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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, 1995 Commission file number 1-106
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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
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LYNCH CORPORATION
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(Exact name of Registrant as specified in its charter)
Indiana 38-1799862
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State of other jurisdiction of (I.R.S Employer Identification No.)
incorporation or organization
8 Sound Shore Drive, Suite 290, Greenwich, CT 06830
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (203) 629-3333
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, No Par Value American Stock Exchange
Securities registered pursuant to section 12(g) of the Act: None
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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. / /
The aggregate market value of voting stock held by non-affiliates of
the Registrant (based upon the closing price of the Registrant's Common Stock
on the American Stock Exchange on March 15, 1996 of $66 per share) was
$68,254,000. (In determining this figure, the Registrant has assumed that all
of the Registrant's directors and officers are affiliates. This assumption
shall not be deemed conclusive for any other purpose.)
The number of outstanding shares of the Registrant's Common Stock was
1,390,464 as of March 15, 1996.
DOCUMENTS INCORPORATED BY REFERENCE:
Parts I, II, and IV: Certain portions of the Annual Report of Shareholders
for the year ended December 31, 1995.
Part III: Certain portions of the Proxy Statement for 1996
Annual Meeting of Shareholders to be held May 9, 1996.
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PART I
ITEM 1. BUSINESS
The Registrant, Lynch Corporation ("Lynch"), incorporated in 1928
under the laws of the State of Indiana, is a diversified holding company with
subsidiaries engaged in multimedia, services and manufacturing. Lynch's
executive offices are located at 8 Sound Shore Drive, Greenwich, Connecticut
06830. Its telephone number is 203-629-3333. The company's business
development strategy is to expand its existing operations through internal
growth and acquisitions. For the year ended December 31, 1995, multimedia
operations provided 7% of the Registrant's consolidated revenues; services
operations provided 36% of the Registrant's consolidated revenues; and
manufacturing operations provided 57% of the Registrant's consolidated
revenues. As used herein, the Registrant includes subsidiary corporations.
I. MULTIMEDIA
A. TELECOMMUNICATIONS
Operations. The Registrant conducts its telecommunications
operations through subsidiary corporations. The telecommunications segment is
expanding through the selective acquisition of local exchange telephone
companies serving rural areas and by offering additional services to existing
customers. Since 1989, Registrant has acquired seven telephone companies, five
of which have indirect minority ownership of 2% to 20%, whose operations range
in size from less than 500 to over 5,000 access lines. Total access lines are
now approximately 15,600, 76% of which are served by digital switches.
These subsidiaries' principal line of business is providing
telecommunications services. These services fall into four major categories:
local network, network access, long distance and other. Toll service to areas
outside franchised telephone service territory is furnished through switched
and special access connections with intrastate and interstate long distance
networks.
The Registrant owns minority interests in wireline cellular telephone
service covering several Rural Service Areas ("RSA's") in New Mexico and North
Dakota covering areas with a total population of 408,000, of which the
Registrant's proportionate interest is 49,000. Operating results have been
minimal to date.
Inter-Community Telephone Company's participation in the Defense Com-
mercial Telecommunications Network/Defense Switching Network (DCTN/DSN) was
terminated effective February 28, 1996.
The Company holds franchises, licenses and permits adequate for the
conduct of its business in the territories which it serves.
Future growth in telephone operations is expected to be derived from
the acquisition of additional telephone companies, from providing service to
new or presently unserved establishments, and from upgrading existing customers
to higher grades of service. The following table summarizes certain
information regarding the Company's telephone operations.
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YEAR ENDED DECEMBER 31,
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1995 1994 1993
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Telephone Operations
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Access lines* . . . . . . . . . . . . . . . . . 15,586 14,906 10,798
% Residential . . . . . . . . . . . . . . . . 78% 79% 78%
% Business (nonresidential) . . . . . . . . . 22% 21% 22%
Total revenues ($000's) . . . . . . . . . . . . 23,328 20,016 16,107
% Local service . . . . . . . . . . . . . . . 13% 12% 12%
% network access and long distance. . . . . . 70% 70% 70%
% Other . . . . . . . . . . . . . . . . . . . 17% 18% 18%
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* 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. Since January 1, 1989, Lynch has
acquired 7 telephone companies serving a total of 13,650 access lines at the
time of these acquisitions for an aggregate consideration totaling $81.7
million. Haviland Telephone Company, which serves 3,600 access lines and
represents the most recent of these acquisitions, was completed on September
26, 1994 for an aggregate consideration of approximately $13 million. In
January 1995, Inter-Community Telephone Company signed an agreement with US
West Communications, Inc. to acquire approximately 1,400 access lines in North
Dakota. In August 1995, J.B.N. Telephone signed an agreement with United
Telephone Company of Eastern Kansas to acquire approximately 354 access lines
in Kansas. Those agreements, which are subject to certain conditions including
regulatory approvals, are expected to close in the first half of 1996.
On November 4, 1995, subsidiaries of the Registrant entered into a
contract to acquire the stock of privately owned Dunkirk & Fredonia Telephone
Co. and its subsidiaries, Cassadaga Telephone Corporation and Comtel, Inc.
(collectively "DFT") for $22 million. DFT serves approximately 10,700 access
lines in western New York including the community of Fredonia where a campus of
the state university is located, the Village of Cassadaga and the Hamlet of
Stockton. DFT also owns and operates other telecommunications businesses
including long distance resale and sales and servicing of telecommunications
equipment. The closing under the contract is subject to certain conditions
including regulatory approvals.
The Registrant continually evaluates acquisition opportunities
targeting domestic rural telephone companies with a dominant market position,
good growth potential and predictable cash flow. In addition, Registrant seeks
companies with excellent local management already in place who will remain
active with their company. Telephone holding companies and others actively
compete for the acquisition of telephone companies and such acquisitions are
subject to the consent or approval of regulatory agencies in most states.
While management believes that it will be successful in making additional
acquisitions, there can be no assurance that the Registrant will be able to
negotiate additional acquisitions on terms acceptable to it or that regulatory
approvals, where required, will be received.
Regulatory Environment. Operating telephone companies are regulated
by state regulatory agencies with respect to intrastate telephone services and
the Federal Communications Commission ("FCC") with respect to its interstate
telephone service.
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The Registrant's telephone subsidiaries participate in the National
Exchange Carrier Association ("NECA") common line and traffic sensitive tariffs
and participate in the access revenue pools administered by NECA for interstate
services. Where applicable, the Company's subsidiaries also participate in
similar pooling arrangements approved by state regulatory authorities for
intra-state services. Such interstate and intrastate arrangements are intended
to compensate local exchange carriers ("LEC's"), such as the Registrant's
operating telephone companies, for the costs, including a fair rate of return,
of facilities furnished in originating and terminating interstate and
intrastate long distance services.
In addition to access pool participation, certain of the Registrant's
subsidiaries are compensated for their intrastate costs through billing and
keeping access charge revenues (without participating in an access pool). The
access charge revenues are developed based on intrastate access rates filed
with the state regulatory agency. One of the Registrant's subsidiaries also
receives intrastate compensation from billing and keeping intrastate toll
(without participating in a toll pool).
Various aspects of federal and state telephone regulation have in
recent years been subject to re-examination and on-going modification. For
example, the FCC is currently reviewing the structure of the Universal Service
Fund mechanism as to whether it is effectively meeting its stated objectives
and has proposed for comment various modifications thereto. In February 1996,
Congress passed major telecommunications legislation (see below) intended,
among other things, to introduce more competition in local telephone service by
permitting long distance and cable television companies to provide local
telephone service. In certain states, regulators have ordered the
restructuring of local service areas to eliminate nearby long distance calls
and substitute extended calling areas. In addition, a 1989 FCC decision
provided for price cap regulation for certain interstate services. The price
cap approach differs from traditional rate-of-return regulation by focusing
primarily on the prices of communications services. The intention of price cap
regulation is to focus on productivity and the approved plan for telephone
operating companies. This allows for the sharing with its customers of profits
achieved by increasing productivity. Alternatives to rate-of-return regulation
have also been adopted or proposed in some states as well. Inter-Community
Telephone Company is an example of one such subsidiary which has elected a
price cap limitation on local exchange access charges. However, management
does not believe that this agreement will have a material effect on the
Registrant's results.
In February 1996, the Telecommunications Act of 1996, which is the
most substantial revision of communication law since the 1930's, became law.
The Act is intended generally to allow telephone, cable, broadcast and other
telecommunications providers to compete in each other's businesses, while
loosening regulation of those businesses. Among other things, the Act (i)
would allow major long distance telephone companies and cable television
companies to provide local exchange telephone service; (ii) would allow new
local telephone service providers to connect into existing local telephone
exchange networks and purchase services at wholesale rates for resale; (iii)
reaffirms a general commitment to universal service for high-cost, rural areas
and authorizes state regulatory commissions to consider their status on certain
competition issues; (iv) would allow the Regional Bell Operating Companies to
offer long distance telephone service and enter the alarm services and
electronic publishing businesses; (v) would remove rate regulation over
non-basic cable service in three years; and (vi) would increase the number of
television stations that can be owned by one party. The FCC will be
promulgating new regulations covering these and related matters. Registrant
cannot predict the effect of the new Act, but because its telecommunications
and multimedia properties (other than its television stations interests) are
primarily in high-cost, rural areas, Registrant expects competitive changes to
be slower in coming.
Competition. All of the Registrant's current telephone companies are
currently monopoly providers in their respective area of local telephone
exchange
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service and are protected from landline, facilities-based competition.
However, as a result of FCC and state agency regulatory and judicial decisions,
competition has been introduced into certain areas of the toll network wherein
certain providers are attempting to bypass local exchange facilities to connect
directly with high-volume toll customers. For example, in June 1994 the
Wisconsin Legislature passed a telecommunications bill intended to introduce
more competition among providers of local services and reduce regulation. A
substantial impact is yet to be seen on Registrant's telephone companies. The
Registrant's subsidiaries do not expect bypass to pose a significant
competitive threat due to a limited number of high-volume customers they serve.
Regulatory authorities in certain states have taken steps to promote
competition in local telephone exchange service, including in New York
requiring certain companies to offer wholesale rates to resellers, and Congress
in February 1996, passed legislation designed to introduce competition (see
above). In addition, cellular radio or similar radio-based services could
provide an alternative local telephone exchange service at some point in the
future.
B. Entertainment
STATION WHBF-TV -- Lynch Entertainment Corporation ("Lynch Entertainment I"), a
wholly-owned subsidiary of Registrant, and Lombardo Communications, Inc.,
wholly-owned by Philip J. Lombardo, are the general partners of Coronet
Communications Company ("Coronet"). Lynch Entertainment I has a 20% interest
in Coronet and Lombardo Communications, Inc. has an 80% interest. Coronet owns
a CBS-affiliated television station WHBF-TV serving Rock Island and Moline,
Illinois and Davenport and Bettendorf, Iowa.
STATION WOI-TV -- On March 1, 1994, Capital Communications Corporation
("Capital"), a corporation which is 49%-owned by Lynch Entertainment
Corporation II, acquired the assets of WOI-TV for $12.7 million. WOI-TV is an
ABC affiliate and serves the Des Moines, Iowa market. Lombardo Communications,
Inc. II, controlled by Philip J. Lombardo, has the remaining 51% interest in
Capital.
Operations. Revenues of a local television station depend to some
extent upon its relationship with an affiliated network. In general, the
affiliation contracts of WHBF-TV and WOI-TV with CBS and ABC, respectively,
provide that the network will offer to the affiliated station the programs it
generates, and the affiliated station will transmit a number of hours of
network programming each month. The programs transmitted by the affiliated
station generally include advertising originated by the network, for which the
network is compensated by its advertisers.
The affiliation contract provides that the network will pay to the
affiliated station an amount which is determined by negotiation, based upon the
market size and rating of the affiliated station. Typically, the affiliated
station also makes available a certain number of hours each month for network
transmission without compensation to the local station, and the network makes
available to the affiliated station certain programs which will be broadcast
without advertising, usually public information programs. Some network
programs also include "slots" of time in which the local station is permitted
to sell spot advertising for its own account. The affiliate is permitted to
sell advertising spots preceding, following, and sometimes during network
programs.
A network affiliation is important to a local station because network
programs, in general, have higher viewer ratings than non-network programs and
help to establish a solid audience base and acceptance within the market for
the local station. Because network programming often enhances a station's
rating, a network-affiliated station is often able to charge higher prices for
its own advertising time.
In addition to revenues derived from broadcasting network programs,
local television stations derive revenues from the sale of advertising time for
spot
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advertisements, which vary from 10 seconds to 120 seconds in length, and from
the sale of program sponsorship to national and local advertisers. Advertising
contracts are generally short in duration and may be canceled upon two-weeks
notice. WHBF-TV and WOI-TV are represented by a national firm for the sale of
spot advertising to national customers, but have local sales personnel covering
the service area in which each is located. National representatives are
compensated by a commission based on net advertising revenues from national
customers.
Competition. WHBF-TV and WOI-TV compete for revenues with local
television and radio stations, cable television, and other advertising media,
such as newspapers, magazines, billboards and direct mail. Generally,
television stations such as WHBF-TV and WOI-TV do not compete with stations in
other markets.
Other sources of competition include community antenna television
("CATV") systems, which carry television broadcast signals by wire or cable to
subscribers who pay a fee for this service. CATV systems retransmit
programming originated by broadcasters, as well as providing additional
programming that is not originated on, or transmitted from, conventional
broadcasting stations. In addition, some alternative media operators, such as
multipoint distribution service owners provide, for a fee and on a subscription
basis, programming that is not a part of regular television service.
Additional program services are provided by low-power television stations and
direct broadcast satellites provide video services as well.
Federal Regulation. Television broadcasting is subject to the
jurisdiction of the FCC under the Communications Act of 1934, as amended
("Communications Act"). The Communications Act, and/or the FCC's rules, among
other things, (i) prohibit the assignment of a broadcast license or the
transfer of control of a corporation holding a license without the prior
approval of the FCC; (ii) prohibit the common ownership of a television station
and an AM or FM radio station or daily newspaper in the same market, although
AM-FM station combinations by itself are permitted; (iii) prohibit ownership of
a CATV system and television station in the same market; (iv) restrict the
total number of broadcast licenses which can be held by a single entity or
individual or entity with attributable interests in the stations and prohibits
such individuals and entities from operating or having attributable interests
in most types of stations in the same service area (loosened by the recently
passed Federal telecommunications bill); and (v) prohibit a corporation from
holding an FCC license if any of its officers or directors are aliens or if
more than one-fifth of its capital stock is owned of record or voted by aliens
or their representatives or by a foreign government or representative thereof,
or by any corporation organized under the laws of a foreign country. See
Regulatory Environment under A. above for a description of certain provisions
of the Telecommunications Act of 1996. In calculating media ownership
interests, Registrant's interests may be aggregated under certain circumstances
with certain other interests of Mr. Mario J. Gabelli, Chairman and Chief
Executive Officer of the Registrant, and certain of his affiliates.
Television licenses are issued for terms of five years and are
renewable for terms of five years. The current licenses for WHBF-TV and WOI-TV
expire on December 1, 1997 and February 1, 1998, respectively.
On December 1, 1995, Clear Video LLC, a 60% owned subsidiary of
Registrant acquired 23 cable television systems in northeast Kansas serving
approximately 4,500 subscribers for $5.2 million. Certain of the systems
cluster with local telephone exchanges owned by J.B.N. Telephone. Registrant
also owns a small cable system in Kansas.
Registrant also has the right to market direct broadcasting TV
services via satellite to approximately 10,000 households in New Mexico and
Wisconsin and had approximately 865 customers at December 31, 1995. Operating
results have not been material to date.
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C. Personal Communications Services ("PCS").
Subsidiaries of the Registrant are limited partners with a 49.9%
equity interest in five partnerships (the "Partnerships") which filed
applications on November 6, 1995, with the Federal Communications Commission
("FCC") to bid in the FCC's C-Block ("Entrepreneurs") Auction on Basic Trading
Area licenses for 30 MHZ of spectrum to be used for broadband wireless personal
communications services ("PCS") and made up-front cash deposits of
approximately $7.6 million with the FCC which qualifies the Partnership to bid
on up to 17 million POPs. The Auction began on December 11, 1995 and is
continuing. FCC Rules provide for an installment payment plan for winning
bidders in the Auction, pursuant to which winning bidders put up a down-payment
equal to 10% of the cost of the licenses won, with interest only payments for
six years and payment of principal and interest amortized over the remaining
four years. Registrant's subsidiaries entered into agreements to loan funds to
the Partnerships for up-front deposits, down payments and installments interest
payments on any licenses won, and certain other Partnership expenses. The
aggregate amount of such loans could be as high as $41.8 million, over
approximately seven years with respect to licenses won. The FCC has imposed
build out requirements that would require the licensee to provide adequate
service to at least one-third of the population in the licensed area within
five years and two-thirds within ten years. There can be no assurances that
the Partnerships will win any PCS licenses or that if they do such licenses can
be successfully developed.
II. SERVICES
A. THE MORGAN GROUP, INC.
The Morgan Group Inc. ("Morgan") is the Registrant's only service
subsidiary. On July 22, 1993, Morgan completed an initial public offering
("IPO") of 1,100,000 shares of its Class A common Stock, $.015 par value, at
$9.00 per share. As a result of this offering, Lynch's equity ownership in
Morgan was reduced from 90% to 47%, represented by its ownership of 1,200,000
shares of Class B common stock. In December 1995, Lynch acquired from Morgan
150,000 shares of Class A common stock (plus $1.3 million in cash plus accrued
dividends) in exchange for its 1,493,942 shares of Series A Preferred Stock of
Morgan. Lynch's equity ownership in Morgan is approximately 49.5%. Because
the Class B common stock is entitled to two votes per share, its voting
interest in Morgan is approximately 65% and, therefore, Lynch continues to
consolidate Morgan's results in its financial statements. Morgan Class A
common stock is listed on the American Stock Exchange under the symbol "MG."
Morgan is the leading provider of outsourcing transportation services
to the manufactured housing and recreational vehicle ("RV") and commercial truck
industries in the United States and has been operating since 1936. Morgan
provides outsourcing transportation services through a national network of
approximately 1,480 independent owner-operators and 1,475 drive-away drivers.
Morgan dispatches its drivers from 109 offices located in 38 states. Morgan's
largest customers include Cavalier Homes, Inc., Champion Enterprises, Inc.,
Fleetwood Enterprises, Inc., Ryder Systems, Schult Homes, Oakwood Homes
Corporation, Redman Homes, Skyline Corporation, Thor Industries, and Winnebago
Industries, Inc. Morgan's services also include transporting other products,
including commercial vehicles and office trailers. In May 1995, Morgan acquired
the assets of Transfer Drivers, Inc. ("TDI"), which focuses on relocating rental
equipment for companies such as Ryder Systems, Budget Rentals and Penske Truck
Leasing and also delivery of new equipment from manufacturers including
Utilimaster, Grumman Alson and Bluebird Bus. TDI, which has over 325 drivers,
had revenues of $5.3 million in 1995. As of December 31, 1995, Morgan's owned
transportation equipment included 18 tractors, 74 drop deck trailers, 20 car
carrier trailers, 33 tent camper trailers, and 133 lowboy and miscellaneous
trailers.
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Morgan also provides certain insurance and financing services to its
owner-operators. Morgan currently provides physical damage insurance and
certain other insurance protection to the owners of equipment under lease to
the Company through a captive insurance subsidiary. In addition, Morgan
provides financing and certain guarantees of equipment loans through its
finance subsidiary.
Industry Information. Morgan's business is substantially dependent
upon the manufactured housing and recreational vehicle industries. Both of
these industries are subject to broad production cycles. The manufactured
housing industry continued to experience growth during 1995, while the
recreational vehicle industry was down in 1995.
Growth Strategy. Morgan's strategy is to improve the efficiency of
its core transportation services and expand its overall service capacity,
possibly through acquisitions if suitable opportunities arise. Morgan also
plans to evaluate and may pursue opportunities to expand its services to
owner-operators, customers and dealers in areas related to its core business.
Morgan has been improving its operating efficiency by automating most
of its dispatching functions and expanding its transportation capacity by
purchasing additional transportation equipment. These improvements are
expected to place Morgan in a better position to meet its customers'
requirements.
Morgan is continuously reviewing and negotiating potential
acquisitions. There can be no assurance that any future acquisitions will be
effected or, if effected, that they can be successfully integrated with
Morgan's business.
Customers and Marketing. Morgan's ten largest customers accounted for
approximately 60% of its revenues in the previous three years.
Competition. All of Morgan's activities are highly competitive. In
addition to fleets operated by manufacturers, Morgan competes with several
large national interstate carriers and numerous small regional or local
interstate and intrastate carriers. Morgan's principal competitors in the
manufactured housing and RV marketplaces are privately owned. In the
commercial transport market, Morgan competes with large national interstate
carriers, many of whom have substantially greater resources than Morgan.
Morgan also competes for certain services with railroad carriers. No assurance
can be given that Morgan will be able to maintain its competitive position in
the future.
Competition among carriers is based on the rate charged for services,
quality of service, financial strength, insurance coverage and the geographic
scope of the carrier's authority and operational structure. The availability
of tractor equipment and the possession of appropriate registration approvals
permitting shipments between points required by the customer may also be
influential.
Selected Operating Information. The following tables set forth
certain operating information for each of the five years ended December 31,
1995.
Years Ended December 31
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
(Revenues in thousands)
MANUFACTURED HOUSING GROUP:
Shipments . . . . . . . 81,330 80,587 95,184 121,604 135,750
Revenues. . . . $ 30,586 $ 32,324 $ 39,930 $ 53,520 $ 63,353
DRIVER OUTSOURCING:
Shipments . . . . . . . 22,601 23,636 30,978 32,060 49,885
Revenues. . . . . . . . $ 6,701 $ 8,055 $ 13,416 $ 15,197 $19,842
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SPECIALIZED TRANSPORT:
Shipments . . . . . . . 30,953 39,706 38,618 41,934 44,406
Revenues . . . . . . . $ 17,883 $ 24,016 $ 25,835 $ 28,246 $ 29,494
OTHER SERVICE REVENUES $ 3,437 $ 2,722 $ 3,612 $ 4,917 $ 9,614
-------- -------- -------- -------- --------
Total operating
revenues . . . . . . . $ 58,607 $ 67,116 $ 82,793 $101,880 $122,303
======== ======== ======== ======== ========
INDUSTRY PARTICIPATION. The following tables set forth participation in the
two principal industries the company operates in where industry information is
available:
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
MANUFACTURED HOMES:
Industry production(1). . 250,376 309,457 374,126 451,646 505,819
Shipments 55,656 60,381 76,188 98,181 114,890
Shares of units shipped 22.2 19.5 20.4 21.7 22.7
RECREATIONAL VEHICLES:
Industry productions(2) 280,600 369,200 406,300 426,100 380,300
Units moved(3) 46,528 62,012 71,792 67,502 64,303
Shares of units shipped(3) 16.6 16.8 17.7 15.8 16.9
Risk Management, Safety and Insurance. The risk of substantial losses
arising from traffic accidents is inherent in any transportation business.
Morgan carries insurance to cover such losses up to $15 million per occurrence
with a deductible of up to $250,000 per occurrence for personal injury and
property damage. The frequency and severity of claims under the Company's
liability insurance affect the cost, and potentially the availability, of such
insurance. If Morgan is required to pay substantially greater insurance
premiums, or incurs substantial losses above $15 million or substantial losses
below its $250,000 deductible, its results of operations can be materially
adversely affected. There can be no assurance that Morgan can continue to
maintain its present insurance coverage on acceptable terms.
Interstate Indemnity Company ("Interstate"), a wholly-owned insurance
subsidiary of the Company, makes available physical damage insurance coverage
for the Company's owner-operators. Interstate also writes performance surety
bonds for Morgan Drive Away, Inc.
Regulation. Morgan's interstate operations are subject to regulation
by the Interstate Commerce Commission ("I.C.C.") or its successor and the
United States Department of Transportation ("D.O.T."). Effective August 26,
1994, essentially all motor common carriers were no longer required to file
individually determined rates, classifications, rules or practices with the
I.C.C. Effective January 1,1995, the economic regulation of certain intrastate
operations by various state agencies was preempted by federal law. The states
will continue to have jurisdiction primarily to insure that carriers providing
intrastate transportation services maintain required insurance coverage, comply
with all applicable safety regulations, and conform to regulations governing
size and weight of shipments on state highways. Most states have adopted
D.O.T. safety regulations and conform to regulations governing size and weight
of shipments on state highways, and actively enforce them in conjunction with
D.O.T. personnel.
- --------------------
(1) Based on reports of Manufactured Housing Institute
("MHI"). To calculate shares of homes shipped, Morgan assumes two
unit shipments for each multi-section home.
(2) Based on reports of Recreational Vehicle Industry Association
("RVIA"), excluding van campers, truck campers, pick-up truck
conversions, and sport utility vehicles conversion. RVIA began
reporting truck and sport utility vehicle conversions in their
industry shipment data in 1994.
(3) Shares of units shipped calculation includes travel trailers,
two types of motor homes, van conversion, and tent campers and
truck conversion in 1994 and 1995. Morgan's share of units
shipped are based on units moved compared to industry production
rather than shipments because certain RV shipments include more
than one unit per move.
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Carriers normally are required to obtain authority from the I.C.C. or
its successor as well as various state agencies. Morgan is approved to provide
transportation from, to, and between all points in the continental United
States.
Morgan provides contract and non-contract transportation services to
the shipping public pursuant to governing rates and charges maintained at its
corporate and various dispatching offices. A contract carrier provides
transportation services pursuant to a written contract designed to meet a
customer's specific shipping needs or by dedicating equipment exclusively to a
given customer for the movement of a series of shipments during a specified
period of time.
Federal regulations govern not only operating authority and
registration, but also such matters as the content of agreements with
owner-operators, required procedures for processing of cargo loss and damage
claims, and financial reporting. Morgan believes that it is in substantial
compliance with all material regulations applicable to its operations.
The D.O.T. regulates safety matters with respect to the interstate
operations of Morgan. Among other things, the D.O.T. regulates commercial
driver qualifications and licensing; sets minimum levels of carrier liability
insurance; requires carriers to enforce limitations on drivers' hours of
service; prescribes parts, accessories and maintenance procedures for safe
operation of freight vehicles; establishes noise emission and employee health
and safety standards for commercial motor vehicle operators; and utilizes
audits, roadside inspections and other enforcement procedures to monitor
compliance with all such regulations. Recently, the D.O.T. has established
regulations which mandate random, periodic, pre-employment, post-accident and
reasonable cause drug testing for commercial drivers. The D.O.T. has also
established similar regulations for alcohol testing. Morgan believes that it
is in substantial compliance with all material D.O.T. requirements applicable
to its operations.
From time to time, tax authorities have sought to assert that owner
operators in the trucking industry are employees, rather than independent
contractors. No such tax claim has been successfully made with respect to
Morgan. Under existing industry practice and interpretations of federal and
state tax laws, as well as Morgan's current method of operation, Morgan, based
on the advise of counsel, maintains that its owner operators are not employees.
Whether an owner operator is an independent contractor or employee is, however,
generally a fact-sensitive determination and the laws and their interpretations
can vary from state to state. There can be no assurance that tax authorities
will not successfully challenge this position, or that such tax laws or
interpretations thereof will not change. If the owner operators were
determined to be employees, such determination could materially increase
Morgan's employment tax and workers' compensation exposure.
Interstate, Morgan's insurance subsidiary, is a captive insurance
company incorporated under Vermont law. It is required to report annually to
the Vermont Department of Banking, Insurance & Securities and must submit to an
examination by this Department on a triennial basis. Vermont regulations
require Interstate to be audited annually and to have its loss reserves
certified by an approved actuary. Morgan believes Interstate is in substantial
compliance with Vermont insurance regulations.
III. MANUFACTURING
A. Spinnaker Industries, Inc. ("Spinnaker")
Spinnaker's common stock is traded in the over-the-counter market
under the symbol "SPNI" and is listed in the National Association of Securities
Dealers Automated Quotations System (NASDAQ). Registrant owns 2,259,063 shares
of Spinnaker common stock, 83.17% of the outstanding. In June 1994, Spinnaker
11
entered into an agreement with Boyle, Fleming, George & Co., Inc. ("BF"), for
BF to provide operating and strategic management to Spinnaker. In addition to
a management fee, BF received a warrant to purchase 678,945 shares of Spinnaker
common stock (20%) at a price of $2.67 per share (adjusted for the 3 for 2
stock splits in December 1994 and December 1995). BF may, on the occurance of
an equity offering by Spinnaker, also receive warrants to acquire additional
Spinnaker shares.
Spinnaker is a diversified manufacturing company with three
subsidiaries: Brown-Bridge Industries, Inc.("Brown-Bridge"), 80.1% owned,
acquired in September 1994, Central Products Company ("Central Products"),
wholly-owned, acquired in October 1995 and Entoleter, Inc. ("Entoleter"),
wholly-owned, which it has owned since Registrant acquired Spinnaker in 1987.
Brown-Bridge is in the adhesive-coated paper industry. Central Products
manufactures carton sealing tape. Entoleter manufactures size reduction,
recycling and pollution control equipment.
BROWN-BRIDGE INDUSTRIES, INC.
In September 1994, Brown-Bridge acquired the assets of Kimberly Clark
Corporation's Brown-Bridge operation and assumed certain liabilities at a cost
of approximately $36 million. Brown-Bridge develops, manufactures, and markets
adhesive coated paper that is converted by printers and industrial users into
products used for marking, identifying, promoting, labeling, and decorating
applications. End uses include consumer product labeling, electronic data
processing (EDP) identification, pharmaceutical and food marking, and postage
stamp paper.
Markets and Customers. Brown-Bridge competes in the $3.5 billion
adhesive coated paper and film market, where it offers a full line of adhesive
backed paper products that are pressure, heat and water sensitive. Although
this market is dominated principally by two suppliers (see "Competition"),
Brown-Bridge markets and sells its product nationally. Brown-Bridge
principally sells products to printers, converters and paper merchants.
Brown-Bridge generally markets its products through its own sales
representatives to regional and national printers, converters and merchants.
The majority of sales represent product sold and shipped from Brown-Bridge's
facilities in Troy, Ohio. However, Brown-Bridge also contracts with seven
regional processors throughout the United States, with whom Brown-Bridge stores
the product until sold. Generally, these processors perform both slitting and
distribution services for Brown-Bridge.
Brown-Bridge's business is not dependent upon a single customer and
the loss of any one customer would not have a material adverse effect on the
business of Brown-Bridge. However, the top 25 customers account for
approximately 50% of Brown-Bridge's total revenues.
Products: Pressure Sensitive. Pressure sensitive products, which are
activated by the application of pressure, are manufactured with a three element
construction consisting of face stock, adhesive coating, and silicone coated
release liner. The adhesive product is sold in roll or sheet form for further
conversion into products used primarily for marking, identification and
promotional labeling. Brown-Bridge sells its pressure sensitive product line
primarily to the graphic arts segment. Pressure sensitive products are sold
under the trade names Strip Tac and Strip Tac Plus. Pressure sensitive
products accounted for approximately $82,880,000 (61%) of Spinnaker's
consolidated net sales during 1995.
Rolls. Roll pressure sensitive products are generally sold to
label printers that produce products used primarily for informational
labels (shipping labels, price labels, warning labels, etc.), product
identification and postage stamps. A distinct product segment is EDP
end use. These computer-generated labels are usually produced as part
of forms set for mailing, shipping, inventory control labels or other
similar
12
applications. This product line includes a variety of face stocks,
several hot melt and emulsion adhesives (permanent, removable and
speciality), and in-house coated silicone release liner.
Sheets. Sheet pressure sensitive products are sold to
commercial sheet printers, who provide information labels and other
products, such as bumper stickers. This product line consists of a
variety of face stocks and several permanent, removable and speciality
emulsion process adhesive.
Heat Sensitive. Heat sensitive products, which are activated by the
application of heat, are manufactured by coating a face stock with either a hot
melt coating or an emulsion process adhesive. The heat sensitive product line
is sold primarily for labeling end uses. Adhesives are either instantaneous or
delayed action to allow label repositioning. Heat sensitive uses include
labels for pharmaceutical bottles, meat and cheese packages, supermarket
scales, cassettes and bakery packages. The adhesive coated product is sold in
roll or sheet form for further conversion. Brown-Bridge offers a full line of
hot melt, delayed action products and a limited line of emulsion and wax-based
instantaneous products. Heat sensitive products are sold under the trade name
Heat Seal.
Water Sensitive. Water sensitive products, which are activated by the
application of water, include a broad range of paper and cloth materials,
coated with a variety of adhesives. There are two distinct water sensitive
adhesives, known as conventional and dry gum, that are produced with different
coating processes. The adhesive coated products are sold in roll or sheet form
for further conversion to postage and promotional stamps, container labels,
inventory control labels, shipping labels and splicing, binding, and stripping
tapes. The water sensitive line is sold under the trade name Pancake and
consists of three product groups: dry process, conventional gummed, and
industrial.
Dry Process - Dry process is sold primarily for label and
business forms uses. Dry process is sold in sheet form primarily to
fine paper merchants for resale to commercial printers who, in turn,
resell printed labels for a variety of uses such as carton labels.
Dry process is also sold for use in roll form to manufactures of
imprinting machines or to the distributors of machine rolls.
Brown-Bridge offers dry process stock for both label and business
forms applications, including laser printer compatible products.
Conventional Gum - Conventional gum products serve many of the
same end uses for hand applied labels as dry process stock. A major
portion of these products is sold for governmental postage and
promotional stamp uses. These large volume pieces of business are
awarded on a bid basis. Brown-Bridge is one of the largest
manufacturers of postage stamp paper. Products are distributed either
through fine paper merchants or directly to printers. Brown-Bridge
products are available for both stamp and label applications.
Industrial - This product line consists of products sold in
several small industry niches: acid-free electrical grades, binding
and stripping tapes, cloth and splicing tapes, veneer tapes, and other
craft and speciality items.
Manufacturing: Facilities. Brown-Bridge owns two manufacturing
facilities in Troy, Ohio, where it mixes and coats paper stock with adhesives
to produce water sensitive, heat sensitive and pressure sensitive roll and
sheet products. In addition, in order to service roll pressure sensitive
regional markets, Brown-Bridge has contracts with seven regional
slitters/distributors in Los Angeles, Dallas, Atlanta, High Point (NC), Boston,
and Chicago. These locations typically consist of warehouse space and one or
more slitting machines owned by the regional slitter/distributor. Brown-Bridge
stores products in these regional locations, until sold or processed by such
slitter/distributors.
13
Raw Materials. Brown-Bridge uses a wide array of raw materials to
produce its products, including paper stock, silicone and adhesives. These
materials are procured from numerous suppliers in the United States and Canada
and, while temporary shortages may occur occasionally, these items are
currently readily available.
Manufacturing Improvements. Although the Company believes that
Brown-Bridge products have a good reputation for quality within the
marketplace, Brown-Bridge is continuing an intensive company-wide effort to
improve manufacturing and administrative efficiency and product quality.
Brown-Bridge management has specifically identified the reduction of scrap and
defective products, the improvement of product quality and cycle time, and the
reduction of working capital requirements as goals to be addressed in this
effort.
Competition, Pricing and Costs. The adhesive coated products industry
is highly competitive and Brown-Bridge competes with both national and regional
suppliers. A majority of the adhesive coated products market is held by two
market leaders, Avery Dennison and Bemis. Competition for many of
Brown-Bridges products is based primarily on quality, supplier response time
and price.
Industry leaders have historically set general product price levels
that influence prices established by mid-sized suppliers such as Brown-Bridge.
Brown-Bridge has experienced some flexibility in pricing its products,
consistent with general industry-wide price levels, while simultaneously
allowing it to maintain its product margins.
Raw materials are the most significant cost components for producers
of adhesive backed products: the three most important raw material costs being
face stock (paper substrate), adhesives and silicone.
Environmental. Brown-Bridge believes that it operates in compliance
with current applicable federal, state and local environmental regulations.
Air. Brown-Bridge operates air contaminant sources at both Troy
plants. These sources consist of coaters and boilers, all of which are
permitted or registered in compliance with Ohio law. Brown-Bridge continues to
monitor anticipated changes in federal and state environmental regulations and
intends to comply with such regulations following their approval. To date,
Brown-Bridge has complied with all preliminary requirements. The nature of
Brown-Bridge's coating operations necessitates the emission of a minimal number
of air pollutants that the Environmental Protection Agency has targeted for
nationwide reduction through voluntary and/or regulatory programs.
Brown-Bridge has voluntarily reduced its use of most of the chemicals and
continues to search for effective substitutes for the others.
Wastewater. Brown-Bridge generates sanitary and process wastewater at
both of its plants in Troy, Ohio. Both plants discharge sanitary and process
wastewater to the City of Troy's publicly owned treatment works and are in
compliance with the city's discharge requirements. Additionally, Plant 1
discharges non-contact cooling water and storm water directly to the Great
Miami River pursuant to a National Pollutant Discharge Elimination System
permit.
Solid and Hazardous Waste. Brown-Bridge generates hazardous waste and
nonhazardous solid waste at both plants. Both waste streams are transported by
licensed haulers and properly disposed of at facilities permitted to manage
said waste streams.
Superfund Involvement. Liability for Brown-Bridge's past off-site
disposal practices has been retained by Kimberly-Clark Corporation as provided
in the acquisition agreement, pursuant to which the Brown-Bridge unit was
acquired.
Employees. As of December 31, 1995, Brown-Bridge employed
approximately
14
371 persons. Brown-Bridge's employees are not covered by a collective
bargaining agreement.
CENTRAL PRODUCTS COMPANY
In October 1995, Central Products Company ("Central") acquired the
stock and assets of Alco Standard Corporation's Central Products operation for
approximately $80 million. Central is the second largest U.S. carton sealing
tape manufacturer. Central manufactures water activated tape (also known as
"gummed" tape) and pressure sensitive tape. Central offers three types of
gummed tape: paper tape, reinforced tape and box tape, and pressure sensitive
tape with all three primary adhesive technologies: acrylic, hot melt and
natural rubber. Central believes it is the only U.S. supplier to manufacture
both gummed tape and pressure sensitive tape, and the only company to produce
all three pressure sensitive adhesive technologies. Central also offers tape
dispensers and tape application equipment manufactured by unaffiliated
companies.
Markets and Customers. Carton sealing tape is used in a broad array
of industrial and consumer applications, including the packaging of goods for
shipment by manufacturing or distribution companies. Tape competes with other
methods for sealing cartons, such as staples, metal or plastic strapping, and
hot-melt glues and cold glues. Tape can provide significant advantages to
certain end users over other forms of closure in terms of cost, speed,
efficiency and security; however, certain industry segments lend themselves to
competing technologies.
Over the last several years, pressure sensitive tape has grown rapidly
at the expense of water activated tape and non-tape applications such as glue,
for carton sealing applications. This has occurred primarily due to advances
in performance, strength and versatility, and decreasing prices for pressure
sensitive products resulting from increased capacity in the industry. However,
pressure sensitive tape does not perform as effectively as water activated tape
in certain applications, such as recycled corrugated cartons which are
increasing due to environmental concerns. Environmental issues also have
benefited the water activated tape segment due to the perception that
paper-backed tape is more environmentally-friendly than film-backed tape.
Additionally, new and improved equipment for the dispensing and the application
of water activated tape is being developed which should make water activated
tape more competitive with pressure sensitive tape.
Central's sales strategy emphasizes supplying a full line of both
water activated and pressure sensitive tape products. It is the only company
in the industry that is capable of providing its customers with "one stop
shopping" for their carton sealing tape requirements. Central sells its
products primarily to paper distributors, who then resell the products to the
final customer. Central possesses a widely diversified customer base, with no
single customer accounting for more than 10% of the Company's total sales and
only 5% of total sales to the non-U.S. market.
Water Activated Tapes (Also known as Gummed Tapes). Water activated
tape is generally manufactured through the application of a thin layer of water
activated adhesive to gumming kraft paper. It is available in light, medium
and heavy grades of either non-reinforced tape with one layer of kraft, or
reinforced tape with two layers of kraft that sandwich glass fibers.
Paper Tape. Paper tape is utilized for less challenging
applications such as light loads, retail carry-out and unitized
pallets. Paper tape utilizes a consistent and dependable adhesive
applied to high tensile strength kraft paper.
Reinforced Tape. Reinforced tape is the strongest and most
widely
15
used water activated tape. It adds an extra measure of strength for
applications where durability and reliability are required, such as in
two strip carton sealing and non-unitized load.
Box Tape. Box tape is designed specifically for taping the
manufacturer's joint on corrugated cartons. It is similar in
construction to reinforced tape and is reliable, bonds quickly and is
recyclable.
Pressure Sensitive Tapes. Pressure sensitive tape is manufactured
primarily through the coating of plastic film with a thin layer of acrylic, hot
melt or natural rubber adhesive. Pressure sensitive carton sealing tape
generally varies from 1.75 to 3 inches in width and from 1.7 to 3.0 mils (one
mil = .001 inches) in thickness. The adhesive is applied to various grades of
high-quality, low-stretch polypropylene film for use in all applications as
well as PVC and polyester films which are used for certain applications.
Acrylic Adhesive Pressure Sensitive Tape. Acrylic technology
is the least complex of those used to manufacture pressure sensitive
adhesives and produces tapes with excellent clarity, non-yellowing
properties, good temperature resistance and low application cost.
Hot Melt Adhesive Pressure Sensitive Tape. Hot melt adhesive
technology produces tape with an aggressive bond that can seal more
cartons in less time, making it the most widely used pressure
sensitive tape.
Natural Rubber Adhesive Pressure Sensitive Tape. Due to its
very strong bonding properties, natural rubber is better suited than
other pressure sensitive tapes for more challenging carton sealing
applications such as over-filled cartons, cartons exposed to varying
temperatures and dusty cartons. Natural rubber tape possesses a firm
unwind characteristic which makes it excellent for manual
applications. Central is the only manufacturer of natural rubber
adhesive tape in the U.S.
Equipment/Specialty and Converter Products. Central supplies tape
dispensing equipment manufactured by other companies. It currently offers two
types of table top dispensers for water activated tape--a manual dispenser and
a more expensive electric dispenser. Central also offers a broad line of
carton sealing equipment for pressures sensitive tape which ranges from hand
held dispensers to automated random sizing equipment.
To supplement its product offerings, Central also offers specialty
tapes for other applications including kraftback pressure sensitive tape,
filament tape, masking tape, duct tape and strapping tape, manufactured by
other companies. The converter group also develops new non-tape products
including an overlaminating film used as a protective barrier over paper
labels.
Central offers printed tapes in both its water activated tape and
pressure sensitive tape lines. Customers see printed tape as a means of
inexpensive advertising.
Manufacturing Facilities. Central currently manufactures tape
products at two locations. Water activated tape is manufactured in Menasha,
Wisconsin and pressure sensitive tape is manufactured in Brighton, Colorado.
Central also maintains three distribution centers across the U.S. to ensure
fast and reliable service to its customers.
Competition. The Company competes with other manufacturers of carton
sealing tape products as well as manufacturers of alternative carton closure
products. Competition in the carton sealing market is based primarily on price
16
and quality, although other factors may enhance a company's competitive
position, including product performance characteristics, technical support,
product literature and customer support. There are a wide range of
participants in the carton sealing industry, including large diversified
corporations (principally in pressure sensitive tape) and small private
companies (principally in water activated tape). 3M Company is the largest
manufacturer of carton sealing tape in the United States.
Raw Materials. Raw materials are the most significant cost component
of carton sealing tape products. The material component accounts for 65% to
70% of the total cost, with the most important raw materials being paper
(gumming kraft), polypropylene resin, amorphous polypropylene laminate,
fiberglass, and adhesive materials. While prices of these materials vary,
Central has not experienced any difficulties in obtaining the materials because
they are available from multiple sources.
Environmental. Central Products believes that both its Menasha, WI
and Brighton, CO manufacturing facilities operate in compliance with current
applicable federal, state, and local environmental laws, regulations and
ordinances.
Water Activated Tape. The Menasha production operation has a
series of coaters and laminators for applying either water-based or
hot melt coatings. Further, there exist steam boilers, boilers for
heating fluid and several water-based printing presses. All of the
above sources are exempt from obtaining air emission point source
permits.
Wastewater discharged from the Menasha facility is a
combination of wash-down water from operations, non-contact cooling
water and domestic wastewater. Except for a portion of the sanitary
water, all wastewater is discharged to the Neenah-Menasha Sewerage
Commission with no pretreatment necessary.
The water activated tape plant is currently classified as a
small quantity generator of hazardous waste, though during 1996 this
site will likely be reclassified as a conditionally-exempt small
quantity generator. Waste streams are transported by licensed haulers
and disposed of at facilities permitted to manage said waste streams.
Pressure Sensitive Tape. The Brighton production operation is
covered under a Bubble Construction Permit covering the entire
facility. The permit covers all storage/mix tanks, several coating
lines, the film extrusion process, natural gas fired boilers, and
fugitive emissions. During the past five years, Central has
voluntarily reduced solvent emissions by more than 70%. Due to this
significant reduction in hazardous air pollutants, the operation has
evolved from a major source to a synthetic minor.
Wastewater in Brighton is generated from the film production
process, several cooling towers and other plant processes. The
wastewater is discharged to the City of Brighton publicly-owned
treatment works and no current compliance issues have been identified.
The pressure sensitive tape plant is currently classified as a
large quantity hazardous waste generator. The various waste streams
are transported by licensed haulers and disposed of at facilities
permitted to manage said waste streams. A significant portion of the
solid waste from the operation is sold as by-products and are
reclaimed offsite by other manufacturers.
Liability for Central's past off-site disposal practices and
involvement with any Superfund sites has been retained by Alco
Standard as
17
provided in the acquisition agreement, pursuant to which Central was
acquired.
Employees. Central employed approximately 680 employees at December
31, 1995. The Company has a labor agreement at the Menasha Plant with the
United Paperworkers International Union AFL-CIO, which expires in 1998. The
Brighton plant is non-union. Central believes it has good relations with its
employees.
ENTOLETER, INC.
Entoleter engineers, manufactures and markets a vertically integrated
line of size reduction equipment complemented by a line of pollution control
equipment. Entoleter's products primarily consist of: (a) Centrimil Milling
Equipment for particle size reduction; (b) Central granulators for the plastics
molding industry and precision cutters for the film and non-woven industry; and
(c) Centrifield Scrubbers for the removal of impurities from air, gases and
liquids and for heat recovery, gas absorption, and other mass transfer
functions. The Centrimil product line offers centrifugal impact mills that
utilize a wide range of free flowing materials. Entoleter's line of
granulators is now complemented by a new rotary knife cutter. The Centrifield
Vortex Scrubber is an air pollution control device that removes particulate and
acid gases from exhaust streams.
Competition and Marketing. Entoleter operates in highly competitive
worldwide markets. Entoleter has many competitors in these markets, most of
which are larger and have greater financial resources than Entoleter.
Competitive factors include price and quality of products. Entoleter markets
its products directly to users primarily through outside sales representatives.
Employees. As of December 31, 1995, Entoleter had approximately 40
full-time employees. Hourly-paid production employees are represented by the
United Electrical, Radio and Machine Workers of America Union. The current
collective bargaining agreement expires on April 30, 1996.
B. Lynch Machinery, Inc. ("LM")
LM, a 90% owned subsidiary of Registrant, is a manufacturer of
glass-forming machines and packaging machinery. LM also produces replacement
parts for various types of glass forming and glass container-making machines,
some of which LM does not manufacture, and for machines which package butter,
margarine and bacon.
Glass Forming Machinery. There are two different areas for
glass-forming machinery: container manufacturing for which LM only supplies
spare parts, and pressware manufacturing for which it produces machinery and
spare parts. Container-manufacturing machinery, which represents the larger
area, consists of machines for the production of "narrow-neck" containers such
as soda, beer, and ketchup bottles, and "wide-mouth" jars. Pressware machinery
is designed for the production of household items such as glass tumblers,
plates, cups, saucers, television and computer screens, and similar items.
The production of glass pressware entails the use of machines which
heat glass and, using great pressure, form an item by pressing it into a
desired shape. Because of the high cost of bringing the machine and materials
up to temperature, a machine for producing glass pressware must be capable of
running 24 hours a day, 365 days a year. While certain pressware machines,
such as those used for the manufacture of glass tumblers, produce an
inexpensive and relatively unrefined product, others, such as those for the
manufacture of television face plates, produce a high quality product which
meets rigid specifications. LM glass-forming press machines vary as to size of
the item produced, productive
18
capacity per hour, and number and shape of glass-forming molds.
Pressware machines range in price from $200,000 to $3,500,000,
including spare parts. Because of the durability of pressware machinery,
demand for replacement machinery is low. Recent orders have been originating
primarily in countries developing new or additional glassware manufacturing
capacity. Since January 1, 1994, LM received orders for 16 extra-large glass
pressing machines for the production of very large television picture tubes,
including orders for 6 machines in 1995. These machines can be converted to
produce picture tubes for high definition television ("HDTV"), which is
currently being developed by television manufacturers.
During 1995, LM delivered 15 glass press machines. At December 31,
1995, LM had orders for, and had in various stages of production, 7 glass press
machines, at a total sales price of approximately $15,280,000, which are
scheduled for delivery in 1996. There can be no assurance that LM can obtain
orders for additional large glass pressing orders to replace its existing
orders.
LM believes that it is the largest supplier to glass companies that do
not manufacture their own pressware machines in the worldwide pressware market.
Competitors include various companies in Italy, Japan, France, Germany and
elsewhere.
While several of the largest domestic and foreign producers of glass
pressware frequently build their own glass-forming machines and produce spare
parts in-house, nearly all pressware producers have made purchases of machines
and/or spare parts from LM.
Packaging Machinery. Effective in January 1996, LM discontinued the
manufacturing of automated case packers and related equipment; however, it will
continue to sell parts for existing machines.
Lynch Tri-Can International. In December 1993, LM purchased
substantially all of the assets of Tri-Can Systems, Inc. of Alsip, Illinois, a
company that had ceased operations. LM established a new company, Lynch
Tri-Can International, to produce most of the products formerly supplied by
Tri-Can Systems Inc. These products are packaging machines of types that are
complementary to LM's existing packaging machinery product lines. At December,
31, 1995, Tri-Can had orders for, and had in various stages of production,
several packaging machines with a total sales price of approximately
$1,426,000.
Parts for packaging machinery vary from approximately 20% - 35% of the
sales associated with the packaging machinery operations.
There are many other United States equipment manufacturers of various
sizes that compete with Tri-Can in these product lines.
Foreign Sales. During 1995, approximately 80% of LM's sales were made
to foreign customers, and 15 of its 16 large glass pressing machine orders were
from foreign customers in East Asia. The profitability of foreign sales is
equivalent to that of domestic sales. Because many foreign orders require
partial advance deposits, with the balance often secured by irrevocable letters
of credit from banks in the foreign country, the Registrant believes that some
of the credit risks commonly associated with doing business in foreign
countries are minimized. The Registrant avoids currency exchange risk by
transacting all foreign sales in United States dollars.
Backlog. LM had an order backlog of approximately $16,633,000 at
December 31, 1995, compared with approximately $28,900,000 at December 31,
1994. The decrease in backlog is attributable to the smaller number of orders
for large presses booked in 1995. LM believes that all of the December 31,
1995 backlog will be shipped during 1996. LM includes as backlog those orders
which are subject to written contract, written purchase orders and telephone
orders from long standing customers who maintain satisfactory credit ratings.
LM has
19
historically experienced only insignificant cancellations of the orders
included in its backlog.
Raw Materials. Raw materials are generally available to LM in
adequate supply from a number of suppliers.
C. M-tron Industries, Inc. ("M-tron")
M-tron, 94% owned subsidiary of the Registrant, is a manufacturer and
importer of quartz crystal products and clock oscillator modules used for
clocking digital circuits, precision time base references and
telecommunications equipment. A quartz crystal is an oscillating component
which performs the clocking function in a circuit. Crystals and clock
oscillator modules are used primarily in microprocessor-related equipment and
telecommunications equipment. Frequency and time related products essentially
use crystals or clock oscillators, with the addition of electronic circuitry
vertically integrating the product. Crystal and clock oscillators are sold to
original equipment manufacturers, both directly and through commissioned
representatives and distributors.
For 1995, 1994, and 1993 M-tron's sales consisted of (in thousands):
1995 1994 1993
------ ------ ------
Crystals............................ $13,775 $ 7,179 $7,443
Oscillator Modules.................. 6,343 4,768 5,834
------- -------- -------
Total $20,118 $11,947 $13,277
======= ======= =======
Competition. Quartz crystals and clock oscillators are sold in a
highly competitive industry. There are numerous domestic and foreign
manufacturers who are capable of providing quartz crystals and clock
oscillators comparable in quality and performance to M-tron's products.
Foreign competitors, particularly from the Far East, continue to dominate the
United States market. M-tron seeks to manufacture smaller specialty orders of
crystals and oscillators, which it believes it can competitively fill based
upon price, quality and order response time. M-tron also performs quality
control tests on all products it imports from the Far East and resells
domestically and internationally.
Foreign Sales. M-tron's foreign sales in 1995 were approximately 10%
of total sales and were concentrated in Canada and Western Europe. The
profitability of foreign sales is substantially equivalent to that of domestic
sales. Because sales are ordinarily spread over a number of customers in a
number of developed countries with no individually significant shipments, the
Registrant believes that risks commonly associated with doing business in
foreign countries are minimized.
Backlog. M-tron had backlog orders of approximately $7,292,000 at
December 31, 1995, compared with $3,596,000 at December 31, 1994. M-tron
includes as backlog those orders which are subject to specific production
release orders under written contracts, verbal and written orders from
distributors with which M-tron has had long-standing relationships, as well as
written purchase orders from sales representatives. M-tron believes that all
of the backlog at December 31, 1995 will be shipped during 1996.
Raw Material. To the extent possible, M-tron's raw materials are
purchased from multiple sources. Of primary significance are quartz crystal
bars and the bases used for mounting certain finished crystals. M-tron
currently has at least two qualified vendors for each of these items. No
shortages have occurred in the recent past nor are any anticipated in the near
future.
20
IV. OTHER INFORMATION
While the Registrant holds licenses and patents of various types,
Registrant does not believe they are critical to its overall operations, except
for (1) the television-broadcasting license of WHBF-TV and WOI-TV; (2)
Western's, Inter-Community's, Cuba City's, Belmont's, Bretton Woods', JBN's and
Haviland's exclusive franchise certificates to provide local-exchange telephone
service within its service areas; (3) Western's FCC licenses to operate
point-to-point microwave systems; and (4) partnerships and corporations in
which Western and Inter-Community own minority interests in the entities that
hold licenses to operate wireline cellular radio systems covering areas in New
Mexico and North Dakota and (5) CLR Video's non-exclusive franchises to
provide cable television service within its service area.
The Registrant conducts product development activities with respect to
each of its major lines of manufacturing business. Currently, such activities
are directed principally toward the improvement of existing products, the
development of new products and/or diversification. The cost of such
activities, which have been funded entirely by the Registrant, amounted to
approximately $1,673,000 in 1995, $1,231,000 in 1994, and $622,000 in 1993.
The capital expenditures, earnings and competitive position of
Registrant have not been materially affected by compliance with current
federal, state, and local laws and regulations relating to the protection of
the environment; however, Registrant cannot predict the effect of future laws
and regulations. The Registrant has not experienced difficulties relative to
fuel or energy shortages but substantial increases in fuel costs or fuel
shortages could adversely affect the operations of Morgan.
No portion of the business of the Registrant is regarded as seasonal,
except that, in the case of Morgan, fewer shipments are scheduled during the
winter months in those parts of the country where weather conditions limit
highway use.
There were no customers in 1995 that represents 10% or more of
consolidated revenues. In 1994, one of the Morgan Drive Away, Inc. customers,
Fleetwood Enterprises, Inc., constituted 13% of consolidated revenues of the
Registrant. The Registrant does not believe that it is dependent on any single
customer.
Excluding the following for The Morgan Group, Inc.: approximately
1,480 independent owner-operators and 1,475 drive-away drivers, the Registrant
had a total of 1,986 employees at December 31, 1995 and 1,173 employees at
December 31, 1994.
Additional information with respect to each of the Registrant's lines
of business is included in Note 11 to the Consolidated Financial Statements
included in the Registrant's 1995 Annual Report to Shareholders and is
incorporated herein by reference.
V. EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction G (3) of Form 10-K, the following list
of executive officers of the Registrant is included in Part 1 of this Annual
Report on Form 10-K in lieu of being included in the Proxy Statement for the
Annual Meeting of Shareholders to be held on May 9, 1996. Such list sets forth
the names and ages of all executive officers of Registrant indicating all
positions and offices with the Registrant held by each such person and each
such person's principal occupations or employment during the past five years.
Offices and
Name Positions Held Age
---- -------------- ---
21
Mario J. Gabelli Chairman and Chief Executive Officer 53
(since May 1986); Chairman and
Chief Executive Officer (since March,
1980) of Gabelli Funds Inc. (successor
to The Gabelli Group, Inc.),
holding company for subsidiaries
engaged in various aspects of the
securities business
Robert E. Dolan Chief Financial Officer (since February 44
1992) and Controller (since May 1990);
Corporate Controller (1984-1989)
of Plessey North America Corporation,
formerly the United States subsidiary
of a United Kingdom defense electronics/
telecommunications company.
Robert A. Hurwich Vice President-Administration, Secretary 54
& General Counsel (since February 10,
1994); Private Law Practice (1991-1993);
Vice President, Secretary & General
Counsel of Moore McCormack
Resources, Inc. (1975-1989)
Joseph H. Epel Treasurer (since May 1990) and 50
Assistant Treasurer (January to May
1990); Assistant Treasurer (1986-1989)
of SSMC, Inc., manufacturer and
distributor of Singer sewing machines
and other consumer products; Director,
Financial Planning and Analysis
(1983-1986) of the Singer Company
The executive officers of the Registrant are elected annually by the
Board of Directors at its organizational meeting in May and hold office until
the organizational meeting in the next subsequent year and until their
respective successors are chosen and qualified.
ITEM 2. PROPERTIES
Lynch leases space containing approximately 3,400 square feet for its
executive offices in Greenwich, Connecticut.
LM's operations are housed in two adjacent buildings containing
approximately 89,000 square feet situated on 3.19 acres of land in Bainbridge,
Georgia. LM is in the process of expanding its manufacturing capacity at this
site. Finished office area in the two buildings totals approximately 17,000
square feet. All such properties are subject to security deeds relating to a
loans. Title is held by two mortgagees and upon repayment in full of the
loans, title will revert to LM.
Lynch Tri-Can International operates in a leased facility in Alsip,
Illinois; the facility consists of 20,000 square feet of production area and
approximately 3,000 square feet of finished office space.
M-tron's operations are housed in two separate facilities in Yankton,
South Dakota. These facilities contain approximately 34,000 square feet in the
aggregate. One facility owned by M-tron contains approximately 18,000 square
feet and is situated on 5.34 acres of land. This land and building are subject
to a mortgage executed in support of a bank loan. The other Yankton facility
22
containing approximately 16,000 square feet is leased, which lease expires on
September 30, 1997.
Spinnaker's corporate headquarters is located in Dallas, Texas, where
it shares office space with an affiliate of its principal executive officers.
In addition, Spinnaker owns approximately 27 acres of unimproved land located
in Atlanta, Georgia.
Brown-Bridge owns two manufacturing facilities, Plant One and Plant
Two, in Troy, Ohio. Plant One is a 200,000 square foot complex located on
approximately five acres of land adjacent to the Miami River and Plant Two is a
98,000 square foot facility located on approximately five aces of land nearby.
There are approximately five undeveloped acres of land adjacent to Plant Two
that are available for expansion. Both facilities house manufacturing,
administrative and shipping operations. All of Brown-Bridge's properties are
subject to liens that secure indebtedness owed to its lenders.
Central Products owns two manufacturing facilities, one in Menasha,
Wisconsin and the other in Brighton, Colorado. The Menasha facility contains
approximately 160,000 square feet and the Brighton facility contains
approximately 210,000 square feet. The corporate office and center for
administrative services are located in a 20,000 square foot facility adjacent
to the Menasha plant. All of Central Products' properties are subject to liens
that secure indebtedness owned to its lenders. Central Products also maintain
three leased distribution centers in Neenah, WI (90,000 square feet), Linden,
NJ (30,000 square feet) and Denver, CO (100,000 square feet).
Entoleter owns a manufacturing plant containing 72,000 square feet
located on approximately 5 acres of land in Hamden, Connecticut. The land and
building are subject to a mortgage and security agreement executed in support
of a bank loan. Entoleter also owns approximately 6 unimproved acres located
in Hamden, Connecticut adjacent to its property.
Morgan owns approximately 24 acres of land with improvements in
Elkhart, Indiana. The improvements include a 23,000 square foot office
building used as Morgan's principal office, a 7,000 square foot leased
building containing additional offices leased to one of its customers, a 9,000
square foot building used for Morgan's safety and driver service departments
and also for storage and an 8,000 square foot building used as a garage to
service company-owned vehicles. Most of Morgan's 11 regional and 109 dispatch
offices are situated on leased property. Morgan also owns and leases property
for parking and storage of equipment at various locations throughout the United
States, usually in proximity to manufacturers of products moved by Morgan. The
property leases have lease term commitments of a minimum of thirty days and a
maximum of three years, at monthly rental ranging from $100 to $8,600. The
Elkhart facility is currently mortgaged to one of Morgan's lenders. In total,
Morgan owns 73 acres of land throughout the United States, including the
Elkhart facilities.
Western New Mexico Telephone Company owns a total of 16.4 acres at
twelve sites located in southwestern New Mexico. Its principal operating
facilities are located in Silver City, where Western owns a building comprising
a total of 6,480 square feet housing its administrative offices and certain
storage facilities. In Cliff, Western owns five buildings with a total of
14,055 square feet in which are located additional offices and storage
facilities as well as a vehicle shop, a wood shop, and central office switching
equipment. Smaller facilities, used mainly for storage and for housing central
office switching equipment, with a total of 8,384 square feet, are located in
Lordsburg, Reserve, Magdalena and five other localities. In addition, Western
leases 1.28 acres on which it has constructed four microwave towers and a 120
square-foot equipment building. Western has the use of 34 other sites under
permits or easements at which it has installed various equipment either in
small company-owned buildings (totaling 4,757 square feet) or under protective
cover. Western also owns 3,101 miles of buried copper cable and 226 miles of
buried fiber optic cable running through rights-of-way within its 15,000
square-mile service area. All Western's
23
properties described herein are encumbered under mortgages held by the Rural
Electrification Administration ("REA").
Inter-Community Telephone Company owns 12 acres of land at 10 sites in
North Dakota. Its main office at Nome, North Dakota contains 4,326 square feet
of office and storage space. In addition, it has 4,400 square feet of garage
space and 5,035 square feet utilized for its switching facilities.
Inter-Community has 825 miles of buried copper cable and 105 miles of buried
fiber optic cable. All of Inter-Community's properties described herein are
encumbered under mortgages held by the REA.
Cuba City Telephone is located in a 3,800 square foot brick building
on 0.4 of an acre of land. The building serves as the central office,
commercial office, and garage for vehicle and material storage. The company
also owns a cement block storage building of 800 square feet on 0.1 of an acre.
In Madison, Wisconsin, Cuba City leases 900 square feet for administrative
headquarters and financial functions. Belmont company is located in a cement
block building of 800 square feet on .5 acre of land in Belmont, Wisconsin.
The building houses the central office equipment for Belmont. The companies
own a combined total of 217 miles of buried copper cable. All of Cuba City's
and Belmont's property described herein are encumbered under mortgages held by
the REA and Rural Telephone Bank, respectively.
J.B.N. Telephone Company owns a total of 2.25 acres at fifteen sites
located in northeast Kansas. Its administrative and commercial office
consisting of 2,820 square feet along with a 1,600 square feet garage and
warehouse facility are located in Wetmore, Kansas. In addition, J.B.N. owns
thirteen smaller facilities housing central office switching equipment and over
795 miles of buried copper cable. All properties described herein are
encumbered under mortgages held by the Rural Utilities Service.
Haviland Telephone Company owns a total of 3.9 acres at 20 sites
located in south central Kansas. Its administrative and commercial office
consisting of 4,450 square feet is located in Haviland, Kansas. In addition,
Haviland owns 19 smaller facilities housing garage, warehouse, and central
office switching equipment and over 1,500 miles of buried copper cable. All
properties described herein are encumbered under a mortgage to the National
Bank for Co-Operatives ("Co-Bank").
CLR has its headquarters in leased space in Wetmore, Kansas. It also
owns one small parcel of land and leases 22 small sites, which it uses for its
cable receiving and transmission equipment. All properties described herein
are encumbered under a mortgage to Co-Bank.
It is the Registrant's opinion that the facilities referred to above
are in good operating condition and suitable and adequate for present uses.
ITEM 3. LEGAL PROCEEDINGS
Registrant is a party to certain lawsuits in the ordinary course of
business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
24
The information required by this Item 5 is incorporated herein by
reference heading "Market Price Information and Common Stock Ownership" in
Registrant's Annual Report to Shareholders for the year ended December 31,
1995.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item 6 is incorporated herein by
reference to "Five Year Summary Selected Financial Data" in Registrant's Annual
Report to Shareholders for the year ended December 31, 1995.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
The information required by this Item 7 is incorporated herein by
reference to "Management Discussion and Analysis" in Registrant's Annual Report
to Shareholders for the year ended December 31, 1995.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Report of Independent Auditors and the following Consolidated
Financial Statements of the Registrant are incorporated herein by reference to
Registrant's Annual Report to Shareholders for the year ended December 31,
1995.
Consolidated Statements of Income - Years ended December 31, 1995,
1994, and 1993.
Consolidated Balance Sheets - December 31, 1995 and 1994.
Consolidated Statements of Shareholders' Equity - Years ended December
31, 1995, 1994, and 1993.
Consolidated Statements of Cash Flows - Years ended
December 31, 1995, 1994, and 1993.
Notes to Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
In March 1994, The Morgan Group, Inc., a publicly traded subsidiary of
the Registrant, approved Arthur Andersen LLP to replace Ernst & Young LLP as its
auditors for 1994 and 1995. For 1996, Ernst & Young LLP, Registrant's auditors,
will replace Arthur Andersen LLP as auditors for The Morgan Group, Inc. See
Registrant's Form 8-K dated March 19, 1996 which is incorporated herein by
reference.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 is included under the caption
"Executive Officers of the Registrant" in Item 1 hereof and included under the
captions "Election of Directors" and "Section 16(a) Reporting" in Registrant's
Proxy Statement for its Annual Meeting of Shareholders to be held on May 9,
1996, which information is incorporated herein by reference.
25
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is included under the caption
"Compensation of Directors," under the captions "Executive Compensation,"
"Executive Compensation and Benefits Committee Report on Executive
Compensation" and "Performance Graph" in Registrant's Proxy Statement for its
Annual Meeting of Shareholders to be held on May 9, 1996, which information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is included under the caption
"Security Ownership of Certain Beneficial Owners and Management," in the
Registrant's Proxy Statement for its Annual Meeting of Shareholders to be held
on May 9, 1996, which information is included herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is included under the caption
"Executive Compensation", "Transactions with Certain Affiliated Persons" and
"Compensation Committee Interlocks and Insider Participants" in the
Registrant's Proxy Statement for its Annual Meeting of Shareholders to be held
on May 9, 1996, which information is included herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form 10-K Annual
Report:
(1) Financial Statements:
The Report of Independent Auditors and the following Consolidated
Financial Statements of the Registrant are incorporated herein by reference to
the Registrant's Annual Report to Shareholders for the year ended December 31,
1995, as noted in Item 8 hereof:
Consolidated Balance Sheets - December 31, 1995 and 1994
Consolidated Statements of Income - Years ended December 31, 1995,
1994, and 1993.
Consolidated Statements of Shareholders' Equity - Years ended December
31, 1995, 1994, and 1993
Consolidated Statements of Cash Flows - Years ended December 31, 1995,
1994, and 1993
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
Schedule I - Condensed Financial Information of Registrant
Schedule II- Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions, or are inapplicable, and therefore have been omitted.
(3) Exhibits:
26
See the Exhibit Index in this Form 10-K Annual Report. The
following Exhibits listed in the Exhibit Index are filed with this
Form 10-K Annual Report:
10(b) - Lynch Corporation 401(k) Plan.
10(s) - Directors Stock Program.
10(t) - Phantom Stock Plan.
10(v) - Stock Purchase Agreement, dated as of November 1,
1995, among Brighton Communications Corporation,
Lynch Telephone Corporation VIII and certain others
(excluding exhibits).
10(w) - Loan Agreement, dated as of November 6, 1995, between
PCS Corporation A and Aer Force Communications, L.P.
11 - Computation of Per Share Earnings.
13 - Annual Report to Shareholders for the year ended
December 31, 1995.
21 - Subsidiaries of the Registrant.
23 - Consents of Independent Auditors.
- Ernst & Young LLP
- Arthur Andersen LLP
- McGladrey & Pullen, LLP(2)
- Deloitte & Touche LLP
24 - Powers of Attorney.
27 - Financial Data Schedule
99 - Reports of Independent Auditors.
- Report of Arthur Andersen LLP on the
Consolidated Financial Statements of
The Morgan Group, Inc. for the year
ended December 31, 1995.
- Report of McGladrey & Pullen, LLP on
the Financial
Statements of Capital Communications
Corporation for the year ended December
31, 1995.
- Report of McGladrey & Pullen, LLP on
the Financial
Statements of Coronet Communications
Company for the year ended December 31,
1995.
- Report of Deloitte & Touche LLP on
the Financial Statements of Central
Products Company for the year ended
December 31, 1995.
(b) Reports on Form 8-K: A Report on Form 8-K was filed on
October 19, 1995 to report the acquisition by Registrant of
Central Products Company. Required financial statements
(including proforma financial statements) regarding the
acquisitions were filed on December 18, 1995 as an amendment
thereto and further amendments were filed on January 4,
February 2, March 4 and March 15, 1996. Reports on Form 8-K
were also filed on March 19,1996 to report certain information
on the proposed Dunkirk & Fredonia Telephone Company
acquisition and March 26, 1996 with respect to a change of
auditors at Morgan.
(c) Exhibits:
Exhibits are listed in response to Item 14(a)(3)
(d) Financial Statement Schedules:
27
Financial Statement Schedules are listed in response to Item
14(a)(2)
28
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
----------------------- Directors and Chief March 30, 1996
MARIO J. GABELLI Executive Officer
(Principal Executive Officer)
* MORRIS BERKOWITZ Director March 30, 1996
-----------------------
MORRIS BERKOWITZ
* E. VAL CERUTTI Director March 30, 1996
-----------------------
E. VAL CERUTTI
* PAUL J. EVANSON Director March 30, 1996
-----------------------
PAUL J. EVANSON
* SALVATORE MUOIO Director March 30, 1996
-----------------------
SALVATORE MUOI0
* RALPH R. PAPITTO Director March 30, 1996
-----------------------
RALPH R. PAPITTO
* PAUL P. WOOLARD Director March 30, 1996
-----------------------
PAUL P. WOOLARD
s/ROBERT E. DOLAN Chief Financial Officer
- ------------------------- (Principal Financial
ROBERT E. DOLAN and Accounting Officer) March 30, 1996
*s/ROBERT A. HURWICH
-------------------
ROBERT A. HURWICH
Attorney-in-fact
29
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
LYNCH CORPORATION
CONDENSED STATEMENT OF INCOME
Year Ended December 31
----------------------
1995 1994 1993
-------- -------- --------
(In Thousands of dollars)
Interest, Dividends & Gain on Sales
of Marketable Securities $ 232 $ 344 $ 365
Net Interest, Dividend & Other
Income from Subsidiaries 715 84 189
Gain on Sale of Subsidiary and
Affiliate Stock:
The Morgan Group, Inc. -- -- 3,851
Tremont Advisors, Inc. -- 190 475
------- ------- -------
TOTAL INCOME 947 618 4,880
Costs and Expenses:
Unallocated Corporate Administrative
Expense $ 2,869 $ 1,454 $ 1,378
Interest Expense 448 858 1,372
------ ------- -------
TOTAL COST AND EXPENSES 3,317 2,312 2,750
------ ------- -------
INCOME (LOSS) BEFORE INCOME TAXES, EQUITY
IN NET INCOME OF SUBSIDIARIES
EXTRAORDINARY ITEM, AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGE (2,370) (1,694) 2,130
Income Tax Benefit (Provision) 779 786 (1,161)
Equity in net income of subsidiaries 6,736 3,500 1,880
------- ------- -------
INCOME BEFORE EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE 5,145 2,592 2,849
Gain (Loss) on early extinguishment of debt -- (264) (206)
Cumulative effect to January 1, 1993
of change in accounting for income taxes -- -- 296
------- ------- ------
NET INCOME $ 5,145 $ 2,328 $ 2,939
======= ======= =======
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE A - DIVIDENDS FROM SUBSIDIARIES
Cash dividends paid to Lynch Corporation from the Registrant's consolidated
subsidiaries were $1,166,000 in 1995, $277,000 in 1994, and $1,000,000 in 1993.
No other dividends were received from subsidiaries or investees.
NOTE B - SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR ADDITIONAL
INFORMATION
30
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
LYNCH CORPORATION
CONDENSED BALANCE SHEETS
December 31
-----------
1995 1994
-------- --------
(In Thousands of dollars)
ASSETS
- ------
CURRENT ASSETS
Cash and Cash Equivalents $ 498 $ 106
Marketable Securities and
Short Term Investments 770 1,234
Deferred Income Tax Benefits 479 292
Other Current Assets 44 8
------- -------
Total Current Assets 1,791 1,640
OFFICE EQUIPMENT (Net of Depreciation) 16 11
OTHER ASSETS (Principally Investment in
and Advances to Subsidiaries) 44,498 35,812
------- -------
Total Assets $46,305 $37,463
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES $ 7,935 $ 4,277
DEFERRED INCOME TAX LIABILITIES 1,652 1,637
DEFERRED CHARGES 1,206 1,265
TOTAL SHAREHOLDERS' EQUITY 35,512 30,284
------- -------
Total Liabilities and
Shareholders' Equity $46,305 $ 37,463
======= ========
31
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
LYNCH CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
Year Ended December 31
----------------------
(Thousands of dollars)
1995 1994 1993
-------- -------- --------
Cash provided from (used in)
operating activities ($1,158) $(1,675) $(1,955)
------- ------- -------
INVESTING ACTIVITIES:
Investment in Lynch Manufacturing 781 1,000 6,934
Investment and advances to in
Brighton Communications Corporation -- (1,780) (150)
Loan to Spinnaker Industries, Inc. -- (965) --
Investment in Brown-Bridge
Industries, Inc. -- (407) --
Investment in and advances to LENCO II 2,535 (2,535) (31)
Investment in and advances to
The Morgan Group, Inc. 1,300 -- --
Investment in and advances
to PCS Partnerships (7,010) -- --
Sales (purchases) of current marketable
securities-net -- -- 2,452
Other (13) 25 22
------ ------- -------
NET CASH PROVIDED FROM (USED IN)
INVESTING ACTIVITIES (2,407) (4,662) 9,227
------ ------- -------
FINANCING ACTIVITIES:
Net Borrowings
Line of credit 3,709 3,198 --
Redemption of debentures -- (11,835) (6,144)
Sale of treasury stock -- 2,290 --
conversion of debenture into
common stock -- 1,597 --
Other 248 305 --
------ ------ -------
NET CASH PROVIDED (USED IN)
FINANCING ACTIVITIES 3,957 (4,445) (6,144)
------ ------- -------
TOTAL INCREASE (DECREASE)IN CASH
AND CASH EQUIVALENTS 392 (10,782) 1,128
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 106 10,888 9,760
------- ------- --------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 498 $ 106 $ 10,888
======= ======= ========
32
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
LYNCH CORPORATION AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
------------------------ -------- -------- ---------- ----------
ADDITIONS
-------------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER ACCOUNTS DEDUCTIONS END OF
DESCRIPTION OF PERIOD EXPENSES - DESCRIBE - DESCRIBE PERIOD
------------------------ ---------- --------- ---------- ---------- --------
YEAR ENDED DECEMBER 31, 1995
ALLOWANCE FOR UNCOLLECTIBLE $737,000 $987,000 $1,160,000(D) $1,152,000(A) $1,732,000
YEAR ENDED DECEMBER 31, 1994
ALLOWANCE FOR UNCOLLECTIBLE $305,000 $605,000 $ 240,000(C) $ 413,000(A) $ 737,000
YEAR ENDED DECEMBER 31, 1993
ALLOWANCE FOR UNCOLLECTIBLE $627,000 $268,000 $ 4,000(B) $ 586,000(A) $ 305,000
(A) UNCOLLECTIBLE ACCOUNTS WRITTEN OFF ARE NET OF RECOVERIES.
(B) RECLASS
(C) RECLASSES ($43,000) AND AMOUNT RECORDED AS PART OF THE ALLOCATION OF
PURCHASE PRICE OF ACQUIRED COMPANIES ($197,000).
(D) ALLOCATION OF PURCHASE PRICE OF ACQUIRED COMPANY.
33
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
3 (a) Restated Articles of Incorporation of Registrant (incorporated
by reference to Exhibit 3(a) of the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1987).
(b) By-Laws of the Registrant, (incorporated by reference to the
Exhibit 3(b) of the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1987).
4 (a) Loan Agreement and Revolving Loan Note of Lynch Telephone
Corporation, dated October 18, 1989, (incorporated by
reference to exhibit 4(d) of the Registrant's Form 10-K for
the year ended December 31, 1989).
(b) Loan Agreement, dated as of September 16, 1994, between
Transamerican Business Credit Corporation and Brown-Bridge
Industries, Inc. (incorporated by reference to Exhibit 4 to
Registrant's Form 10-Q for the Quarter ended September 30,
1994).
(c) Credit Agreement, dated as of September 29, 1995, by and among
Central Products Acquisition Corp., as Borrower, Spinnaker
Industries, Inc., as Pledgor, and Heller Financial, Inc. as
Agent and Lender (incorporated by reference to Exhibit 7.2 to
Registrant's Form 8-K dated October 19, 1995).
(d) Term Note A, dated October 4, 1995, from Central Products
Acquisition Corp. payable to the order of Heller Financial
Inc. in the original principal amount of $10 million
(incorporated by reference to Exhibit 7.3 to Registrant' Form
8-K dated October 18, 1995).
(e) Term Note B, dated October 4,1995, from Central Products
Acquisition Corp. payable to the order of Heller Financial,
Inc. in the principal amount of $16 million (incorporated by
reference to Exhibit 7.4 to Registrant's Form 8-K dated
October 18, 1885).
(f) Revolving Note, dated September 29, 1995, from Central
Products Acquisition Corp. payable to the order of Heller
Financial, Inc. in the maximum principal amount of $24 million
(incorporated by reference to Exhibit 7.5 to Registrant's Form
8-K dated October 18,1995).
(g) Subordinated Promissory Note, dated September 29, 1995, from
Spinnaker Industries, Inc. payable to Also Standard
Corporation in the original principal amount of $25 million
(incorporated by reference to Exhibit 7.6 to Registrant's Form
8-K, dated October 18, 1995.)
(h) The Registrant, by signing this Form 10-K Annual Report,
agrees to furnish to the Securities and Exchange Commission a
copy of any long-term debt instrument where the amount of the
securities authorized thereunder does not exceed 10 percent of
the total assets of the Registrant on a consolidated basis.
10 (a) Partnership Agreement, dated March 11, 1987, between Lombardo
Communications, Inc. and Lynch Entertainment Corporation
(incorporated by reference to Exhibit 10(e) of the Registrant'
34
Annual Report on Form 10-K for the year ended December 31,
1987).
*(b) Lynch Corporation 401(k) Savings Plan.
(c) Stock Purchase Agreement, dated May 13, 1993, whereby
Registrant acquired J.B.N. Telephone Company, Inc.
(incorporated by reference to Exhibit 2(a) of the Registrant's
Form 8-K, dated December 13, 1993).
(d) Stock Purchase Agreement, dated January 19, 1994, between
Registrant and Mario J. Gabelli (incorporated by reference to
Exhibit II of Amendment Number 36 to Schedule 13D filed by
Mario J. Gabelli and affiliated companies on January 19,
1994).
(e) Shareholder Agreement among Capital Communications Company,
Inc., Lombardo Communications, Inc. and Lynch Entertainment
Corporation II (incorporated by reference to Exhibit 10 of
Registrant's form 8-K, dated March 14, 1994).
*(f) Letter Agreement, dated as of January 18, 1994, between
Registrant and Michael J. Small (incorporated by reference to
Exhibit 10(a) to Registrant's Form 10-Q for the Quarter ended
June 30, 1994).
*(g) Stock Option Agreement, dated as of January 18, 1994, between
Registrant and Michael J. Small (incorporated by reference to
Exhibit 10(b) to Registrant's Form 10-Q for the Quarter ended
June 10, 1994).
(h) Acquisition Agreement between Brown-Bridge Acquisition
Corporation and Kimberly-Clarke Corporation, dated June 15,
1994 (incorporated by reference to Exhibit 10(c) to
Registrant's Form 10-Q for the Quarter ended June 10, 1994).
*(i) Management Agreement, dated as of June 10, 1994, by and among
Boyle, Fleming, George & Co., Inc., Safety Railway Service
Corporation (incorporated by reference to Exhibit 7.1 to
Registrant's Form 8-K dated June 13, 1994).
(k) Warrant Purchase Agreement, dated as of June 10, 1994, by and
among Boyle, Fleming, George & Co., Inc. and Safety Railway
Service Corporation (incorporated by reference by Exhibit 7.1
to the Registrant's Form 8-K dated June 13, 1994).
(l) A Warrant dated as of June 10, 1994, executed by Safety
Railway Service Corporation (incorporated by reference to
Exhibit 7.1 to Registrant's Form 8-K dated Juan 13, 1994).
(m)(i) Asset Purchase Agreement, dated as of June 15, 1994, between
Kimberly-Clark Corporation and Brown-Bridge Acquisition Corp.
(Exhibits omitted) (Incorporated by reference to Exhibit 10(c)
to Registrant's Form 10-Q for the quarter ended June 30,
1994). Registrant agrees to furnish supplementally a copy of
any omitted schedule to the Securities and Exchange Commission
upon request.
(m)(ii) Amendments Nos. 1-3 to Asset Purchase Agreement by and between
Kimberly-Clark Corporation and Brown-Bridge Industries, Inc.
(formerly Brown-Bridge Acquisition Corp.) (incorporated by
reference to Registrant's Form 8-K dated September 19, 1994).
(o) Stock Purchase Agreement, dated as of August 26, 1994, among
Brighton Communications Corporation, Lynch Telephone
Corporation
35
VII, Universal Service Telephone Company and
InterDigital Communications Corporation (Exhibits omitted).
(Incorporated by reference to exhibit 7.1 to Registrant's Form
8-K dated September 26, 1994).
(q) Shareholders' and Voting Agreement, dated September 16, 1994,
among Safety Railway Service Corporation, Brown-Bridge
Industries, Inc. and the other stockholders of Brown-Bridge
(incorporated by reference to Exhibit 10(q) to Registrant's
Form 10-K for the year ended December 31, 1994).
(r) Put Option Agreements, dated September 16, 1994, among Safety
Railway, Brown-Bridge and certain stockholders of Brown-Bridge
(incorporated by reference to Exhibit 10(q) to Registrant's
Form 10-K for the year ended December 31, 1994).
*(s) Directors Stock Plan.
*(t) Phantom Stock Plan.
(u) Stock and Asset Purchase Agreement, dates as of September 27,
1995, by and among Central Products Acquisition Corp.,
Unisource Worldwide, Inc. and Alco Standard Corporation
(incorporated by reference to Exhibit 7.1 to Registrant's Form
8-K dated October 18, 1995).
(v) Stock Purchase Agreement, dated as of November 1, 1995,
among Brighton Communications Corporation, Lynch Telephone
Corporation VIII and certain other persons (excluding schedules
exhibits). Registrant agrees to furnish supplementally a copy
of any omitted schedule or exhibit to the Securities and
Exchange Commission.
(w) Loan Agreement, dated as of November 6, 1995, between PCS
Corporation A and Aer Force Communications L.P. (loan
agreements in similar form with four other partnerships
increase the total potential commitment to $41.8 million.
11 Computation of Per Share Earnings.
13 Annual Report to Shareholders for the year ended December 31,
1995.
21 Subsidiaries of the Registrant.
23 Consents of Independent Auditors.
- Ernst & Young LLP
- Arthur Andersen LLP
- McGladrey & Pullen, LLP(2)
- DeLoitte & Touche LLP
24 Powers of Attorney.
99 Report of Independent Auditors.
- Report of Arthur Andersen LLP on the Consolidated Financial
Statements of the Morgan Group, Inc. for the year ended
December 31, 1995.
- Report of McGladrey & Pullen, LLP on the Consolidated
Financial Statements of Capital Communications
Corporation for the year ended December 31, 1995.
- Report of McGladrey & Pullen, LLP on the Consolidated
Financial Statements of Coronet Communications Corporation
for the year ended December 31, 1995.
- Report of Deloitte LLP on the Financial Statements of
Central Products Company for the year ended December 31,
1995.
36
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*Management contract or compensatory or arrangement.
The Exhibits listed above (with the exception of the Annual Report to
Shareholders) have been filed separately with the Securities and Exchange
Commission in conjunction with this Annual Report on Form 10-K or have
been incorporated by reference into this Annual Report on Form 10-K.
Lynch Corporation will furnish to each of its shareholders a copy of any
such Exhibit for a fee equal to Lynch Corporation's cost in furnishing
such Exhibit. Requests should be addressed to the Office of the
Secretary, Lynch Corporation, 8 Sound Shore Drive, Greenwich, Connecticut
06830.