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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]
For the fiscal year ended December 31, 1996 Commission file number 1-106
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
LYNCH CORPORATION
(Exact name of Registrant as specified in its charter)
Indiana 38-1799862
State of other jurisdiction of (I.R.S. EmployerIdentification No.)
incorporation or organization
8 Sound Shore Drive, Suite 290, Greenwich, CT 06830
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (203) 629-3333
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange Title of each class
on which registered Common Stock, No Par Value
American Stock Exchange
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934
during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate 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. [X]
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 14, 1997 of $106.50 per share) was
$114,873,770. (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
1,416,834 as of March 14, 1997.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III: Certain portions of the Proxy Statement for the 1997
Annual Meeting of Shareholders.
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, 1996, multimedia
operations provided 6% of the Registrant's consolidated revenues; services
operations provided 29% of the Registrant's consolidated revenues; and
manufacturing operations provided 65% of the Registrant's consolidated
revenues. As used herein, the Registrant includes subsidiary corporations.
On December 5, 1996, Registrant announced that it is examining the
possibility of splitting, through a spin-off, either its multimedia
operations or its manufacturing operations. There are a number of matters to
be examined in connection with a possible spin-off, including tax
consequences, and there is no assurance that such a spin-off will be
effected.
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. From 1989 through 1996, Registrant has acquired nine telephone
companies, five of which have indirect minority ownership of 2% to 20%, whose
operations range in size from less than 500 to over 9,500 access lines. In
mid-March 1997, Registrant acquired approximately 60% of a tenth telephone
company, with the intent to acquire the remaining stock. As of December 31,
1996, total access lines were approximately 28,984, 99% 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.
At December 31, 1996, the Registrant owned 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 approximately 393,000, of which the Registrant's proportionate
interest is approximately 15,150. Operating results through 1996 have not
been significant to date.
Inter-Community Telephone Company's participation in the Defense Com-
mercial Telecommunications Network/Defense Switching Network (DCTN/DSN) was
terminated in early 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 establishments, from upgrading existing customers to higher grades of
service, and from offering related services such as Internet. The following
table summarizes certain information regarding the Registrant's telephone
operations.
Year Ended December 31,
1996 1995 1994
Telephone Operations
Access lines* . . . . . . . . . . . . . . . . . 28,984 15,586 14,906
% Residential . . . . . . . . . . . . . . . . 74% 78% 79%
% Business (nonresidential) . . . . . . . . . 26% 2% 21%
Total revenues ($000's) . . . . . . . . . . . . 28,608 23,328 20,016
% Local service . . . . . . . . . . . . . . . 14% 13% 12%
% Network access and long distance. . . . . . 73% 69% 0%
% Other . . . . . . . . . . . . . . . . . . . 13% 17% 18%
* An "access line" is a single or multi-party circuit between the customer's
establishment and the central switching office.
Telephone Acquisitions. The Registrant pursues an active program of
acquiring operating telephone companies. From January 1, 1989 through
December 31, 1996, Lynch has acquired nine telephone companies serving a
total of approximately 24,750 access lines at the time of these acquisitions
for an aggregate consideration totaling approximately $109 million. In May
1996, Inter-Community Telephone Company acquired from US West Communications,
Inc. approximately 1,400 access lines in North Dakota. In 1996, J.B.N.
Telephone acquired from United Telephone Company of Eastern Kansas 354 access
lines in Kansas. In November 1996, a subsidiary of Registrant acquired the
stock of Dunkirk & Fredonia Telephone Company and its subsidiaries, Cassadaga
Telephone Corporation and Comantel, Inc. (collectively "DFT") for
approximately $22 million. DFT serves approximately 11,129 access lines in
western New York, including the community of Fredonia, the Village of
Cassadaga and the Hamlet of Stockton. DFT also owns and operates other
telecommunications businesses, including Internet, long distance resale,
security systems, and sales and servicing of telecommunications equipment.
In mid-March 1997, Registrant acquired approximately 60% of the stock
of Upper Peninsula Telephone Company ("UPTC") for approximately $15.3
million, with the intent of acquiring, and the obligation to offer to
acquire, the rest of the company. UPTC serves approximately 6,200 access
lines located principally in the Upper Peninsula of Michigan. UPTC also has
cellular interests covering three RSA's in Michigan with a total population
of approximately 550,000, of which UPTC's proportionate interest is
approximately 59,000. UPTC had revenues and net income of $7.8 million and
$1.9 million, respectively, for the year ended December 31, 1995 and $8.5
million and $2.0 million, respectively, for the year ended December 31, 1996.
The Registrant continually evaluates acquisition opportunities
targeting domestic rural telephone companies with a strong 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 its intrastate telephone services
and the Federal Communications Commission ("FCC") with respect to its
interstate telephone service and, with the enactment of the
Telecommunications Act of 1996 (the "1996 Act"), certain other matters
relating principally to local and intrastate competition.
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.
Various aspects of federal and state telephone regulation have in
recent years been subject to re-examination and on-going modification. In
February 1996, the 1996 Act, 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) would provide for a 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 is in the process of promulgating new regulations covering
these and related matters. The Federal/State Joint Board designated by the
FCC has recently proposed modifications to the three major sources of
interstate funding for the commitment to universal service for high-cost,
rural areas. The Joint Board proposed modification to the Universal Service
Fund (USF) and the Weighted DEM and Long-Term Support (LTS) subsidy portions
of interstate access charges. The USF for rural telephone companies, such as
Lynch's telephone subsidiaries, would be frozen for the next three years at
the amounts received during 1997 (adjusted for any change in the number of
access lines). Weighted DEM and LTS revenues would also be frozen (with an
adjustment for access lines) but at 1996 levels. After the three year
freeze, the USF, weighted DEM and LTS revenues would begin an additional
three-year transitional phase-in to where ultimately, the reimbursement would
be based on a cost model which is yet to be determined, rather than a
telephone company's actual cost. New USF rules are scheduled to be adopted
in May 1997. The 1996 Act would also permit states to allow competitive
carriers to obtain USF funding under certain circumstances. In December
1996, the FCC proposed certain changes to the rules applicable to interstate
access charges which long distance telephone carriers pay to local exchange
companies. The proposed changes would apply principally to "price cap"
companies (see paragraph below), although non-price cap companies may be
affected by the FCC's proposed changes, including the allocation of USF
support to interstate revenue requirements and possible changes to
transportation and common line rate structures. The FCC is expected to begin
an access charge preceding to propose access rule changes for non-price cap
companies later in 1997. All of Registrant's telephone companies are non-price
cap companies for interstate access charges. Since USF and access
charges constituted approximately 60% of the revenues of the Registrant's
nine telephone companies in 1996, modifications could have a material
effect.
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 certain states, regulators have ordered the restructuring of
local service areas to eliminate nearby long distance calls and substitute
extended calling areas.
Registrant cannot predict the effect of the 1996 Act and proposed
Federal regulations, 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. 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 the last few years the States of Wisconsin, New York and Michigan
passed or amended telecommunications bills 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
near-term 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, by requiring certain companies to offer wholesale rates to resellers.
In addition, cellular radio or similar radio-based services, including
personal communication services (PCS) 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 -- Lynch Entertainment Corporation II ("LEC-II"), a wholly-owned
subsidiary of Registrant, owns 49% of the outstanding common shares of
Capital Communications Corporation ("Capital") and a convertible preferred
stock, which when converted, would bring LEC-II's common share ownership to
50%. On March 1, 1994, Capital 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 share 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 (the
"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 in the 1996 Act); 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 international government or representative thereof,
or by any corporation organized under the laws of a international country.
See Regulatory Environment under A. above for a description of certain
provisions of the 1996 Act including in particular those which would remove
the regulations over non-basic cable service in three years and permit
telephone service providers to provide cable service. 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 seven years and are
renewable for terms of seven years. The current licenses for WHBF-TV and
WOI-TV expire on December 1, 1997 and February 1, 1998, respectively.
Other
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 21,200 households in New Mexico and Wisconsin
and had approximately 1,350 customers at December 31, 1996. Operating
results have not been material to date.
C. Personal Communications Services ("PCS").
Subsidiaries of Registrant are 49.9% limited partners in five
partnerships (the "C-Block Partnerships"). In the FCC's C-Block auction
(restricted to small businesses and certain other qualifying bidders) of 30
megahertz personal communications services licenses, which concluded in 1996,
the "C-Block" Partnerships won 31 licenses in 17 states covering a population
of approximately 7 million people. The licenses had an aggregate purchase
price of $216 million after a 25% bidding credit.
Under FCC rules, the "C-Block Partnerships made a down payment equal to
10% of the cost (net of bidding credits) of the licenses ($21.6 million).
The Government is providing 10 year financing, interest only for the first
six years at an interest rate of 7% per annum (Registrant argues strenuously
that the interest rate should have been 6.51%, the applicable treasury rate
at the time the licenses were awarded), for the remaining 90% of the cost of
the licenses. Registrant's subsidiaries have agreements to loan the C-Block
Partnerships an aggregate of $41.8 million, $20.4 million of which has been
utilized at December 31, 1996, to fund the down payments on the licenses, and
the remainder is to be utilized for interest payments on the Government loans
and certain other partnership expenses. These loans carry an annual commit-
ment fee of 20% and an interest rate of 15% which are payble when the loans
mature in 2003. The 50.1% general partners have no obligation to provide
loans or additional funds to the C-Block Partnerships. In late March 1997,
the FCC approved a possible combining of the five C-Block Partnerships into a
single partnership.
Another subsidiary of Registrant, Lynch PCS Corporation F ("LPCSF"), is
a 49.9% limited partner in Aer Force Communications B, L.P. ("Aer Force").In
the FCC's F-Block Auction (restricted to small businesses and certain other
qualifying bidders) of 10 megahertz PCS licenses, Aer Force won five licenses
in four states covering a population of approximately 20 million people. The
licenses have an aggregate purchase price of $19 million after a 25% bidding
credit. The grant of licenses won in the F-Block Auction is subject to the
FCC's application and review process, in which other bidders and the FCC have
the right to challenge Aer Force's qualifications.
Under FCC rules, Aer Force has to make a down payment equal to 20% of
the cost (net of bidding credits) of the licenses ($3.8 million), 50% of
which was made on January 23, 1997 with the remaining 50% due shortly after
the award of the licenses. The Government is providing 10 year financing,
interest only for two (2) years, for the remaining 80%. Registrant's
subsidiary has agreed to loan Aer Force $11.8 million for five years, of
which $1.9 million was used for the first half of the down payment and
another $1.9 million would be used for the second half of the down payments
with the remainder to be used for interest and certain other partnership
expenses. The 50.1% general partner has no obligation to provide loans or
additional funds to Aer Force. To fund LPCSF's loan obligation, Registrant
has borrowed $11.8 million from Gabelli Funds, Inc. ("GFI"), of which $10
million has been repaid. Registrant expects to reborrow $1.9 million for the
remaining 50% of the down payment. The GFI loan is due August 12, 1997, and
is secured by the note to LPCSF from Aer Force, LPCSF's 49.9% partnership
interest in Aer Force and the stock of certain of Registrant's subsidiaries.
The loan from GFI includes a special fee payable to GFI equal to 10% of the
net profits (after an assumed cost of capital) on LPCSF's investment in Aer
Force. Another subsidiary of Registrant has an agreement with Rivgam
Communicators L.L.C. ("Rivgam"), a subsidiary of GFI, which won licenses in
the FCC's D and E Block Auctions for 10 megahertz PCS licenses, to provide
certain services to it and to receive a fee equal to 10% of the profits of
Rivgam (after an assumed cost of capital). Rivgam won twelve licenses in
seven states covering a population of 33 million, with an aggregate cost of
$84.9 million. Registrant is examining the possibility of spinning off Lynch
PCS Corporation F to Registrant's shareholders. There are certain matters to
be examined in connection with a possible spin-off, and there is no assurance
that such a spin-off will be effected.
FCC rules impose build-out requirements that require PCS licensees to
provide adequate service to at least one-third of the population in the
licensed area within five years from the date of grant and two-thirds within
ten years. There are also substantial restrictions on the transfer of
control of PCS licenses in the C and F blocks.
There are many risks relating to PCS, including without limitation, the
high cost of PCS licenses, the fact that it involves start-up businesses,
raising the substantial funds required to pay for the licenses and the build
out, determining the best way to develop the licenses and which technology to
utilize, the small size and limited resources of the C-Block Partnerships and
Aer Force compared to other potential competitors, existing and changing
regulatory requirements, additional auctions of wireless telecommunications
spectrum and actually building out and operating new businesses profitably in
a highly competitive environment (including already established cellular
telephone operators and other new PCS licensees). There can be no assurance
that any licenses granted to the C-Block Partnerships, Aer Force, or Rivgam
can be successfully financed, developed and/or operated, with Registrant's
subsidiaries recovering their debt and equity investments.
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. At December 31, 1996, Lynch's equity ownership in Morgan is
approximately 50%. Because the Class B common stock is entitled to two votes
per share, its voting interest in Morgan is approximately 66% 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 1,720 independent owner-operators and 1,300 drive-away
drivers. Morgan dispatches its drivers from 115 locations in 35 states.
Morgan's largest customers include Fleetwood Enterprises, Inc., Oakwood Homes
Corporation, Winnebago Industries, Inc., Champion Enterprises, Inc., Cavalier
Homes, Inc., Schult Homes, Clayton Homes, Skyline Corporation and Ryder
Systems. Morgan's services also include arranging for 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 Olson and
Bluebird Bus. TDI had revenues of $8.4 million in 1996 and $5.3 million in
1995. On December 30, 1996, Morgan acquired the operating assets of Transit
Homes of America ("Transit") which had more than 400 independent contract
drivers and serves a number of leading producers in the manufactured housing
industry. Transit had revenues of $29.5 million in 1996.
As of December 31, 1996, Morgan's owned transportation equipment
included 32 tractors, 74 drop deck trailers, 15 car carrier trailers, 22
tent camper trailers, and 112 lowboy and miscellaneous trailers. The
transportation equipment, except for 26 tractors, are being held for sale in
conjunction with the sale or discontinuance of the "truckaway" operation (see
below).
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.
Morgan has decided to discontinue the "truckaway" operation of the
Specialized Transport Division. Morgan recorded in the fourth quarter of 1996,
special charges of $3,500,000 before taxes relating to exiting the truckaway
operation and a write down of properties in accordance with the SFAS 121.
Truckaway is a line of business which focused on the transportation of van
conversions, tent campers, and automotive product utilizing Company-owned
equipment. In addition to the above identified equipment being held for sale
in conjunction with the sale or discontinuance of the "truckaway" operation,
there are 13 tractors and 9 tent camper trailers currently financed under
operating leases. At December 31, 1996, there were approximately 110 owner
operators and 19 company drivers assigned to the truckaway operation. The
truckaway operation had revenues of $12,900,000, $14,400,000, and $20,600,000
and estimated losses of $1,800,000, $1,200,000 and estimated profits of
$1,200,000 for the years ended December 31, 1996, 1995, and 1994, respectively.
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 1996, while the
recreational vehicle industry was down in 1996.
Growth Strategy. Morgan's strategy is to (i) capitalize on its
stronger market position in the manufactured housing business, growing
internally and through acquisitions and (ii) emphasize the Company's role in
the large outsourcing transport industry which encompasses arranging for
deliveries of numerous types of consumer and commercial vehicles.
Morgan's initiatives for improved margins are to exit lines of business
which are unrewarding, reducing corporate overhead, and improving the
Company's safety record. There is no assurance that such strategy and
initiatives will be successful in light of changing economics market and
competitive conditions.
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 69% 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 table sets forth certain
operating information for each of the five years ended December 31, 1996.
Years Ended December 31
1992 1993 1994 1995 1996
(Revenues in thousands)
Manufactured Housing Group:
Shipments . . . . . . . 80,587 95,184 121,604 135,750 144,601
Revenues. . . . . . . . $ 32,324 $ 39,930 $ 53,520 $ 63,353 $ 72,616
Driver Outsourcing:
Shipments . . . . . . . 23,636 30,978 32,060 49,885 58,368
Revenues. . . . . . . . $ 8,055 $ 13,416 $ 15,197 $ 19,842 $ 23,090
Specialized Transport:
Shipments . . . . . . . 39,706 38,618 41,934 44,406 41,255
Revenues . . . . . . . $ 24,016 $ 25,835 $ 28,246 $ 29,494 $ 26,169
Other service revenues $ 2,722 $ 3,612 $ 4,917 $ 9,614 $ 10,333
Total operating
revenues . . . . . . . $ 67,116 $ 82,793 $101,880 $122,303 $132,208
Industry Participation. The following tables set forth participation in the
two principal industries the company operates in where industry information
is available:
1992 1993 1994 1995 1996
Manufactured Homes:
Industry production. . . 309,457 374,126 451,646 505,819 553,133
Shipments . . . . . . . . 60,381 76,188 98,181 114,890 121,227
Shares of units shipped . 19.5% 20.4% 21.7% 22.7% 21.9%
Recreational Vehicles:
Industry productions. . . 369,200 406,300 426,100 380,300 376,400
Units moved 62,012 71,792 67,502 64,303 57,703
Shares of units shipped3 16.8% 17.7% 15.8% 16.9% 15.3%
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 $20 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 $20 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 Federal Highway Administration, which is an agency of 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
Interstate Commerce Commission ("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 highway, and actively enforce them in conjunction with
D.O.T. personnel.
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 advice 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 and Class A Common Stock are traded
in the over-the-counter market under the symbol "SPNI" and SPNI-A,
respectively, and are listed in the National Association of Securities
Dealers Automated Quotations System (NASDAQ). In August 1996, Spinnaker
changed the name of its existing Common Stock to Class A Common Stock and
declared a stock dividend of one share of a new Common Stock for each share
of Class A Common Stock outstanding. At December 31,1996, Registrant owned
2,237,203 shares of Spinnaker Common Stock, approximately 72.8% of the
outstanding, and 2,259,063 shares of Class A Common Stock, approximately
73.5% 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 Class A Common Stock and
Common Stock (20%) at a price of $2.67 for one share of both Common Stock and
Class A Common Stock (adjusted for the 3 for 2 stock splits in December 1994,
December 1995 and the August 1996 Common Stock Dividend). In April 1996, BF
exercised warrants to purchase 187,476 shares of Common Stock and Class A
Common (adjusted for the August 1996 Stock Dividend). In August 1996, the
Management Agreement with BF was terminated and Messrs. Richard J. Boyle and
Ned Fleming III became employees of Spinnaker.
Spinnaker is in discussion with potential underwriters
concerning a possibly offering of Spinnaker common stock, although there can
be no assurance that an offering will be accomplished on terms satisfactory
to Spinnaker.
Spinnaker is a leading manufacturer and marketer of adhesive
carton sealing tape and adhesive-backed label stock, primarily for the carton
sealing tape and pressure sensitive label stock markets. Spinnaker's
products are grouped into two principal businesses that accounted for the
following percentages of 1996 net sales: pressure and water sensitive carton
sealing tape (51%) and adhesive-backed label stock (46%). For the fiscal
year ended December 31, 1996, Spinnaker had net sales of $246.5 million.
Spinnaker has three 100% owned subsidiaries: Brown-Bridge
Industries, Inc.("Brown-Bridge"), 80.1% of which was acquired in September
1994, Central Products Company ("Central Products"), acquired in October 1995
and Entoleter, Inc. ("Entoleter"), which it has owned since Registrant
acquired Spinnaker in 1987. In October 1996, Spinnaker acquired the
remaining 19.9% of outstanding stock of Brown-Bridge (plus management stock
options), which were owned by the management of Brown-Bridge, BF and
Registrant. Brown-Bridge is in the adhesive-coated paper industry. Central
Products manufactures carton sealing tape. Entoleter manufactures a line of
industrial process equipment and a line of air pollution equipment.
Central Products
Central Products' carton sealing tape is used for the
packaging of goods for shipment by manufacturing, retail or distribution
companies. Central Products manufactures pressure sensitive tape with all
three primary adhesive technologies: acrylic, hot melt and natural rubber. It
also offers three types of water sensitive tape: paper tape, fiberglass
reinforced tape and box tape. Central Products believes it is the only United
States supplier to manufacture both pressure sensitive tape and water
sensitive tape, and is the only company to produce pressure sensitive tape
utilizing all three pressure sensitive adhesive technologies.
Pressure Sensitive Tape. Pressure sensitive tape is
manufactured primarily through the coating of plastic film with a thin layer
of acrylic, hot melt or natural rubber adhesive. The adhesive is applied to
various grades of high-quality, low-stretch polypropylene film for use in
most applications as well as PVC and polyester films which are used for
certain specialized applications. Acrylic adhesives, which are noted for
their clarity, non-yellowing properties, good temperature resistance and low
application cost, are best suited for manual applications on light and medium
carton sealing situations. Hot melt adhesives, noted for their quiet release
and easy unwind during application, are the most widely used pressure
sensitive adhesives because they satisfy 90% of all carton sealing
requirements. Natural rubber adhesives are unique because of their aggressive
adhesion properties and, although they are ideal for recycled content cartons
and cartons requiring hot, humid or cold packing, transportation and storage,
they can be used for a wide variety of surface conditions and extreme
temperature tolerances. Central Products' pressure sensitive tapes are sold
under the trade names Alltac and Central .
Water Sensitive Tape. Water sensitive tape is generally
manufactured through the application of a thin layer of water sensitive
adhesive to gumming kraft paper. It is offered as either non-reinforced
(paper) tape or fiberglass reinforced tape. Non-reinforced tape is made by
applying an adhesive to a single layer of high tensile strength kraft paper
coated with Central Products' patented starch-based adhesive. Non-reinforced
tapes are totally biodegradable and are used in light to medium carton
sealing applications. Fiberglass reinforced tape contains a layer of
fiberglass yarn placed between two layers of kraft paper, and is typically
used to seal heavy packages or on cartons that will be subject to a high
level of abuse during shipping and is also favored in shipping high value
goods due to its strong sealing qualities. Both non-reinforced tape and
fiberglass reinforced tape are available in light, medium and heavy grades.
Central Products' water sensitive carton sealing tapes are sold under the
trade names Glasseal , Central , Green Core and Tru-Seal .
Central Products also supplies tape dispensing equipment
manufactured by other companies. It currently offers a broad line of carton
sealing equipment for pressure sensitive tape, which ranges from hand held
dispensers to automatic random sizing equipment. Central Products also offers
two types of table top dispensers for water sensitive tape a manual
dispenser and a more expensive electric dispenser.
Brown-Bridge
Brown-Bridge develops, manufactures and markets
adhesive-backed label stock that is converted by printers and industrial
users into products that are utilized for marking, identifying, labeling and
decorating applications and products. Brown-Bridge's products are offered in
three primary adhesive categories: pressure sensitive, water sensitive and
heat sensitive.
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's pressure sensitive products are sold
under the trade names Strip Tac and Strip Tac Plus . 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. Sheet pressure
sensitive products are sold to commercial sheet printers, who provide
information labels and other products (such as laser printer stock). During
fiscal 1996, pressure sensitive products constituted approximately 87% of
Brown-Bridge's net sales.
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. 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 is sold primarily
for label and business form uses. 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 government postage and promotional stamp uses.
Industrial products are sold in several niche markets, such as electrical and
other specialty markets.
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, such as 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's heat sensitive products are sold under the
trade name Heat Seal.
Marketing and Customers
Spinnaker markets its broad range of products to a variety of
customers. During 1996, no single customer accounted for more than 10% of
Spinnaker's net sales.
Central Products' marketing and sales strategy emphasizes
supplying a full line of both water sensitive and pressure sensitive tape
products to the carton sealing tape industry. Central Products sells its
products directly to over 1,500 paper distributors (customers), who in turn
resell these tape products to the end user markets. In addition, Central
Products sells private-brand carton closure tapes direct to large customers
who in turn distribute the products under their name to end users. Central
Products provides its distributor customers with a high level of product
education to enable them to better sell the Company's products.
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, to broaden its market
penetration, Brown-Bridge also contracts with seven regional processors
throughout the United States, with whom Brown-Bridge stores product until
sold. Generally, these processors perform both slitting and distribution
services for Brown-Bridge.
Manufacturing and Raw Materials
Spinnaker produces all adhesive technologies for carton
sealing tape and adhesive-backed label stock. It produces carton sealing
tapes and label stock for a variety of standard and custom applications
requiring water, pressure and heat sensitive technologies. Spinnaker believes
its strong manufacturing capabilities enable it to maintain high product
quality and low operating costs and respond to customers' needs quickly and
efficiently.
Raw materials are the most significant cost component in
Spinnaker's production process. The material component accounts for
approximately 65% to 70% of the total cost of its products, with the most
important raw materials being paper (gumming kraft and face stock), adhesive
materials, fiberglass, and polypropylene resin. These materials are currently
readily available and are procured from numerous suppliers.
Among Spinnaker's manufacturing strengths at its Central
Products water sensitive tape operation are fully integrated, computerized
coating and laminating machines, fully automated slitting, rewinding and
packaging machines and a state of the art print shop. At its pressure
sensitive tape operation, they include an in-house film line for production
of polypropylene film and an advanced computerized coating machine for each
of the three adhesive technologies.
See Item 2 below for a description of manufacturing and
distribution facilities.
Competition
The adhesive-backed materials industry is highly competitive,
and Spinnaker competes with both national and regional suppliers. As a result
of the competitive environment in the markets in which Spinnaker operates,
Spinnaker faces (and will continue to face) pressure on sales prices of its
products. As a result of such pricing pressures, Spinnaker may in the future
experience reductions in the profit margins on its sales, or may be unable to
pass future raw material price increases to its customers (which would also
reduce profit margins). Spinnaker operates in markets characterized by a few
large diversified companies selling products under recognized trade names and
a number of smaller public and privately-held companies selling to the
market. In addition to branded products, some companies in the industry
produce private-label products to enhance supply relationships with large
buyers.
Central Products 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) and small private companies
(principally in water sensitive tape). Central Products is one of the leading
manufactures of water sensitive tape. 3M Corporation is the largest
manufacturer of pressure sensitive tape in the carton sealing market in the
United States.
The adhesive-backed label stock market is fragmented. Brown-Bridge
competes with several national manufacturers, including
Avery-Dennison, Bemis, 3M Corporation and a number of smaller regional
manufacturers. Spinnaker believes that Avery-Dennison, Bemis and 3M
Corporation are the only competitors with national production facilities and
Avery-Dennison and 3M Corporation are the only competitors with nationally
recognized brand names.
Environmental Regulations
Spinnaker's operations are subject to environmental laws and
regulations governing emissions to the air, discharges to waterways, and
generation, handling, storage, transportation, treatment and disposal of
waste materials. Spinnaker is also subject to other federal and state laws
and regulations regarding health and safety matters. Environmental laws and
regulations are constantly evolving and it is impossible to predict the
effect that these laws and regulations will have on Spinnaker in the future.
While Spinnaker believes it is currently in substantial compliance with all
such environmental laws and regulations, there can be no assurance that it
will at all times be in complete compliance with all such requirements. In
addition, although Spinnaker believes that any noncompliance is unlikely to
have a material adverse affect on Spinnaker, it is possible that such
noncompliance could have a material adverse affect on Spinnaker. Spinnaker
has made and will continue to make capital expenditures to comply with
environmental requirements. As is the case with manufacturers in general, if
a release of hazardous substances occurs on or from Spinnaker's properties or
any associated offsite disposal location, or if contamination from prior
activities is discovered at any of Spinnaker's properties, Spinnaker may be
held liable and the amount of such liability could be material.
Patents and Trademarks
Patents are held by Spinnaker with respect to the manufacture
of certain of its products, but its management does not consider such patents
to be important to Spinnaker's operations. The patents expire over various
lengths of time with the last patent expiring in about 10 years. Spinnaker
has registered several of its trade names and trademarks for adhesive-backed
materials.
International Sales
The Company's international sales were $11.5 million,
$10.4 million and $3.9 million in 1996, 1995 and 1994, respectively. Of the
$11.5 million in 1996 international sales, approximately $6 million were
represented by exports of Brown-Bridge products. The substantial majority of
these sales were to Canadian customers. The profitability of international
sales is substantially equivalent to that of domestic sales. Because
international sales are transacted in United States dollars, payments in many
cases are secured by irrevocable letters of credit, and sales are spread over a
number of customers in several countries, Spinnaker believes that the risks
commonly associated with doing business internationally are minimized.
Backlog
The Company's backlog believed to be firm was $9.2 million at
December 31, 1996, as compared to $10.7 million at December 31, 1995.
Industrial Process Equipment Business
Through its Entoleter subsidiary, the Company engineers,
manufactures and markets a line of industrial process equipment and a line of
air pollution control equipment. Entoleter's net sales consist entirely of
sales to commercial and industrial customers.
Employees
As of December 31, 1996, Spinnaker employed approximately
1,000 persons, of which 380 were Brown-Bridge employees, 570 were Central
Products employees and 40 were Entoleter employees. All employees other than
management are paid on an hourly basis. A majority of its hourly employees
are not represented by unions. Central Products has a labor agreement
expiring in 1998 with the United Paperworkers International Union AFL-CIO
covering approximately 200 hourly employees at the Menasha, Wisconsin plant.
Entoleter's approximately 20 hourly-paid production employees are members of
the United Electrical, Radio and Machine Workers of America Union. The
current collective bargaining agreement expires on April 30, 1999. Spinnaker
believes that its relations with its employees are good; however, there can
be no assurance that the Company will not experience work stoppages or
slowdowns in the future.
B. Lynch Machinery, Inc. ("LM")
LM, a 90% owned subsidiary of Registrant, designs, develops,
manufactures and markets a broad range of manufacturing equipment for the
electronic display and consumer glass industries. To better reflect its
current operations, LM is planning to change its name to Lynch Interactive
Displays, Inc. LM also produces replacement parts for various types of
packaging and glass container-making machines which LM does not manufacture.
CRT Display and Consumer Glass Manufacturing Technologies. LM
manufactures nine models of glass-forming presses to provide high-speed
automated systems to form different sizes of face panels and tubes for
television screens and computer monitors. LM produces an HDTV model press to
build large-screen televisions for the HDTV (high definition television)
market. LM manufactures and installs presses to form table ware such as
glass tumblers, plates, cups, saucers and commercial optical glass. LM also
manufactures and installs electronic controls and retrofit systems for CRT
display and consumer glass presses. LM shipped four controls and retrofit
systems amounting to approximately $3.2 million in 1996.
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.
During 1996, LM delivered four glass press machines. At
December 31, 1996, LM had orders for, and had in various stages of
production, six glass press machines, at a total sales price of approximately
$9,240,000, which are scheduled for delivery in 1997. 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 international
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. In
mid-1996, LM discontinued and sold its Tri-Can International operation, which
manufactured packaging machines. In connection therewith, LM recognized a
charge to income in 1996 of approximately $832,470.
International Sales. During 1996, approximately 88% of LM's
sales were made to international customers, and 100% of its large glass
pressing machine orders were from international customers in East Asia. The
profitability of international sales is equivalent to that of domestic sales.
Because many international orders require partial advance deposits, with the
balance often secured by irrevocable letters of credit from banks in the
international country, the Registrant believes that some of the credit risks
commonly associated with doing business internationallt are minimized. The
Registrant avoids currency exchange risk by transacting all international
sales in United States dollars.
Backlog. LM had an order backlog of approximately $6.6
million at December 31, 1996, compared with approximately $16.9 million at
December 31, 1995. The decrease in backlog is attributable to the smaller
number of orders for large presses booked in 1996. LM believes that all of
the December 31, 1996 backlog will be shipped during 1997. 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 1996, 1995, and 1994, M-tron's sales consisted of (in
thousands):
1996 1995 1994
Crystals............................ $10,594 $13,778 $7,179
Oscillator Modules.................. 7,839 6,434 5,254
Total $18,433 $20,118 $12,433
Competition. Quartz crystals and clock oscillators are sold in a
highly competitive industry. There are numerous domestic and international
manufacturers who are capable of providing quartz crystals and clock
oscillators comparable in quality and performance to M-tron's products.
International 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.
International Sales. M-tron's international sales in 1996 were
approximately 15% of total sales and were concentrated in Canada and Western
Europe. The profitability of international 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 international countries are minimized.
Backlog. M-tron had backlog orders of approximately $5,049,000 at
December 31, 1996, compared with $6,435,000 at December 31, 1995. 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, 1996 will be shipped during 1997.
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)Registrant's telephone subsidiaries franchise certificates to provide
local-exchange telephone service within its service areas; (3) Western's FCC
licenses to operate point-to-point microwave systems; (4) licenses held by
partnerships and corporations in which Western, Inter-Community and UPTC own
minority interests to operate cellular radio systems covering areas in New
Mexico, North Dakota and Michigan, and (5) CLR Video's franchises to provide
cable television service within its service areas.
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 $1,627,000 in 1996, $1,673,000 in 1995, $1,231,000
in 1994.
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 1996 or 1995 that represents 10% or more
of consolidated revenues. The Registrant does not believe that it is
dependent on any single customer.
Excluding the following for The Morgan Group, Inc.: approximately
1,720 independent owner-operators and 1,300 drive-away drivers, the
Registrant had a total of 1,910 employees at December 31, 1996 and 1,986
employees at December 31, 1995.
Additional information with respect to each of the Registrant's
lines of business is included in Note 14 to the Consolidated Financial
Statements included as Item 14(a) below.
V. FORWARD LOOKING INFORMATION
This Form 10-K contains certain forward looking information,
including without limitation examining the possibility of a spin-off (pg.2),
Item 1-I.A "Regulatory Environment" and possible changes thereto and
"Competition" (pgs. 4-6), Item 1-I.C "Personal Communications Services
("PCS")" (pgs. 8-10), Item 1-II. Morgan "Growth Strategy" (p.11), Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operation," particularly Financial Condition, and Notes to Financial Statements
(Item 14(a) below). It should be recognized that such information are estimates
or forecasts based upon various assumptions, including the matters referred to
therein, as well as meeting the Registrant's internal performance assumptions
regarding expected operating performance and the expected performance of the
economy and financial markets as it impacts Registrant's businesses. As a
result, such information is subject to uncertainties, risks and inaccuracies.
VI. 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 1997 Annual Meeting of Shareholders. 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
Mario J. Gabelli Chairman and Chief Executive Officer 54
(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 45
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 55
& General Counsel (since February 10,
1994); Private Law Practice (1991-1993);
Vice President, Secretary & General
Counsel of Moore McCormack
Resources, Inc. (1975-1989).
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 situated on
3.19 acres of land in Bainbridge, Georgia. In January 1997, LM completed an
expansion of its manufacturing capacity at this site, which added
approximately 15,000 square feet, bringing total manufacturing space to
approximately 73,000 square feet. Finished office area in the two buildings
totals approximately 17,000 square feet. All such properties are subject to
security deeds relating to loans.
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.
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.
Central Products owns one manufacturing facility in Menasha,
Wisconsin and leases another in Brighton, Colorado. The Menasha facility
contains approximately 160,000 square feet and the Brighton facility whose
lease expires in 2014, 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. Central Products also
maintain two leased distribution centers in Neenah, WI (90,000 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.
During 1996 and 1995, Registrant's manufacturing facilities operated
in the aggregate at a relatively high level of capacity utilization.
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
127 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 $9,750. 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. Morgan is in the
process of selling 38 acres located at four property locations, two of which
are associated with exiting the "truckaway" operation.
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 3,221 miles of
buried copper cable and 421 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
Utilities Service.
Inter-Community Telephone Company owns 12 acres of land at 10 sites.
Its main office at Nome, ND, 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 1,728
miles of buried copper cable and 172 miles of buried fiber optic cable. All
of Inter-Community's properties described herein are encumbered under
mortgages held by the National Bank for Co-Operatives ("Co-Bank").
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 and 26 miles of fiber optic 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 approximately 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 947 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 approximately 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. Its 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 Co-Bank.
Dunkirk & Fredonia Telephone Company (including its subsidiaries)
own a total of approximately 9 acres at 10 sites located in western New York.
Its host central office switching equipment, administrative and commercial
offices consisting of 18,297 square feet is located in Fredonia, New York.
In addition, Dunkirk & Fredonia owns nine other smaller facilities housing
garage, warehouse and central office switching equipment and over 111 miles
of buried copper cable and 19 miles of fiber optic cable.
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
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 high and lows in
consolidated trading of the Common Stock during the past two years is as
follows:
Three Months Ended
1996 March 31 June 30 Sept 30 Dec 31
High 72 1/2 92 1/2 90 1/2 77
Low 56 70 67 1/2 63 1/2
1995
High 39 1/8 47 3/4 84 3/4 80
Low 30 35 1/2 46 1/8 57 3/4
At March 20, 1997, the Company had 1,070 shareholders of record.
The Registrant did not declare any dividends in 1996 or 1995. See Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations below.
ITEM 6. SELECTED FINANCIAL DATA
(in thousand of dollars, except per share amounts)
Year Ended December 31 (a)
1996 1995 1994 1993 1992
Revenues(a).................$451,880 $333,627 $183,241 $127,021 $108,657
EBITDA(b)................... 33,921 31,096 18,379 12,527 13,351
Operating Profit(c)......... 16,940 19,847 10,942 6,634 8,283
Net Financing Activities.... (14,689) (7,376) (4,333) (3,643) (4,142)
Gain on Sales of Subsidiary and
Affiliate Stock........... 5,146 59 190 4,326 --
Income from Continuing Operations
Before Income Taxes, Minority
Interests, Discontinued Operating
and Extraordinary Item.... 7,397 12,530 6,799 7,317 4,141
Provision for Income Tax... (3,021) (4,906) (2,726) (2,454) (1,733)
Minority Interests......... 418 (2,155) (1,372) (737) (257)
Income from Continuing Operations
Before Discontinued Operations
and Extraordinary Items
and Cumulative Effect of
Accounting Change......... 4,794 5,469 2,701 4,126 2,151
Discontinued Operations(d) (750) (324) (109) (10) --
Extraordinary Item(e)...... (1,348) -- (264) (206) 18
Cumulative Effect to January 1,
1993 of Change in Accounting
for Income Taxes(f) -- -- -- (957) --
Net Income................. $ 2,696 $ 5,145 $ 2,328 $2,953 $ 2,169
Per Common Share (g).......
Income from Continuing
Operations................ $ 3.41 $ 3.89 $ 2.02 $ 3.37 $ 1.71
Net Income................ 1.92 3.66 1.74 2.41 1.72
Cash, Securities and Short-
Term Investments.......... $ 36,102 $ 27,353 $ 31,521 $45,509 $ 44,914
Total Assets............... 392,620 302,439 185,910 129,523 111,374
Long-term Debt............. 219,579 138,029 62,745 65,768 68,286
Shareholders' Equity(h)..... $ 38,923 $ 35,512 $ 30,531 $24,316 $ 21,272
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 for 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, Central Products
Company from October 4, 1995 and Dunkirk and Fredonia Telephone
Company from November 26,1996.
(b) EBITDA is earnings before interest, taxes, depreciation and
amortization.
(c) Operating Profit (Loss) is sales and revenues less operating
expenses, which excludes investment income, interest expense,
share of operations of affiliated companies, minority interests
and taxes.
(d) Discontinued operations of Lynch Tri-Can International.
(e) Gain (Loss) on repurchase or redemption of Company's 8%
convertible subordinated debentures for years 1994, 1993, and 1992
and early extinguishment of debt at Spinnaker in 1996.
(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) Based on weighted average number of common shares outstanding.
(h) No dividends have been declared over the period.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
RESULTS OF OPERATIONS
YEAR 1996 COMPARED TO 1995
Revenues increased to $451.9 million in 1996 from $333.6
million in 1995, a 35.5% increase. Acquisitions made during late 1995,
principally in the manufacturing segment, were the most significant
contributors to the increase. In the manufacturing segment, revenues
increased by $103.4 million to $291.1 million versus $187.7 million in 1995,
or 55%. Central Products Company, which was acquired on October 4, 1995,
contributed $126.4 million in 1996 versus $30.6 million in 1995. 1996's
manufacturing revenues also reflect $26.1 million from Lynch Machinery, Inc.,
a decrease of $6.2 million when compared with 1995 results. This decline was
a result of lower production activities associated with extra-large glass
presses versus 1995. Three extra-large glass presses were shipped in 1996
versus eleven in 1995. The services segment, which represents 29.3% of total
revenue, increased by $9.9 million from 1995 or 8%. In the multimedia
segment, which represents 6.3% of total revenue, revenues increased by $5.0
million. The inclusion of CLR Video for the full year($1.4 million),
increased revenues at Western New Mexico($1.8 million) and the acquisition of
Dunkirk & Fredonia Telephone ($.9 million) were the major factors
contributing to the growth in the multimedia segment.
Earnings before interest, taxes, depreciation and amortization
(EBITDA) increased to $33.9 million in 1996 from $31.1 million in 1995, a
$2.8 million, or a 9% increase. Operating segment EBITDA (prior to corporate
management fees and expenses) grew to $37.3 million from $35.0 million, a 7%
increase. The manufacturing segment represented 67% of EBITDA or $22.8
million, an increase of $5.7 million versus 1995. The full year inclusion of
Central Products whose EBITDA contribution was $10.9 million in 1996 versus
$2.7 million in 1995 accounted for $8.2 million of the increase. This
increase was offset by lower EBITDA at Lynch Machinery of $2.6 million when
compared to 1995 results due to lower sales volume of the extra-large glass
presses. The services segment had negative EBITDA of ($1.8) million versus
$4.7 million in 1995. The decline was attributable to (a)a $3.5 million loss
reserve taken by Morgan relating to the closing of the Truckaway Division and
related real estate and (b) a decrease in recreational vehicle margins due to
reduced demand and higher driver pay and insurance claims. The multimedia
segment contributed $15.3 million or 45.0% of total EBITDA versus $12.3
million in 1995.
Operating profits for 1996 were $16.9 million in 1996, a
decrease of $2.9 million or 15% versus 1995. Operating profits in the
services segment declined by $6.6 million due to the same factors impacting
EBITDA. This decline was partially offset by improvements in the
manufacturing, multimedia and corporate segments of $1.5 million, $1.7
million and $.5 million, respectively.
Investment income decreased by $.9 million to $2.2 million in
1996 versus 1995. The decrease was related to lower dollar investments in
generating current income.
Interest expense increased by $6.2 million in 1996 when
compared to 1995. The increase is due primarily to the full year effect of
financing the acquisition of CPC in late 1995.
Gain on sales of subsidiary and affiliate stock increased by
$5.1 million in 1996. This increase is the result of the conversion of a $6.0
million Spinnaker Note into Spinnaker Common Stock in 1996 and other
transactions.
The 1996 tax provision of $3.0 million, included federal,
state and local taxes and represents an effective rate of 40.8% versus 39.2%
in 1995.
Results of discontinued operations reflect the disposal Tri-Can
International, a manufacturer of packaging machinery. The assets sold
consisted primarily of inventory and intangibles. As a result of this
disposal, a loss of $.5 million net of taxes and minority interest was
recorded. In addition, the operating results of Tri-Can have been classified
as discontinued operations and result in net operating losses of $.3 million
in 1996 versus $.3 million in 1995.
Loss on early extinguishment of debt, net of taxes and
minority interest, resulted in an extraordinary charge to income of $1.3
million in 1996. The early extinguishment of debt is the result of Spinnaker
Industries issuing $115 million of Senior secured debt due in 2006. The debt
proceeds were used to extinguish substantially all bank debt, bridge loans
and lines of credit at Spinnaker and its major operating subsidiaries.
YEAR 1995 COMPARED TO 1994
Revenues increased to $333.6 million in 1995 from $183.2
million in 1994, an 82% 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 $126.5 million to $187.7 million in 1995 from $61.2 million in
1994, or 207%. 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 the total manufacturing 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 $32.3 million from Lynch Machinery, Inc. compared to
$15.1 million in 1994, 14% 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 37% 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 74% 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 $31.1 million in 1995 from $18.4 million in 1994, a
$12.7 million, or 69% increase. Operating segment EBITDA (prior to corporate
management fees and expenses) grew to $ 35.0 million from $20.6 million, a
70% increase. The manufacturing segment was the largest contributor to
EBITDA with $17.1 million, or 55% in 1995, as compared to $4.7 million, or
26% 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 32% of the total increase in
manufacturing EBITDA. Profit margins associated with the production of
extra-large glass were the cause of the significant improvement. The
services segment contributed $4.6 million, or 15%, 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% of total EBITDA in 1995, or
$12.3 million, as compared to $10.9 million, or 59% of 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 $19.8 million in 1995 from
$10.9 million in 1994, $8.9 million or 82% 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 for 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 $4.9 million, included
federal, state and local taxes and represents an effective rate of 39.2%
versus 40.1% 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 and discontinued operations
was $5.5 million, or $3.89 per share in 1995 as compared to $2.7 million or
$2.02 in 1994. These amounts include the gain on the sale of affiliate stock
which contributed $35,000 to net income, or $.02 per share in 1995 and
$190,000, or $0.14 per share in 1994. Results of discontinued operations
reflect the operating results of Tri-Can which has been re-classified as
discontinued. 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.
FINANCIAL CONDITION
As of December 31, 1996, the Registrant had current assets of
$140.1 million and current liabilities of $98.5 million. Working capital was
therefore $41.6 million as compared to $25.6 million at December 31, 1995,
primarily due to the decline in current maturities of long-term debt as a
result of the high yield offering at Spinnaker Industries and acquisitions
made during 1995.
Within the elements of current assets, cash and cash
equivalents increased by $18.0 million, primarily due to the sale of
marketable securities and short-term investments of $9.4 million, inclusion
of Dunkirk and Fredonia ($4.4 million) and an increase of approximately $6.5
million at Spinnaker due to changes in working capital demands offset by a
reduction of $1.5 million at Lynch Machinery (see Consolidated Statement of
Cash Flow for additional elements). Inventories increased by $3.6 million
primarily due to increases at Central Products and Brown Bridge. Within
current liabilities, notes due to banks increased by $7.8 million, primarily
due to borrowing under the holding company's line of credit. Cash flow from
operations as presented in the Consolidated Statement of Cash Flow increased
by $1.9 million, primarily due to increased EBITDA from the Company's
operating entities, and net sales of trading securities offset by an increase
in other net working capital components.
Capital expenditures were $25.5 million in 1996 and $19.6
million in 1995 due to significant deployment of enhanced technology by our
telephone operations, installation of the silicone paper coating machine at
Brown-Bridge and the inclusion of Central Products for the full year in 1996.
This increased level of capital expenditures is expected to decline in 1997
in the multimedia segment as upgrade programs wind down and absence of large
machine investments in manufacturing. Overall 1997 capital expenditures are
expected to be approximately 15% - 20% below the 1996 level.
At December 31, 1996, total debt was $260.8 million, which was
$73.4 million more than the $187.4 million at the end of 1995. Total debt
was significantly impacted by: the acquisition of Dunkirk and Fredonia
Telephone Company, with a total of $25.8 million of debt incurred and assumed
and Registrant's investment in PCS partnerships of $27.1 million, with the
remainder attributable principally to Spinnaker. Debt at year end 1996
included $234.9 million of fixed interest rate debt, at an average cash
interest rate of 9.1% and $25.8 million of variable interest rate debt at an
average interest rate of 8.2 %. Additionally, the Company had $50.8 million
in unused short-term lines of credit of which $39.3 million was attributed to
Spinnaker, and $4.2 million of which was attributable to Morgan. As of
December 31, 1996, the Parent Company borrowed $11.9 million under a $12.0
million short-term line of credit facility. These funds were primarily used
to fund the bids by affiliated partnerships in the PCS Auctions. This short-
term line of credit expires April 15, 1997. Management anticipates that this
line will be renewed for one year but there is no assurance that it will be.
Backlog in the manufactured products segment at December 31,
1996 was $20.9 million versus $34.0 million at the end of 1995. Backlog at
Lynch Machinery was $6.6 million at December 31, 1996, and $16.9 million at
December 31, 1995. The lack of significant orders coupled with the
elimination of product lines caused the decrease. Orders of $9 million were
booked in early 1997, somewhat compensating for the decline in 1996. Backlog
at Brown-Bridge declined by $2.6 million in 1996 to $3.1 million at December
31, 1996. Backlog at Central Products increased by $1.4 million in 1996 to
$4.5 million at December 31, 1996.
Since 1987, the Board of Directors of Lynch has authorized the
repurchase of 300,000 common shares. At December 31, 1996, 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 1997.
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.
Registrant has a minority position in several entities to
which it has funding commitments. These entities participated in two of the
auctions conducted by the Federal Communications Commission for 30 megahertz
and 10 megahertz of broadband spectrum to be used for personal communications
services, the so-called "C" and "F" Block Auction, respectively. In the C-Block
Auction, such entities acquired 30 licenses to provide personal
communications services to geographic areas of the United States with a total
population of 7.0 million. The cost of these licenses was $216.2 million,
$194.0 million of the cost of these licenses was funded via a loan from the
United States Government. The loan requires quarterly interest payments at
7% (Registrant argues strenuously that the interest rate should have been
6.51%, the applicable treasury rate at the time the licenses were awarded),
and with quarterly principal amortization in years 7, 8, 9, and 10. As of
December 31, 1996, Registrant invested $598,000 in partnership equity and
$20.4 million in loans and has funding commitments to provide an additional
$20.2 million in loans, including funding quarterly interest on the
Government debt of $3.4 million. In the F-Block Auction, an entity in which
Lynch holds a minority position acquired five licenses to provide personal
communications services in geographic areas of the United States with a total
populations of 20 million. The cost of these licenses was $19.9 million.
$16.5 of the cost of the licenses will be financed with a loan from the
United States Government. The interest rate on the loan will be the long-
term Government rate at the date of issuance and with quarterly principal
amortization in years 3 to 10. As of December 31, 1996 Registrant has
invested $99,000 in partnership equity and provided the entity with a loan of
$11.8 million funded by a short-term secured borrowing by the Registrant. $10
million of this loan was returned in January 1997; however, Registrant
continues to have a funding commitment to provide $10 million in loans to the
entity. Registrant is currently seeking alternatives to minimize or raise
funds for its funding commitments to the entities, but currently expects to
fund required interest payments. There are many risks associated with
personal communications services. In addition, funding aspects of
acquisition of licenses and the subsequent mandatory build out requirements
plus the amortization of the license, could significantly and materially
impact the Registrant's reported net income over the next several years. Of
note, under the current structure the ramifications of this should not impact
reported revenues and EBITDA in the future.
In mid-March 1997, Registrant acquired 60% of the stock of
Upper Peninsula Telephone Company for approximately $15.3 million with a
short-term secured bridge financing. Registrant is currently seeking
permanent financing to replace the bridge financing and to finance the
acquisition of the remaining stock of Upper Peninsula.
In December, 1996, the Registrant's Board of Directors
announced that it is examining the possibility of splitting, through a
"Spin-off", either its communications operations or its manufacturing
operations. A spin-off could improve management focus, facilitate and enhance
financings and set the stage for future growth, including acquisitions. A split
could also help surface the underlying values of the company as the different
business segments appeal to differing "value" and "growth" cultures in the
investment community. There are a number of matters to be examined in
connection with a possible spin-off, including tax consequences, and there is
no assurance that such a spin-off will be effected.
Lynch Corporation has a significant need for resources to fund
the operation of the holding company, and meet its current funding
commitments, including those related to personal communications services, and
fund future growth. Lynch is currently considering various alternative long
and short-term financing arrangements. One such alternative would be to sell
a portion or all of certain investment in operating entities. Additional
debt and/or equity financing vehicles are also being considered. While
management expects to obtain adequate financing resources to enable the company
to meet its obligations, there is no assurance that such can be readily obtained
or at reasonable costs.
See Item 1.V above re Forward Looking Information.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a).
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 as its auditors for 1994 and 1995. For 1996, Ernst & Young,
Registrant's auditors, replaced 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 for 1997,
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 for 1997, which information
is incorporated herein by reference. The Performance Graph in the Proxy
Statement shows that Registrant's Common Stock under performed the American
Stock Exchange Market Value Index and the American Stock Exchange Service
Industry Index in 1993 and over performed said indices in 1992, 1994, 1995
and 1996.
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 for
1997, 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 for
1997, 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 included herein:
Consolidated Balance Sheets - December 31, 1996 and 1995
Consolidated Statements of Income - Years ended December 31,
1996, 1995, and 1994.
Consolidated Statements of Shareholders' Equity - Years ended
December 31, 1996, 1995, and 1994
Consolidated Statements of Cash Flows - Years ended December
31, 1996, 1995, and 1994
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
Schedule I - Condensed Financial Information of Registrant
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
LYNCH CORPORATION
CONDENSED STATEMENT OF INCOME
Year Ended
December 31
1996 1995 1994
(In Thousands ofdollars)
Interest, Dividends & Gain on Sales
of Marketable Securities $ 649 $ 232 $ 344
Interest, Dividend & Other Income
from Subsidiaries 621 715 84
Gain on Sale of Subsidiary and
Affiliate Stock:
Brown-Bridge Industries, Inc. 203
Tremont Advisors, Inc. -- 190
TOTAL INCOME 1,473 947 618
Costs and Expenses:
Unallocated Corporate Administrative
Expense $2,312 $ 2,869 $ 1,454
Interest Expense 669 448 858
Interest Expense to Subsidiaries 249
TOTAL COST AND EXPENSES 3,230 3,317 2,312
LOSS BEFORE INCOME TAXES, EQUITY
IN NET INCOME OF SUBSIDIARIES AND
EXTRAORDINARY ITEM (1,758) (2,370) (1,694)
Income Tax Benefit 515 779 786
Equity in net income of subsidiaries 3,939 6,736 3,500
INCOME BEFORE EXTRAORDINARY ITEM 2,696 5,145 2,592
Loss on early extinguishment of debt -- -- (264)
NET INCOME $2,696 $ 5,145 $ 2,328
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE A - DIVIDENDS FROM SUBSIDIARIES
Cash dividends paid to Lynch Corporation from the Registrant's consolidated
subsidiaries were $1,811,000 in 1996, $1,166,000 in 1995, and $277,000 in
1994. 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
1996 1995
(In Thousands ofdollars)
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 68 $ 498
Marketable Securities and
Short Term Investments 573 770
Deferred Income Tax Benefits 738 479
Other Current Assets 11 44
Total Current Assets 1,390 1,791
OFFICE EQUIPMENT (Net of Depreciation) 26 16
OTHER ASSETS (Principally Investment in
and Advances to Subsidiaries) 61,836 44,498
Total Assets $63,252 $46,305
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES $18,965 $ 7,935
LONG TERM DEBT 2,090 --
DEFERRED INCOME TAX LIABILITIES 1,585 1,652
DEFERRED CHARGES 1,689 1,206
TOTAL SHAREHOLDERS' EQUITY 38,923 35,512
Total Liabilities and
Shareholders' Equity $63,252 $46,305
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
LYNCH CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
Year Ended December 31
(Thousands of dollars)
1996 1995 1994
Cash provided from (used in)
operating activities $ 529 $(1,158) $(1,676)
INVESTING ACTIVITIES:
Investment in Lynch Manufacturing 1,683 781 1,000
Investment and advances to in
Brighton Communications Corporation (2,053) -- (1,780)
Loan to Spinnaker Industries, Inc. 1,330 -- (965)
Investment in Brown-Bridge
Industries, Inc. 407 -- (407)
Investment in and advances to LENCO II -- 2,535 (2,535)
Investment in and advances to
The Morgan Group, Inc. -- 1,300 --
Investment in and advances
to PCS Partnerships (12,341) (7,010) --
Sales (purchases) of current
marketable securities-net -- -- --
Other 607 (13) 25
NET CASH PROVIDED FROM (USED IN)
INVESTING ACTIVITIES (12,281) (2,407) (4,662)
FINANCING ACTIVITIES:
Net Borrowings
Line of credit 8,627 3,709 3,198
Issuance of Long Term Debt 2,000 -- --
Redemption of debentures -- -- (11,835)
Sale of treasury stock 754 -- 2,290
Conversion of debenture into
common stock -- -- 1,597
Other 1 248 305
NET CASH PROVIDED (USED IN)
FINANCING ACTIVITIES 11,382 3,957 (4,445)
TOTAL INCREASE (DECREASE)IN CASH
AND CASH EQUIVALENTS (430) 392 (10,782)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 498 106 10,888
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 68 $ 498 $ 106
Schedule II - Valuation and Qualifying Accounts
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
LYNCH CORPORATION AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
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
DESCRIPTION OF PERIOD EXPENSES - DESCRIBE DESCRIBE PERIOD
YEAR ENDED DECEMBER
31, 1996 ALLOWANCE
FOR UNCOLLECTIBLE $1,732,000 $1,900,000 $ 75,000(C) $2,182,000(A) $1,525,000
YEAR ENDED DECEMBER
31, 1995 ALLOWANCE
FOR UNCOLLECTIBLE $ 737,000 $ 987,000 $1,160,000(C) $1,152,000(A) $1,732,000
YEAR ENDED DECEMBER
31, 1994 ALLOWANCE
FOR UNCOLLECTIBLE $ 305,000 $ 605,000 $ 240,000(B) $ 413,000(A) $ 737,000
(A) UNCOLLECTIBLE ACCOUNTS WRITTEN OFF ARE NET OF RECOVERIES.
(B) RECLASSES ($43,000) AND AMOUNT RECORDED AS PART OF THE ALLOCATION OF
PURCHASE PRICE OF ACQUIRED COMPANIES ($197,000).
(C) ALLOCATION OF PURCHASE PRICE OF ACQUIRED COMPANY.
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.
See Item 1.V above re Forward Looking Information.
(3) Exhibits:
See the Exhibit Index of this Form 10-K Annual Report below.
The following Exhibits listed in the Exhibit Index are filed with
this Form 10-K Annual Report:
10(u)(i) Loan Agreement, dated as of August 12, 1996,
between Gabelli Funds, Inc. and Registrant.
10(u) (ii) Pledge and Security Interest Agreement, dated as
of August 12, 1996, by and between Gabelli
Funds, Inc. Registrant and certain subsidiaries
of Registrant.
10(v) Letter Agreement, dated as of August 12, 1996,
between Rivgam Communicators, L.L.P. and Lynch PCS
Corporation G.
10(w) Loan Agreement, dated as of August 12, 1996, between
Lynch PCS Corporation F and Aer Force Communications
B, L.P.
11 - Computation of Per Share Earnings.
21 - Subsidiaries of the Registrant.
23 - Consents of Independent Auditors.
- Ernst & Young LLP
- Arthur Andersen LLP
- McGladrey & Pullen, LLP(2)
- Deloitte & Touche, LLP
- Frederick & Warinner, LLC
- Johnson MacKowiak Moore & Myott, 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, 1996.
- Report of McGladrey & Pullen, LLP on the
Financial Statements of Coronet Communications
Company for the year ended December 31,
1996.
- Report of Deloitte & Touche, LLP on the
Financial Statements of Central Products
Company for year ended December 31, 1996.
- Report of Frederick & Warinner LLC on the
Financial Statements of CLR Video, LLC for the
year ended December 31, 1996.
- Report of Johnson MacKowiak Moore & Myott, LLP
on the Consolidated Financial Statements of
Dunkirk & Fredonia Telephone Company for the
period November 26, 1996 to December 31, 1996.
(b) Reports on Form 8-K: A Reports on Form 8-K was filed as of (i)
October 23, 1996 to report on a financing by Registrant's
subsidiary, Spinnaker Industries, Inc. (ii) November 25, 1996 to
report on the completion of the Dunkirk & Fredonia Telephone Company
acquisition and the examining by Registrant of the possibility of
splitting, through a spin-off, either its multimedia operations or
its manufacturing operations, and (iii) as of December 30, 1996 to
report on the acquisition of Transit Homes of America, Inc.
(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
By:s/ROBERT E. DOLAN
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
MARIO J. GABELLI Directors and Chief March 28, 1997
Executive Officer
(Principal Executive Officer)
* MORRIS BERKOWITZ Director March 28, 1997
MORRIS BERKOWITZ
* E. VAL CERUTTI Director March 28, 1997
E. VAL CERUTTI
* PAUL J. EVANSON Director March 28, 1997
PAUL J. EVANSON
Director March , 1997
JOHN C. FERRARA
* SALVATORE MUOIO Director March 28, 1997
SALVATORE MUOI0
* RALPH R. PAPITTO Director March 28, 1997
RALPH R. PAPITTO
* PAUL P. WOOLARD Director March 28, 1997
PAUL P. WOOLARD
s/ROBERT E. DOLAN Chief Financial Officer
ROBERT E. DOLAN (Principal Financial
and Accounting Officer) March 28, 1997
*s/ROBERT A. HURWICH
ROBERT A. HURWICH
Attorney-in-fact
ANNUAL REPORT ON FORM 10-K
ITEM 14(a)(1) AND (2),(c) AND (d)
FINANCIAL STATEMENTS
CERTAIN EXHIBITS
FINANCIAL STATEMENTS SCHEDULES
YEAR ENDED DECEMBER 31, 1996
LYNCH CORP0RATION AND SUBSIDIARIES
Audited Consolidated Financial Statements
Lynch Corporation and Subsidiaries
Years ended December 31, 1996, 1995 and 1994
with Report of Independent Auditors
Lynch Corporation and Subsidiaries
Audited Consolidated Financial Statements
Years ended December 31, 1996, 1995 and 1994
Contents
Report of Independent Auditors 1
Audited Consolidated Financial Statements
Consolidated Balance Sheets 2
Consolidated Statements of Income 4
Consolidated Statements of Shareholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
Lynch Corporation and Subsidiaries
Consolidated Balance Sheets
December 31
1996 1995
(In Thousands)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 33,946 $ 15,921
Marketable securities and short-
term investments 2,156 11,432
Trade accounts receivable, less
allowances of $1,525 and $1,732 in
1996 and 1995, respectively includes
$9,624 and $3,602 of costs in excess
of billings at 1996 and 1995,
respectively 52,963 52,306
Inventories 36,859 33,235
Deferred income taxes 5,571 3,944
Other current assets 8,598 6,810
TOTAL CURRENT ASSETS 140,093 123,648
PROPERTY, PLANT AND EQUIPMENT:
Land 1,367 2,068
Buildings and improvements 21,334 16,675
Machinery and equipment 155,370 128,397
178,071 147,140
Accumulated depreciation (46,707) (36,093)
131,364 111,047
INVESTMENTS IN AND ADVANCES TO
PCS ENTITIES 34,116 6,412
INVESTMENTS IN AND ADVANCES TO
AFFILIATED COMPANIES 2,529 2,570
EXCESS OF COSTS OVER FAIR VALUE
OF NET ASSETS ACQUIRED 69,206 53,060
OTHER ASSETS 15,312 5,702
TOTAL ASSETS $392,620 $302,439
See accompanying notes.
December 31
1996 1995
(In Thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks $ 17,419 $ 9,622
Trade accounts payable 20,998 20,147
Accrued interest payable 1,230 1,146
Accrued liabilities 28,663 23,612
Customer advances 6,382 3,787
Current maturities of long-term debt 23,769 39,708
TOTAL CURRENT LIABILITIES 98,461 98,022
LONG-TERM DEBT 219,579 138,029
DEFERRED INCOME TAXES 22,389 17,912
MINORITY INTERESTS 13,268 12,964
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 8,417 7,873
Retained earnings 26,472 23,776
Treasury stock of 80,157 and
92,528 shares, at cost (1,105) (1,276)
TOTAL SHAREHOLDERS' EQUITY 38,923 35,512
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $392,620 $302,439
See accompanying notes.
Lynch Corporation and Subsidiaries
Consolidated Statements of Income
(Dollars In Thousands, Except per Share Amounts)
Year ended December 31
1996 1995 1994
SALES AND REVENUES:
Multimedia $ 28,608 $ 23,597 $ 20,144
Services 132,208 122,303 101,880
Manufacturing 291,064 187,727 61,217
451,880 333,627 183,241
COSTS AND EXPENSES:
Multimedia 21,435 17,889 14,239
Services 127,236 111,672 92,155
Manufacturing 241,683 147,497 44,456
Selling and administrative 44,586 36,722 21,449
OPERATING PROFIT 16,940 19,847 10,942
Other income (expense):
Investment income 2,203 3,070 2,446
Interest expense (17,011) (10,844) (6,478)
Share of operations of
affiliated companies 119 398 (301)
Gain on sales of subsidiary
and affiliate stock 5,146 59 190
(9,543) (7,317) (4,143)
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES, MINORITY
INTERESTS, DISCOUNTED OPERATIONS
AND EXTRAORDINARY ITEM 7,397 12,530 6,799
Provision for income taxes (3,021) (4,906) (2,726)
Minority interests 418 (2,155) (1,372)
INCOME FROM CONTINUING OPERATIONS
BEFORE DISCONTINUED OPERATIONS
AND EXTRAORDINARY ITEM 4,794 5,469 2,701
Discontinued operations:
Loss from operations of discontinued
Lynch Tri-Can International (less
applicable income taxes of $149, $220
and $74 and minority interest effects
of $29, $36 and $12 in 1996, 1995
and 1994, respectively) (263) (324) (109)
Loss on disposal of Lynch Tri-Can
International (less applicable
income taxes of $167 and minority
interest effect of $54) (487) - -
INCOME BEFORE EXTRAORDINARY ITEM 4,044 5,145 2,592
Loss on early extinguishment of
debt, net of income tax benefit
of $953 and $135 in 1996 and
1994 and minority interest effect
of $495 in 1996 (1,348) - (264)
NET INCOME $ 2,696 $ 5,145 $ 2,328
Weighted average shares outstanding 1,405,000 1,407,000 1,337,000
Primary earnings per share:
Income before discontinued
operations and extraordinary item $ 3.41 $ 3.89 $ 2.02
Loss from discontinued operations (.53) (.23) (.08)
Extraordinary item (.96) - (.20)
NET INCOME $ 1.92 $ 3.66 $ 1.74
Fully diluted earnings per share:
Income before discontinued operations
and extraordinary item $ 3.41 $ 3.89 $ 1.95
Loss from discontinued operations (.53) (.23) (.07)
Extraordinary item (.96) - (.16)
NET INCOME $ 1.92 $ 3.66 $ 1.72
See accompanying notes.
PAGE
Lynch Corporation and Subsidiaries
Consolidated Statements of Shareholders' Equity
Additional
Common Stock Common Paid-in Retained
Outstanding Stock Capital Earnings
(Dollars In Thousands)
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 8,631
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
Issuance of treasury stock 12,371 - 584 -
Capital transactions of
the Morgan Group Inc. - - (40) -
Net income for the year - - - 2,696
Balance at December 31, 1996 1,391,034 $5,139 $8,417 $26,472
See accompanying notes.
PAGE
Lynch Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Year ended December 31
1996 1995 1994
(In Thousands)
OPERATING ACTIVITIES
Net income $ 2,696 $ 5,145 $ 2,328
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 16,981 11,276 7,497
Extraordinary charge on early
extinguishment of debt 1,348 - -
Net effect of purchases and sales
of trading securities 9,276 2,079 5,450
Deferred taxes 2,082 201 (1,505)
Share of operations of affiliated companies (119) (398) 301
Minority interests (500) 2,119 1,360
Morgan special charge 3,500 - -
Gain on sale of stock by subsidiaries (5,146) (59) (190)
Changes in operating assets and liabilities,
net of effects of acquisitions:
Receivables 407 (3,704) (11,243)
Inventories (3,374) 1,539 (949)
Accounts payable and accrued liabilities 3,743 10,417 12,234
Other (1,810) (1,437) (836)
Other - - 109
NET CASH PROVIDED BY OPERATING ACTIVITIES 29,084 27,178 14,556
INVESTING ACTIVITIES
Acquisitions (total cost less debt assumed
and cash equivalents acquired):
Personal Communications Services
Partnerships (27,106) (7,010) -
U.S. West Lines (5,518) - -
Dunkirk and Fredonia (17,788) - -
Central Products Company - (85,072) -
CLR Video - (5,242) -
Transport Drivers, Inc. - (2,806) -
Brown-Bridge Industries Inc. (2,295) - (29,071)
Haviland Telephone Company - - (2,854)
Capital expenditures (25,518) (19,569) (11,598)
Investment in Capital Communications, Inc. - 3,000 (2,541)
Other (1,597) (1,349) (288)
NET CASH USED IN INVESTING ACTIVITIES (79,822) (118,048) (46,352)
FINANCING ACTIVITIES
Issuance of long-term debt 166,358 90,167 31,477
Payments to reduce long-term debt (101,708) (4,720) (3,439)
Debenture redemption/conversion - - (11,835)
Net borrowings (repayments), lines
of credit 7,797 3,718 3,957
Deferred financing costs (7,139) - -
Sale (purchase) of treasury stock 755 - 2,290
Conversion of debentures into common stock - - 1,597
Sale of minority interests 3,642 (220) 906
Other (942) (164) 305
NET CASH PROVIDED BY FINANCING ACTIVITIES 68,763 88,781 25,258
Net increase (decrease) in cash
and cash equivalents 18,025 (2,089) (6,538)
Cash and cash equivalents at
beginning of year 15,921 18,010 24,548
Cash and cash equivalents at end of year $ 33,946 $ 15,921 $ 18,010
See accompanying notes.
PAGE
Lynch Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1996
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.
The Company has a significant need for resources to fund the operation of the
holding company, and meet its current funding commitments, including those
related to personal communications services, and fund future growth. The
Company is currently considering various alternatives long and short-term
financing arrangements. One such alternative would be to sell a portion or
all of certain investments in operating entities. Additional debt and/or
equity financing vehicles are also being considered. While management expects
to obtain adequate financing resources to enable the Company to meet its
obligations, there is no assurance that such can be readily obtained or at
reasonable costs.
Cash Equivalents
Cash equivalents consist of highly liquid investments with a maturity of less
than three months when purchased.
At December 31, 1996 and 1995, assets of $14.4 million and $7.9 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" ("SFAS" 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, and preferred and common stocks and bonds. At December
31, 1996, 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 $.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 $628,000, $408,000 and
($214,000) on trading securities has been included in earnings for the year
ended December 31, 1996, 1995, and 1994, respectively. There was no
adjustment to shareholders' equity for the available-for-sale security at
December 31, 1996 and 1995, respectively.
The cost of marketable securities sold is determined on the specific
identification method. Realized gains of $102,000, $529,000 and $293,000, and
realized losses of $112,000, $108,000 and $233,000 are included in other
income for the years ended December 31, 1996, 1995, and 1994, respectively
Lynch Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Accounting and Reporting Policies (continued)
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 which range from 3 years to 35 years. 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
cash flows in relation to its net capital investment in the subsidiary. Based
on its review, 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 $1,626,870 in 1996, $1,673,000 in 1995 and $1,231,000 in
1994.
Lynch Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Accounting and Reporting Policies (continued)
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 is engaged in
the manufacture and marketing of glass forming machines and specialized
manufacturing machines. Certain sales contracts require an advance payment
(usually 15% of the contract price) which is accounted for as a customer
advance. The contractual sales prices are paid either (i) as the
manufacturing process reaches specified levels of completion or (ii) based on
the shipment date. Guarantees by letter of credit from a qualifying financial
institution are required for most sales 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 completed contract method.
Impairments
Effective January 1, 1996, the Company adopted SFAS No. 121 "Accounting for
the Impairment of Long-Lived Assets to be Disposed Of". The Company
periodically assesses the net realizable value of its long-lived assets and
evaluates such assets for impairment whenever events or changes in
circumstances indicate the carrying amount of an asset may not be
recoverable. For assets to be held, impairment is determined to exist if
estimated undiscounted future cash flows are less than the carrying amount.
For assets to be disposed of, impairment is determined to exist if the
estimated net realizable value is less than the carrying amount.
Stock Based Compensation
During 1996, the Company adopted SFAS No. 123, "Accounting for Stock Based
Compensation". SFAS No. 123 establishes a fair value method of accounting and
reporting standards for stock based compensation plans. However as permitted
by SFAS No. 123, the Company has elected to continue to apply the provisions
of Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock
Issued to Employees" and related interpretations. Under APB No. 25, because
the exercise price of the Company's employee stock options were not less than
the market price of the underlying stock on the date of grant, no
compensation expense is recognized. The Company is required to disclose the
pro forma net income (loss) and net income (loss) per share as if the fair
value method defined in SFAS No. 123 had been applied to all grants made on
or after January 1, 1995. See Note 10 for pro forma disclosures.
Lynch Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Accounting and Reporting Policies (continued)
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 1995 financial statements have been
reclassified to conform to the 1996 presentation.
2. Acquisitions
On December 30, 1996, The Morgan Group, Inc., 51% owned by Lynch, acquired
the operating assets of Transit Homes of America, Inc., a provider of
transportation services to a number of producers in the manufactured housing
industry. The purchase price was approximately $4.4 million, including
assumed obligations.
On November 26, 1996, Lynch Telephone Corporation VIII, a wholly-owned
subsidiary of Lynch, acquired all of the outstanding shares of Dunkirk &
Fredonia Telephone Company, a local exchange company serving portions of
western New York. The total cost of this transaction was $27.7 million. As a
result of this transaction, the Company recorded $13.8 million in goodwill
which is being amortized over 25 years.
On June 3, 1996, Inter-Community Telephone, a Lynch Telephone Corporation II
subsidiary acquired four telephone exchanges in North Dakota containing
approximately 1,400 access lines from U.S. West Communications, Inc. for
approximately $4.7 million.
On October 4, 1995, Central Products Acquisition Corp., a wholly-owned
subsidiary of Spinnaker Industries, Inc. ( a 73% owned subsidiary of Lynch)
acquired from Alco Standard Corporation ("Alco"), the assets and stock of
Central Products Company, a manufacturer 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., a wholly-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.
Lynch Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Acquisitions (continued)
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.
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 purchase of Transit Homes
and Dunkirk and Fredonia were made at the beginning of 1995, and Central
Products, Haviland, Brown-Bridge, and Station WOI-TV had been made at the
beginning of 1994.
Year ended December 31
1996 1995 1994
(In thousands except per share data)
Sales $492,383 $467,720 $358,927
Income from continuing operations 7,510 4,843 2,634
Income from discontinued operations (750) (324) (109)
Extraordinary item (1,348) - (264)
Net income $ 5,412 $ 4,519 $ 2,261
Income per common share:
Income from continuing operations 5.34 3.44 1.97
Income from discontinued operations (.53) (.23) (.08)
Extraordinary item (.96) - (.20)
Net income per share $ 3.85 $ 3.21 $ 1.69
On March 18, 1997, the Company acquired approximately 60% ($15.3 million) of
the stock of Upper Peninsula Telephone Co., a local exchange company in
Michigan, with 6,200 access lines, with the intent of acquiring the rest of
the company.
3. Discontinued Operations
Morgan Drive Away, a 50.1% owned subsidiary of the Company, recorded in the
fourth quarter of 1996, special charges of $3,500,000 before taxes relating
to exiting the truckaway operation and a write down of properties in
accordance with SFAS 121. In addition in the fourth quarter, Morgan recorded
a pre-tax charge of $750,000 of increased insurance reserves and insurance
costs primarily related to 1996 accidents. These charges have been included
in the Company's results of continuing operations.
The Board of Directors of Lynch Machinery, a 90% owned subsidiary of the
Company, decided to discontinue the operations of Tri-Can International, Ltd.
("Tri-Can) and sell the assets of the operation. The sale of Tri-Can was
completed in August, 1996. Accordingly, Tri-Can is reported as a discontinued
operation for the years ended December 31, 1996, 1995 and 1994. Tri-Can which
was previously reported in the manufacturing segment due to the insignificance
tothe Company's financial statements, is treated as a discontinued operation as
its products and customers are different than those of Lynch Machinery.
Lynch Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Discontinued Operations (continued)
As a result of this disposal, the Registrant recorded a provision for loss of
$487,000 after-taxes, to reflect the writedown of certain assets and costs
estimated to be incurred prior to disposal and a provision of $263,000
after-tax for operating losses prior to the sale. The operating results of
Tri-Can are summarized as follows (dollars in thousands):
For the Year ended December 31
1996 1995 1994
Sales $ 2,797 $ 4,539 $ 5,461
Loss before tax benefit $ (441) $ (580) $ (195)
Income tax benefit 149 220 74
Minority interest 29 36 12
Loss from operations (263) (324) (109)
Loss on disposal before income tax benefit (708) - -
Income tax benefit 167 - -
Minority interest 54 - -
Loss on disposal (487) - -
Total loss on discontinued operations $ (750) $ (324) $ (109)
Components of net assets (liabilities) of discontinued operations included in
the Balance Sheet is as follows:
December 31
1996 1995
Current assets $ 59,027 $1,273,000
Property, plant and equipment, net - 295,000
Other assets - 245,000
Current liabilities - (2,304,000)
$ 59,027 $ (491,000)
4. Inventories
Inventories are stated at the lower of cost or market value. Inventories
valued using the last-in, first-out (LIFO) method comprised approximately 53%
and 58% of consolidated inventories at December 31, 1996 and 1995.
Inventories at Brown-Bridge, 42% and 38% of inventories at December 31, 1996
and 1995, are valued using the specific identification method. The balance of
inventories are valued using the first-in first-out (FIFO) method.
December 31
1996 1995
(In Thousands)
Raw materials and supplies $10,987 $10,470
Work in process 3,950 4,044
Finished goods 21,922 18,721
Total $36,859 $33,235
Lynch Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Inventories (continued)
Current cost exceeded the LIFO value of inventories by $973,457 and $905,000
at December 31, 1996 and 1995, respectively.
5. Personal Communications Services
Lynch subsidiaries through limited partnerships participated in the auctions
conducted by the Federal Communications Commission ("FCC") for 30 megahertz
and 10 megahertz of broadband spectrum to be used for personal communications
services, the "C-Block" and "F-Block" Auctions, respectively. These two
auctions, which were part of six auctions conducted by the FCC for a total 90
megahertz of spectrum, were specially designated by the FCC to encourage
small businesses to participate in the wireless telecommunications industry,
so-called "entrepreneurial blocks." To effectuate this, the FCC provided
certain designated bidders a 25% bidding credit to be used during the auction
as well as long-term financing for a substantial portion of the cost of the
licenses acquired. The licenses represent the right to provide wireless
communications services to territorial areas of the United States. Under FCC
regulations, service must be provided to one-third of the population within
the area of the license within five years of the date of the award and
two-thirds of the population within ten years of the date of award. Failure
to comply may result in the forfeiture of the license. The subsidiaries hold
a 49.9% limited partnership interest position in each of these partnerships
and have committed to funding the government interest and certain other
expenses up to a specified amount as discussed below.
Lynch subsidiaries are limited partners in five separate partnerships which
participated in the C-Block auction, which ended in May 1996. Such
partnerships acquired 31 licenses at a net cost, after the bidding credit,
of $216 million. These licenses were awarded in September 1996. The FCC
provided 90% of the financing of the cost of these licenses at an interest
rate of 7% per annum with interest due quarterly for years one through six
and principal amortization and interest due quarterly in years seven through
ten. Lynch subsidiaries have agreements to provide a total of $41.8 million
of funding to such partnerships, of which $20.4 million was funded through
December 31, 1996. There loans carry an annual commitment fee of 20% and
an interest rate of 15% which are payable when the loans mature in 2003.
For accounting purposes, all cost and expenses, including interest expense,
associated with the licenses are currently being capitalized until service is
provided. The proforma combined balance sheet of these partnerships at
December 31, 1996 is as follows (in thousands):
Assets
Cost of license acquired $223,064
Total assets $223,064
Liabilities and (Deficit)
Due to the Department of Treasury $198,486
Due to Lynch Subsidiaries 31,461
Partnership Capital (6,883)
Total liabilities and (Deficit) $223,064
Lynch Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Personal Communications Services (continued)
A Lynch subsidiary is a limited partner in Aer Force Communications B, L.P.,
which participated in the "F-Block Auction" which began in August 1996. Under
the auction rules, in order for a bidder to bid on a designated area, it had
to have on deposit with the FCC, $0.60 for each person within that designated
area. Aer Force put $12 million on deposit with the FCC. The bidding
concluded during January 1997 and Aer Force was high bidder for five licenses
at a net bid of $19.0 million. These licenses have not yet been awarded. Once
the licenses are awarded, the FCC will finance 80% of the cost of the
licenses with interest only due quarterly in years one and two and principal
amortization and interest due quarterly in years three through ten. The
interest rate will be determined on the date of the award based on the
long-term treasury rate at that time. $11.8 million of the $12 million
deposited with the FCC was financed from a facility from Gabelli Funds, Inc.
("GFI"), an affiliate of the Chairman and CEO of the Company (see
Note 8 for the description of the terms of this loan). In January, $10.0
million of this loan was repaid with monies returned from the FCC. Currently,
Aer Force has on deposit with the FCC $1.9 million, or 10% of the cost of the
licenses for which it was high bidder. Once the licenses have been awarded,
Aer Force will be required to make the remaining 10% down payment, which is
expected to be financed through a draw-down by Lynch on the facility with
GFI. Lynch subsidiaries have committed a total of $11.8 million, based on the
award of licenses for which Aer Force is currently high bidder. The balance
sheet of Aer Force at December 31, 1996 is as follows (in thousands):
Assets
Deposit with FCC $12,000
Total assets $12,000
Liabilities and (deficit)
Due to Lynch Subsidiary $13,395
Partnership capital (1,395)
Total liabilities and (deficit) $12,000
A wholly-owned Lynch subsidiary will also receive a 10% net profit interest
(after a capital charge) in certain PCS Licenses won by Rivgam
Communications, L.L.C. in compensation for certain services during the PCS "D
and E" block auctions. Rivigam is a subsidiary of GFI.
Lynch Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Investments in Affiliated Companies
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.
At December 31, 1996 and 1995, LENCO's net investment in Coronet is
$1,214,000 and $995,000, respectively. Long-term debt of Coronet, at December
31, 1996, is comprised of $13.2 million due to a third party lender and $2.9
million due to LENCO. All of this debt was repaid on February 3, 1997 from
the proceeds of a $16.1 million term loan from a third party lender which is
due quarterly through December 31, 2003. The Company recorded interest income
on the LENCO debt of $287,000, $276,000, and $265,000 for the years ended
December 31, 1996, 1995, and 1994, respectively. LENCO guaranteed $3.75
million of $16.1 million of Coronet's third party debt.
At December 31, 1996 and 1995, LENCO II's investment in Capital is carried at
zero as its share of net losses recognized to date would have exceeded in net
investment. 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%.
7. Excess of Costs Over Fair Value of Net Assets Acquired Intangible assets
include acquisition intangibles of $69.2 million and $53.1 million, net of
accumulated amortization of $7.9 million and $5.5 million, at December 31,
1996 and 1995, respectively.
Lynch Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Notes Payable and Long-term Debt
Long-term debt consists of (all interest rates are at December 31, 1996):
December 31
1996 1995
(In Thousands)
Spinnaker Industries, Inc. 10.75%
Senior Secured Notes due 2006 $115,000 -
Rural Electrification Administration and
Rural Telephone Bank notes payable in
equal quarterly installments through 2023
at fixed interest rates ranging from 2%
to 7.03% (4.2% weighted average),
secured by assets of the telephone
companies of $77.2 million 34,734 $ 27,543
Bank credit facilities utilized by
certain telephone and telephone
holding companies through 2008,
$37.6 million at a fixed interest
rate averaging 9.1% and $3.9 million
at variable interest rates averaging 8.3% 41,513 28,255
Unsecured notes issued in connection with
telephone company acquisitions; $28.0
million at fixed interest rates
averaging 9% and $1.8 million at
a variable rate of 7.75% 29,783 16,149
Gabelli Funds, Inc. loan issued in
connection with FCC F-Block Auction
at fixed rate of 10% due in 1997 11,800 -
Bank Debt associated with Central Products:
Revolving line of credit with interest
at 9.75% expiring in 2000 - 14,126
Term loan with interest at 9.5%,
due in installments through 2002 - 19,625
Term loan with interest rate at
10.5%, due in installments through 2002 - 16,000
Alco loan at no interest, due in
installments through 1998 - 5,000
Alco loan at fixed rate of 8%, due 2003 - 15,000
Alco loan at fixed rate of 11%,
due in installments through 2002 - 10,000
Bank debt associated with Brown-Bridge:
Revolving line of credit at interest
rate of prime plus 1.25% (8.5%)
expiring in 1999 - 12,646
Term loan at interest rate of prime
plus 1.25% (9.75%), due in
installments through 1999 - 6,691
Other 10,518 6,702
243,348 177,737
Current maturities (23,769) (39,708)
$219,579 $138,029
On October 23, 1996, Spinnaker Industries, Inc. completed the issuance of
$115,000,000 of 10.75% senior-secured debt due 2006. The debt proceeds were
used to extinguish substantially all existing bank debt, bridge loans and
lines of credit at Spinnaker and its two major operating subsidiaries,
Central Products and Brown-Bridge. The early extinguishment of debt resulted
in an extraordinary charge to fourth quarter earnings of $1,348,000 net of
applicable taxes and minority interest. In addition, Spinnaker established a
$40 million asset-backed senior-secured revolving credit facility. Financing
costs were incurred by Spinnaker in conjunction with the issuance of the
10.75% senior secured notes. These financing costs are deferred and amortized
over the term of the related debt. Unamortized financing costs of
approximately $6,200,000 at December 31, 1996 are included in other assets.
Lynch Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Notes Payable and Long-term Debt (continued)
RUS debt of $13.4 million bearing interest at 2% has been reduced by a
purchase price allocation of $3.0 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.
The Company maintains lines of credit with banks which aggregate $47.0
million, of which $11.1 million was unused at December 31, 1996. These lines
along with the long-term debt facilities are secured by the operating assets
of the related subsidiaries as well as pledges of stock of certain
subsidiaries. The line of credit agreements expire in 1997, are renewable
annually, and are at interest rates ranging from LIBOR plus 1.25%, to prime
plus .25%. The Company's outstanding balances under these lines of credit
totaled $17.4 million and standby letters of credit totaled approximately
$3.6 million at December 31, 1996, securing various insurance obligations and
customer advances. Several of the credit agreements contain restrictive
covenants. Due to certain of these restrictive covenants and working capital
requirements of the subsidiaries, cash distributions from these subsidiaries
are limited. At December 31, 1996 and 1995, $8.4 million and $5.6 million,
respectively, of subsidiaries' retained earnings were restricted under these
agreements.
Spinnaker's subsidiaries have unused short-term credit facilities available
for future use, including revolving credit agreements with a maximum
aggregate availability of $40,000,000. Borrowings under these credit lines
totaled $686,000 at December 31, 1996. Interest on the outstanding balances
under these credit facilities are at variable rates with an interest rate in
effect at December 31, 1996 of 10.0%. Spinnaker is required to comply with
various covenants including a limitation on capital expenditures, and minimum
levels of current ratio, interest coverage, and net worth, as well as various
other financial covenants. Spinnaker's line of credit agreement expires in
2001.
In conjunction with the "F-Block" auction discussed in Note 5, a deposit of
$12.0 million was deposited with the FCC. Lynch borrowed $11.8 million of
this deposit from GFI on August 12, 1996 which is due and payable in one
year. The interest rate on this loan is fixed at 10% and in addition a
commitment fee of 1% per annum is being charged on the principal amount of
GFI's commitment ($11.8 million) including funds actually borrowed. GFI will
also receive 10% of Lynch's subsidiary's share of net profits of Aer Force
Communications B, L.P. In January, 1997, $10.0 million of this loan was repaid
with monies returned from the FCC.
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.
Cash payments for interest were $16.7 million, $10.6 million and $6.2 million
for the years ended December 31, 1996, 1995 and 1994, respectively.
Aggregate principal maturities of long-term debt for each of the next five
years are as follows: 1997--$23.8 million; 1998--$6.2 million, 1999--$5.8
million, 2000--$13.5 million and 2001--$5.7 million.
Lynch Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Minority Interests and Related Party Transactions
On June 13, 1994, Spinnaker entered into a management agreement (the
"Management Agreement") with Boyle, Fleming & Co., Inc. ("BF"), of whom a
former Director of the Company is a principal, to assume the management of
Spinnaker. Effective August 31, 1996, the Management Agreement was terminated
at which time Messrs. Boyle, and Fleming became employees of Spinnaker and
continued to be Chairman and Chief Executive Officer and President,
respectively, of Spinnaker. Spinnaker and BF also entered into a Warrant
Purchase Agreement in 1994, pursuant to which BF received warrants to
purchase common stock of Spinnaker (equating to a 20% ownership of Spinnaker)
at any time on or before June 30, 1999, subject to certain restrictions. As
of December 31, 1996 there were approximately 490,000 warrants outstanding to
purchase one share each of Class A Common Stock and common stock at a total
price of $2.67 per warrant exercise (adjusted for the 3 for 2 stock splits
in December 1995 and 1994, and a stock dividend in August 1996).
On May 5, 1996, Alco converted a $6.0 million convertible note issued in
connection with the purchase of CPC, into Spinnaker Common Stock. In
accordance with the Company's policy, as a result of this and other
transactions the Company recognized a gain on sales of subsidiary and
affiliate stock of $5.1 million in 1996.
On October 23, 1996, concurrent with the issuance of the $115 million senior
notes (see Note 8), Spinnaker acquired the remaining 25% minority interest in
its Brown-Bridge subsidiary. The terms of the acquisition involved a cash
payment of approximately $2.3 million and the issuance of 9,613 shares of
Spinnaker Common Stock. In addition, as part of the consideration for the
shares of capital stock of Brown-Bridge, the minority shareholders received
the right to a contingent payment, which is exercisable at any time during
the period beginning October 1, 1998 and ending September 30, 2000. The value
of the contingent payment is equal to the percentage of the capital stock of
the former Brown-Bridge entity owned by such stockholder at the time of the
merger multiplied by 75% of the fair market value of the capital stock of
Brown-Bridge, as determined in accordance with certain economic assumptions,
as of the date such right is exercised, less the consideration received at
closing. The contingent price is payable through the issuance of Common
Stock of Spinnaker, unless Spinnaker elects to pay the contingent price in
cash. If such paymebts are made in cash, they could raise to a default under
the Senior Notes, unless there is sufficient availability under provisions
regarding restricted payments contained in the Senior Notes.
In connection with the purchase of the Brown-Bridge minority interest, all
the Brown-Bridge options were accelerated and in turn certain key executives
of Brown-Bridge management exercised those options to purchase 71,065 shares
of Brown-Bridge common stock at various prices between $7.16 and $14.69 per
share, for a total of approximately $670,000. The options were originally
granted in 1994 and were issued at not less than 100% of the fair market
value of the common stock at the date of grant.
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.
Relating to this reimbursement, the Company charged results of operations for
the year ended December 31, 1994 in the amount of $317,000.
On January 19, 1994 and March 12, 1996, Lynch sold 100,000 and 10,373,
respectively, shares of common stock held in its treasury to its Chairman and
Chief Executive Officer at the market price per share, the closing price in
trading of Lynch common stock on The American Stock Exchange on those dates
was $22.875 and $60.25, respectively. The January 19, 1994 transaction was
approved by the Company's shareholders at its annual meeting held on May 5,
1994.
Lynch Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Stock Option Plans
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
non-qualified 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 non-qualified 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. Morgan employees have been granted non-qualified stock options to
purchase 175,500 shares of Class A Common Stock, net of cancellations and
exercises, at prices ranging from $7.38 to $8.75 per share. Stock options
vest over a four year period pursuant to the terms of the plan. As of
December 31, 1996, there were 88,375 options to purchase shares granted to
employees and non-employees directors which were exercisable based upon the
vesting terms, and 4,000 shares had option prices less than the closing price
of $7.50.
In accordance with the Company's directors stock option plan, the Company may
grant stock options to directors who are not employees of the Company.
Effective February 15, 1996, Spinnaker granted 30,000 stock options for the
purchase of one share each of Spinnaker Class A Common Stock and Spinnaker
Common Stock at a total price of $40 per option exercise (adjusted for the
stock dividend in August 1996) to qualifying directors. The options vest
over a two year period with 15,000 options becoming exercisable one year after
the grant date and the remaining 15,000 options becoming exercisable two years
after the grant date. The options expire on the fifth anniversary after the
grant date or 30 days after the director ceaswes to be a director.
The Company has adopted the provisions of SFAS No. 123, "Accounting for Stock
Based Compensation" and as permitted by SFAS No. 123, the Company and its
subsidiaries have elected to account for all of the above option plans under
APB No. 25 and as such no compensation expense was recorded. Pro forma
information regarding net income and earnings per share is required by SFAS
No. 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions: risk-free interest rates of 5.58%; dividend yields of 0%;
volatility factors of the expected market price of the Company's common stock
of .50; and a weighted-average expected life of the options of three years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
estimated weighted-average fair value per option is approximately $5.20. The
pro forma effect on the Company's 1996 operations is as follows:
Net Income
Net Income Per Share
(In Thousands)
As reported $2,696 $1.92
Pro forma $2,607 $1.86
Lynch Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. Shareholders' Equity
In December 1996, the Company's Board of Directors announced that it is
examining the possibility of splitting, through a "spin-off", either its
communications operations or its manufacturing operations. A spin-off could
improve management focus, facilitate and enhance financings and set the stage
for future growth, including acquisitions. A split could also help surface
the underlying values of the Company as the different business segments
appeal to differing "value" and "growth" cultures in the investment
community. There are a number of matters to be examined in connection with a
possible spin-off, including tax consequences, and there is no assurance that
such a spin-off will be effected.
In 1987, 1988 and 1992, the Board of Directors authorized the purchase of up
to 300,000 shares of Common Stock. Through December 31, 1996, 230,861 shares
had been purchased at an average cost of $13.15 per share.
In January 1994, an officer was granted stock options to purchase up to
24,516 shares of Lynch common stock at an exercise price of $23.125, the
closing price on the American Stock Exchange on January 18, 1994. These
options were exercised in January, 1997.
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 of
common stock is based upon the market price at the end of the previous year.
In February 1996 and January 1997, the Company awarded 1,428 and 1,284,
respectively, shares under this program.
On February 29, 1996, the Company adopted a Phantom Stock Option Plan for
certain employees. To date, 39,100 of Phantom Stock Options ("PSO") have been
granted at a prices ranging from $63 to $70 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.
12. Income Taxes
Deferred income taxes for 1996 and 1995 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, 1996 and 1995 are as follows:
December 31, 1996 December 31, 1995
Deferred Tax Deferred Tax
Asset Liability Asset Liability
(In Thousands)
Inventory reserve $ 435 - $ 485 -
Fixed assets written up under
purchase accounting and tax
over book depreciation - $14,818 - $12,438
Discount on long-term debt - 1,286 - 1,398
Basis difference in subsidiary
and affiliate stock - 3,486 85 1,750
Partnership tax losses in
excess of book losses - 1,669 - 1,249
Other reserves and accruals 5,104 - 2,620 -
Other 194 1,130 952 1,077
5,733 22,389 4,142 17,912
Valuation allowance (162) - (198) -
Total deferred income taxes $5,571 $22,389 $3,944 $17,912
Lynch Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. Income Taxes (continued)
The provision for income taxes is summarized as follows:
1996 1995 1994
(In Thousands)
Current payable taxes:
Federal $ 695 $4,420 $ 3,265
State and local 193 992 966
888 5,412 4,231
Deferred taxes:
Federal 1,495 (446) (1,223)
State and local 638 (60) (282)
2,133 (506) (1,505)
$3,021 $4,906 $2,726
A reconciliation of the provision for income taxes from continuing operations
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:
1996 1995 1994
(In Thousands)
c>
Tax at statutory rate $2,515 $4,260 $2,312
Increases (decreases):
State and local taxes, net of
federal benefit 543 615 452
Amortization of excess of acquired
net assets over cost, net 132 64 1
Unremitted earnings of domestic subsidiary (65) 91 109
Sale of subsidiary stock - - (65)
Losses of unconsolidated affiliates - - 224
Reduction attributable to special election
by captive insurance company (216) (223) (202)
Other 112 99 (105)
$3,021 $4,906 $2,726
Net cash payments for income taxes were $3.5 million, $4.2 million and $2.3
million for the years ended December 31, 1996, 1995 and 1994, respectively.
13. 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 liquidity, financial
position or results of operations of Lynch.
Lynch Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. Contingencies (continued)
Pursuant to the CPC acquisition agreement, CPC assumed sponsorship of a
defined benefit pension plan for union employees per their collective
bargaining agreement and also agreed to establish a new defined benefit plan
for non-union employees hired by CPC. The seller retained the defined benefit
pension obligation for non-union retirees as of September 30, 1995 and any
non-union employees not hired by CPC.
The acquisition agreement required the seller to transfer assets to the CPC
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. The assets were transferred by the seller to the CPC union and
non-union plans in January 1997.
14. 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 $25 million in 1996, $41 million in 1995 and
$16.5 million in 1994. The Company does not believe it is dependent on any
single customer. The multimedia segment includes local telephone companies,
the investment in PCS entities and investments in two network-affiliated
television stations. The services segment includes transportation and related
services. $11.6 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 $24.3 million, $29.4
million and $27.5 million in revenues of the services segment for the years
ended December 31, 1996, 1995, and 1994, 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 $932,000, $965,000 and $790,000
during the years ended December 31 1996, 1995 and 1994, 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.
Lynch Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. Segment Information (continued)
Year ended December 31
1996 1995 1994
(In Thousands)
Revenues
Multimedia $ 28,608 $ 23,597 $ 20,144
Services 132,208 122,303 101,880
Manufacturing 291,064 187,727 61,217
$451,880 $333,627 $183,241
Operating profit
Multimedia $ 6,611 $ 4,938 $ 5,164
Services (3,263) 3,371 3,434
Manufacturing 15,928 14,412 3,822
Unallocated corporate expense (2,336) (2,874) (1,478)
$ 16,940 $ 19,847 $ 10,942
Capital expenditures
Multimedia $ 11,056 $ 14,051 $ 8,410
Services 1,007 2,135 1,434
Manufacturing 13,438 3,373 1,743
General corporate 17 10 11
$ 25,518 $ 19,569 $ 11,598
Depreciation and amortization
Multimedia $ 8,660 $ 7,350 $ 5,651
Services 1,498 1,264 915
Manufacturing 6,823 2,662 931
$ 16,981 $ 11,276 $ 7,497
Assets
Multimedia $168,354 $102,998 $ 92,151
Services 33,066 30,796 28,978
Manufacturing 186,299 162,819 62,260
General corporate 4,901 5,826 2,521
$392,620 $302,439 $185,910
PAGE
Lynch Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
15. Quarterly Results of Operations (unaudited)
The following is a summary of the quarterly results of operations for the
years ended December 31, 1996 and 1995 (in thousands, except per share
amounts):
1996-Three Months Ended
March 31 June 30 September 30 December 31
Sales and revenues $109,475 $113,493 $117,321 $111,591
Operating profit 5,938 5,383 6,714 (1,095)
Income from continuing
operations before dis-
continued operations and
extraordinary items 1,224 3,215 1,249 (894)
Discontinued operations (23) (720) - (7)
Extraordinary item - - - (1,348)
Net income 1,201 2,495 1,249 (2,249)
Primary earnings per share:
Net income .86 1.77 .89 (1.60)
Fully diluted earnings
per share:
Net income .86 1.77 .89 (1.60)
1995-Three Months Ended
March 31 June 30 September 30 December 31
Sales and revenues $68,686 $75,382 $80,600 $108,959
Operating profit 4,001 4,309 4,919 6,618
Income from continuing
operations before
discontinued operations 1,113 1,184 1,408 1,764
Discontinued operations 12 (28) (115) (193)
Net income 1,125 1,156 1,293 1,571
Primary earnings per share:
Net income .80 .82 .92 1.12
Fully diluted earnings per share:
Net income .80 .82 .92 1.12
EXHIBIT INDEX
Exhibit No. Description
(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) Purchase Agreement, dated October 18, 1996 (the "Purchase
Agreement") among Spinnaker Industries, Inc., a Delaware
corporation ("Spinnaker"), Brown-Bridge Industries, Inc., a
Delaware corporation ("Brown-Bridge), Central Products Company, a
Delaware corporation ("Central Products"), and Entoleter, Inc.,
("Entoleter") and together with Brown-Bridge and Central
Products, the "Guarantors") and BT Securities Corporation (the
"Initial Purchaser") (incorporated by reference to Exhibit 4.1 to
Registrant's Form 8-K, dated October 23, 1996).
(c) Indenture dated, October 23, 1996, among Spinnaker, the
Guarantors and the Chase Manhattan Bank, as Trustee (incorporated
by reference to Exhibit 4.3 to Registrant's Form 8-K, dated April
19, 1996).
(d) Credit Agreement among Central Products, Brown-Bridge and
Entoleter, as Borrowers, Spinnaker, as Guarantor, each of the
financial institutions listed on Schedule 1 thereto, BT
Commercial Corporation, as Agent, Transamerican Business Credit
Corporation, as Collateral Agent, and Bankers Trust Company as
Issuing Bank (incorporated by reference to Exhibit 99.1 to
Registrant's Form 8-K dated April 19, 1996).
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's
Annual Report on Form 10-K for the year ended December 31, 1987).
*(b) Lynch Corporation 401(k) Savings Plan (incorporated by reference
to Exhibit 10(b) to Registrant's Report Form 10-K for the year
ended December 31, 1995).
(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) Shareholders 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) Acquisition Agreement between Brown-Bridge Acquisition
Corporation and Kimberly-Clark 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).
*(g) Management 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).
(h) 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).
(i) 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 June 12, 1994).
(j)(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.
(j)(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).
(k) 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).
*(l) Stock Purchase and Loan Program (incorporated by reference to
Exhibit 10(p) to Registrant's Form 10-K for the year ended
December 31, 1994).
(m) 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).
(n) Put Option Agreements, dated September 16, 1994, among Safety
Railway Service Corporation, Brown-Bridge Industries, Inc. 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).
*(o) Directors Stock Plan (incorporated by reference to Exhibit 10(s)
to Registrant's Form 10-K for the year ended December 31, 1995).
*(p) Phantom Stock Plan (incorporated by reference to Exhibit (t) to
Registrant's Form 10-K for the year ended December 31, 1995).
(q) 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).
(r) Stock Purchase Agreement, dated as of November 1, 1995, among
Brighton Communications Corporation, Lynch Telephone Corporation
VIII and certain other persons (excluding exhibits).
(s)(i) Loan Agreement, dated as of November 6, 1995, between Lynch
PCS Corporation A and Aer Force Communications L.P. (now
Fortunet Wireless, L.P.) (four similar loan agreements with
Fortunet Wireless, L.P. increase the total potential
commitment to $41.8 million).
(s)(ii) Amendment No. 1 to the Loan Agreement, dated as of November
6, 1995, referred to in 10(s)(i) (incorporated by reference
to Exhibit 10(a) to Registrant's Form 10-Q for quarter
ended March 31, 1996).
(t) Agreement and Plan of Merger (Brown-Bridge Minority Interest), by
and among Spinnaker, BB Merger Corp., Brown-Bridge Industries,
Inc. and the stockholders of Brown-Bridge Industries, Inc. on
Exhibit A thereto (incorporated by reference to Exhibit 99.2 to
Registrant's Form 8-K, dated April 19, 1996).
(u)(i) Loan Agreement, dated as of August 12, 1006, between
Gabelli Funds, Inc. and Registrant.
(u)(ii) Pledge and Security Interest Agreement, dated as of August
12, 1996, by and between Gabelli Funds, Inc. Registrant and
certain subsidiaries of Registrant.
(v) Letter Agreement, dated as of August 12, 1996, between Rivgam
Communicators, L.L.P. and Lynch PCS Corporation G.
(w) Loan Agreement, dated as of August 12, 19967, between Lynch PCS
Corporation F and Aer Force Communications B, L.P.
11 Computation of Per Share Earnings.
16 Letter Re: Change in Certifying Accountant (incorporated by
reference to Exhibit 16 to Registrant's Form 8-K, dated March 19,
1996).
16(a) Registrant's Form 8-K, dated March 19, 1996 (incorporated
by reference).
21 Subsidiaries of the Registrant.
23 Consents of Independent Auditors.
- Ernst & Young LLP
- Arthur Andersen LLP
- McGladrey & Pullen, LLP(2)
- Frederick & Warinner, LLC
- Johnson MacKowiak Moore & Myott, 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, 1996.
- Report of McGladrey & Pullen, LLP on the Consolidated
Financial Statements of Capital Communications
Corporation for the year ended December 31, 1996.
- Report of McGladrey & Pullen, LLP on the Consolidated
Financial Statements of Coronet Communications
Corporation for the year ended December 31, 1996.
- Report of Frederick & Warinner LLC on the Financial
Statements of CLR Video, LLC for the year ended
December 31, 1996.
- Report of Johnson MacKowiak Moore & Myott, LLP on the
Consolidated Financial Statements of Dunkirk & Fredonia
Telephone Company for the period November 26, 1996 to
December 31, 1996.
______________________
*Management contract or compensatory or arrangement.
The Exhibits listed above 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.