturer behind Minnesota Mining & Manufacturing. Central Products has two manufacturing facilities located in Menasha, Wisconsin and Brighton, Colorado. While financing has not been completed, Messrs. Boyle & Fleming are confident of their ability to complete the financing.
- - WOI-TV--Phil Lombardo was able to renegotiate the $14.0 million of loans outstanding and has basically reduced Lynch's investment in WOI to its equity investment.
- - M-TRON INDUSTRIES, INC.--participated fully in the growth of the telecommunications and computer industry it services. Revenues grew 62% to $20.1 million, EBITDA increased to $2.0 million in 1995 from $200,000 in 1994. M-tron's backlog was $7.3 million at December 31, 1995, up from $3.6 million at the end of the prior year.
- - LYNCH MACHINERY, INC.--In 1995, Lynch Machinery delivered 11 extra-large glass presses. This was extraordinary for a company of its size.
FINANCIAL HIGHLIGHTS
- - EBITDA (earnings before interest, taxes, depreciation and amortization) and before corporate expenses surged 67.5% to $34.5 million in 1995 from $20.6 million in 1994.
- - Revenues at $338.2 million, increased by 79.2% from the previous year (and are expected to also grow by over 40% again in 1996).
- - Capital expenditures were $19.6 million in 1995--as we continue to build our telecommunications infrastructure--compared to $11.6 million in 1994 and $13.6 million projected for 1996.
- - Our reported net earnings from operations excluding extraordinary items rose to $3.66 per share in 1995 from $1.88 in 1994.
AND NOW BACK TO THE FUTURE --
"THE FIRST TEN YEARS"
Some observers might look on our first ten years as "building a business on nothing." We grew Lynch's EBITDA from $147,000 in 1985 to $30.6 million in 1995--without an increase in our shares outstanding. But that's history! Where are we going? Should the next ten years be a period of harvesting the acorns that we planted, some of which have sprouted into oaks and some of which are still in the incubation/acceleration stage. Or should we plant more acorns? Or should we do both. The question is easier to articulate than the answer.
To understand our guidelines for the future, let's look at 1995 and the past transactions we structured for Lynch.
FIRST TEN YEARS "SOWING"
When we took command of the company in 1985, there were 1,364,110 shares outstanding and shareholder equity was $14.3 million. At the end of 1995, there were 1,378,663 shares outstanding and shareholder equity was $35.5 million. More importantly, EBITDA was nearly $31 million versus $147,000 in 1985.
1985 1995
- --------------------------------------------------------------------------------
Revenues $10,699,000 $338,166,000
EBITDA $ 147,000 $ 30,591,000
Shareholder Equity $14,348,000 $ 35,512,000
Number of Shares 1,364,110 1,378,663
Intrinsic Value (Pre-tax) $ 12 $ 150 +/-
Stock Price $ 11 $ 58 1/2
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BUILDING BLOCKS
How did we grow the company without giving away ownership? We accomplished this by our plans to endow each operating entity with its own shareholder base. We will now walk you through selected transactions that proved to be building blocks to our success. These are listed in no particular order.
MORGAN DRIVE AWAY, INC.
We purchased Morgan Drive Away, Inc. in 1988. We paid $11 million. Of this amount, $8 million was a loan from First National Bank of Elkhart, Indiana, $2 million was subdebt from Lynch, and $1 million represented our equity. At that time, Warren Golden, Chairman of Morgan's parent, CLC, which was acquired by Archer Daniel Midland, was retained to manage Morgan. Since then, Lynch has recouped all of its investment (including the exchange of our preferred for additional Morgan shares and cash in 1995). Today, Lynch owns 1.35 million shares of Morgan which is traded on the American Stock Exchange. While its shares presently trade in the $8 range, we believe underlying values are at least twice that amount. Of interest also is that Morgan's revenues in the first year of our ownership were $60.6 million and are now $122.3 million.
WESTERN NEW MEXICO TELEPHONE COMPANY
In 1989, we created a partnership with the Keen family of Western New Mexico Telephone Company ("WNMTC") whereby we affiliated with WNMTC primarily for cash and in turn entered into an agreement that provided for continuing ownership of Western New Mexico by our partners, the Keen family. Jackie Keen and Mary Beth (Baxter) learned a great deal from their father J.C. Keen on how to care for and nurture the local community while creating value for shareholders. Since the time we involved ourselves with the company, the number of telephone lines has increased from 4,100 to 5,200 a growth of 27%. They are now examining ways to enter the Internet and to provide the cable needs of their communities. Bottom line--our return on equity has been the best yet. Bring us more relationships like Western New Mexico.
SAFETY RAILWAY SERVICE CORPORATION (RENAMED SPINNAKER INDUSTRIES, INC. IN 1994)
Safety (83% to be precise) was purchased from Gurdon Wattles, former Chairman and CEO of American Manufacturing Corporation for $3.8 million in December 1987. Safety was energized in 1994 by entrusting the stewardship to the Boyle, Fleming & George Group, which received a 20% carry through the issuance of a warrant, plus certain dilution protection on the first round of financing with a strike price concurrent with the share price to be issued on a subsequent financing. Reflecting two three-for-two stock splits, Lynch's original investment of $3.8 million had a market value at December 31 of $80 million. Indeed, there are now 1.6 shares of Spinnaker outstanding for each share of Lynch.
TREMONT ADVISERS, INC.
Our investment in the financial services area also turned out to be profitable. In 1987, Lynch took a majority position in Tremont Partners, Inc., an investment management consulting firm. As Lynch's direction shifted to more industrial activities, we decided to spin Tremont off to our shareholders. In 1992, Tremont Advisers, Inc. was launched as a public entity via a rights offering to our shareholders. Indeed, each shareholder of Lynch has an investment in Tremont, if they exercised their rights. Today, Tremont is flourishing and oversees over $1.6 billion in assets.
ACQUISITION OF STATION WOI
Lynch signed a contract to buy Station WOI-TV, the ABC affiliate in Des Moines Iowa, on September 25, 1992. On March 1, 1994, Capital Communications Corporation, a joint venture between Lynch and Lombardo Communications II, Inc., acquired the Station from Iowa State University. The total consideration of the acquisition was $14 million. Despite greater than anticipated obstacles in closing the purchase, with our knowledge of broadcasting, our understanding of values, and with the proven broadcasting skills of Phil Lombardo, we were encouraged to proceed. Lynch initially borrowed $11 million from First National Bank of Omaha. While this was an unpopular decision when we made the acquisition, it has returned substantial results. We believe our share of the station over and above our capital contribution is worth $20 million, that is $15 per Lynch share. At the same time, an examination of the operating results in our financial statements indicates that the station contributed only $0.21 per share that we reported for 1995. This underscores another Lynch base-building concept, trade off reported earnings for an increase in the intrinsic or private market value.
NOT ALL WAS ROSY
During the first ten years, we suffered many disruptions. This included financial difficulty at Ameritrust Bank, the successor to the National Bank of Elkhart, that helped us purchase Morgan Drive Away, and the acquisition of the loan by a second bank and the subsequent trend of those banks to foreclose in the winter and spring of 1992. Things were so bleak that your Chairman paid a "unique" visit to Morgan to assure our Morgan family of their future.
In addition during this period, your Chairman was the subject of extensive harassment from an "excited shareholder" as well as regulatory inquiry into trading patterns in Lynch shares. Despite our desire and mandate to be fair and equal to all our growing and extended families, each has been caught up with the profits of the legal profession that is now able to advertise its legal services. The distraction of management from its goal of providing quality service to its customers needs to be eliminated in our society if indeed we are to compete in a global society with the Germans and Japanese. If any questions arise from this statement, refer to the movie Disclosure.
IT'S TIME TO HARVEST OR IS IT STILL TIME TO SOW
In examining our goals for our second ten years of stewardship, we expect to continue to find ways to grow our intrinsic value at the 25% hurdle rate that we set as our benchmark for growth in our assets. While we continue to be creative and opportunistic, we will continue husbanding resources that are at our disposal. As your Chairman, I personally own 346,646 shares of the company, approximately 24.9%. As the saying goes, "I eat my own cooking."
Our "prism" for the future is ever changing--should we spin-off Spinnaker--should we do an IPO for M-tron--should we sell convertibles/debt/equity to broaden our base of accessibility--should we accelerate penetration of telephone/cable/broadcast.
NEW DIRECTORS
I would like to welcome two new directors to the Lynch Board, Ralph R. Papitto, Chairman, AFCCable Systems, Inc. and Salvatore Muoio, Vice President of Lazard Freres &Co. L.L.C., who joined the Lynch Board during 1995. I have known and been associated with these two gentlemen for many years and look forward to their contributions to Lynch Corporation.
As always, we will be cognizant of the needs of our "stakeholders"--our equity owners, our staff, our partner/employees, our debtholders, and our communities in which we are job creators.
Mario J. Gabelli Chairman of the Board and Chief Executive Officer
March 29, 1996
LYNCH CORPORATION
A ROAD MAP TO VALUES
[charts to come]
OBJECTIVE
The stated and steadfast goal of Lynch is to grow the intrinsic value of the company by 25% annually. It is a long-term concept of managing an enterprise based on the cash flow generating ability of a business and the collateral value of its assets. Lynch plans to achieve its growth goal by acquisitions, both strategic and opportunistic, and by internal development.
STRATEGY
The initial stage of our strategy is to make value-oriented acquisitions, applying strict rate of return criteria. We will only participate in "friendly" transactions that will enable us to employ our management/shareholder partnership philosophy. We actively seek potential acquisitions that generally have the following characteristics:
- - domestic operations;
- - basic business--no high technology or high research and development;
- - a franchise with a protected and/or dominant market position;
- - dependable and growing free cash flow;
- - no turnarounds or start-up companies; and
- - good management in place willing to continue with the business.
An appropriate level of financial leverage is imperative to minimize our net investment and maximize our returns. Once an acquisition is made, we cement a management/shareholder partnership by insuring that each local management team has an interest in their respective business. Incentive compensation plans reward management for operating each company entrepreneurially by holding down operating expenses and making capital expenditures only as prudently necessary. They are encouraged, though, to develop and grow their businesses and will fully participate in the upside potential. We also look to optimize growth by structuring transactions in the most tax efficient manner and utilizing financial engineering, such as, access to public markets.
OUR STRUCTURE
[FLOW CHART GRAPH]
Currently, our organization consists of four acquisition vehicles--Lynch Multimedia, The Morgan Group, Inc., Spinnaker Industries, Inc. and Lynch itself. In addition, we have ownership interests in two broadcast properties--Station WOI-TV and Station WHBF-TV, and in two manufacturers--Lynch Machinery, Inc. and M-tron Industries, Inc.
Lynch Multimedia--Lynch Multimedia has investments of 80% to 100% in seven rural telephone properties throughout the United States and a 60% investment in one cable television investment. Of late, in private transactions, rural telephone companies have been selling at 7 to 9 times EBITDA. On a proforma basis, Lynch's companies consist of over 27,000 access lines, 4,700 cable television subscribers, 49,000 cellular POPs and the right to provide Direct Satellite TV to over 10,000 homes. Proforma telecommunications revenues and EBITDA, (proforma for the full year results for CLR Video, 1,400 lines to be acquired from US West in North Dakota, 350 lines to be acquired from Sprint in Kansas, and the consolidated operations of Dunkirk and Fredonia Telephone Company) for the year ended December 31, 1995, were $32.5 million and $16.5 million, respectively. At December 31, 1995, on a proforma basis, these companies held cash and cash equivalents of $18.6 million and had total debt outstanding of $102.2 million. The definitive agreements with US West, Sprint and the current owners of Dunkirk and Fredonia Telephone Company were signed in 1995 and all are expected to close in the first half of 1996.
The Morgan Group, Inc.--Morgan is the premier outsourcer of service to the manufactured housing and recreational vehicle industries. Morgan Common Shares are listed on the American Stock Exchange. There are 2.6 million common shares outstanding, of which Lynch Corporation owns 1.35 million, or 51%. Revenues and EBITDA in 1995 were $122.3 million and $4.6 million, respectively. At December 31, 1995, it held cash and cash equivalents of $2.9 million and had $3.3 million debt outstanding.
Spinnaker Industries, Inc.--Spinnaker is an acquirer and developer of manufacturing companies. It is traded NASDAQ Small Cap. Lynch owns 2.2 million of the 3.4 million fully diluted common shares (adjusted for the 3 for 2 stock splits that were effective in December 1995 and 1994). Pro forma revenues and EBITDA, including full year results of Central Products, were $226.6 million and $18.8 million, respectively. At December 31, 1995, it had cash and cash equivalents of $3.1 million and total debt outstanding of $102.0 million. In addition to its common share interest, Lynch holds a subordinated note from Spinnaker of $1.2 million.
Speciality Niches--
Broadcasting: Lynch owns 50% (fully diluted) and 20% net interests in
Stations WOI-TV and WHBF-TV, two network affiliated television stations.
In recent transactions, network affiliates have sold 12 to 14 times
broadcast cash flow.
In 1995, WOI's full year revenues and broadcasting cash flow were $9.2 million and $3.3 million, respectively. At December 31, 1995, it had cash and cash equivalents of $1.1 million and outstanding debt of $14.0 million.
In 1995, WHBF's full year revenues and broadcasting cash flow were $7.2 million and $3.1 million, respectively. At December 31, 1995, it had cash and cash equivalents of $0.2 million and outstanding debt of $17.3 million, of which Lynch owns $2.7 million.
Lynch Machinery, Inc.: Lynch Machinery produces glass presses and packaging machinery. Its 1995 revenues and EBITDA were $36.9 million and $7.0 million, respectively. At December 31, 1995, it had cash and cash equivalents of $2.0 million and outstanding debt of $1.3 million.
M-tron Industries, Inc.: M-tron produces quartz crystals and oscillators. In 1995 it had revenues and EBITDA of $20.1 million and $2.0 million, respectively. At December 31, 1995, it had cash and cash equivalents of $0.2 million and outstanding debt of $2.8 million.
BUILDING FOR THE FUTURE
In the following pages our partners will present to you what they are doing to enhance values.
LYNCH MULTIMEDIA
Lynch continues to make strides in rounding out its multimedia portfolio. We accomplished the following in 1995 and early 1996.
- - On November 6, 1995 Lynch executed a contract to acquire Dunkirk & Fredonia Telephone Company from Robert Maytum and his family. Dunkirk & Fredonia, through two local telephone companies, Dunkirk & Fredonia and Cassadaga Telephone Companies, provides telephone service to 10,700 access lines in upstate New York, approximately 30 miles south of Buffalo. The company is one of the lowest cost independent telephone companies in the United States. The Maytum family has been very aggressive in complementing their telephone service with ancillary businesses. They currently provide long distance reselling, burglar alarm and security business, paging, and telecommunications equipment sales and repair. In addition to these businesses, they currently are in the process of applying for a franchise to provide cable television service to the Village of Fredonia and to provide Internet service to their customer base. We currently expect to close in mid 1996. All members of Lynch's multimedia family welcome the Maytums to our telecommunications group.
- - On December 1, 1995, CLR Video closed on the acquisition of 4,500 cable television subscribers in northeast Kansas. CLR, which is 60% owned by Lynch Corporation, is a joint venture of Lynch, Robert L. Carson and Rainbow Telephone Company. CLR Video's service area is adjacent to J.B.N. Telephone Company. In addition, there are several opportunities in the area to acquire contiguous cable properties. We welcome our association with Rainbow Telephone Company and our continued relationship with Bob Carson, who has been an immeasurable help in assisting our efforts in establishing J.B.N. Telephone Company and CLR Video.
- - As we announced in last year's annual report, Lynch, in two separate transactions, will acquire approximately 1,700 lines in North Dakota and Kansas from US West and Sprint Telecommunications, respectively. While these transactions have not yet closed, due to regulatory hurdles, delayed in part by the recently enacted Telecommunications Bill of 1996, both are expected to close in the first half of 1996.
- - As part of the Western New Mexico Telephone Company acquisition in 1989, Lynch acquired an interest in New Mexico Cellular RSA #1. Two of our partners in this transaction wished to partition this RSA into the North and South. As part of this partition, Lynch increased its net POP share by retaining a 21% ownership in the North partition, which includes the affluent community of Farmington, New Mexico. In addition, as part of the transaction, Lynch acquired the ability to sell its share in the property to the general partner for $5.0 million in the year 2001. This transaction greatly enhances the value of this cellular asset.
Below, our partners in our current telephone operations will discuss with you how their companies are doing and the steps they are taking to grow and prosper under the Lynch umbrella. The recently enacted Telecommunications Bill of 1996, opens new competitive environments in telephone services. In addition, it does provide some safeguards for those providing high quality service to rural areas. As our partners will share with you below, we welcome the opportunity to expand our current service offerings to our current customer service base and beyond.
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WESTERN NEW MEXICO TELEPHONE COMPANY, INC.
Western New Mexico Telephone Company continued to grow and expand its operations in 1995 by adding over 225 access lines, a 4.5% growth rate. This phenomenal growth is occurring in all of our nine exchanges located in the southwestern corner of New Mexico. Active marketing programs by local Chambers of Commerce and real estate firms, plus having one of the finest climates in the country, have been largely responsible for this influx of new subscribers.
In anticipation of this continuing growth pattern, and to be in a position to provide the latest in technological products and services to southwestern New Mexico, we began placing fiber optic cables between all of our exchanges and upgrading our central office transmission facilities in 1995. This project should be completed and turned up by the early months of 1996. Broadband capabilities such as distance learning, remote medical care, equal access to long distance providers, and access to the internet services are some of the many new and interesting challenges we will face in 1996 and beyond.
Western's management continues to be active in other Lynch Corporation businesses. We have lent financial and operational assistance to the Kansas telephone companies, to Lynch cellular partnerships in New Mexico, and also to WNM Communications, Lynch's Direct Broadcast Satellite Television Company (DBS). Recently, Western announced a new company venture into the cable television business, with the formation of Enchantment Cable Company. This venture will be exploring various options to provide cable television both within and outside our current telephone service areas.
Western's management has been actively involved with various industry associations in 1995 and will continue to participate in 1996. The FCC and Congress continue to advance the concept of competition in all areas of telecommunications. We will continue to push for rules and regulations which advance and preserve the universal service principles which have long been in policy of the United States; but more specifically in high cost, rural areas, such as our service territory. The future of the information superhighway is uncertain, but holds much promise for our company. Western will strive to be on the cutting edge of new technology and to be the full-service provider for our service area.
Jack C. Keen Jack W. Keen Chairman President |
INTER-COMMUNITY TELEPHONE COMPANY
Inter-Community Telephone Company serves over 1,200 subscribers in southeastern North Dakota. We have five exchanges that are tied together by 98 miles of fiber optic cable. Switching service is accomplished with a Northern Telecom DMS-10 switch utilizing a host-remote configuration.
As of December 31, 1995, we were still in the process of finalizing the acquisition of lines in Hope, Page, Sanborn and Tower City exchanges from US West Communications. As a result of the acquisition process, we postponed the upgrading of our existing facilities so that we may upgrade all of our equipment simultaneously. In 1996, our plans include linking these new exchanges with our existing network, to which another approximately 40 miles of cable will be linked. The addition of these lines will increase our total number of subscribers to 2,600. We also plan to offer features such as Caller I.D., Equal Access and local Internet access to all of our 2,600 subscribers.
We look upon 1996 with great anticipation. A tremendous amount of work will have to be completed in a short time; but with that will come a tremendous sense of accomplishment when the task is completed.
Keith Andersen
General Manager
CUBA CITY TELEPHONE EXCHANGE COMPANY
BELMONT TELEPHONE COMPANY
The Cuba City and Belmont Telephone Companies continued to show good growth during 1995. Subscribers reached 2,382 in December 1995, a 2% increase from 1994.
Long distance calling, which represents 70% of total companies operating revenues, grew at a 7.8% rate during the year. We are currently in the process of constructing 22 miles of fiber optic circuits planned for early 1996 which will permit the re-routing of long distance traffic, which increases line haul revenue, and will bring fiber optic capability to both communities.
At year end, nineteen school districts in southwest Wisconsin were forming a "distance learning" facility to expand school curriculums while reducing costs. The facility is expected to be operational by the 1997/1998 school year.
The companies anticipate participating in the emerging technologies as they develop into viable business opportunities, while continuing to maintain business relations with the interexchange carriers who continue to press for reduced costs for joint services.
LaFayette County Satellite TV, Inc. was formed in 1994 to market the DBS 18 inch receiving dish and DirecTV programming. At year end, subscriber count reached 190. These small dish systems provide 175 channels of programming in areas without cable or with limited cable service.
Richard A. Kiesling President
BRETTON WOODS TELEPHONE COMPANY
1995 marked several accomplishments for Bretton Woods. The Company converted to Equal Access, activated New Hampshire statewide E911 system, completed an acquisition of access lines from NYNEX which folded nicely into our service area, and in December we upgraded our Northern Telecom DMS10 switch to 408.10 generic, adding several more customer enhancements. To remain prepared to access the information super highway, we are committed to upgrading our switch and maintaining the reliability of our network.
The completion of additional subdivisions of residential homes in Bretton Woods resulted in a continued increase in customers, with an even greater projected increase in 1996.
In the future, we look forward to continuing growth in subdivisions, improving our technology and network to give our customers state-of-the-art service, and broadening our service base by providing cable and security service to our customer base and beyond.
Nancy Hubert
Senior Vice President
of Operations
JBN TELEPHONE COMPANY
JBN Telephone Company, located in Northeast Kansas, has completed nearly 50% of its Network Modernization Plan. Six communities serving over 1,100 customers were cut over to new digital central office equipment supported with fiber optic facilities. An agreement was also made in 1995 to purchase the telephone properties of Haddam and Morrowville, Kansas adding 350 more customers to JBN Telephone Company. The acquisition will be completed in 1996 and customers in Haddam and Morrowville will then be converted to new digital central office equipment. Construction of a fiber optic ring serving all eight communities will be completed in 1996, which supports uninterrupted service in the event of a cable cut.
Construction will also begin in 1996 on new digital central office equipment and a second fiber optic ring for seven more communities serving another 1,600 customers. Upon completion of this phase of our plan, all JBN Telephone Company customers will have access to new services and features including Custom Calling Features, Voice Mail and Switched 56 Kbs data service.
The increased demand for advanced services in the rural area continues to grow. We are anxious to show new and existing customers the high quality of service they can expect from JBN Telephone Company. I feel as long as we continue offering this kind of service, along with our personal touch to our customers, our customers will remain loyal when competition in the local loop becomes reality.
I look forward to the challenges and opportunities ahead.
Gene Morris
General Manager
HAVILAND TELEPHONE COMPANY
Haviland Telephone Company serves about 4,000 customers in 12 exchanges in southcentral Kansas. The company offers digital switching capability, with attendant options, to about 75% of its customers. About 220 customers in the town of Haviland enjoy company-carrier CATV. Several additional services are offered including state-wide paging, voice mail, and mobile telephone service.
During 1995, regulated revenues were the highest in company history and expenses have been cut to the lowest levels since 1992. Telephone related earnings before interest, taxes, and depreciation have attained the highest level ever; 1995 was a good year.
1995 saw several facility improvements. The company began a buried telephone plant construction in Cullison that will replace old subscriber carrier equipment. In select locations, the company installed Ultraphones, the digital wireless telephone product that uses standard subscriber telephone equipment. As a major infrastructure improvement, the company buried about 50 miles of additional fiber optic cable. Using the fiber, the company placed in service remote switching facilities for Cullison and Coats. The move replaced electronic mechanical switching equipment that has been in service for nearly 40 years. Over $1.3 million in capital improvements to its communications infrastructure were made.
In 1996, three more towns will enjoy remote digital node technology that will enable the company to offer value-added options, faster call completion time, enhanced 911 dialing, and lower installation and maintenance costs. During 1996, five additional towns will convert to Equal Access 1+ dialing. This move will probably stimulate intrastate toll traffic in the towns targeted. The company will complete the buried plant upgrade started in 1995 which will enable affected customers to purchase additional telephone lines. In a significant cash-improvement move, Haviland will continue to explore the feasibility of converting to cost-based settlements in the interstate jurisdiction. Long-range buried plant projects that will eliminate old subscriber carrier equipment, extend additional line capabilities to homes, and improve service reliability will move forward in 1996. The company will continue to use Ultraphone for an interim solution where adequate physical facilities do not exist and for temporary service to transient locations.
Access lines will continue to grow in eastern exchanges due to area out-growth from metropolitan Wichita. Access lines will probably grow in western towns as families and businesses add lines. Network access revenues will increase, especially interstate traffic, probably to their highest level.
Robert Ellis
President
LYNCH BROADCASTING
Lynch currently has ownership interest in two network affiliated television stations, Station WOI-TV and Station WHBF-TV. Station WOI is an ABC affiliate which serves the Des Moines, Iowa media market, the 73rd largest in the United States. Station WHBF is a CBS affiliate which serves the Quad-Cities media market in Rock Island and Moline, Illinois, and Davenport and Bettendorf, Iowa, the 88th largest market in the United States.
Philip J. Lombardo is our partner in both these ventures. Phil is a well known industry player with over thirty five years of experience in operating broadcasting properties.
STATION WOI-TV
On March 1, 1994, Capital Communications Corporation acquired the assets of Station WOI-TV from Iowa State University for $12.7 million. Lynch Corporation owns 49% of the common shares outstanding and a convertible preferred, which when converted, will bring Lynch's common share ownership to 50%.
Since the acquisition, much has been done to improve the operations of Station WOI. Operating procedures and staff have been stream-lined to lower costs and improve efficiencies. The station's viewing line-up has been upgraded. In the news department, there has been significant upgrading of equipment. Operations have been centralized to a new location near the State Capitol Building in Des Moines. As such, despite the fact that the Lombardo/Lynch partnership has operated the station for less than two years, broadcast cash flow for 1995 grew to $3.3 million. In addition, the improved operating results have allowed us to refinance the station's capital structure, so much so, that of Lynch's $13.25 million initial investment in Station WOI-TV in the form of Senior Debt, Subordinated Notes, Preferred Stock, and Common Stock, all funds have been returned to Lynch, including interest at the stated rates, save for a $250,000 anticipated long-term investment in the common and convertible preferred. Lynch applauds the efforts of our partner Phil Lombardo and his management team in this improvement.
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STATION WHBF-TV
In 1987, Lynch acquired a 20% interest in Station WHBF-TV. Since its acquisition by Lombardo/Lynch, Station WHBF has shown consistent growth in both revenues and cash flow. In 1995, revenues and broadcast cash flow reached $7.2 million and $3.1 million, respectively. These results were slightly higher than the 1994 reported results despite a lackluster local economy and the absence of political advertising which bolstered 1994 results.
PERSPECTIVE
We have long believed in the value of local television stations. These values are increasingly being recognized by industry and marketplace in the form of higher multiples being afforded these properties. The recently enacted Telecommunications Act of 1996 which allows companies to own television stations covering up to 35% (up from 25%) of the national population should provide increased visibility to our ownership interest.
While the financial results of these properties are not significant contributors to Lynch's reported financial results (a $0.24 per share net profit in 1995, and $0.27 net loss in 1994), their intrinsic value represents one of the many "hidden assets" of Lynch. We will continue to look for opportunities to leverage off these values and expand our multimedia operations both domestically and abroad.
THE MORGAN GROUP, INC.
The Morgan Group, Inc. ("Morgan") and its wholly owned subsidiaries, Morgan Drive Away, Inc., Interstate Indemnity Company, Morgan Finance Company and newly-acquired Transfer
Drivers, Inc. ("TDI") enjoyed a successful year in 1995.
The highlights were:
- - We believe enhancement of shareholder value can be attained not only by polishing the Morgan Drive Away engine, but by building on this base to expand out-sourcing services to current and new customers. We are excited about our 1995 acquisition of TDI, a market leader in the fragmented out-sourcing business servicing the relocation needs of such major corporations as Ryder System, Budget Rentals, Hertz Penske, and others.
- - Revenues reached $122 million, a milestone signifying our leadership position in providing services to our customers. This volume gain represents the third successive year of growth in excess of 20%.
- - Morgan continued to emphasize our goal of servicing industry leaders and firmed its relationship and expanded our involvement with outstanding customers. In manufactured housing these include: Fleetwood Enterprises, Oakwood Homes, Schult Homes, Cavalier Homes, Skyline Corporation, Clayton Homes and Champion Homes. For recreational vehicles, industry pace-setter and Morgan clients include Fleetwood Enterprises, Winnebago Industries, Thor Industries and Holiday Rambler.
- - Our emphasis on training and safety continued to bear positive results and is reflected in lower accidents per mile driven.
- - Terence L. Russell was named President and CEO of Morgan Drive Away. Terry has served as President of three key divisions of Ryder System and is a welcome addition to the Company.
- - Morgan's shareholder equity reached $15.6 million, bolstered by current year operations earnings and a $450,000 equity increase on the early retirement of the $3.0 million issue of Lynch Corporation preferred stock. The company's balance sheet is quite strong, with shareholders' equity of $15.6 million, cash at close to $3.0 million, long term debt of under $2.5 million, and available credit facilities of approximately $14.8 million.
INDUSTRY OVERVIEW
The Morgan Drive Away core operation is the leading out-sourcer of moving services for the manufactured housing and recreational vehicle industries. With a committed force of about 3,300 independent owner-operator drivers nationwide, Morgan is the industry leader, arranging via its "booking agency" service about one-fifth of the moves from manufacturers of these products to their dealers' lots and showrooms. Morgan Drive Away also facilitates the moving of a variety of other goods such as commercial vehicles, van conversions, military equipment, modular offices, semi-trailers and the like. Our national operation of 109 dispatch locations and 9 regional offices located in 39 states, our reputation for reliable service, our strong relationship with drivers and customers built up over a sixty year history, all provide reasons for optimism that Morgan will maintain its position as industry leader.
We believe that a combination of factors may well sustain Morgan's momentum in the longer term. High quality new products, favorable demographics, healthy consumer confidence levels, and, for manufactured housing, a relatively short supply of rental apartments, bode well. Further, the national trend to outsourcing in many American industries fits into our strategy of providing services to some of the best and rapidly growing companies in the country.
RESULTS OF OPERATIONS AND OUTLOOK
Revenues in 1995 reached an "all time" record of $122 million, a gain of 20%. EBITDA reached $4.6 million, operating income finished at $3.4 million, and net earnings after-taxes were a record $2.3 million. While these results are the best ever for Morgan, we expect better operating margins to accompany planned double digit top line growth in the years ahead. These projected results reflect strength in the industries served, marketing efforts securing and expanding major accounts, attention to costs in all facets of the business, and the aforementioned improvement in accident and claims costs.
Morgan's future has never been brighter. The industries served are expanding,
its most important customers are the leaders within those industries, and the
company's financial wherewithal and management commitment to maximizing
shareholder value should enable continued progress along three paths of growth:
core business improvement, acquisitions, and expansion of outsourcing services.
Charles C. Baum Chairman
SPINNAKER INDUSTRIES, INC.
Spinnaker Industries, Inc. experienced another year of strong growth and steep increase in shareholder value in 1995. Spinnaker completed the major acquisition of Central Products Company, continuing the aggressive growth trend that began with the 1994 acquisition of Brown-Bridge Industries. The company's management team of Richard J. Boyle and Ned N. Fleming III, continuing with the mandate of building shareholder value through acquisitions and internal growth, has built a company with annual revenues swiftly approaching a quarter-billion dollars. The substantial growth seen over the last 19 months is due to the company's dedication to all stakeholders: customers, employees, management, the community and the shareholders. The record revenues and EBITDA attained by Spinnaker in 1995 are illustrated in the table below:
Figures in Thousands 1993 1994 1995
------ ------- --------
REVENUES $6,371 $33,632 $135,289
EBITDA $ 187 $ 1,117 $ 7,940
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Central Products Company--In accordance with Spinnaker's value enhancing strategy, the recent acquisition of Central Products Company is an important element of the adhesive backed materials industry. The company was purchased from Alco Standard Corporation in October of 1995 and functions as a wholly owned subsidiary of Spinnaker. Central has been one of the nation's leading manufacturers of carton sealing tapes for over 75 years. Central is the only US supplier to manufacture both water activated paper and reinforced gummed tape and pressure sensitive polypropylene tape, and the only company to produce all three pressure sensitive adhesive technologies to meet the diverse needs of today's customers. Net sales from Central's operations for the 1995 calendar year totaled approximately $122 million, including over $30 million under Spinnaker ownership.
It is Central Products Company's strategy to be the sole source for its customers' carton sealing tape and system needs. The Company possesses over 50% of the water activated carton sealing tape services, and the second largest share of the pressure sensitive carton sealing market. Central's position as the only supplier to offer every major carton sealing tape and technology, provides excellent opportunities to take advantage of the growing market and to expand its international presence. Enhanced by its strong management team, Central remains well positioned as a platform for the acquisition of other companies.
Brown-Bridge Industries, Inc.--Acquired from the Kimberly-Clark Corporation in September of 1994, Brown-Bridge Industries develops, manufactures and markets adhesive coated materials that are converted by printers and industrial users into products for marketing, identifying, promoting, labeling, and decorating applications. At the time of acquisition, several key company-wide initiatives were launched: increased product quality, improved customer service, reduced production and administration costs, and a reduction in working capital investment. Evidencing Brown-Bridge's significant progress in each of these areas, 1995 reported the highest level of sales and earnings in the company's fifty year history, with another record year expected in 1996.
The $3.5 billion adhesive backed materials industry enjoyed another year of strong growth. Brown-Bridge has capitalized on the increased demand for consumer package labeling, the popularity of non-impact printing systems and the heavy consumption of pressure sensitive labels and self-adhesive materials in everyday business. While increasing its presence in the more mature heat and water activated segments, the majority of Brown-Bridge's growth has been from increasing its share of the expanding pressure sensitive market.
Entoleter, Inc.--Entoleter's "back-to-basics" philosophy delivered not only a third year of increased sales, but substantially increased EBITDA. As a manufacturer of impact milling and rotary-knife size reduction equipment, Entoleter's new management team has leveraged the Company's core competencies in design and engineering to provide the market place with products that have clear advantages over the competition. Technological advances in the company's air pollution control product line have further positioned Entoleter for growth in the volatile environmental industry.
An infusion of new talent, coupled with the implementation of new business growth initiatives has brought strong improvements to the company's financials. Net sales were up over 10% to a record $7.5 million in 1995, while EBITDA rose to $0.5 million from $0.2 million giving net income a strong boost over the 1994 figure.
Spinnaker completed the year with a stock split of 3-for-2, increasing shares outstanding to 2,715,649 shares. This effort also moves the company closer to meeting the standards for trading on the NASDAQ National Market.
Richard J. Boyle Chairman
LYNCH MACHINERY, INC.
[PICTURE]
Lynch Machinery manufactures and markets glass forming machines and packaging machinery in facilities located in Bainbridge, Georgia and in suburban Chicago, Illinois.
RESULTS OF OPERATIONS
Revenues and operating income for 1995 continued to increase dramatically. Revenues were $36.9 million, an increase of 79% from $20.6 million in 1994. EBITDA more than doubled, increasing to $7.0 million from $3.4 million in the prior year. We shipped fifteen glass presses in 1995 compared to eight in 1994; of these, eleven were advanced technology presses used for the production of television glass in China, Korea, and India.
EMERGING MARKETS
Many former Third World countries have been successful in managing their economies for sustained growth. Countries such as India, China, Indonesia, and others are now experiencing burgeoning demand for consumer products as a result of the overall improvement in their macroeconomic conditions. As these economies continue to grow, demand will increase for consumer products, including television sets, personal computers, and household glassware. We expect our glass making customers to continue to expand to fill market demand. They will need additional high-efficiency production equipment, including Lynch presses and ancillary equipment.
CONTROL SYSTEMS
In the past it was the practice of Lynch customers to furnish their own control systems for the press and for related equipment in the production line. Quality and productivity requirements in the glass industry are increasing, making precise control of the production process more critical. At the same time, the level of technology in machinery control is increasing, and glass factories are hard pressed to stay abreast of these advances. To help solve the complex problems of controls in the glass factory, we created a stand-alone Electronic Controls Department, separate from the Engineering Department. This new department is responsible for designing, integrating, and assembling control systems on all Lynch Machinery products, including retrofit packages. We believe this department offers significant growth opportunity for the future.
PREPARATIONS FOR GROWTH
In order to respond to recent growth and to prepare for future growth, we have made a number of physical additions and improvements. To accommodate our growing engineering resources, we constructed a new, larger engineering department. We made numerous physical improvements to the plant including renovation or replacement of several structures. From the standpoint of operations, we implemented project management software for scheduling and controlling projects from the quotation process through manufacturing and shipping. We have introduced the workcell concept in our machine shop. As a result, some of our most experienced employees are more productive and enjoy a more varied work routine.
EXPANSION
Lynch marketing people are in continual contact with key participants in the glass industry and we know that several participants in the industry plan to increase production capacity during the next few years. Our existing production facility in Bainbridge, Georgia is not large enough to handle the anticipated demand. Accordingly, we plan to construct additional fabrication and assembly facilities. These plant improvements should result in production economies which will improve the manufacturing gross margins of our machines.
M-TRON INDUSTRIES, INC.
[LOGO]
Robert T. Pando
President
M-tron is an ISO (International Standards Organization) registered company involved in the design, manufacture, and sourcing of Frequency Control Products serving the telecommunications, wireless communications, and computer marketplaces.
OPERATION IMPROVEMENTS
Recently, there have been a number of areas which were reorganized and expanded to meet the constantly changing needs of the market place served by M-tron. Among these were the Engineering, Sales/ Marketing, and the Operations departments. As a result, significant penetration into the telecommunications marketplace was realized.
The redirection of the Engineering department showed considerable success in the introduction of several new products in the Frequency Control field. These new products, although supplied to customers in 1995, will have a major impact on M-tron's business in 1996 and beyond. New product development will be going into the production phase of the systems into which these new products have been designed.
The Sales/Marketing department, with the changes implemented in 1994, showed significant maturity in 1995 resulting in the handling of additional new bookings, which increased to $20 million from $13 million without any additional personnel. M-tron sees additional growth in new bookings in 1996, still anticipating no significant additions to personnel.
Operations, because of the rapid growth of new bookings in 1995, had to address a significant increase in production capacity for both quartz crystals and clock oscillator frequency control products. Due to the demand for M-tron's manufactured products, production of quartz crystals increased 60% and clock oscillators production increased by 50%. The team concept introduced in 1994 had considerable impact on achieving this increase without excessive capital expenditures. The second phase of team training is currently being finalized and will be implemented in 1996. This is expected to result in further improvement in productivity and efficiency.
The Hong Kong Sales operation, started in the early part of 1995, has seen considerable improvement during the year. There is still more work to be done in this area. M-tron is recognizing more activity in the Pacific Rim manufacturing community, and anticipates increased profitability in 1996 and beyond.
1995 SUMMARY OF OPERATIONS
M-tron's backlog increased by 220% in the course of 1995. New bookings increased by 154% in 1995 over 1994. Telecommunications and like applications were responsible for 35% of the new bookings increase, and 29% of the distribution increase. Sales were $20.1 million in 1995 compared to $12.4 million in 1994. EBITDA showed a significant increase in 1995 going to $2.0 million from $.2 million in 1994.
With the increasing demand for the products supplied for the telecommunications and wireless communications marketplace that M-tron serves, it is expected that M-tron will continue to see an increasing demand for its products in 1996 and beyond.
M-tron would like to take this opportunity to thank its employees, suppliers, the Yankton community, and in particular, its customers for the understanding and hard work necessary to achieve a growing business in today's workplace.
Martin J. Kiousis President
MANAGEMENT DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
YEAR 1995 COMPARED TO 1994
Revenues increased to $338.2 million in 1995 from $188.7 million in 1994, a 79% increase. Acquisitions made during 1995 and 1994, principally in the manufacturing segment, were the most significant contributors to the increase. In the manufacturing segment, where revenues increased by $125.6 million to $192.3 million in 1995 from $66.7 million in 1994, or 188%, the acquisition of Brown-Bridge Industries, Inc. on September 19, 1994, contributed $97.2 million in revenues for 1995 versus $26.8 million in 1994. This represents 56% of total manufacturing revenue increase. The acquisition of Central Products Company on October 4, 1995, contributed $30.6 million, or 24% of the segment's revenues increase. 1995's manufacturing revenues also reflect $36.9 million from Lynch Machinery, Inc., compared to $20.6 million in 1994, 13% of the segment's revenue increase. The production of extra-large glass presses from orders contracted for in 1994 and 1995 resulted in this additional revenue. Fifteen glass presses were shipped in 1995, compared to eight in 1994. Of the presses shipped in 1995, eleven were advanced technology extra-large presses. As a result of the shipment of these presses in 1995, Lynch Machinery glass press backlog was reduced by $11.5 million to $13.3 million at December 31, 1995 from $24.8 million at December 31, 1994. While Lynch Machinery is in the process of bidding for additional glass press contracts, it is not anticipated that the level of production in 1996 will equal 1995 levels. The services segment, which represents 36% of total revenue, increased by $20.4 million from 1994 or 20%. The Morgan Group, Inc.'s results increased due to continued strength in manufactured housing shipments (industry shipments up 12%) and the acquisition of Transfer Drivers, Inc. in May 1995. In the multimedia segment, which represents 7% of total revenue, revenues increased by $3.5 million from 1994, or 17%. Haviland Telephone Company, which was acquired on September 26, 1994, contributed 71% of the increase. The inclusion of Central Products for the full year plus additional acquisitions contracted for in 1995 and anticipated to close in 1996 are projected to increase reported revenues by about 40% in 1996 from 1995.
Earnings before interest, taxes, depreciation and amortization (EBITDA) increased to $30.8 million in 1995 from $18.3 million in 1994, a $12.5 million, or 69% increase. Operating segment EBITDA (prior to corporate management fees and expenses) grew to $34.6 million from $20.6 million, a 68% increase. The manufacturing segment was the largest contributor to EBITDA with $16.7 million, or 54% in 1995, as compared to $4.6 million, or 25% in 1994. Spinnaker's EBITDA grew to $8.0 million from $1.1 million, a $6.9 million increase. The inclusion of Brown-Bridge for the full year accounted for $3.9 million of the increase in 1995. Central Products' EBITDA of $2.7 million in the fourth quarter primarily accounted for the remaining increase. Lynch Machinery accounted for 30% of the total increase in manufacturing EBITDA. Profit margins associated with the production of the extra-large glass presses were the cause of the significant improvement. The services segment contributed $4.6 million, or 15%, of total EBITDA in 1995, compared to $4.3 million, or 24% in 1994. This increase was directly the result of the increased revenues offset by a product mix shift and increases in certain operating costs. The multimedia segment contributed 40% in total EBITDA in 1995, or $12.4 million, as compared to $10.9 million, or 59% in total EBITDA in 1994. The inclusion of Haviland represents 79% of this increase. The inclusion of Central Products for the full year plus additional acquisitions made in 1995 and anticipated to close in 1996 are projected to increase reported EBITDA by about 50% in 1996 from 1995.
Operating profits increased to $19.3 million in 1995 from $10.8 million in 1994, a $8.4 million, or 78% increase. The breakdown of the increases and the primary causes are the same as the above discussion regarding EBITDA.
Investment income increased in 1995 from 1994 primarily reflecting additional net gains in marketable securities.
Interest expense increased during 1995 primarily as a result of the debt incurred for acquisition needs in 1995 and 1994 primarily Central Products and Brown-Bridge.
The full year effect of the financing for the Central Products acquisition is expected to significantly increase interest expense.
The 1995 income tax provision of $4.7 million, included federal, state and local taxes and represents an effective rate of 39.2% versus 40.2% in 1994. The rate is effected by a provision for the repatriating of earnings by subsidiaries that are not consolidated for income tax purposes (Morgan), a change in its deferred tax reserve associated with income (1995) and losses (1994) related to the Company's equity investee, a reduction in taxes attributable to a special election available to Morgan's captive insurance company. It should be noted that Morgan is consolidated for financial statement purposes, but in accordance with FASB 109 "Accounting for Income Taxes", a deferred tax liability is recognized for the difference between the financial reporting basis and the tax basis of the investment in Morgan created by current earnings.
Income before extraordinary items was $5.1 million, or $3.66 per share in 1995 as compared to $2.6 million, or $1.94 per share in 1994. These amounts include the gain on the sale of affiliate stock which contributed $35,000 to net income, or $0.02 per share in 1995 and $190,000, or $0.14 per share in 1994. During 1994, the company recorded an extraordinary item which represented the loss on the redemption of the company's 8% Convertible Subordinated Debentures. This loss was $264,000, or $0.20 per share.
RESULTS OF OPERATIONS
YEAR 1994 COMPARED TO 1993
Revenues increased to $188.7 million in 1994 from $127.0 million in 1993, a 49% increase. Acquisitions made during 1994 and 1993 were the significant contributors to the increased revenues. In the manufacturing segment which accounted for 35% of total revenues, revenues were increased by $38.7 million. The acquisition of Brown-Bridge Industries, Inc., acquired on September 19, 1994, contributed $26.8 million, or 69% of the revenues increase. 1994's manufacturing revenues also reflect $5.5 million from Lynch Tri-Can Industries, which was acquired on December 15, 1993. Production of extra-large glass presses at Lynch Machinery, Inc. from orders received in 1994 also resulted in $6.8 million in increased revenues. In the service segment which accounted for 54% of total revenues, revenues increased by $19.1 million. The two acquisitions made in 1993 by The Morgan Group, Inc., contributed $5.3 million to their overall revenue. Morgan's results also increased due to continued strength in the manufactured housing (industry shipments up 21%) and recreational vehicle (industry shipments up 5%) industries and the addition of several new accounts. In the multimedia segment, which accounted for 11% of total revenues, revenues increased by $3.9 million. The acquisition of J.B.N. Telephone Company on November 1, 1993, and Haviland Telephone Company on September 26, 1994, contributed 88% of the segment's revenue increase.
EBITDA increased to $18.3 million in 1994 from $12.5 million in 1993, a $5.8 million, or 46% increase. Operating segment EBITDA (prior to corporate management fees and expenses) grew to $20.6 million from $14.6 million in 1993, a $6.0 million or 41% increase. All operating segments displayed improved results. The largest contribution came from the manufacturing segment where EBITDA grew from $1.2 million to $4.6 million. This increase reflects contributions of $1.4 million from Brown-Bridge, plus a significant increase in operating earnings at Lynch Machinery. The Lynch Machinery increases were due to higher revenues and the higher margins associated with the production of the extra-large glass presses. EBITDA at Morgan increased to $4.3 million from $3.0 million, reflecting higher revenues and improved operating margins.
Operating profits increased to $10.8 million from $6.6 million in 1993, a $4.2 million or 64% increase. The breakdown of the increases and the primary causes are the same as the above discussion regarding EBITDA.
Investment income increased from 1993 to 1994 primarily reflecting additional interest on the Company's temporary loans to Capital Communications Corporation, the parent company of Station WOI-TV.
Interest expense increased during 1994 primarily as a result of the debt incurred for the various acquisitions plus the effect of higher interest rates on variable-based borrowings, partially off set by the redemption or conversion of $11.8 million of the Company's 8% Convertible Subordinated Debentures on October 24, 1994.
The 1994 income tax provision of $2.7 million included federal, state and local taxes and represents an effective rate of 40.2% versus 34.0% in 1993. The rate is effected by a provision for the repatriation of earnings by tax unconsolidated subsidiaries (principally Morgan), a deferred tax reserve associated with losses incurred by the Company's equity investee and a reduction in taxes attributable to a special election available to Morgan's captive insurance company.
Income before extraordinary items and the cumulative effect charge was $2.6 million, or $1.94 per share in 1994, as compared to $4.1 million, or $3.36 per share in 1993. The gain on sales of subsidiary and affiliate stock contributed $190,000 to net income, or $0.14 per share in 1994 and $2.7 million, or $2.22 per share in 1993. Also in 1994, the company recorded an extraordinary item which represents the loss on the redemption of the Company's 8% Convertible Subordinated Debentures. This loss was $264,000, or $0.20 per share. 1993's net income also included an extraordinary loss on the redemption of debentures of $206,000, or $0.17 per share. In addition, in 1993, the Company recorded a loss from the cumulative effect of the change in accounting for income taxes of $957,000, or $0.78 per share.
FINANCIAL CONDITION
As of December 31, 1995, the Company has current assets of $123.6 million and current liabilities of $123.0 million, working capital of $0.6 million. Included in current liabilities is $25.0 million of term debt due to the Alco Standard Corporation resulting from the acquisition of Central Products operation from Alco on October 4, 1995. The management of Spinnaker is currently in the process of refinancing this debt with a combination of longer term facilities. Other changes in working capital, predominantly the increase in accounts receivable and inventories, also resulted from the acquisition of the Central Products acquisition. Cash flow from operations as presented in the Consolidated Statement of Cash Flow increased by $12.6 million from $14.6 million in 1994 to $27.2 million in 1995. The increase primarily reflects the effect of acquisitions, the primarily Brown-Bridge and Central Products and the higher level of production at Lynch Machinery.
Capital expenditures were $19.6 million in 1995 and $11.6 million in 1994 due to significant deployment of enhanced technology by our telephone operations and the addition of Brown-Bridge in 1994 and Central Products in 1995. This increased level of capital expenditures is expected to decline in 1996 in the multimedia segment as upgrade programs are completed and increases in the manufacturing segment due to the acquisition of Central Products is completed. Overall 1996 capital expenditures are expected to be 40% below the 1995 level.
At December 31, 1995, the Company had $27.4 million ($31.5 million at December 31, 1994) in cash, marketable securities, and short-term investments. At December 31, 1995, total debt was $187.4 million, which was $89.2 million more than the $98.2 million at the end of 1994. The above items were significantly impacted by: the acquisition of Central Products Company, for a total of $80.0 million including cash paid and debt incurred and assumed. Debt at year end 1995 included $92.7 million of fixed interest rate debt, at an average cash interest rate of 7.7% and $94.7 million of variable interest rate debt at an average interest rate of 9.1%. Additionally, the Company had $20.6 million in unused short-term lines of credit, $11.0 million of which was attributable to Morgan. As of December 31, 1995, the Parent Company had borrowed $6.9 million under a $12.0 million short-term line of credit facility. These funds were primarily used to advance funds to the partnerships bidding in the PCS Auction, see below. In addition, a portion of the purchase prices of Brown-Bridge Industries, Inc. and Central Products were financed by borrowings under a revolving line of credit, $26.8 million at December 31, 1995. While this amount is classified as a current liability, the facility does not expire until the years 1999 and 2000.
As part of Spinnaker's acquisition of Central Products Company from Alco Standard on October 4, 1995 (see note 2), Alco provided two loans totaling $25 million and received the right to sell these notes to Spinnaker and demand payment (the "Put Agreements"). Lynch Corporation agreed to guarantee the notes and provide funds for the Put Agreements. As of January 2, 1996, Alco exercised its rights under the Put Agreements to sell the notes back to Spinnaker on January 31, 1996. Accordingly, these notes have been classified as current in the accompanying balance sheet. Pursuant to the agreements with Alco, the closing has been extended from January 31, 1996 to early April 1996. Spinnaker is actively pursuing financing alternatives, which may involve additional bank loans and the issuance of debt and equity securities but, at the present time, neither Spinnaker nor Lynch Corporation have sufficient funds or available capacity under their existing financing agreements to settle the Alco obligations under the Put Agreements, Spinnaker has not entered into any definitive agreements regarding the terms of any financing, and there can be no assurance that such financing will be available on terms satisfactory to Spinnaker. Should the Alco obligations not be satisfied, management is unaware of the actions Alco or other lenders might take. For further information on the Central Products acquisition and the financing thereof, reference is made to Lynch's Form 8-K dated as of October 4, 1995, as amended.
Backlog in the manufactured products segment at December 31, 1995 was $34.0 million versus $38.8 million at the end of 1994. At December 31, 1995, backlog included $3.1 million from Central Products. Backlog at Lynch Machinery was $16.9 million at December 31, 1995, and $28.9 million at December 31, 1994. The significant level of shipments in 1995 caused their backlog to be reduced by $12.0 million.
Since 1987, the Board of Directors of Lynch has authorized the repurchase of 300,000 common shares. At December 31, 1995, Lynch's remaining authorization is to repurchase an additional 69,139 shares of common stock.
The Board of Directors has adopted a policy not to pay dividends; and such policy is reviewed annually. This policy takes into account the long term growth objectives of the Company; especially its acquisition program, shareholders' desire for capital appreciation of their holdings and the current tax law disincentives for corporate dividend distributions. Accordingly, no cash dividends have been paid since January 30, 1989 and none are expected to be paid in 1996.
Lynch Corporation maintains an active acquisition program and generally finances each acquisition with a significant component of debt. This acquisition debt contains restrictions on the amount of readily available funds that can be transferred to Lynch Corporation from its subsidiaries. Lynch Corporation (the holding company) currently has a $12 million short-term line of credit which expires April 15, 1996. Management anticipates that this line will be secured for one year and believes is adequate to cover its short term operational needs, but is actively considering alternative long term financing arrangements at the holding company and subsidiary levels to fund future growth.
The company has several entities in which it holds a minority position and to which it has funding commitments, and which, as of the date of this report, are participating in the auction being conducted by the Federal Communications Commission for 30 megahertz of broadband spectrum to be used for personal communications services, the so-called "C" Block Auction. While the auction is not yet complete, the company anticipates that the entities may acquire licenses to provide personal communications services to several areas of the United States. In addition, the Company anticipates that either directly, through the above entities or through other potential joint ventures, it will participate in the scheduled FCC auction of 10 megahertz of spectrum also to be used for personal communications services the so called "D-E-F" block auction. The 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 company's reported net income over the next several years. Under the current structure the ramifications of this would not impact reported revenues and EBITDA in the future.
MARKET PRICE INFORMATION AND
COMMON STOCK OWNERSHIP
The Common Stock of Lynch Corporation is traded on the American Stock Exchange under the symbol "LGL." The market price highs and lows in consolidated trading of the Common Stock during the past two years are as follows:
THREE MONTHS ENDED 1995
--------------------------------------------------
1995 MARCH 31 JUNE 30 SEPT 30 DEC 31
--- -------- ------- ------- ------
High 39 1/8 47 3/4 84 3/4 80
Low 30 35 1/2 46 1/8 57 3/4
1994
---
High 25 1/8 26 7/8 30 32 7/8
Low 22 3/4 25 25 28 5/8
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At March 15, 1996, the Company had 1,060 shareholders of record.
LYNCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year ended December 31
1995 1994 1993
----------- ----------- -----------
SALES AND REVENUES:
Multimedia .................................................. $ 23,597 $ 20,144 $ 16,206
Services .................................................... 122,303 101,880 82,829
Manufacturing ............................................... 192,266 66,678 28,004
----------- ----------- -----------
338,166 188,702 127,039
----------- ----------- -----------
COSTS AND EXPENSES:
Multimedia .................................................. 17,889 14,239 11,084
Services .................................................... 111,672 92,155 75,243
Manufacturing ............................................... 152,568 50,064 19,243
Selling and administrative .................................. 36,722 21,449 14,851
----------- ----------- -----------
318,851 177,907 120,421
----------- ----------- -----------
OPERATING PROFIT .............................................. 19,315 10,795 6,618
----------- ----------- -----------
Other income (expense):
Investment income ........................................... 3,070 2,446 2,112
Interest expense ............................................ (10,892) (6,526) (5,686)
Share of operations of affiliated companies ................. 398 (301) (69)
Gain on sales of subsidiary and affiliate stock ............. 59 190 4,326
----------- ----------- -----------
INCOME BEFORE INCOME TAXES, MINORITY INTERESTS,
EXTRAORDINARY ITEM AND CUMULATIVE EFFECT
OF ACCOUNTING CHANGE ........................................ 11,950 6,604 7,301
Provision for income taxes .................................... (4,686) (2,652) (2,448)
Minority interests ............................................ (2,119) (1,360) (737)
----------- ----------- -----------
INCOME BEFORE EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE ...................... 5,145 2,592 4,116
Loss on early extinguishment of debt, net of income tax benefit
of $135 and $106 ............................................ -- (264) (206)
Cumulative effect to January 1, 1993 of change in accounting
for income taxes ............................................ -- -- (957)
----------- ----------- -----------
NET INCOME .................................................... $ 5,145 $ 2,328 $ 2,953
=========== =========== ===========
Weighted average shares and share equivalents outstanding ..... 1,407,000 1,337,000 1,226,000
Primary earnings per share:
Income before extraordinary item and
cumulative effect change .................................. $ 3.66 $ 1.94 $ 3.36
Extraordinary item .......................................... -- (.20) (.17)
Cumulative effect change .................................... -- -- (.78)
----------- ----------- -----------
NET INCOME .................................................... $ 3.66 $ 1.74 $ 2.41
=========== =========== ===========
Fully diluted earnings per share:
Income before extraordinary item and
cumulative effect change .................................. $ 3.66 $ 1.88 $ 2.98
Extraordinary item .......................................... (.16) (.12)
Cumulative effect change .................................... -- (.57)
----------- ----------- -----------
NET INCOME .................................................... $ 3.66 $ 1.72 $ 2.29
=========== =========== ===========
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See accompanying notes.
LYNCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
December 31
1995 1994
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ..................................................... $ 15,921 $ 18,010
Marketable securities and short-term investments .............................. 11,432 13,511
Trade accounts receivable, less allowances of $1,732 and $737 in 1995 and 1994,
respectively; includes $3,602 and $3,624 of costs in excess of billings
in 1995 and 1994, respectively .............................................. 52,306 36,454
Inventories ................................................................... 33,235 18,955
Deferred income taxes ......................................................... 3,944 2,872
Other current assets .......................................................... 6,810 4,083
--------- ---------
TOTAL CURRENT ASSETS ........................................................ 123,648 93,885
PROPERTY, PLANT AND EQUIPMENT:
Land .......................................................................... 2,068 1,893
Buildings and improvements .................................................... 16,675 11,713
Machinery and equipment ....................................................... 128,397 79,290
--------- ---------
147,140 92,896
Accumulated depreciation ...................................................... (36 ,093) (31,451)
--------- ---------
111,047 61,445
INVESTMENTS IN AND ADVANCES TO AFFILIATED COMPANIES ............................. 8,982 3,503
INTANGIBLE ASSETS, NET .......................................................... 53,060 23,518
OTHER ASSETS .................................................................... 5,702 3,559
--------- ---------
TOTAL ASSETS .................................................................... $ 302,439 $ 185,910
========= =========
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See accompanying notes.
LYNCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS)
December 31
1995 1994
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks .............................. $ 9,622 $ 5,904
Trade accounts payable .............................. 20,147 11,999
Accrued interest payable ............................ 1,146 565
Accrued liabilities ................................. 23,612 15,759
Customer advances ................................... 3,787 7, 400
Current maturities of long-term debt ................ 64,708 29,545
--------- ---------
TOTAL CURRENT LIABILITIES ......................... 123,022 71,172
LONG-TERM DEBT ........................................ 113,029 62,745
DEFERRED INCOME TAXES ................................. 17,912 10,397
MINORITY INTERESTS .................................... 12,964 11,065
SHAREHOLDERS' EQUITY:
Common Stock, no par or stated value:
Authorized 10 million shares
Issued 1,471,191 shares ........................... 5,139 5,139
Additional paid-in capital ........................ 7,873 8,037
Retained earnings ................................. 23,776 18,631
Treasury stock of 92,528 and 92,533 shares, at cost (1,276) (1,276)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY ............................ 35,512 30,531
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............ $ 302,439 $ 185,910
========= =========
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See accompanying notes.
LYNCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
Shares of
Common Additional
Stock Common Paid-in Retained
Outstanding Stock Capital Earnings
---------- ---------- ---------- ----------
Balance at January 1, 1993 .................. 1,225,660 $ 3,542 $ 7,126 $ 13,350
Purchase of treasury stock .................. (13) -- -- --
Issuance of treasury stock .................. 30 -- -- --
Net income for the year ..................... -- -- -- 2,953
---------- ---------- ---------- ----------
Balance at December 31, 1993 ................ 1,225,677 3,542 7 ,126 16,303
Sale of stock to Officer .................... 100,000 -- 910 --
Conversion of Debentures .................... 52,881 1,597 -- --
Issuance of treasury stock .................. 100 -- 1 --
Net income for the year ..................... -- -- -- 2,328
---------- ---------- ---------- ----------
Balance at December 31, 1994 ................ 1,378,658 5,139 8,037 18,631
Issuance of treasury stock .................. 5 -- -- --
Capital transactions of The Morgan Group Inc. -- -- (164) --
Net income for the year ..................... -- -- 5,145
---------- ---------- ---------- ----------
Balance at December 31, 1995 ................ 1,378,663 $ 5,139 $ 7,873 $ 23,776
========== ========== ========== ==========
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See accompanying notes.
LYNCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
Year ended December 31
1995 1994 1993
--------- --------- ---------
OPERATING ACTIVITIES
Net income .................................................. $ 5,145 $ 2,328 $ 2,953
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ........................... 11,276 7,497 5,893
Net effect of (purchases) and sales of trading securities 2,079 5,450 --
Deferred taxes .......................................... 201 (1,505) 1, 830
Share of operations of affiliated companies ............. (398) 301 69
Minority interests ...................................... 2,119 1,360 618
Gain on Morgan IPO ...................................... -- -- (3,851)
Changes in operating assets and liabilities,
net of effects of acquisitions:
Receivables ......................................... (3,704) (11,243) (340)
Inventories ......................................... 1,539 (949) 416
Accounts payable and accrued liabilities ............ 10,417 12,234 2,062
Other ............................................... (1,496) (1,026) (379)
Other ................................................... -- 109 479
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES ................... 27,178 14,556 9,750
--------- --------- ---------
INVESTING ACTIVITIES
Acquisitions (total cost less debt assumed and cash
equivalents acquired):
Central Products Company ............................ (85,072) -- --
CLR Video ........................................... (5,242) -- --
Transport Drivers, Inc. ............................. (2,806) -- --
Personal Communications Services Partnerships ....... (7,010) -- --
Brown-Bridge Industries Inc. ........................ -- (29,071) --
Haviland Telephone Company .......................... -- (2,854) --
JBN Telephone Company ............................... -- -- (6,698)
Other ............................................... -- -- (1,141)
Capital expenditures ...................................... (19,569) (11,598) (4,356)
Sales (purchases) of marketable securities, net ........... -- -- (4,724)
Net investment in Capital Communications, Inc. ............ 3,000 (2,541) (26)
Other ..................................................... (1,349) (288) (291)
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES ....................... (118,048) (46,352) (17,236)
--------- --------- ---------
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See accompanying notes.
LYNCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
Year ended December 31
1995 1994 1993
-------- -------- --------
FINANCING ACTIVITIES
Issuance of long-term debt ................. 90,167 31,477 6,688
Payments to reduce long-term debt .......... (4,720) (3,439) (7,979)
Debenture redemption/conversion ............ -- (11, 835) (6,144)
Net borrowings, lines of credit ............ 3,718 3,957 285
Sale of treasury stock ..................... -- 2,290 --
Conversion of debentures into common stock . -- 1,597 --
Minority interest transactions ............. (220) 906 8,597
Other ...................................... (164) 305 (152)
-------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES .. 88,781 25,258 1,295
-------- -------- --------
Net decrease in cash and cash equivalents .... (2,089) (6,538) (6,191)
Cash and cash equivalents at beginning of year 18,010 24,548 30,739
-------- -------- --------
Cash and cash equivalents at end of year ..... $ 15,921 $ 18,010 $ 24,548
======== ======== ========
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See accompanying notes.
LYNCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. ACCOUNTING AND REPORTING POLICIES
Principles of Consolidation: The consolidated financial statements include the accounts of Lynch Corporation ("Company" or "Lynch") and entities in which it has majority voting control. Investments in affiliates in which the Company does not have majority voting control are accounted for in accordance with the equity method. All material intercompany transactions and accounts have been eliminated in consolidation.
Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Cash Equivalents: Cash equivalents consist of highly liquid investments with a maturity of less than three months when purchased.
At December 31, 1995 and 1994, assets of $7.9 million and $13.4 million, which are classified as cash and cash equivalents, are invested in United States Treasury money market funds for which affiliates of the Company serve as investment managers to the respective Funds.
Marketable Securities and Short-Term Investments: On January 1, 1994, the Company adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (Statement No. 115). Under Statement No. 115, the accounting for investments depends on the classification of such securities as either held-to-maturity, available-for-sale, or trading.
Marketable securities and short-term investments consist principally of U.S. Treasury obligations, preferred and common stocks and bonds. At December 31, 1995, all marketable securities and United States Treasury money market funds classified as cash equivalents were classified as trading, with the exception of an equity security with a carrying value of $0.9 million which was classified as available-for-sale. Trading and available-for-sale securities are stated at fair value with unrealized gains or losses on trading securities included in earnings and unrealized gains or losses on available-for-sale securities included in a separate component of shareholders' equity. Unrealized gains (losses) of $408,000 and ($214,000) for December 31, 1995 and 1994 on trading securities have been included in earnings. There was no adjustment to shareholders' equity for the available-for-sale security at December 31, 1995.
The cost of marketable securities sold is determined on the specific identification method. Realized gains of $529,000 and $293,000, and realized losses of $108,000 and $233,000 are included in other income for the years ended December 31, 1995 and 1994.
Properties and Depreciation: Property, plant and equipment are recorded at cost and include expenditures for additions and major improvements. Maintenance and repairs are charged to operations as incurred. Depreciation is computed for financial reporting purposes using the straight-line method over the estimated useful lives of the assets. For income tax purposes, accelerated depreciation methods are used.
Excess of Cost Over Net Assets of Companies Acquired: Excess of cost over net assets of companies acquired (goodwill) is being amortized on a straight-line basis over periods not exceeding forty years. The Company periodically reviews goodwill to assess recoverability, and impairments would be recognized in operating results if a permanent diminution in value were to occur. The Company measures the potential impairment of recorded goodwill by the undiscounted value of expected future operating cash flows in relation to its net capital investment in the subsidiary. The Company does not believe that an impairment of its goodwill has occurred.
Multimedia: Multimedia revenues include local and intrastate telephone company service revenues which are subject to review and approval by state public utility commissions, and long distance network revenues, which are based upon charges to long distance carriers through a tariff filed by the National Exchange Carriers Association with the Federal Communications Commission. Revenues are based on cost studies for the Company's exchanges, and have been estimated pending completion of final cost studies.
Services: Service revenues and related estimated costs of transportation are recognized when transportation of the manufactured housing, recreational vehicle or other product is completed.
Liability insurance is maintained with a deductible amount for claims resulting from personal injury and property damage. Provisions are made for the estimated liabilities for the self-insured portion of such claims as incurred.
Manufacturing: Manufacturing revenues, with the exception of certain long-term contracts discussed below, are recognized on shipment.
Research and Development Costs: Research and development costs are charged to operations as incurred. Such costs approximated $1,673,000 in 1995, $1,231,000 in 1994 and $622,000 in 1993.
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 debentures when outstanding and the exercise of all stock options having an exercise price less than the greater of the average or the closing market price of the Common Stock of the Company at the end of the period using the treasury stock method.
Accounting for Long-Term Contracts: Lynch Machinery, Inc., a 90% owned subsidiary of the Company, produces specialized machines under long-term contracts. Because of the specialized nature of these machines and the period of time needed to complete production and shipping, Lynch Machinery accounts for these contracts using the percentage of completion method.
Impairments: In 1995, the Financial Accounting Standards Board ("FASB") issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which is effective for fiscal years beginning after December 15, 1995. The Company is studying this Statement but does not believe its adoption will have a material impact on the financial statements.
Stock Based Compensation: Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" was issued in October 1995 and is effective for fiscal years beginning after December 15, 1995. The Statement establishes financial accounting and reporting standards for stock based compensation plans. Companies may elect to account for such plans under the fair value method or to continue previous accounting and disclose proforma net earnings and earnings per share as if the fair value method was applied. The Company has not yet determined the potential financial statement impact of this Statement, nor has it determined how it will initially adopt this Statement.
Fair Value of Financial Instruments: Cash and cash equivalents, trade accounts receivable, short-term borrowings, trade accounts payable and accrued liabilities are carried at cost which approximates fair value due to the short-term maturity of these instruments. The carrying amount of the Company's borrowings under its revolving lines of credit approximates fair value, as the obligations bear interest at a floating rate. The fair value of all other long-term obligations approximate cost based on discounted cash flows using the Company's incremental borrowing rate for similar instruments.
Reclassifications: Certain amounts in the 1994 and 1993 financial statements have been reclassified to conform to the 1995 presentation.
2. ACQUISITIONS
On October 4, 1995, Central Products Acquisition Corp., a wholly-owned subsidiary of Spinnaker Industries, Inc. (an 83% owned subsidiary of Lynch) acquired from Alco Standard Corporation ("Alco"), the assets and stock of Central Products Company. Central Products manufactures and markets a wide variety of carton sealing tapes and related equipment. The cost of the acquisition was $80.0 million. As a result of this transaction, the Company recorded $27.2 million in goodwill which is being amortized over 25 years.
On September 26, 1994, Lynch Telephone Corporation VII, a wholly-owned subsidiary of Lynch, acquired all of the outstanding shares of Haviland Telephone Company, Inc. a local exchange Company in Kansas, from InterDigital Communications Corporation. The total cost of this transaction was $13.4 million. As a result of this transaction, the Company recorded $8.2 million in goodwill which is being amortized over 25 years.
On September 19, 1994, Brown-Bridge Industries, Inc., an 80.1% owned subsidiary of Spinnaker Industries, Inc., acquired from Kimberly-Clark Corporation the net assets associated with its Brown-Bridge operation, a manufacturer of adhesive coated stock for labels and related applications. The cost of the transaction was $29.1 million, plus $6.9 million in current liabilities assumed.
On March 1, 1994, Capital Communications Corporation, 49% owned by Lynch, acquired certain assets associated with the operations of Station WOI-TV from Iowa State University. Station WOI is an ABC affiliate serving the Des Moines, Iowa market. The total cost of the transaction was $13.0 million.
On November 30, 1993, Lynch Telephone VI ("Lynch Tel VI"), a 98% owned subsidiary of Lynch, acquired all of the outstanding shares of J.B.N. Telephone Company, Inc. ("JBN"), a local exchange Company in Kansas from GTE Corporation. The total cost of the transaction was $9.4 million.
All of the above transactions were accounted for as purchases, and accordingly, the assets acquired and liabilities assumed were recorded at their estimated fair market values.
The operating results of the acquired companies are included in the consolidated statements of income from their respective acquisition dates. The following unaudited combined pro forma information shows the results of the Company's operations presented as though the purchases of Central Products were made at the beginning of 1994, and Haviland, Brown-Bridge, Station WOI-TV and JBN had been made at the beginning of 1993.
Year Ended
December 31
1995 1994 1993
------ ------ ------
(In Thousands,
Except per Share Data)
Sales and revenues ............. $429,435 $364,388 $216,331
Income before extraordinary
item and cumulative effect
of accounting change ......... 6,145 3,980 5,176
Net income ..................... 6,145 3,716 4,013
Income per share before
extraordinary item and
cumulative effect of
accounting change ............ 4.37 2.98 4.22
Net income per share ........... 4.37 2.78 3.27
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On January 25, 1995, a contract was signed for $4.7 million with US West Communications Inc. to acquire 1,400 access lines in North Dakota. On November 4, 1995, a contract was signed for $22.0 million, subject to certain conditions, to acquire Dunkirk & Fredonia Telephone Co., a local exchange Company in New York, with 10,700 access lines. These transactions are expected to close during 1996.
3. INVENTORIES
Inventories are stated at the lower of cost or market value. Inventories valued using the last-in, first-out (LIFO) method comprised approximately 58% and 23% of consolidated inventories at December 31, 1995 and 1994. Inventories at Brown-Bridge, 38% and 68% of inventories at December 31, 1995 and 1994, are valued using the specific identification method. The balance of inventories are valued using the first-in first-out (FIFO) method.
December 31
1995 1994
------- -------
(In Thousands)
Raw materials and supplies ............. $10,676 $ 5,560
Work in process ........................ 10,286 7,745
Finished goods ......................... 12,273 5,650
------- -------
TOTAL .................................. $33,235 $18,955
======= =======
|
Current cost exceeded the LIFO value of inventories by $905,000 and $961,000 at December 31, 1995 and 1994, respectively.
4. INVESTMENT IN AND ADVANCES TO AFFILIATED COMPANIES
Certain subsidiaries of Lynch are limited partners with a 49.9% equity interest in five partnerships which filed applications on November 6, 1995 with the Federal Communications Commission to bid in the FCC's C-Block Auction on Basic Trading Area licenses for 30 MHZ of spectrum to be used for broadband wireless personal communications services ("PCS"). Lynch has advances outstanding to these partnerships of $7.0 million on December 31, 1995. The Company has also committed to loan these partnerships an additional $35.3 million over the next seven years, based on the outcome of the Auction.
Lynch Entertainment Corporation ("LENCO"), a wholly-owned subsidiary of the Company, has a 20% investment in Coronet Communications Company ("Coronet"), which operates television station WHBF-TV, a CBS affiliate in Rock Island, Illinois. Lynch Entertainment Corporation II ("LENCO II"), a wholly-owned subsidiary of the Company, has a 49% investment in Capital Communications Company ("Capital"), which operates television station WOI-TV, an ABC affiliate in Des Moines, Iowa, which it acquired on March 1, 1994. The following represents condensed financial information of Coronet as of and for the years ended December 31, 1995, 1994 and 1993 and of Capital for the years ended December 31, 1995 and 1994, both derived from audited financial statements of the respective companies:
Coronet
----------------------------------------
1995 1994 1993
------ ------ ------
(In Thousands)
Current assets .............. $ 4,670 $ 3,892 $ 2,627
Property and
other assets ............... 6,842 7,108 7,134
-------- -------- --------
Total assets ................ $ 11,512 $ 11,000 $ 9,761
======== ======== ========
Current liabilities,
including current
portion of
long-term debt ............. $ 4,752 $ 3,681 $ 2,481
Long-term debt and
other liabilities .......... 16,186 17,555 18,442
Partners' equity (deficit) .. (9,426) (10,236) (11,162)
-------- -------- --------
$ 11,512 $ 11,000 $ 9,761
======== ======== ========
Revenues .................... $ 7,195 $ 7,069 $ 5,951
Expenses .................... (6,385) (6,144) (6,299)
-------- -------- --------
Income (loss) ............... $ 810 $ 925 $ (348)
======== ======== ========
|
Coronet's results include depreciation and amortization expense of $389,193, $364,377, and $493,088 for 1995, 1994, and 1993, respectively.
Capital
1995 1994
-------- --------
(In Thousands)
Current assets ......................... $ 5,045 $ 3,961
Property and other assets .............. 9,837 11,361
-------- --------
Total assets ........................... $ 14,882 $ 15,322
======== ========
Current liabilities,
including current
portion of
long-term debt ........................ 2,818 1,996
Long-term debt
and other liabilities ................. 13,052 12,738
Shareholder's equity (deficit) ......... (988) 588
-------- --------
$ 14,882 $ 15,322
======== ========
Revenues ............................... $ 9,217 $ 7,034
Expenses ............................... (9,704) (8,549)
-------- --------
Loss before taxes ...................... (487) (1,515)
Tax benefit ............................ 98 606
-------- --------
Net loss ............................... $ (389) $ (909)
======== ========
|
Capital's results include depreciation and amortization expense of $1,842,684 and $2,153,000 for 1995 and 1994, respectively.
The long-term debt of Coronet at December 31, 1995 is comprised of $14.5 million due to a third party lender and $2.8 million due to LENCO. The third party debt is due in February 1997, and is at an average interest rate of 9.26%. The debt to LENCO is due June 15, 1997 and is at a fixed rate of 10%, composed of a quarterly cash payment of 6% and a payment-in-kind of 4%, compounded annually. The Company recorded interest income on this debt of $276,000, $265,000, and $261,000 for the years ended December 31, 1995, 1994, and 1993, respectively. LENCO has a $980,000 net investment in Coronet at December 31, 1995 and has guaranteed $4.0 million of $11.7 million of Coronet's third party debt.
The subordinated debt and Preferred Stock A provided by LENCO II to acquire the assets of Station WOI-TV on March 1, 1994, was fully paid off on December 15, 1995. The third party financing agreement between Capital Communications, Inc. ("Capital") was refinanced during 1995 with the principal sum increasing to $14 million. The loan is to be paid off in consecutive, quarterly principal payments until December 31, 2002 at which time the remaining balance of the debt, $5.0 million becomes due. Interest shall be paid at a rate per annum equal to the Prime Rate adjusted monthly on the first business day of each month. The interest rate at December 31, 1995 was 8.75%. LENCO II also owns $10,000 of Preferred Stock B of Capital, which is convertible at any time into the Common Stock of Capital in a sufficient amount to bring LENCO II's ownership to 50%. LENCO II's investment in Capital at December 31, 1995 has been reduced to zero as its share of net losses would have exceeded its net investment.
On October 31, 1993, Tremont Advisers, Inc. ("Tremont") exercised its option to acquire 1,000,000 shares of Tremont's Class B Common Stock, $.01 par value, from Lynch at $.40 per share. This sale and the proceeds from the option resulted in a gain of $475,000, for which there is no tax provision, or $.39 per share which is included in the 1993 gain on sale of subsidiary and affiliate stock.
5. INTANGIBLE ASSETS
Intangible assets include acquisition intangibles of $53.1 million and $26.4 million, net of accumulated amortization of $5.5 million and $2.9 million, at December 31, 1995 and 1994, respectively.
6. NOTES PAYABLE AND LONG-TERM DEBT
The Company maintains lines of credit with banks which aggregate $35.8 million, of which $20.6 million was available at December 31, 1995. These lines are secured by operating assets of the related subsidiaries ($38.1 million). The line of credit agreements expire in 1996, are renewable annually, and are at interest rates ranging from prime less .25%, to prime plus 1%. The Company's outstanding balances under these lines of credit and standby letters of credit totaled approximately $5.9 million at December 31, 1995, securing various insurance obligations and customer advances. Several of the credit agreements contain covenants restricting distributions. At December 31, 1995 and 1994, $5.6 million and $5.7 million, respectively, of subsidiaries' retained earnings were restricted under these agreements.
Spinnaker Industries, Inc. also maintains lines of credit with banks for working capital needs at each subsidiary which aggregate $45.5 million. Spinnaker had cash advances of $27 million outstanding under the lines of credit as of December 31, 1995. Interest on all outstanding borrowings bear interest at variable rates related to the prime interest rate or the lender's base rate. At December 31, 1995, the interest rates in effect ranged from 8.5% to 11%. Credit availability under the lines of credit are subject to certain variables, such as the amount of inventory and receivables eligible to be included in the borrowing base. These lines are secured by the operating assets of certain Spinnaker subsidiaries. Spinnaker is required to comply with various covenants including a limitation on capital expenditures, interest and fixed charge coverage, and minimum levels of operating earnings, as well as various other financial covenants. Certain of the lines of credit require the payment of a fee based upon the face amount of each letter of credit issued. The
line of credit agreements expire in 1997 for Entoleter, 2000 for CPC, and 1997 for Brown-Bridge and are renewable annually.
Long-term debt consists of (all interest rates at December 31, 1995):
December 31
1995 1994
--------- --------
(In Thousands)
Rural Utilities Service and
Rural Telephone Bank notes payable
in equal quarterly installments through
2023 at fixed interest rates ranging
from 2% to 7% (3.0% weighted aver-
age), secured by assets of the tele-
phone companies of $67.1 million ........... $ 27,543 $ 24,283
Bank credit facilities utilized by certain
telephone and telephone holding
companies through 2010, $17.4 million
at a fixed interest rate averaging 10.4%
and $10.9 million at variable
interest rates averaging 8.6% .............. 28,255 24,158
Unsecured notes issued in connec-
tion with telephone company
acquisitions at an interest rate
of 10% due from 1996 to 2003 ............... 16,149 16,266
Bank Debt associated with Central Products:
Revolving line of credit at interest
rate of (9.75%) expiring in 2000 ........... 14,126 --
Term loan at interest rate of (9.5%), due
in installments through 2002 ............... 19,625 --
Term loan at interest rate of (10.5%), due
in installments through 2002 ............... 16,000 --
Notes issued to seller:
Term loan due 2003 at fixed
interest rates of (8%) see below .......... 15,000 --
Term loan due in installments through
2002 at fixed interest rate of (11%)
see below ................................. 10,000 --
Subordinated loan due in installments through
1998 at fixed interest rate of (0%) ........ 5,000 --
Bank debt associated with Brown-Bridge:
Revolving line of credit at interest
rate of prime plus 1.25% (9.75%)
expiring in 1999 .......................... 12,646 13,180
Term loan at interest rate of prime
plus 1.25% (9.75%), due in install-
ments through 1999 ........................ 6,691 9,000
Other ....................................... 6,702 5,403
--------- --------
177,737 92,290
Current maturities .......................... (64,708) (29,545)
--------- --------
$ 113,029 $ 62,745
========= ========
|
As part of Spinnaker's acquisition of Central Products Company from Alco Standard on October 4, 1995 (see note 2), Alco provided two term loans totaling $25 million and received the right to sell these loans to Spinnaker and demand payment (the "Put Agreements"). Lynch Corporation agreed to guarantee the loans and provide funds for the Put Agreements. As of January 2, 1996, Alco exercised its rights under the Put Agreements to sell the loans back to Spinnaker on February 1, 1996. Pursuant to the agreements with Alco, the closing has been extended from February 1, 1996 to early April 1996. Spinnaker is actively pursuing financing alternatives, which may involve the issuance of debt and equity securities but, at the present time, neither Spinnaker nor Lynch Corporation have sufficient funds or available capacity under their existing financing agreements to settle the Alco obligations under the Put Agreements, Spinnaker has not entered into any definitive agreements regarding the terms of any financing, and there can be no assurance that such financing will be available on terms satisfactory to Spinnaker. Should the Alco obligations not be satisfied, management is unaware of the actions Alco or other lenders might take.
RUS debt of $27.5 million bearing interest at 2% has been reduced by a purchase price allocation of $3.6 million reflecting an imputed interest rate of 5%. Unsecured notes issued in connection with the telephone company acquisitions are predominantly held by members of management of the telephone operating companies.
In July 1986, the Company issued $23.0 million principal amount of 8% convertible subordinated debentures. These debentures were unsecured obligations of the Company and were convertible into Common Stock at a price of $31 per share prior to maturity. Through September 21, 1994, the Company had either purchased on the open market or redeemed $11.2 million of the original issuance. At that date, in accordance with the terms of the debenture indenture, the Company called for redemption all of the remaining debentures outstanding, at 101.6% of their face amount plus accrued interest. The redemption was completed on October 24, 1994, and $10,195,000 of the debentures were redeemed and $1.6 million were converted into 52,881 shares of Common Stock at $31 per share before allocation of related expenses. As a result of the redemption, the Company recognized in 1994 an extraordinary loss of $264,000, net of taxes. On October 18, 1993, the Company redeemed $6.0 million principal amount of debentures at 102.4% of face value plus accrued interest to that date. As a result of this redemption, the Company recognized in 1993 an extraordinary loss of $206,000, net of taxes.
Cash payments for interest were $10.6 million, $6.2 million and $5.5 million for the years ended December 31, 1995, 1994 and 1993, respectively.
Aggregate principal maturities of long-term debt for each of the next five years are as follows: 1996--$64.7 million, 1997--$8.9 million; 1998--$11.6 million, 1999--$11.8 million, and 2000--$14.1 million.
7. MINORITY INTERESTS AND RELATED PARTY TRANSACTIONS
In October 1989, Lynch Telephone Corporation, an 80.1% owned subsidiary, purchased 100% of the capital stock of Western New Mexico Telephone Company, Inc. ("Western"), an independent local telephone company serving southwestern New Mexico. The sellers of Western own 19.9% of Lynch Telephone Corporation and have
been granted an option to acquire stock equal to an additional 30.1% interest of the shares currently outstanding, which was extended in 1993 to become exercisable during a three month period commencing October 19, 1996, at a formula price. In addition, during 1993, Lynch secured the right to acquire stock equal to 15% of Lynch Telephone Corporation at terms similar to the sellers' option.
On July 22, 1993, Morgan completed an initial public offering ("IPO") of 1,100,000 shares of its Class A Common Stock, $.015 par value, at $9.00 per share. In accordance with Lynch's policy of recognizing a gain or loss on the sale of stock by a subsidiary, a pre-tax gain of approximately $3.9 million ($2.2 million after tax, $1.84 per share) was recorded in connection with Morgan's IPO. Lynch's ownership of 150,000 Class A shares (acquired during 1995) and 1,200,000 Class B shares of Morgan entitles it to a voting control and, therefore, Lynch consolidates Morgan's results in its financial statements. In accordance with FASB Statement No. 109, a deferred tax liability is recognized for the difference between the financial reporting basis and the tax basis of the Company's investment in Morgan.
On June 4, 1993, the Board of Directors of Morgan approved the adoption of a stock option plan which provides for the granting of incentive or nonqualified stock options to purchase up to 200,000 shares of Class A Common Stock to officers, including members of Morgan's Board of Directors, and other key employees. No options may be granted under this plan at less than the fair market value of the Common Stock at the date of the grant, except for certain nonemployee directors. Three nonemployee directors were granted nonqualified stock options to purchase a total of 24,000 shares of Class A Common Stock at prices ranging from $6.80 to $9.00 per share. Although the exercise period is determined when options are actually granted, an option shall not be exercised later than 10 years and one day after it is granted. Stock options granted will terminate if the grantee's employment terminates prior to exercise for reasons other than retirement, death, or disability. Employees have been granted nonqualified stock options to purchase 163,500 shares of Class A Common Stock at an exercise price from $7.50 to $8.75 per share. These options will vest over a four year period pursuant to the terms of the plan. As of December 31, 1995, options to purchase 61,000 shares were exercisable.
On June 13, 1994, Spinnaker entered into a series of agreements with Boyle, Fleming & Co., Inc. ("BF"), of whom a former Director of the Corporation is a principal, for BF to assume the management of Spinnaker. As part of these arrangements, BF received warrants to purchase 678,945 shares of Spinnaker Common Stock (equating to a 20% ownership of Spinnaker) at a price of $2.67 per share (adjusted for a 3 for 2 stock split which was effective December 29, 1995) at any time prior to or before June 10, 1999, subject to certain conditions. BF may also, on the occurrence of an equity offering by Spinnaker Industries, Inc., receive warrants to acquire additional shares of Spinnaker at terms to be determined at the time of the offering.
During 1994, Brown-Bridge granted certain of its key executives options to purchase up to 71,065 shares of Brown-Bridge's common stock at various prices between $7.16 and $14.69 per share. Brown-Bridge currently has 1,000,000 common shares outstanding. The options become exercisable (i) in cumulative installments of one-fifth each year if certain levels of profitability, as defined in the plan, are met, or (ii) seven years from the date of grant. The options were issued at not less than 100% of the fair market value of the common stock at the date of grant. At December 31, 1995, 14,213 options were exercisable. None of the options were exercisable at December 31, 1994.
The Company, pursuant to Indiana law and the Company's Articles of Incorporation, has reimbursed its Chairman and Chief Executive Officer, for $392,000 of legal fees incurred in connection with a regulatory inquiry. Amounts relating to this reimbursement were charged to the Company's results of operations for the years ended December 31, 1994 ($317,000) and 1993 ($75,000).
On January 19, 1994, Lynch sold 100,000 shares of common stock held in its treasury to its Chairman and Chief Executive Officer at $22.875 per share, the closing price in trading of Lynch common stock on The American Stock Exchange on that date. The transaction was approved by the Company's shareholders at its annual meeting held on May 5, 1994.
8. SHAREHOLDERS' EQUITY
In 1987, 1988 and 1992, the Board of Directors authorized the purchase of up to 300,000 shares of Common Stock. Through December 31, 1995, 230,861 shares had been purchased at an average cost of $13.15 per share. In January 1994, two officers were granted stock options to purchase up to 86,000 shares of Lynch common stock. Approximately 24,500 options were granted at an exercise price of $23.125, the closing price on the American Stock Exchange on January 18, 1994. These options are fully vested and outstanding. During 1995, the balance of the options were canceled.
On February 1, 1996, the Company adopted a plan to provide a portion of the compensation for its directors in common shares of the Company. The amount is fixed, and the conversion to common stock is based upon the market price at the end of the previous year. In February, 1996, the Company awarded 1,428 shares under this program. Such shares will vest during 1996.
On February 29, 1996, the Company adopted a Phantom Stock Option Plan for certain employees. To date, 7,400 of Phantom Stock Options ("PSO") have been granted at a price of $63 per share. Upon the exercise of a PSO, the holder is entitled to receive an amount equal to the amount by which the market value of the Company's common stock on the exercisable date exceeds the exercise price of the PSO.
9. INCOME TAXES
The Company changed its method of accounting for income taxes in 1993 from the deferred method to the liability method required by Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109") The adoption of SFAS 109, which resulted in a cumulative effect charge of $957,000 or $.78 per share, is reported in the 1993 Consolidated Statement of Income. Accordingly, prior years' financial statements have not been restated to apply the provisions of SFAS 109.
Deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities. Cumulative temporary differences and carryforwards at December 31, 1995 and 1994 are as follows:
December 31, 1995 December 31, 1994
Deferred Tax Deferred Tax
Asset Liability Asset Liability
-------- --------- -------- ---------
(In Thousands)
Inventory reserve ............ $ 485 -- $ 500 --
Fixed assets written
up under purchase
accounting and tax
over book depreciation ..... -- $12,438 -- $ 5,622
Discount on long-term debt ... -- 1,398 -- 1,511
Basis difference in subsidiary
and affiliate stock ........ 85 1,750 165 1,686
Partnership tax losses in
excess of book losses ...... -- 1,249 -- 1,139
Other reserves and accruals .. 2,620 -- 2,331 --
Other ........................ 952 1,077 154 439
-------- ------- -------- -------
4,142 17,912 3,150 10,397
Valuation allowance .......... (198) -- (278) --
-------- ------- -------- -------
Total deferred
income taxes ............... $ 3,944 $17,912 $ 2,872 $10,397
======== ======= ======== =======
|
The provision for income taxes is summarized as follows:
1995 1994 1993
------- ------- ------
(In Thousands)
Current payable taxes:
Federal ........................ $ 4,235 $ 3,203 $1,239
State and local ................ 957 954 455
------- ------- ------
5,192 4,157 1,694
------- ------- ------
Deferred taxes:
Federal ........................ (446) (1,223) 397
State and local ................ (60) (282) 357
------- ------- ------
(506) (1,505) 754
------- ------- ------
$ 4,686 $ 2,652 $2,448
======= ======= ======
|
A reconciliation of the provision for income taxes and the amount computed by applying the statutory federal income tax rate to income before income taxes, minority interest, extraordinary item, and cumulative effect of accounting change follows:
1995 1994 1993
------- ------- -------
(In Thousands)
Tax at statutory rate ................... $ 4,063 $ 2,245 $ 2,482
Increases (decreases):
State and local taxes,
net of federal benefit .............. 592 449 536
Amortization of excess
of acquired net assets
cost, net ........................... 64 1 (1)
Unremitted earnings of
domestic subsidiary ................. 91 109 50
Deferred tax asset
recognized from
prior years ........................... -- -- (262)
Sale of subsidiary stock ................ -- (65) (193)
Losses of unconsolidated
affiliates ............................ -- 224 --
Reduction attributable
to special election by
captive insurance
company ............................... (223) (202) (300)
Other ................................... 99 (109) 136
------- ------- -------
$ 4,686 $ 2,652 $ 2,448
======= ======= =======
|
Net cash payments for income taxes were $4.2 million, $2.3 million and $1.8 million for the years ended December 31, 1995, 1994 and 1993, respectively.
10. CONTINGENCIES
Lynch has pending claims incurred in the normal course of business. Management believes that the ultimate resolution of these claims will not have a material adverse effect on the consolidated financial position or the results of operations of Lynch.
Pursuant to the Acquisition Agreement with Alco (see Note 2), Central Products assumed sponsorship of a defined benefit pension plan for union employees. Central Products also agreed to establish a new defined bene-
fit plan for its non-union employees. Alco retained the defined benefit pension obligation for non-union retirees as of September 30, 1995 and any non-union employees not hired by Central Products.
The agreement requires Alco to transfer assets to Central's plans equal to the present value of accrued benefits as of September 30, 1995, as defined in the Agreement plus a defined rate of interest to the transfer date. Central Products' management believes that it was the intent of Alco that the defined benefit pension obligations for the union and non-union employees be "fully funded" by Alco. Accordingly, Central Products has not recorded the unfunded projected benefit obligation of $1.5 million as a liability when recording the purchase accounting entries.
11. SEGMENT INFORMATION
The Company is principally engaged in three business segments: multimedia, services and manufacturing. All businesses are located domestically, and export sales were approximately $41 million in 1995, $16.5 million in 1994 and $9.3 million in 1993. The Company does not believe it is dependent on any single customer. The multimedia segment includes local telephone companies and investments in two network-affiliated television stations. The services segment includes transportation and related services. $11.8 million of the Company's accounts receivable are related to the services segment and are principally due from companies in the mobile home and recreational vehicle industry located throughout the United States, including several located in the Midwest and Southeast. Services provided to one major mobile home manufacturer accounted for approximately $29.4 million, $27.5 million, and $18.8 million in revenues of the services segment for the years ended December 31, 1995, 1994, and 1993, respectively. The manufacturing segment includes the manufacture and sale of adhesive coated stock for labels and related applications, glass forming, impact milling, adhesive tapes, and other machinery and related replacement parts, as well as quartz crystals and oscillators. There were no intersegment sales or transfers.
Operating profit (loss) is equal to revenues less operating expenses, excluding unallocated general corporate expenses, interest and income taxes. The Company allocates a portion of its general corporate expenses to its operating segments. Such allocation was $965,000, $790,000 and $657,000 during the years ended December 31, 1995, 1994 and 1993, respectively. Identifiable assets of each industry segment are the assets used by the segment in its operations excluding general corporate assets. General corporate assets are principally cash and cash equivalents, short-term investments and certain other investments and receivables.
Year ended December 31
1995 1994 1993
--------- --------- ---------
(In Thousands)
REVENUES
Multimedia ............. $ 23,597 $ 20,144 $ 16,206
Services ............... 122,303 101,880 82,829
Manufacturing .......... 192,266 66,678 28,004
--------- --------- ---------
$ 338,166 $ 188,702 $ 127,039
========= ========= =========
OPERATING PROFIT
Multimedia ............. $ 4,938 $ 5,164 $ 4,520
Services ............... 3,371 3,434 2,270
Manufacturing .......... 13,880 3,675 1,209
Unallocated corporate
expense .............. (2,874) (1,478) (1,381)
--------- --------- ---------
$ 19,315 $ 10,795 $ 6,618
========= ========= =========
CAPITAL EXPENDITURES
Multimedia ............. $ 14,051 $ 8,410 $ 2,138
Services ............... 2,135 1,434 1,393
Manufacturing .......... 3,373 1,743 825
General corporate ...... 10 11 --
--------- --------- ---------
$ 19,569 $ 11,598 $ 4,356
========= ========= =========
DEPRECIATION AND
AMORTIZATION
Multimedia ............. $ 7,350 $ 5,651 $ 4,400
Services ............... 1,264 915 803
Manufacturing .......... 2,662 931 690
--------- --------- ---------
$ 11,276 $ 7,497 $ 5,893
========= ========= =========
ASSETS
Multimedia ............. $ 102,998 $ 92,151 $ 73,043
Services ............... 30,796 28,978 24,519
Manufacturing .......... 162,819 62,260 18,349
General corporate ...... 5,826 2,521 14,061
--------- --------- ---------
$ 302,439 $ 185,910 $ 129,972
========= ========= =========
|
12. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the years ended December 31, 1995 and 1994 (in thousands, except per share amounts):
1995--Three Months Ended
--------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
------- ------- ------- --------
Sales and revenues .............. $69,788 $76,874 $81,546 $109,958
Operating profit ................ 4,034 4,278 4,763 6,240
Net income .................... 1,125 1,156 1,293 1,571
Primary earnings per share:
Net income .................... .80 .82 .92 1.13
Fully diluted earnings per share:
Net income .................... .80 . 82 .92 1.13
|
1994--Three Months Ended
--------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
Sales and revenues ............. $36,071 $39,678 $44,687 $68,265
Operating profit ............... 1,740 2,351 3,011 3,693
Income before
extraordinary item
and cumulative effect
of accounting change ....... 641 206 835 910
Net income ................... 641 206 571 910
Primary earnings per share:
Income before
extraordinary item and
cumulative effect of
accounting change .......... .49 .15 .63 .66
Net income ................... .49 .15 .43 .66
Fully diluted earnings
per share:
Income before
extraordinary item and
cumulative effect of
accounting change .......... 47 .15 .52 .64
Net income ................... 47 .15 .38 .64
|
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Lynch Corporation
We have audited the accompanying consolidated balance sheets of Lynch Corporation and subsidiaries ("Lynch Corporation") as of December 31, 1995 and 1994, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of Central Products Company, a wholly-owned subsidiary of Spinnaker Industries, Inc. (an 83% owned subsidiary of Lynch Manufacturing, a wholly-owned subsidiary of Lynch Corporation), which statements reflect total assets of $94,492,000 as of December 31, 1995 and total revenues of $30,581,000 for the three month period ended December 31, 1995 and the financial statements of The Morgan Group, Inc. and subsidiaries, a subsidiary in which the Company has a 64% voting interest, which statements reflect total assets of $30,796,000 and $28,978,000 as of December 31, 1995 and 1994, respectively and total revenues of $122,303,000 and $101,880,000 for the years then ended and the financial statements of Coronet Communications Company and Capital Communications Company, Inc. (corporations in which the Company has a 20% and 49% interest, respectively). Those statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to data included for Central Products Company, The Morgan Group, Inc. and subsidiaries, Coronet Communications Company and Capital Communications Company, Inc., is based solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Lynch Corporation and subsidiaries at December 31, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that Lynch Corporation will continue as a going concern. As more fully described in Note 6, as of January 2, 1996, Alco Standard Corporation ("Alco"), the former owner of Central Products Company, exercised its rights to require Spinnaker Industries, Inc. to repurchase the $25 million subordinated notes, including accrued interest. Lynch Corporation, as parent of Spinnaker Industries, Inc., agreed to guarantee the notes and provide funds for the repurchase. At the present time, neither Spinnaker Industries, Inc. nor Lynch Corporation have sufficient funds or available capacity under their existing financing arrangements to settle the Alco obligations. These conditions raise substantial doubt about Lynch Corporation's ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
As discussed in Note 1 to the financial statements, in 1994 the Company changed its method of accounting for marketable securities.
As discussed in Note 10 to the financial statements, in 1993 the Company changed its method of accounting for income taxes.
/s/ Ernst & Young LLP
-----------------------------------
Stamford, Connecticut
February 29, 1996, except for Note 6,
as to which the date is March 29, 1996
|
LYNCH CORPORATION
FIVE YEAR SUMMARY
SELECTED FINANCIAL DATA
(IN THOUSAND OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
Year Ended December 31 (a)
---------------------------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- --------- --------- ---------
Sales and revenues (a) ..................... $ 338,166 $ 188,702 $ 127,039 $ 108,657 $ 97,290
--------- --------- --------- --------- ---------
EBITDA (b) ................................. 30,591 18,292 12,511 13,351 9,887
Operating Profit (c) ....................... 19,315 10,795 6,618 8,283 4,871
Net Financing Activities ................... (7,424) (4,381) (3,643) (4,142) (2,182)
Gain on Sales of Subsidiary and
Affiliate Stock .......................... 59 190 4,326 -- --
--------- --------- --------- --------- ---------
Income Before Income Taxes, Minority
Interests, Extraordinary Item and
Cumulative Effect of Accounting Change ... 11,950 6,604 7,301 4,141 2,689
Income Tax (Provision) ..................... (4,686) (2,652) (2,448) (1,733) (923)
Minority Interests ......................... (2,119) (1,360) (737) (257) (363)
--------- --------- --------- --------- ---------
Income Before Extraordinary Item ........... 5,145 2,592 4,116 2,151 1,403
Extraordinary Item (d) ..................... -- (264) (206) 18 93
Cumulative Effect to January 1, 1993 of
Change in Accounting for Income Taxes(f) . -- -- (957) -- --
--------- --------- --------- --------- ---------
Net Income ................................. $ 5,145 $ 2,328 $ 2,953 $ 2,169 $ 1,496
========= ========= ========= ========= =========
Per Common Share (e)
Income Before Extraordinary Item ......... $ 3.66 $ 1.94 $ 3.36 $ 1.71 $ 1.09
Net Income ............................... 3.66 1.74 2.41 1.72 1.07
--------- --------- --------- --------- ---------
Cash, Securities and Short-Term
Investments .............................. $ 27,353 $ 31,521 $ 45,509 $ 44,914 $ 45,514
Total Assets ............................... 302,439 185,910 129,523 111,374 108,236
Long-term Debt ............................. 113,029 62,745 65,768 68,286 70,640
Shareholders' Equity ....................... $ 35,512 30,531 24,316 21,272 19,647
|
NOTES:
(a) Includes results of Inter-Community Telephone Company from April 2, 1991, Cuba City Telephone Exchange and Belmont Telephone Company from October 31, 1991, Bretton Woods Telephone Company from February 4, 1992, J.B.N. Telephone Company from November 30, 1993, the assets of Station WOI-TV from March 1, 1994, the assets of Brown Bridge Division from September 19, 1994, Haviland Telephone Company from September 26, 1994 and Central Products Company from October 4, 1995.
(b) EBITDA is earnings before interest, taxes, depreciation and amortization.
(c) Operating Profit (Loss) equals sales and revenues less operating expenses, which exclude investment income, interest expense, share of operations of affiliated companies, minority interests and taxes.
(d) Gain (Loss) on repurchase or redemption of Company's 8% convertible subordinated debentures.
(e) Based on weighted average number of common shares outstanding.
(f) On January 1, 1993, Lynch adopted the provisions of Statement of Financial Accounting Standard No., 109, "Accounting for Income Taxes." (See Note 9 to the Consolidated Financial Statements.) As a result of this adoption, for the years ended December 31, 1994 and 1993, Operating Profit was lower by $766,000 due to the higher depreciation and amortization as a result of increased write-ups in assets acquired in prior business combinations. The adoption of this statement had no effect on net income, other than the above noted "Cumulative Effect of Accounting Change Adjustment" for that period.
(g) No dividends have been declared over the period.
LYNCH -- PAST HISTORY
- - Lynch Glass Machinery Company, predecessor of Lynch Corporation, was organized in 1917. The Company emerged in the late twenties as a successful manufacturer of glass-forming machinery. In 1928, Lynch Corporation was incorporated in the State of Indiana.
- - In 1946, Lynch was listed on the "New York Curb Exchange" the predecessor to the American Stock Exchange.
- - In 1964, Curtiss-Wright Corporation purchased a controlling lever in interest in Lynch.
- - In 1976, M-tron Industries, Inc., a manufacturer of quartz crystals was acquired.
LYNCH -- 1985 - 1994
- - In 1985, companies affiliated with Gabelli Funds, Inc. acquired a majority interest in Lynch's Common Stock, including the entire interest of Curtiss-Wright Corporation. Mario J. Gabelli was elected Chairman of the Board and Chief Executive Officer in 1986. The price: $11.00/share.
- - In July 1986, Lynch issued $23 million of convertible debentures as the first step in an acquisition program designed to broaden Lynch's business base. Conversion price - $31/share.
- - In 1987, Lynch expanded the scope of its operations into the financial services and entertainment industries with the start-up of Lynch Capital Corporation, a securities broker dealer, and Lynch Entertainment Corporation, a joint venture partner with a 20% interest in WHBF-TV, the CBS television network affiliate in Rock Island, Illinois. Later in the year, the Company acquired Tremont Partners, Inc., a Connecticut-based investment management consulting firm. In December, Lynch added to its manufacturing sector with the acquisition of an 83% interest in Safety Railway Service Corporation, whose sole operating subsidiary at the time, Entoleter, Inc., was a manufacturer of industrial processing and air pollution control equipment.
- - In 1988, Lynch entered the service sector with the acquisition of Morgan Drive Away, Inc., the largest independent service provider to the mobile home and recreational vehicle industry.
- - 1989 was highlighted by Lynch's entry into the telecommunications industry. The acquisition of Western New Mexico Telephone Company, an independent local telephone company servicing southwestern New Mexico, was an important first step.
- - Lynch's second telecommunications acquisition, Inter-Community Telephone Company of Nome, North Dakota, was completed in April 1991 followed in October of that year with the acquisition of Cuba City Telephone Exchange Company and Belmont Telephone Company in Wisconsin.
- - During 1992, Lynch acquired Bretton Woods Telephone Company of New Hampshire; completed a rights offering to its shareholders which resulted in the Tremont investment advisory firm becoming a publicly traded company (OTC:TMAVA) with Lynch initially retaining a 37% interest.
- - 1993 saw the launching of The Morgan Group, Inc., as a public company with an initial public offering of 1.1 million Class A Common Shares at $9 per share. Lynch retained a 47% equity interest and a 64% voting interest. Lynch also acquired J.B.N. Telephone Company in Kansas from GTE Corporation. Lynch Machinery acquired Tri-Can Systems of Aslip, IL, a manufacturer of packaging machinery.
- - 1994 saw the rebirth of Safety Railway Service Corporation into Spinnaker Industries, Inc. under the stewardship of Boyle, Fleming & Company, Inc., with the acquisition of Brown-Bridge Industries, a manufacturer of adhesive coated stocks from Kimberly-Clark. In addition, Lynch completed the acquisition of a 50% interest in station WOI-TV in Ames, IA, and the purchase of Haviland Telephone Company of Kansas. Finally, all the remaining 8% Convertible Subordinated Debentures that were issued in 1986 were redeemed.
LYNCH -- 1995
- - Last year, Lynch continued to make dynamic progress -- Morgan bought TDI and expects to grow by positioning itself further in the outsourcing business. On the telephone front, we completed tuck-ins by agreeing to buy lines from Sprint and moving further into multimedia with the creation of CLR Video, a cable operation in Kansas.
- - The highlight was our affiliation with the Maytum family, which has owned and managed Dunkirk & Fredonia Telephone Company, one of the most efficient telephone companies in the world.
- - We are, on a proforma basis, the 50th largest local exchange company. We currently operate 15,600 access lines, 49,000 cellular POPs, 4,700 cable TV subscribers and 900 Direct TV subscribers. We are currently in the process of evaluating providing Internet service.
- - In addition, during the year, Spinnaker further reinforced its adhesive strategy by purchasing Alco Standard's Central Products, which manufactures and markets a wide variety of carton sealing tapes and related equipment.
LYNCH -- THE FUTURE
To grow Lynch's intrinsic value in 1996 and beyond, we plan to:
- - Grow our multimedia operations
- More local telcos.
- Pursue spectrum in personal communications services (PCS) auctions.
- Look for potential spectrum licenses globally.
- Staff up to pursue growth in burglar alarm, long distance reselling, cable TV tuck-ins, and penetration of the "institutional market" for home video, data and information storage.
- - Grow our manufacturing operations
- M-tron -- Work with Marty Kiousis and his management to maximize the high quality manufacturing capacity and extensive customer base that M-tron has. Our focus is to affiliate with a merchant banking group which will generate product initiatives and provide critical mass capital infusion.
- Lynch Machinery -- Avrum Gray, Chairman, and Bob Pando are channeling efforts back to the historical prowess of Lynch Machinery in the glass press manufacturing area. Lack of comprehensive strategy and cumulative losses at Lynch packaging resulted in the exiting from that niche.
- Spinnaker Industries --
- Finance acquisitions more efficiently by taking advantage of the high yield market.
- Broaden adhesive strategy by exploring other sectors for opportunistic entry.
- There are now 3.4 million fully diluted shares of SPNI, of which Lynch owns 2.2 million shares. Stated another way, there are 1.6 shares of SPNI for each Lynch share.
- - Grow our Services -- The Morgan Group
- Morgan enjoyed a record year in 1995, overcoming an 18% drop in recreational vehicle shipments, and the need to bolster insurance reserves.
- Bright spots included --
- Terry Russell joined Morgan Drive Away on January 4, 1996. He replaces Phil Ringo who left in May to pursue other opportunities.
- Transfer Drivers, Inc. ("TDI") was acquired on May 22, 1995. While results to date have been spotty, TDI enhances Morgan's tradition of service and further grew our outsourcing product, in this case, equipment relocation.
- Restructuring our investment by converting a preferred stock to cash and 150,000 shares of common stock helped further strengthen Morgan's already solid balance sheet.
- Morgan's financials are on solid footing with cash of $2.9 million, receivables of $11.3 million, and book value of $15.6 million.
- There are 1.0 shares of Morgan for each share of Lynch.
- - Look for opportunistic situations.
OUR FUTURE
Valuation accorded to EBITDA streams in both the public market and in the private market place are rising. Moreover, the ever increasing amount of money chasing deals is resulting in fewer transaction opportunities for us, particularly as our job is to build the wealth of Lynch's shareholders. In the next twelve months, we will endeavor to use our resources, intellectual and financial, to enhance intrinsic value on a per unit basis. We will only issue shares if we receive at least equal value in exchange.
PROPORTIONAL OWNERSHIP
FORM 10-K AS OF DECEMBER 31, 1995
LYNCH CORPORATION - LIST OF SUBSIDIARIES
PERCENT
OWNED BY
IMMEDIATE PERCENT
STATE OF PARENT OWNED BY
SUBSIDIARY INCORPORATION COMPANY LYNCH
BRIGHTON COMMUNICATIONS CORPORATION DELAWARE 100.0% 100.0%
LYNCH TELEPHONE CORPORATION IV DELAWARE 100.0% 100.0%
BRETTON WOODS TELEPHONE COMPANY, INC. NEW HAMPSHIRE 100.0% 100.0%
LYNCH TELEPHONE CORPORATION VI DELAWARE 90.0%(A) 98.0%
J.B.N. TELEPHONE COMPANY, INC. KANSAS 100.0% 98.0%
J.B.N. FINANCE CORPORATION DELAWARE 100.0% 98.0%
LYNCH TELEPHONE CORPORATION VII DELAWARE 100.0% 100.0%
USTC KANSAS, INC. KANSAS 100.0% 100.0%
HAVILAND TELEPHONE COMPANY, INC. KANSAS 100.0% 100.0%
HAVILAND FINANCE CORPORATION DELAWARE 100.0% 100.0%
LYNCH TELEPHONE CORPORATION VIII DELAWARE 100.0% 100.0%
GLOBAL TELEVISION, INC. DELAWARE 100.0% 100.0%
HOME TRANSPORT SERVICES, INC. DELAWARE 100.0% 100.0%
LYNCH CAPITAL CORPORATION DELAWARE 100.0% 100.0%
LYNCH ENTERTAINMENT CORPORATION DELAWARE 100.0% 100.0%
LYNCH ENTERTAINMENT CORPORATION II DELAWARE 100.0% 100.0%
LYNCH INTERNATIONAL EXPORTS, INC. (B) U.S. VIRGIN ISL. 100.0% 100.0%
LYNCH MANUFACTURING CORPORATION DELAWARE 100.0% 100.0%
LYNCH MACHINERY, INC. (C) DELAWARE 90.0% 90.0%
TRI-CAN INTERNATIONAL, LTD DELAWARE 100.0% 90.0%
M-TRON INDUSTRIES, INC. SOUTH DAKOTA 94.0% 94.0%
M-TRON INDUSTRIES, LTD HONG KONG 100.0% 94.0%
SPINNAKER INDUSTRIES, INC. (D) DELAWARE 83.2% 83.2%
ENTOLETER, INC. DELAWARE 100.0% 83.2%
BROWN-BRIDGE INDUSTRIES, INC. DELAWARE 80.1%E) 72.8%
CENTRAL PRODUCTS ACQUISITION CORP. DELAWARE 100.0% 83.2%
CENTRAL PRODUCTS COMPANY DELAWARE 100.0% 83.2%
LYNCH MULTIMEDIA CORPORATION DELAWARE 100.0% 100.0%
CLR VIDEO, L.L.C. KANSAS 60.0% 60.0%
THE MORGAN GROUP, INC. (F) DELAWARE 66.24%(V)/50.95%(O) 66.24%(V)/50.95%(O)
MORGAN DRIVE AWAY, INC. INDIANA 100.0% 66.24%(V)/50.95%(O)
TRANSPORT SERVICES UNLIMITED, INC. INDIANA 100.0% 66.24%(V)/50.95%(O)
INTERSTATE INDEMNITY COMPANY VERMONT 100.0% 66.24%(V)/50.95%(O)
MORGAN FINANCE, INC. INDIANA 100.0% 66.24%(V)/50.95%(O)
TDI, INC. INDIANA 100.0% 66.24%(V)/50.95%(O)
HOME TRANSPORT CORPORATION INDIANA 100.0% 66.24%(V)/50.95%(O)
LYNCH PCS COMMUNICATIONS CORPORATION DELAWARE 100.0% 100.0%
LYNCH PCS CORPORATION A DELAWARE 100.0% 100.0%
LYNCH PCS CORPORATION B DELAWARE 100.0% 100.0%
LYNCH PCS CORPORATION C DELAWARE 100.0% 100.0%
LYNCH PCS CORPORATION D DELAWARE 100.0% 100.0%
LYNCH PCS CORPORATION E DELAWARE 100.0% 100.0%
LYNCH PCS CORPORATION F DELAWARE 100.0% 100.0%
LYNCH TELECOMMUNICATIONS CORPORATION DELAWARE 100.0% 100.0%
LYNCH TELEPHONE CORPORATION DELAWARE 80.1% 80.1%
WESTERN NEW MEXICO TELEPHONE CO., INC. NEW MEXICO 100.0% 80.1%
WNM COMMUNICATIONS CORPORATION DELAWARE 100.0% 80.1%
|
PERCENT
OWNED BY
IMMEDIATE PERCENT
STATE OF PARENT OWNED BY
SUBSIDIARY INCORPORATION COMPANY LYNCH
WESCEL CELLULAR, INC. NEW MEXICO 100.0% 80.1%
WESCEL CELLULAR OF NEW MEXICO
LIMITED PARTNERSHIP COLORADO 51.0% 40.9%
WESCEL CELLULAR, INC. II NEW MEXICO 100.0% 80.1%
NORTHWEST NEW MEXICO CELLULAR, INC. NEW MEXICO 51.0% 40.9%
NORTHWEST NEW MEXICO CELLULAR OF
NEW MEXICO LIMITED
PARTNERSHIP COLORADO 51.0% 20.8%
LYNCH TELEPHONE CORPORATION II DELAWARE 83.0% 83.0%
INTER-COMMUNITY TELEPHONE COMPANY NORTH DAKOTA 100.0% 83.0%
INTER-COMMUNITY ACQUISITION CORPORATION DELAWARE 100.0% 83.0%
INTER-COMMUNITY TELEPHONE COMPANY II NORTH DAKOTA 100.0% 83.0%
LYNCH TELEPHONE CORPORATION III DELAWARE 81.0% 81.0%
CUBA CITY TELEPHONE EXCHANGE COMPANY WISCONSIN 100.0% 81.0%
BELMONT TELEPHONE COMPANY WISCONSIN 100.0% 81.0%
LAFAYETTE COUNTY SATELLITE TV, INC. WISCONSIN 100.0% 81.0%
|
NOTES: (A) OWNED 90% BY BRIGHTON COMMUNICATIONS AND 10% BY LYNCH TELEPHONE CORP.
(B) REPLACES LYNCH EXPORT CORPORATION (WHICH WAS DISSOLVED IN 1994)
(C) CORPORATE NAME WAS CHANGED FROM LYNCH MACHINERY-MILLER HYDRO, INC. IN 1994
(D) CORPORATE NAME WAS CHANGED FROM SAFETY RAILWAY SERVICE CORPORATION
IN 1994
(E) OWNED 80.1% BY SPINNAKER INDUSTRIES AND 6.162% BY LYNCH CORPORATION
(F) CORPORATE NAME WAS CHANGED FROM LYNCH SERVICES CORPORATION IN 1993
(V)=PERCENTAGE VOTING CONTROL; (O)=PERCENTAGE OF EQUITY OWNERSHIP
Consent of Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form 10-K) of Lynch Corporation of our report dated February 29, 1996 (expect for Note 6, as to which the date is March 29, 1996), included in the 1995 Annual Report to Shareholders of Lynch Corporation.
Our audits also included the financial statement schedules of Lynch Corporation listed in Item 14(a). These schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
Stamford, Connecticut Ernst & Young LLP March 29, 1996 |
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
|
As independent public accountants, we hereby consent to the incorporation by reference of our report dated February 5, 1996, to the Shareholders and Board of Directors of The Morgan Group, Inc. in this Form 10-K.
ARTHUR ANDERSEN LLP
Chicago, Illinois,
March 28, 1996
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Capital Communications Company, Inc.
Bronxville, New York
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (Registration No. 33-46953) of our report, dated January 26, 1996 on the financial statements of Capital Communications Company, Inc. which appears as Exhibit 99 in the annual report on Form 10-K of Lynch Corporation and subsidiaries, for the year ended December 31, 1995.
McGladrey & Pullen, LLP
New York, New York
March 29, 1996
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Coronet Communications Company, Inc.
Bronxville, New York
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (Registration No. 33-46953) of our report, dated January 19, 1996 on the financial statements of Coronet Communications Company, which appears as Exhibit 99 in the annual report on Form 10-K of Lynch Corporation and subsidiaries, for the year ended December 31, 1995.
McGladrey & Pullen, LLP
New York, New York
March 29, 1996
INDEPENDENT AUDITORS' CONSENT
We consent to the use of our report dated February 26, 1996 relating to the financial statements of Central Products Company (not presented separately herein), in the annual report on Form 10-K of Lynch Corporation and the incorporation by reference in Registration Statement No 33-46953 of Lynch Corporation on Form S-8.
DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
April 1, 1996
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director of LYNCH
CORPORATION, an Indiana corporation, hereby appoints ROBERT E. DOLAN and ROBERT
A. HURWICH true and lawful attorneys-in-fact and agents, and each of them (with
full power to act without the other) his true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign, execute, deliver and
file with the Securities and Exchange Commission the Annual Report on Form 10-K
of Lynch Corporation for the fiscal year ended December 31, 1995, including any
and all amendments thereto, granting unto said attorneys and agents, and each
of them, full power to do and perform every act and thing requisite, necessary
or desirable to be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or any of them, or their or his
substitutes or substitute, may lawfully do or cause to be done by virtue
hereof, and hereby revoking all prior appointments by him, if any, of
attorneys-in-fact and agents to sign and file the above-described document,
including any and all amendments thereto.
IN WITNESS WHEREOF. the undersigned has hereunto set his hand and seal on the date set forth below.
DATE: March 18, 1996 s/ Morris Berkowitz (L.S.)
-----------------------
Morris Berkowitz
|
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director of LYNCH
CORPORATION, an Indiana corporation, hereby appoints ROBERT E. DOLAN and ROBERT
A. HURWICH true and lawful attorneys-in-fact and agents, and each of them (with
full power to act without the other) his true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign, execute, deliver and
file with the Securities and Exchange Commission the Annual Report on Form 10-K
of Lynch Corporation for the fiscal year ended December 31, 1995, including any
and all amendments thereto, granting unto said attorneys and agents, and each
of them, full power to do and perform every act and thing requisite, necessary
or desirable to be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or any of them, or their or his
substitutes or substitute, may lawfully do or cause to be done by virtue
hereof, and hereby revoking all prior appointments by him, if any, of
attorneys-in-fact and agents to sign and file the above-described document,
including any and all amendments thereto.
IN WITNESS WHEREOF. the undersigned has hereunto set his hand and seal on the date set forth below.
DATE: March 18, 1996 s/ E. Val Cerutti (L.S.)
--------------------
E. Val Cerutti
|
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director of LYNCH
CORPORATION, an Indiana corporation, hereby appoints ROBERT E. DOLAN and ROBERT
A. HURWICH true and lawful attorneys-in-fact and agents, and each of them (with
full power to act without the other) his true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign, execute, deliver and
file with the Securities and Exchange Commission the Annual Report on Form 10-K
of Lynch Corporation for the fiscal year ended December 31, 1995, including any
and all amendments thereto, granting unto said attorneys and agents, and each
of them, full power to do and perform every act and thing requisite, necessary
or desirable to be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or any of them, or their or his
substitutes or substitute, may lawfully do or cause to be done by virtue
hereof, and hereby revoking all prior appointments by him, if any, of
attorneys-in-fact and agents to sign and file the above-described document,
including any and all amendments thereto.
IN WITNESS WHEREOF. the undersigned has hereunto set his hand and seal on the date set forth below.
DATE: March 18, 1996 s/ Paul J. Evanson (L.S.)
--------------------
Paul J. Evanson
|
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director of LYNCH
CORPORATION, an Indiana corporation, hereby appoints ROBERT E. DOLAN and ROBERT
A. HURWICH true and lawful attorneys-in-fact and agents, and each of them (with
full power to act without the other) his true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign, execute, deliver and
file with the Securities and Exchange Commission the Annual Report on Form 10-K
of Lynch Corporation for the fiscal year ended December 31, 1995, including any
and all amendments thereto, granting unto said attorneys and agents, and each
of them, full power to do and perform every act and thing requisite, necessary
or desirable to be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or any of them, or their or his
substitutes or substitute, may lawfully do or cause to be done by virtue
hereof, and hereby revoking all prior appointments by him, if any, of
attorneys-in-fact and agents to sign and file the above-described document,
including any and all amendments thereto.
IN WITNESS WHEREOF. the undersigned has hereunto set his hand and seal on the date set forth below.
DATE: March 18, 1996 s/ Salvatore Muoio (L.S.)
--------------------
Salvatore Muoio
|
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director of LYNCH
CORPORATION, an Indiana corporation, hereby appoints ROBERT E. DOLAN and ROBERT
A. HURWICH true and lawful attorneys-in-fact and agents, and each of them (with
full power to act without the other) his true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign, execute, deliver and
file with the Securities and Exchange Commission the Annual Report on Form 10-K
of Lynch Corporation for the fiscal year ended December 31, 1995, including any
and all amendments thereto, granting unto said attorneys and agents, and each
of them, full power to do and perform every act and thing requisite, necessary
or desirable to be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or any of them, or their or his
substitutes or substitute, may lawfully do or cause to be done by virtue
hereof, and hereby revoking all prior appointments by him, if any, of
attorneys-in-fact and agents to sign and file the above-described document,
including any and all amendments thereto.
IN WITNESS WHEREOF. the undersigned has hereunto set his hand and seal on the date set forth below.
DATE: March 18, 1996 s/ Ralph R. Papitto (L.S.)
--------------------
Ralph R. Papitto
|
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director of LYNCH
CORPORATION, an Indiana corporation, hereby appoints ROBERT E. DOLAN and ROBERT
A. HURWICH true and lawful attorneys-in-fact and agents, and each of them (with
full power to act without the other) his true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign, execute, deliver and
file with the Securities and Exchange Commission the Annual Report on Form 10-K
of Lynch Corporation for the fiscal year ended December 31, 1995, including any
and all amendments thereto, granting unto said attorneys and agents, and each
of them, full power to do and perform every act and thing requisite, necessary
or desirable to be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or any of them, or their or his
substitutes or substitute, may lawfully do or cause to be done by virtue
hereof, and hereby revoking all prior appointments by him, if any, of
attorneys-in-fact and agents to sign and file the above-described document,
including any and all amendments thereto.
IN WITNESS WHEREOF. the undersigned has hereunto set his hand and seal on the date set forth below.
DATE: March 18, 1996 s/ Paul P. Woolard (L.S.)
--------------------
Paul P. Woolard
|
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, Director, Chairman of the
Board and Chief Executive Officer (Principal executive Officer), of LYNCH
CORPORATION, an Indiana corporation, hereby appoints ROBERT E. DOLAN and ROBERT
A. HURWICH true and lawful attorneys-in-fact and agents, and each of them (with
full power to act without the other) his true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities (including Director, Chairman
of the Board and Chief Executive Officer (Principal Executive Officer)), to
sign, execute, deliver and file with the Securities and Exchange Commission the
Annual Report on Form 10-K of Lynch Corporation for the fiscal year ended
December 31, 1995, including any and all amendments thereto, granting unto said
attorneys and agents, and each of them, full power to do and perform every act
and thing requisite, necessary or desirable to be done in connection therewith,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, or their or his substitutes or substitute, may lawfully do or cause to be
done by virtue hereof, and hereby revoking all prior appointments by him, if
any, of attorneys-in-fact and agents to sign and file the above-described
document, including any and all amendments thereto.
IN WITNESS WHEREOF. the undersigned has hereunto set his hand and seal on the date set forth below.
DATE: March 18, 1996 s/ Mario J. Gabelli (L.S.)
--------------------
Mario J. Gabelli
|
| ARTICLE 5 |
| PERIOD TYPE | 3 MOS |
| FISCAL YEAR END | DEC 31 1995 |
| PERIOD END | DEC 31 1995 |
| CASH | 15,921 |
| SECURITIES | 11,432 |
| RECEIVABLES | 52,306 |
| ALLOWANCES | 0 |
| INVENTORY | 33,235 |
| CURRENT ASSETS | 123,946 |
| PP&E | 147,140 |
| DEPRECIATION | 36,093 |
| TOTAL ASSETS | 302,737 |
| CURRENT LIABILITIES | 129,545 |
| BONDS | 113,029 |
| PREFERRED MANDATORY | 0 |
| PREFERRED | 0 |
| COMMON | 5,139 |
| OTHER SE | 30,073 |
| TOTAL LIABILITY AND EQUITY | 302,237 |
| SALES | 109,958 |
| TOTAL REVENUES | 109,958 |
| CGS | 86,678 |
| TOTAL COSTS | 103,718 |
| OTHER EXPENSES | 0 |
| LOSS PROVISION | 0 |
| INTEREST EXPENSE | 4,166 |
| INCOME PRETAX | 3,405 |
| INCOME TAX | 1,307 |
| INCOME CONTINUING | 1,571 |
| DISCONTINUED | 0 |
| EXTRAORDINARY | 0 |
| CHANGES | 0 |
| NET INCOME | 1,571 |
| EPS PRIMARY | 1.13 |
| EPS DILUTED | 1.13 |
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of The Morgan Group, Inc.:
We have audited the accompanying balance sheets of The Morgan Group, Inc. (a Delaware Corporation) and Subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of operations, changes in redeemable preferred stock, common stock and other shareholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Morgan Group, Inc. and Subsidiaries as of December 31, 1995 and 1994, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois,
February 5, 1996
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Capital Communications Company, Inc.
Bronxville, New York
We have audited the accompanying balance sheets of Capital Communications Company, Inc. as of December 31, 1995 and 1994, and the related statements of operations, stockholders' equity (deficit), and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Capital Communications Company, Inc. as of December 31, 1995 and 1994, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles.
McGladry & Pullen
New York, New York
January 26, 1996
Independent Auditor's Report
To the Partners of Coronet Communications Company Bronxville, New York
We have audited the accompanying balance sheets of Coronet Communications Company as of December 31, 1995 and 1994, and the related statements of operations, partners' capital (deficiency), and cash flows for the years then ended. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Coronet Communications Company as of December 31, 1995 and 1994, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles.
McGladry & Pullen
New York, New York
January 19, 1996
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Spinnaker Industries, Inc.:
We have audited the accompanying balance sheet of the Central Products Company (a wholly-owned subsidiary of Spinnaker Industries, Inc.) as of December 31, 1995 and the related statements of operations and shareholder's equity and cash flows for the three months ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of the Central Products Company as of December 31, 1995 and the results of its operations and its cash flows for the three months ended December 31, 1995 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Milwaukee Wisconsin
February 26, 1996