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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996 Commission file number 1-106
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
LYNCH CORPORATION
(Exact name of Registrant as specified in its charter)
Indiana 38-1799862
State of other jurisdiction of (I.R.S. EmployerIdentification No.)
incorporation or organization
8 Sound Shore Drive, Suite 290, Greenwich, CT 06830
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (203) 629-3333
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange Title of each class
on which registered Common Stock, No Par Value
American Stock Exchange
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934
during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by mark if disclosure of delinquent filers pursuant to Item
405 of Regulations S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K, or any
amendment to this Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of
the Registrant (based upon the closing price of the Registrant's Common Stock
on the American Stock Exchange on March 14, 1997 of $106.50 per share) was
$114,873,770. (In determining this figure, the Registrant has assumed that
all of the Registrant's directors and officers are affiliates. This
assumption shall not be deemed conclusive for any other purpose.)
The number of outstanding shares of the Registrant's Common Stock was
1,416,834 as of March 14, 1997.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III: Certain portions of the Proxy Statement for the 1997
Annual Meeting of Shareholders.
PART I
ITEM 1. BUSINESS
The Registrant, Lynch Corporation ("Lynch"), incorporated in 1928
under the laws of the State of Indiana, is a diversified holding company with
subsidiaries engaged in multimedia, services and manufacturing. Lynch's
executive offices are located at 8 Sound Shore Drive, Greenwich, Connecticut
06830. Its telephone number is 203-629-3333. The company's business
development strategy is to expand its existing operations through internal
growth and acquisitions. For the year ended December 31, 1996, multimedia
operations provided 6% of the Registrant's consolidated revenues; services
operations provided 29% of the Registrant's consolidated revenues; and
manufacturing operations provided 65% of the Registrant's consolidated
revenues. As used herein, the Registrant includes subsidiary corporations.
On December 5, 1996, Registrant announced that it is examining the
possibility of splitting, through a spin-off, either its multimedia
operations or its manufacturing operations. There are a number of matters to
be examined in connection with a possible spin-off, including tax
consequences, and there is no assurance that such a spin-off will be
effected.
I. MULTIMEDIA
A. Telecommunications
Operations. The Registrant conducts its telecommunications operations
through subsidiary corporations. The telecommunications segment is expanding
through the selective acquisition of local exchange telephone companies
serving rural areas and by offering additional services to existing
customers. From 1989 through 1996, Registrant has acquired nine telephone
companies, five of which have indirect minority ownership of 2% to 20%, whose
operations range in size from less than 500 to over 9,500 access lines. In
mid-March 1997, Registrant acquired approximately 60% of a tenth telephone
company, with the intent to acquire the remaining stock. As of December 31,
1996, total access lines were approximately 28,984, 99% of which are served
by digital switches.
These subsidiaries' principal line of business is providing
telecommunications services. These services fall into four major categories:
local network, network access, long distance and other. Toll service to
areas outside franchised telephone service territory is furnished through
switched and special access connections with intrastate and interstate long
distance networks.
At December 31, 1996, the Registrant owned minority interests in
wireline cellular telephone service covering several Rural Service Areas
("RSA's") in New Mexico and North Dakota, covering areas with a total
population of approximately 393,000, of which the Registrant's proportionate
interest is approximately 15,150. Operating results through 1996 have not
been significant to date.
Inter-Community Telephone Company's participation in the Defense Com-
mercial Telecommunications Network/Defense Switching Network (DCTN/DSN) was
terminated in early 1996.
The Company holds franchises, licenses and permits adequate for the
conduct of its business in the territories which it serves.
Future growth in telephone operations is expected to be derived from
the acquisition of additional telephone companies, from providing service to
new establishments, from upgrading existing customers to higher grades of
service, and from offering related services such as Internet. The following
table summarizes certain information regarding the Registrant's telephone
operations.
Year Ended December 31,
1996 1995 1994
Telephone Operations
Access lines* . . . . . . . . . . . . . . . . . 28,984 15,586 14,906
% Residential . . . . . . . . . . . . . . . . 74% 78% 79%
% Business (nonresidential) . . . . . . . . . 26% 2% 21%
Total revenues ($000's) . . . . . . . . . . . . 28,608 23,328 20,016
% Local service . . . . . . . . . . . . . . . 14% 13% 12%
% Network access and long distance. . . . . . 73% 69% 0%
% Other . . . . . . . . . . . . . . . . . . . 13% 17% 18%
* An "access line" is a single or multi-party circuit between the customer's
establishment and the central switching office.
Telephone Acquisitions. The Registrant pursues an active program of
acquiring operating telephone companies. From January 1, 1989 through
December 31, 1996, Lynch has acquired nine telephone companies serving a
total of approximately 24,750 access lines at the time of these acquisitions
for an aggregate consideration totaling approximately $109 million. In May
1996, Inter-Community Telephone Company acquired from US West Communications,
Inc. approximately 1,400 access lines in North Dakota. In 1996, J.B.N.
Telephone acquired from United Telephone Company of Eastern Kansas 354 access
lines in Kansas. In November 1996, a subsidiary of Registrant acquired the
stock of Dunkirk & Fredonia Telephone Company and its subsidiaries, Cassadaga
Telephone Corporation and Comantel, Inc. (collectively "DFT") for
approximately $22 million. DFT serves approximately 11,129 access lines in
western New York, including the community of Fredonia, the Village of
Cassadaga and the Hamlet of Stockton. DFT also owns and operates other
telecommunications businesses, including Internet, long distance resale,
security systems, and sales and servicing of telecommunications equipment.
In mid-March 1997, Registrant acquired approximately 60% of the stock
of Upper Peninsula Telephone Company ("UPTC") for approximately $15.3
million, with the intent of acquiring, and the obligation to offer to
acquire, the rest of the company. UPTC serves approximately 6,200 access
lines located principally in the Upper Peninsula of Michigan. UPTC also has
cellular interests covering three RSA's in Michigan with a total population
of approximately 550,000, of which UPTC's proportionate interest is
approximately 59,000. UPTC had revenues and net income of $7.8 million and
$1.9 million, respectively, for the year ended December 31, 1995 and $8.5
million and $2.0 million, respectively, for the year ended December 31, 1996.
The Registrant continually evaluates acquisition opportunities
targeting domestic rural telephone companies with a strong market position,
good growth potential and predictable cash flow. In addition, Registrant
seeks companies with excellent local management already in place who will
remain active with their company. Telephone holding companies and others
actively compete for the acquisition of telephone companies and such
acquisitions are subject to the consent or approval of regulatory agencies in
most states. While management believes that it will be successful in making
additional acquisitions, there can be no assurance that the Registrant will
be able to negotiate additional acquisitions on terms acceptable to it or
that regulatory approvals, where required, will be received.
Regulatory Environment. Operating telephone companies are regulated by
state regulatory agencies with respect to its intrastate telephone services
and the Federal Communications Commission ("FCC") with respect to its
interstate telephone service and, with the enactment of the
Telecommunications Act of 1996 (the "1996 Act"), certain other matters
relating principally to local and intrastate competition.
The Registrant's telephone subsidiaries participate in the National
Exchange Carrier Association ("NECA") common line and traffic sensitive
tariffs and participate in the access revenue pools administered by NECA for
interstate services. Where applicable, the Company's subsidiaries also
participate in similar pooling arrangements approved by state regulatory
authorities for intra-state services. Such interstate and intrastate
arrangements are intended to compensate local exchange carriers ("LEC's"),
such as the Registrant's operating telephone companies, for the costs,
including a fair rate of return, of facilities furnished in originating and
terminating interstate and intrastate long distance services.
In addition to access pool participation, certain of the Registrant's
subsidiaries are compensated for their intrastate costs through billing and
keeping access charge revenues (without participating in an access pool).
The access charge revenues are developed based on intrastate access rates
filed with the state regulatory agency.
Various aspects of federal and state telephone regulation have in
recent years been subject to re-examination and on-going modification. In
February 1996, the 1996 Act, which is the most substantial revision of
communication law since the 1930's, became law. The Act is intended generally
to allow telephone, cable, broadcast and other telecommunications providers
to compete in each other's businesses, while loosening regulation of those
businesses. Among other things, the Act (i) would allow major long distance
telephone companies and cable television companies to provide local exchange
telephone service; (ii) would allow new local telephone service providers to
connect into existing local telephone exchange networks and purchase services
at wholesale rates for resale; (iii) would provide for a commitment to
universal service for high-cost, rural areas and authorizes state regulatory
commissions to consider their status on certain competition issues; (iv)
would allow the Regional Bell Operating Companies to offer long distance
telephone service and enter the alarm services and electronic publishing
businesses; (v) would remove rate regulation over non-basic cable service in
three years; and (vi) would increase the number of television stations that
can be owned by one party.
The FCC is in the process of promulgating new regulations covering
these and related matters. The Federal/State Joint Board designated by the
FCC has recently proposed modifications to the three major sources of
interstate funding for the commitment to universal service for high-cost,
rural areas. The Joint Board proposed modification to the Universal Service
Fund (USF) and the Weighted DEM and Long-Term Support (LTS) subsidy portions
of interstate access charges. The USF for rural telephone companies, such as
Lynch's telephone subsidiaries, would be frozen for the next three years at
the amounts received during 1997 (adjusted for any change in the number of
access lines). Weighted DEM and LTS revenues would also be frozen (with an
adjustment for access lines) but at 1996 levels. After the three year
freeze, the USF, weighted DEM and LTS revenues would begin an additional
three-year transitional phase-in to where ultimately, the reimbursement would
be based on a cost model which is yet to be determined, rather than a
telephone company's actual cost. New USF rules are scheduled to be adopted
in May 1997. The 1996 Act would also permit states to allow competitive
carriers to obtain USF funding under certain circumstances. In December
1996, the FCC proposed certain changes to the rules applicable to interstate
access charges which long distance telephone carriers pay to local exchange
companies. The proposed changes would apply principally to "price cap"
companies (see paragraph below), although non-price cap companies may be
affected by the FCC's proposed changes, including the allocation of USF
support to interstate revenue requirements and possible changes to
transportation and common line rate structures. The FCC is expected to begin
an access charge preceding to propose access rule changes for non-price cap
companies later in 1997. All of Registrant's telephone companies are non-price
cap companies for interstate access charges. Since USF and access
charges constituted approximately 60% of the revenues of the Registrant's
nine telephone companies in 1996, modifications could have a material
effect.
In addition, a 1989 FCC decision provided for price cap regulation for
certain interstate services. The price cap approach differs from traditional
rate-of-return regulation by focusing primarily on the prices of
communications services. The intention of price cap regulation is to focus
on productivity and the approved plan for telephone operating companies.
This allows for the sharing with its customers of profits achieved by
increasing productivity. Alternatives to rate-of-return regulation have also
been adopted or proposed in some states as well. Inter-Community Telephone
Company is an example of one such subsidiary which has elected a price cap
limitation on local exchange access charges. However, management does not
believe that this agreement will have a material effect on the Registrant's
results. In certain states, regulators have ordered the restructuring of
local service areas to eliminate nearby long distance calls and substitute
extended calling areas.
Registrant cannot predict the effect of the 1996 Act and proposed
Federal regulations, but because its telecommunications and multimedia
properties (other than its television stations interests) are primarily in
high-cost, rural areas, Registrant expects competitive changes to be slower
in coming.
Competition. All of the Registrant's current telephone companies are
currently monopoly providers in their respective area of local telephone
exchange service. However, as a result of FCC and state agency regulatory
and judicial decisions, competition has been introduced into certain areas of
the toll network wherein certain providers are attempting to bypass local
exchange facilities to connect directly with high-volume toll customers. For
example, in the last few years the States of Wisconsin, New York and Michigan
passed or amended telecommunications bills intended to introduce more
competition among providers of local services and reduce regulation. A
substantial impact is yet to be seen on Registrant's telephone companies.
The Registrant's subsidiaries do not expect bypass to pose a significant
near-term competitive threat due to a limited number of high-volume customers
they serve. Regulatory authorities in certain states have taken steps to
promote competition in local telephone exchange service, including in New
York, by requiring certain companies to offer wholesale rates to resellers.
In addition, cellular radio or similar radio-based services, including
personal communication services (PCS) could provide an alternative local
telephone exchange service at some point in the future.
B. Entertainment
STATION WHBF-TV -- Lynch Entertainment Corporation ("Lynch Entertainment I"),
a wholly-owned subsidiary of Registrant, and Lombardo Communications, Inc.,
wholly-owned by Philip J. Lombardo, are the general partners of Coronet
Communications Company ("Coronet"). Lynch Entertainment I has a 20% interest
in Coronet and Lombardo Communications, Inc. has an 80% interest. Coronet
owns a CBS-affiliated television station WHBF-TV serving Rock Island and
Moline, Illinois and Davenport and Bettendorf, Iowa.
STATION WOI-TV -- Lynch Entertainment Corporation II ("LEC-II"), a wholly-owned
subsidiary of Registrant, owns 49% of the outstanding common shares of
Capital Communications Corporation ("Capital") and a convertible preferred
stock, which when converted, would bring LEC-II's common share ownership to
50%. On March 1, 1994, Capital acquired the assets of WOI-TV for $12.7
million. WOI-TV is an ABC affiliate and serves the Des Moines, Iowa market.
Lombardo Communications, Inc. II, controlled by Philip J. Lombardo, has the
remaining share interest in Capital.
Operations. Revenues of a local television station depend to some
extent upon its relationship with an affiliated network. In general, the
affiliation contracts of WHBF-TV and WOI-TV with CBS and ABC, respectively,
provide that the network will offer to the affiliated station the programs it
generates, and the affiliated station will transmit a number of hours of
network programming each month. The programs transmitted by the affiliated
station generally include advertising originated by the network, for which
the network is compensated by its advertisers.
The affiliation contract provides that the network will pay to the
affiliated station an amount which is determined by negotiation, based upon
the market size and rating of the affiliated station. Typically, the
affiliated station also makes available a certain number of hours each month
for network transmission without compensation to the local station, and the
network makes available to the affiliated station certain programs which will
be broadcast without advertising, usually public information programs. Some
network programs also include "slots" of time in which the local station is
permitted to sell spot advertising for its own account. The affiliate is
permitted to sell advertising spots preceding, following, and sometimes
during network programs.
A network affiliation is important to a local station because network
programs, in general, have higher viewer ratings than non-network programs
and help to establish a solid audience base and acceptance within the market
for the local station. Because network programming often enhances a
station's rating, a network-affiliated station is often able to charge higher
prices for its own advertising time.
In addition to revenues derived from broadcasting network programs,
local television stations derive revenues from the sale of advertising time
for spot advertisements, which vary from 10 seconds to 120 seconds in length,
and from the sale of program sponsorship to national and local advertisers.
Advertising contracts are generally short in duration and may be canceled
upon two-weeks notice. WHBF-TV and WOI-TV are represented by a national firm
for the sale of spot advertising to national customers, but have local sales
personnel covering the service area in which each is located. National
representatives are compensated by a commission based on net advertising
revenues from national customers.
Competition. WHBF-TV and WOI-TV compete for revenues with local
television and radio stations, cable television, and other advertising media,
such as newspapers, magazines, billboards and direct mail. Generally,
television stations such as WHBF-TV and WOI-TV do not compete with stations
in other markets.
Other sources of competition include community antenna television
("CATV") systems, which carry television broadcast signals by wire or cable
to subscribers who pay a fee for this service. CATV systems retransmit
programming originated by broadcasters, as well as providing additional
programming that is not originated on, or transmitted from, conventional
broadcasting stations. In addition, some alternative media operators, such
as multipoint distribution service owners, provide for a fee and on a
subscription basis, programming that is not a part of regular television
service. Additional program services are provided by low-power television
stations and direct broadcast satellites provide video services as well.
Federal Regulation. Television broadcasting is subject to the
jurisdiction of the FCC under the Communications Act of 1934, as amended (the
"Communications Act"). The Communications Act, and/or the FCC's rules, among
other things, (i) prohibit the assignment of a broadcast license or the
transfer of control of a corporation holding a license without the prior
approval of the FCC; (ii) prohibit the common ownership of a television
station and an AM or FM radio station or daily newspaper in the same market,
although AM-FM station combinations by itself are permitted; (iii) prohibit
ownership of a CATV system and television station in the same market; (iv)
restrict the total number of broadcast licenses which can be held by a single
entity or individual or entity with attributable interests in the stations
and prohibits such individuals and entities from operating or having
attributable interests in most types of stations in the same service area
(loosened in the 1996 Act); and (v) prohibit a corporation from holding an
FCC license if any of its officers or directors are aliens or if more than
one-fifth of its capital stock is owned of record or voted by aliens or their
representatives or by a international government or representative thereof,
or by any corporation organized under the laws of a international country.
See Regulatory Environment under A. above for a description of certain
provisions of the 1996 Act including in particular those which would remove
the regulations over non-basic cable service in three years and permit
telephone service providers to provide cable service. In calculating media
ownership interests, Registrant's interests may be aggregated under certain
circumstances with certain other interests of Mr. Mario J. Gabelli, Chairman
and Chief Executive Officer of the Registrant, and certain of his affiliates.
Television licenses are issued for terms of seven years and are
renewable for terms of seven years. The current licenses for WHBF-TV and
WOI-TV expire on December 1, 1997 and February 1, 1998, respectively.
Other
On December 1, 1995, Clear Video LLC, a 60% owned subsidiary of
Registrant acquired 23 cable television systems in northeast Kansas serving
approximately 4,500 subscribers for $5.2 million. Certain of the systems
cluster with local telephone exchanges owned by J.B.N. Telephone. Registrant
also owns a small cable system in Kansas.
Registrant also has the right to market direct broadcasting TV services
via satellite to approximately 21,200 households in New Mexico and Wisconsin
and had approximately 1,350 customers at December 31, 1996. Operating
results have not been material to date.
C. Personal Communications Services ("PCS").
Subsidiaries of Registrant are 49.9% limited partners in five
partnerships (the "C-Block Partnerships"). In the FCC's C-Block auction
(restricted to small businesses and certain other qualifying bidders) of 30
megahertz personal communications services licenses, which concluded in 1996,
the "C-Block" Partnerships won 31 licenses in 17 states covering a population
of approximately 7 million people. The licenses had an aggregate purchase
price of $216 million after a 25% bidding credit.
Under FCC rules, the "C-Block Partnerships made a down payment equal to
10% of the cost (net of bidding credits) of the licenses ($21.6 million).
The Government is providing 10 year financing, interest only for the first
six years at an interest rate of 7% per annum (Registrant argues strenuously
that the interest rate should have been 6.51%, the applicable treasury rate
at the time the licenses were awarded), for the remaining 90% of the cost of
the licenses. Registrant's subsidiaries have agreements to loan the C-Block
Partnerships an aggregate of $41.8 million, $20.4 million of which has been
utilized at December 31, 1996, to fund the down payments on the licenses, and
the remainder is to be utilized for interest payments on the Government loans
and certain other partnership expenses. These loans carry an annual commit-
ment fee of 20% and an interest rate of 15% which are payble when the loans
mature in 2003. The 50.1% general partners have no obligation to provide
loans or additional funds to the C-Block Partnerships. In late March 1997,
the FCC approved a possible combining of the five C-Block Partnerships into a
single partnership.
Another subsidiary of Registrant, Lynch PCS Corporation F ("LPCSF"), is
a 49.9% limited partner in Aer Force Communications B, L.P. ("Aer Force").In
the FCC's F-Block Auction (restricted to small businesses and certain other
qualifying bidders) of 10 megahertz PCS licenses, Aer Force won five licenses
in four states covering a population of approximately 20 million people. The
licenses have an aggregate purchase price of $19 million after a 25% bidding
credit. The grant of licenses won in the F-Block Auction is subject to the
FCC's application and review process, in which other bidders and the FCC have
the right to challenge Aer Force's qualifications.
Under FCC rules, Aer Force has to make a down payment equal to 20% of
the cost (net of bidding credits) of the licenses ($3.8 million), 50% of
which was made on January 23, 1997 with the remaining 50% due shortly after
the award of the licenses. The Government is providing 10 year financing,
interest only for two (2) years, for the remaining 80%. Registrant's
subsidiary has agreed to loan Aer Force $11.8 million for five years, of
which $1.9 million was used for the first half of the down payment and
another $1.9 million would be used for the second half of the down payments
with the remainder to be used for interest and certain other partnership
expenses. The 50.1% general partner has no obligation to provide loans or
additional funds to Aer Force. To fund LPCSF's loan obligation, Registrant
has borrowed $11.8 million from Gabelli Funds, Inc. ("GFI"), of which $10
million has been repaid. Registrant expects to reborrow $1.9 million for the
remaining 50% of the down payment. The GFI loan is due August 12, 1997, and
is secured by the note to LPCSF from Aer Force, LPCSF's 49.9% partnership
interest in Aer Force and the stock of certain of Registrant's subsidiaries.
The loan from GFI includes a special fee payable to GFI equal to 10% of the
net profits (after an assumed cost of capital) on LPCSF's investment in Aer
Force. Another subsidiary of Registrant has an agreement with Rivgam
Communicators L.L.C. ("Rivgam"), a subsidiary of GFI, which won licenses in
the FCC's D and E Block Auctions for 10 megahertz PCS licenses, to provide
certain services to it and to receive a fee equal to 10% of the profits of
Rivgam (after an assumed cost of capital). Rivgam won twelve licenses in
seven states covering a population of 33 million, with an aggregate cost of
$84.9 million. Registrant is examining the possibility of spinning off Lynch
PCS Corporation F to Registrant's shareholders. There are certain matters to
be examined in connection with a possible spin-off, and there is no assurance
that such a spin-off will be effected.
FCC rules impose build-out requirements that require PCS licensees to
provide adequate service to at least one-third of the population in the
licensed area within five years from the date of grant and two-thirds within
ten years. There are also substantial restrictions on the transfer of
control of PCS licenses in the C and F blocks.
There are many risks relating to PCS, including without limitation, the
high cost of PCS licenses, the fact that it involves start-up businesses,
raising the substantial funds required to pay for the licenses and the build
out, determining the best way to develop the licenses and which technology to
utilize, the small size and limited resources of the C-Block Partnerships and
Aer Force compared to other potential competitors, existing and changing
regulatory requirements, additional auctions of wireless telecommunications
spectrum and actually building out and operating new businesses profitably in
a highly competitive environment (including already established cellular
telephone operators and other new PCS licensees). There can be no assurance
that any licenses granted to the C-Block Partnerships, Aer Force, or Rivgam
can be successfully financed, developed and/or operated, with Registrant's
subsidiaries recovering their debt and equity investments.
II. SERVICES
A. The Morgan Group, Inc..
The Morgan Group Inc. ("Morgan") is the Registrant's only service
subsidiary. On July 22, 1993, Morgan completed an initial public offering
("IPO") of 1,100,000 shares of its Class A common Stock, $.015 par value, at
$9.00 per share. As a result of this offering, Lynch's equity ownership in
Morgan was reduced from 90% to 47%, represented by its ownership of 1,200,000
shares of Class B common stock. In December 1995, Lynch acquired from Morgan
150,000 shares of Class A common stock (plus $1.3 million in cash plus
accrued dividends) in exchange for its 1,493,942 shares of Series A Preferred
Stock of Morgan. At December 31, 1996, Lynch's equity ownership in Morgan is
approximately 50%. Because the Class B common stock is entitled to two votes
per share, its voting interest in Morgan is approximately 66% and, therefore,
Lynch continues to consolidate Morgan's results in its financial statements.
Morgan Class A Common Stock is listed on the American Stock Exchange under
the symbol "MG."
Morgan is the leading provider of outsourcing transportation services
to the manufactured housing and recreational vehicle ("RV") and commercial
truck industries in the United States and has been operating since 1936.
Morgan provides outsourcing transportation services through a national
network of approximately 1,720 independent owner-operators and 1,300 drive-away
drivers. Morgan dispatches its drivers from 115 locations in 35 states.
Morgan's largest customers include Fleetwood Enterprises, Inc., Oakwood Homes
Corporation, Winnebago Industries, Inc., Champion Enterprises, Inc., Cavalier
Homes, Inc., Schult Homes, Clayton Homes, Skyline Corporation and Ryder
Systems. Morgan's services also include arranging for transporting other
products, including commercial vehicles and office trailers.
In May 1995, Morgan acquired the assets of Transfer Drivers, Inc.
("TDI"), which focuses on relocating rental equipment for companies such as
Ryder Systems, Budget Rentals and Penske Truck Leasing and also delivery of
new equipment from manufacturers including Utilimaster, Grumman Olson and
Bluebird Bus. TDI had revenues of $8.4 million in 1996 and $5.3 million in
1995. On December 30, 1996, Morgan acquired the operating assets of Transit
Homes of America ("Transit") which had more than 400 independent contract
drivers and serves a number of leading producers in the manufactured housing
industry. Transit had revenues of $29.5 million in 1996.
As of December 31, 1996, Morgan's owned transportation equipment
included 32 tractors, 74 drop deck trailers, 15 car carrier trailers, 22
tent camper trailers, and 112 lowboy and miscellaneous trailers. The
transportation equipment, except for 26 tractors, are being held for sale in
conjunction with the sale or discontinuance of the "truckaway" operation (see
below).
Morgan also provides certain insurance and financing services to its
owner-operators. Morgan currently provides physical damage insurance and
certain other insurance protection to the owners of equipment under lease to
the Company through a captive insurance subsidiary. In addition, Morgan
provides financing and certain guarantees of equipment loans through its
finance subsidiary.
Morgan has decided to discontinue the "truckaway" operation of the
Specialized Transport Division. Morgan recorded in the fourth quarter of 1996,
special charges of $3,500,000 before taxes relating to exiting the truckaway
operation and a write down of properties in accordance with the SFAS 121.
Truckaway is a line of business which focused on the transportation of van
conversions, tent campers, and automotive product utilizing Company-owned
equipment. In addition to the above identified equipment being held for sale
in conjunction with the sale or discontinuance of the "truckaway" operation,
there are 13 tractors and 9 tent camper trailers currently financed under
operating leases. At December 31, 1996, there were approximately 110 owner
operators and 19 company drivers assigned to the truckaway operation. The
truckaway operation had revenues of $12,900,000, $14,400,000, and $20,600,000
and estimated losses of $1,800,000, $1,200,000 and estimated profits of
$1,200,000 for the years ended December 31, 1996, 1995, and 1994, respectively.
Industry Information. Morgan's business is substantially dependent
upon the manufactured housing and recreational vehicle industries. Both of
these industries are subject to broad production cycles. The manufactured
housing industry continued to experience growth during 1996, while the
recreational vehicle industry was down in 1996.
Growth Strategy. Morgan's strategy is to (i) capitalize on its
stronger market position in the manufactured housing business, growing
internally and through acquisitions and (ii) emphasize the Company's role in
the large outsourcing transport industry which encompasses arranging for
deliveries of numerous types of consumer and commercial vehicles.
Morgan's initiatives for improved margins are to exit lines of business
which are unrewarding, reducing corporate overhead, and improving the
Company's safety record. There is no assurance that such strategy and
initiatives will be successful in light of changing economics market and
competitive conditions.
Morgan is continuously reviewing and negotiating potential
acquisitions. There can be no assurance that any future acquisitions will be
effected or, if effected, that they can be successfully integrated with
Morgan's business.
Customers and Marketing. Morgan's ten largest customers accounted for
approximately 69% of its revenues in the previous three years.
Competition. All of Morgan's activities are highly competitive. In
addition to fleets operated by manufacturers, Morgan competes with several
large national interstate carriers and numerous small regional or local
interstate and intrastate carriers. Morgan's principal competitors in the
manufactured housing and RV marketplaces are privately owned. In the
commercial transport market, Morgan competes with large national interstate
carriers, many of whom have substantially greater resources than Morgan.
Morgan also competes for certain services with railroad carriers. No
assurance can be given that Morgan will be able to maintain its competitive
position in the future.
Competition among carriers is based on the rate charged for services,
quality of service, financial strength, insurance coverage and the geographic
scope of the carrier's authority and operational structure. The availability
of tractor equipment and the possession of appropriate registration approvals
permitting shipments between points required by the customer may also be
influential.
Selected Operating Information. The following table sets forth certain
operating information for each of the five years ended December 31, 1996.
Years Ended December 31
1992 1993 1994 1995 1996
(Revenues in thousands)
Manufactured Housing Group:
Shipments . . . . . . . 80,587 95,184 121,604 135,750 144,601
Revenues. . . . . . . . $ 32,324 $ 39,930 $ 53,520 $ 63,353 $ 72,616
Driver Outsourcing:
Shipments . . . . . . . 23,636 30,978 32,060 49,885 58,368
Revenues. . . . . . . . $ 8,055 $ 13,416 $ 15,197 $ 19,842 $ 23,090
Specialized Transport:
Shipments . . . . . . . 39,706 38,618 41,934 44,406 41,255
Revenues . . . . . . . $ 24,016 $ 25,835 $ 28,246 $ 29,494 $ 26,169
Other service revenues $ 2,722 $ 3,612 $ 4,917 $ 9,614 $ 10,333
Total operating
revenues . . . . . . . $ 67,116 $ 82,793 $101,880 $122,303 $132,208
Industry Participation. The following tables set forth participation in the
two principal industries the company operates in where industry information
is available:
1992 1993 1994 1995 1996
Manufactured Homes:
Industry production. . . 309,457 374,126 451,646 505,819 553,133
Shipments . . . . . . . . 60,381 76,188 98,181 114,890 121,227
Shares of units shipped . 19.5% 20.4% 21.7% 22.7% 21.9%
Recreational Vehicles:
Industry productions. . . 369,200 406,300 426,100 380,300 376,400
Units moved 62,012 71,792 67,502 64,303 57,703
Shares of units shipped3 16.8% 17.7% 15.8% 16.9% 15.3%
Risk Management, Safety and Insurance. The risk of substantial losses
arising from traffic accidents is inherent in any transportation business.
Morgan carries insurance to cover such losses up to $20 million per
occurrence with a deductible of up to $250,000 per occurrence for personal
injury and property damage. The frequency and severity of claims under the
Company's liability insurance affect the cost, and potentially the
availability, of such insurance. If Morgan is required to pay substantially
greater insurance premiums, or incurs substantial losses above $20 million or
substantial losses below its $250,000 deductible, its results of operations
can be materially adversely affected. There can be no assurance that Morgan
can continue to maintain its present insurance coverage on acceptable terms.
Interstate Indemnity Company ("Interstate"), a wholly-owned insurance
subsidiary of the Company, makes available physical damage insurance coverage
for the Company's owner-operators. Interstate also writes performance surety
bonds for Morgan Drive Away, Inc.
Regulation. Morgan's interstate operations are subject to regulation
by the Federal Highway Administration, which is an agency of the United
States Department of Transportation ("D.O.T."). Effective August 26, 1994,
essentially all motor common carriers were no longer required to file
individually determined rates, classifications, rules or practices with the
Interstate Commerce Commission ("I.C.C.") Effective January 1, 1995, the
economic regulation of certain intrastate operations by various state
agencies was preempted by federal law. The states will continue to have
jurisdiction primarily to insure that carriers providing intrastate
transportation services maintain required insurance coverage, comply with all
applicable safety regulations, and conform to regulations governing size and
weight of shipments on state highways. Most states have adopted D.O.T.
safety regulations and conform to regulations governing size and weight of
shipments on state highway, and actively enforce them in conjunction with
D.O.T. personnel.
Carriers normally are required to obtain authority from the I.C.C. or
its successor as well as various state agencies. Morgan is approved to
provide transportation from, to, and between all points in the continental
United States.
Morgan provides contract and non-contract transportation services to
the shipping public pursuant to governing rates and charges maintained at its
corporate and various dispatching offices. A contract carrier provides
transportation services pursuant to a written contract designed to meet a
customer's specific shipping needs or by dedicating equipment exclusively to
a given customer for the movement of a series of shipments during a specified
period of time.
Federal regulations govern not only operating authority and
registration, but also such matters as the content of agreements with owner-
operators, required procedures for processing of cargo loss and damage
claims, and financial reporting. Morgan believes that it is in substantial
compliance with all material regulations applicable to its operations.
The D.O.T. regulates safety matters with respect to the interstate
operations of Morgan. Among other things, the D.O.T. regulates commercial
driver qualifications and licensing; sets minimum levels of carrier liability
insurance; requires carriers to enforce limitations on drivers' hours of
service; prescribes parts, accessories and maintenance procedures for safe
operation of freight vehicles; establishes noise emission and employee health
and safety standards for commercial motor vehicle operators; and utilizes
audits, roadside inspections and other enforcement procedures to monitor
compliance with all such regulations. Recently, the D.O.T. has established
regulations which mandate random, periodic, pre-employment, post-accident and
reasonable cause drug testing for commercial drivers. The D.O.T. has also
established similar regulations for alcohol testing. Morgan believes that it
is in substantial compliance with all material D.O.T. requirements applicable
to its operations.
From time to time, tax authorities have sought to assert that owner
operators in the trucking industry are employees, rather than independent
contractors. No such tax claim has been successfully made with respect to
Morgan. Under existing industry practice and interpretations of federal and
state tax laws, as well as Morgan's current method of operation, Morgan,
based on the advice of counsel, maintains that its owner operators are not
employees. Whether an owner operator is an independent contractor or
employee is, however, generally a fact-sensitive determination and the laws
and their interpretations can vary from state to state. There can be no
assurance that tax authorities will not successfully challenge this position,
or that such tax laws or interpretations thereof will not change. If the
owner operators were determined to be employees, such determination could
materially increase Morgan's employment tax and workers' compensation
exposure.
Interstate, Morgan's insurance subsidiary, is a captive insurance
company incorporated under Vermont law. It is required to report annually to
the Vermont Department of Banking, Insurance & Securities and must submit to
an examination by this Department on a triennial basis. Vermont regulations
require Interstate to be audited annually and to have its loss reserves
certified by an approved actuary. Morgan believes Interstate is in
substantial compliance with Vermont insurance regulations.
III. MANUFACTURING
A. Spinnaker Industries, Inc. ("Spinnaker")
Spinnaker's Common Stock and Class A Common Stock are traded
in the over-the-counter market under the symbol "SPNI" and SPNI-A,
respectively, and are listed in the National Association of Securities
Dealers Automated Quotations System (NASDAQ). In August 1996, Spinnaker
changed the name of its existing Common Stock to Class A Common Stock and
declared a stock dividend of one share of a new Common Stock for each share
of Class A Common Stock outstanding. At December 31,1996, Registrant owned
2,237,203 shares of Spinnaker Common Stock, approximately 72.8% of the
outstanding, and 2,259,063 shares of Class A Common Stock, approximately
73.5% of the outstanding.
In June 1994, Spinnaker entered into an agreement with Boyle,
Fleming, George & Co., Inc. ("BF"), for BF to provide operating and strategic
management to Spinnaker. In addition to a management fee, BF received a
warrant to purchase 678,945 shares of Spinnaker Class A Common Stock and
Common Stock (20%) at a price of $2.67 for one share of both Common Stock and
Class A Common Stock (adjusted for the 3 for 2 stock splits in December 1994,
December 1995 and the August 1996 Common Stock Dividend). In April 1996, BF
exercised warrants to purchase 187,476 shares of Common Stock and Class A
Common (adjusted for the August 1996 Stock Dividend). In August 1996, the
Management Agreement with BF was terminated and Messrs. Richard J. Boyle and
Ned Fleming III became employees of Spinnaker.
Spinnaker is in discussion with potential underwriters
concerning a possibly offering of Spinnaker common stock, although there can
be no assurance that an offering will be accomplished on terms satisfactory
to Spinnaker.
Spinnaker is a leading manufacturer and marketer of adhesive
carton sealing tape and adhesive-backed label stock, primarily for the carton
sealing tape and pressure sensitive label stock markets. Spinnaker's
products are grouped into two principal businesses that accounted for the
following percentages of 1996 net sales: pressure and water sensitive carton
sealing tape (51%) and adhesive-backed label stock (46%). For the fiscal
year ended December 31, 1996, Spinnaker had net sales of $246.5 million.
Spinnaker has three 100% owned subsidiaries: Brown-Bridge
Industries, Inc.("Brown-Bridge"), 80.1% of which was acquired in September
1994, Central Products Company ("Central Products"), acquired in October 1995
and Entoleter, Inc. ("Entoleter"), which it has owned since Registrant
acquired Spinnaker in 1987. In October 1996, Spinnaker acquired the
remaining 19.9% of outstanding stock of Brown-Bridge (plus management stock
options), which were owned by the management of Brown-Bridge, BF and
Registrant. Brown-Bridge is in the adhesive-coated paper industry. Central
Products manufactures carton sealing tape. Entoleter manufactures a line of
industrial process equipment and a line of air pollution equipment.
Central Products
Central Products' carton sealing tape is used for the
packaging of goods for shipment by manufacturing, retail or distribution
companies. Central Products manufactures pressure sensitive tape with all
three primary adhesive technologies: acrylic, hot melt and natural rubber. It
also offers three types of water sensitive tape: paper tape, fiberglass
reinforced tape and box tape. Central Products believes it is the only United
States supplier to manufacture both pressure sensitive tape and water
sensitive tape, and is the only company to produce pressure sensitive tape
utilizing all three pressure sensitive adhesive technologies.
Pressure Sensitive Tape. Pressure sensitive tape is
manufactured primarily through the coating of plastic film with a thin layer
of acrylic, hot melt or natural rubber adhesive. The adhesive is applied to
various grades of high-quality, low-stretch polypropylene film for use in
most applications as well as PVC and polyester films which are used for
certain specialized applications. Acrylic adhesives, which are noted for
their clarity, non-yellowing properties, good temperature resistance and low
application cost, are best suited for manual applications on light and medium
carton sealing situations. Hot melt adhesives, noted for their quiet release
and easy unwind during application, are the most widely used pressure
sensitive adhesives because they satisfy 90% of all carton sealing
requirements. Natural rubber adhesives are unique because of their aggressive
adhesion properties and, although they are ideal for recycled content cartons
and cartons requiring hot, humid or cold packing, transportation and storage,
they can be used for a wide variety of surface conditions and extreme
temperature tolerances. Central Products' pressure sensitive tapes are sold
under the trade names Alltac and Central .
Water Sensitive Tape. Water sensitive tape is generally
manufactured through the application of a thin layer of water sensitive
adhesive to gumming kraft paper. It is offered as either non-reinforced
(paper) tape or fiberglass reinforced tape. Non-reinforced tape is made by
applying an adhesive to a single layer of high tensile strength kraft paper
coated with Central Products' patented starch-based adhesive. Non-reinforced
tapes are totally biodegradable and are used in light to medium carton
sealing applications. Fiberglass reinforced tape contains a layer of
fiberglass yarn placed between two layers of kraft paper, and is typically
used to seal heavy packages or on cartons that will be subject to a high
level of abuse during shipping and is also favored in shipping high value
goods due to its strong sealing qualities. Both non-reinforced tape and
fiberglass reinforced tape are available in light, medium and heavy grades.
Central Products' water sensitive carton sealing tapes are sold under the
trade names Glasseal , Central , Green Core and Tru-Seal .
Central Products also supplies tape dispensing equipment
manufactured by other companies. It currently offers a broad line of carton
sealing equipment for pressure sensitive tape, which ranges from hand held
dispensers to automatic random sizing equipment. Central Products also offers
two types of table top dispensers for water sensitive tape a manual
dispenser and a more expensive electric dispenser.
Brown-Bridge
Brown-Bridge develops, manufactures and markets
adhesive-backed label stock that is converted by printers and industrial
users into products that are utilized for marking, identifying, labeling and
decorating applications and products. Brown-Bridge's products are offered in
three primary adhesive categories: pressure sensitive, water sensitive and
heat sensitive.
Pressure Sensitive. Pressure sensitive products, which are
activated by the application of pressure, are manufactured with a three
element construction consisting of face stock, adhesive coating and silicone
coated release liner. The adhesive product is sold in roll or sheet form for
further conversion into products used primarily for marking, identification
and promotional labeling. Brown-Bridge's pressure sensitive products are sold
under the trade names Strip Tac and Strip Tac Plus . Roll pressure sensitive
products are generally sold to label printers that produce products used
primarily for informational labels (shipping labels, price labels, warning
labels, etc.), product identification and postage stamps. Sheet pressure
sensitive products are sold to commercial sheet printers, who provide
information labels and other products (such as laser printer stock). During
fiscal 1996, pressure sensitive products constituted approximately 87% of
Brown-Bridge's net sales.
Water Sensitive. Water sensitive products, which are
activated by the application of water, include a broad range of paper and
cloth materials, coated with a variety of adhesives. The adhesive coated
products are sold in roll or sheet form for further conversion to postage and
promotional stamps, container labels, inventory control labels, shipping
labels and splicing, binding and stripping tapes. The water sensitive line is
sold under the trade name Pancake and consists of three product groups: dry
process, conventional gummed and industrial. Dry process is sold primarily
for label and business form uses. Conventional gum products serve many of the
same end uses for hand applied labels as dry process stock. A major portion
of these products is sold for government postage and promotional stamp uses.
Industrial products are sold in several niche markets, such as electrical and
other specialty markets.
Heat Sensitive. Heat sensitive products, which are activated
by the application of heat, are manufactured by coating a face stock with
either a hot melt coating or an emulsion process adhesive. The heat sensitive
product line is sold primarily for labeling end uses, such as pharmaceutical
bottles, meat and cheese packages, supermarket scales, cassettes and bakery
packages. The adhesive coated product is sold in roll or sheet form for
further conversion. Brown-Bridge's heat sensitive products are sold under the
trade name Heat Seal.
Marketing and Customers
Spinnaker markets its broad range of products to a variety of
customers. During 1996, no single customer accounted for more than 10% of
Spinnaker's net sales.
Central Products' marketing and sales strategy emphasizes
supplying a full line of both water sensitive and pressure sensitive tape
products to the carton sealing tape industry. Central Products sells its
products directly to over 1,500 paper distributors (customers), who in turn
resell these tape products to the end user markets. In addition, Central
Products sells private-brand carton closure tapes direct to large customers
who in turn distribute the products under their name to end users. Central
Products provides its distributor customers with a high level of product
education to enable them to better sell the Company's products.
Brown-Bridge generally markets its products through its own
sales representatives to regional and national printers, converters and
merchants. The majority of sales represent product sold and shipped from
Brown-Bridge's facilities in Troy, Ohio. However, to broaden its market
penetration, Brown-Bridge also contracts with seven regional processors
throughout the United States, with whom Brown-Bridge stores product until
sold. Generally, these processors perform both slitting and distribution
services for Brown-Bridge.
Manufacturing and Raw Materials
Spinnaker produces all adhesive technologies for carton
sealing tape and adhesive-backed label stock. It produces carton sealing
tapes and label stock for a variety of standard and custom applications
requiring water, pressure and heat sensitive technologies. Spinnaker believes
its strong manufacturing capabilities enable it to maintain high product
quality and low operating costs and respond to customers' needs quickly and
efficiently.
Raw materials are the most significant cost component in
Spinnaker's production process. The material component accounts for
approximately 65% to 70% of the total cost of its products, with the most
important raw materials being paper (gumming kraft and face stock), adhesive
materials, fiberglass, and polypropylene resin. These materials are currently
readily available and are procured from numerous suppliers.
Among Spinnaker's manufacturing strengths at its Central
Products water sensitive tape operation are fully integrated, computerized
coating and laminating machines, fully automated slitting, rewinding and
packaging machines and a state of the art print shop. At its pressure
sensitive tape operation, they include an in-house film line for production
of polypropylene film and an advanced computerized coating machine for each
of the three adhesive technologies.
See Item 2 below for a description of manufacturing and
distribution facilities.
Competition
The adhesive-backed materials industry is highly competitive,
and Spinnaker competes with both national and regional suppliers. As a result
of the competitive environment in the markets in which Spinnaker operates,
Spinnaker faces (and will continue to face) pressure on sales prices of its
products. As a result of such pricing pressures, Spinnaker may in the future
experience reductions in the profit margins on its sales, or may be unable to
pass future raw material price increases to its customers (which would also
reduce profit margins). Spinnaker operates in markets characterized by a few
large diversified companies selling products under recognized trade names and
a number of smaller public and privately-held companies selling to the
market. In addition to branded products, some companies in the industry
produce private-label products to enhance supply relationships with large
buyers.
Central Products competes with other manufacturers of carton
sealing tape products as well as manufacturers of alternative carton closure
products. Competition in the carton sealing market is based primarily on
price and quality, although other factors may enhance a company's competitive
position, including product performance characteristics, technical support,
product literature and customer support. There are a wide range of
participants in the carton sealing industry, including large diversified
corporations (principally in pressure sensitive) and small private companies
(principally in water sensitive tape). Central Products is one of the leading
manufactures of water sensitive tape. 3M Corporation is the largest
manufacturer of pressure sensitive tape in the carton sealing market in the
United States.
The adhesive-backed label stock market is fragmented. Brown-Bridge
competes with several national manufacturers, including
Avery-Dennison, Bemis, 3M Corporation and a number of smaller regional
manufacturers. Spinnaker believes that Avery-Dennison, Bemis and 3M
Corporation are the only competitors with national production facilities and
Avery-Dennison and 3M Corporation are the only competitors with nationally
recognized brand names.
Environmental Regulations
Spinnaker's operations are subject to environmental laws and
regulations governing emissions to the air, discharges to waterways, and
generation, handling, storage, transportation, treatment and disposal of
waste materials. Spinnaker is also subject to other federal and state laws
and regulations regarding health and safety matters. Environmental laws and
regulations are constantly evolving and it is impossible to predict the
effect that these laws and regulations will have on Spinnaker in the future.
While Spinnaker believes it is currently in substantial compliance with all
such environmental laws and regulations, there can be no assurance that it
will at all times be in complete compliance with all such requirements. In
addition, although Spinnaker believes that any noncompliance is unlikely to
have a material adverse affect on Spinnaker, it is possible that such
noncompliance could have a material adverse affect on Spinnaker. Spinnaker
has made and will continue to make capital expenditures to comply with
environmental requirements. As is the case with manufacturers in general, if
a release of hazardous substances occurs on or from Spinnaker's properties or
any associated offsite disposal location, or if contamination from prior
activities is discovered at any of Spinnaker's properties, Spinnaker may be
held liable and the amount of such liability could be material.
Patents and Trademarks
Patents are held by Spinnaker with respect to the manufacture
of certain of its products, but its management does not consider such patents
to be important to Spinnaker's operations. The patents expire over various
lengths of time with the last patent expiring in about 10 years. Spinnaker
has registered several of its trade names and trademarks for adhesive-backed
materials.
International Sales
The Company's international sales were $11.5 million,
$10.4 million and $3.9 million in 1996, 1995 and 1994, respectively. Of the
$11.5 million in 1996 international sales, approximately $6 million were
represented by exports of Brown-Bridge products. The substantial majority of
these sales were to Canadian customers. The profitability of international
sales is substantially equivalent to that of domestic sales. Because
international sales are transacted in United States dollars, payments in many
cases are secured by irrevocable letters of credit, and sales are spread over a
number of customers in several countries, Spinnaker believes that the risks
commonly associated with doing business internationally are minimized.
Backlog
The Company's backlog believed to be firm was $9.2 million at
December 31, 1996, as compared to $10.7 million at December 31, 1995.
Industrial Process Equipment Business
Through its Entoleter subsidiary, the Company engineers,
manufactures and markets a line of industrial process equipment and a line of
air pollution control equipment. Entoleter's net sales consist entirely of
sales to commercial and industrial customers.
Employees
As of December 31, 1996, Spinnaker employed approximately
1,000 persons, of which 380 were Brown-Bridge employees, 570 were Central
Products employees and 40 were Entoleter employees. All employees other than
management are paid on an hourly basis. A majority of its hourly employees
are not represented by unions. Central Products has a labor agreement
expiring in 1998 with the United Paperworkers International Union AFL-CIO
covering approximately 200 hourly employees at the Menasha, Wisconsin plant.
Entoleter's approximately 20 hourly-paid production employees are members of
the United Electrical, Radio and Machine Workers of America Union. The
current collective bargaining agreement expires on April 30, 1999. Spinnaker
believes that its relations with its employees are good; however, there can
be no assurance that the Company will not experience work stoppages or
slowdowns in the future.
B. Lynch Machinery, Inc. ("LM")
LM, a 90% owned subsidiary of Registrant, designs, develops,
manufactures and markets a broad range of manufacturing equipment for the
electronic display and consumer glass industries. To better reflect its
current operations, LM is planning to change its name to Lynch Interactive
Displays, Inc. LM also produces replacement parts for various types of
packaging and glass container-making machines which LM does not manufacture.
CRT Display and Consumer Glass Manufacturing Technologies. LM
manufactures nine models of glass-forming presses to provide high-speed
automated systems to form different sizes of face panels and tubes for
television screens and computer monitors. LM produces an HDTV model press to
build large-screen televisions for the HDTV (high definition television)
market. LM manufactures and installs presses to form table ware such as
glass tumblers, plates, cups, saucers and commercial optical glass. LM also
manufactures and installs electronic controls and retrofit systems for CRT
display and consumer glass presses. LM shipped four controls and retrofit
systems amounting to approximately $3.2 million in 1996.
The production of glass pressware entails the use of machines
which heat glass and, using great pressure, form an item by pressing it into
a desired shape. Because of the high cost of bringing the machine and
materials up to temperature, a machine for producing glass pressware must be
capable of running 24 hours a day, 365 days a year.
During 1996, LM delivered four glass press machines. At
December 31, 1996, LM had orders for, and had in various stages of
production, six glass press machines, at a total sales price of approximately
$9,240,000, which are scheduled for delivery in 1997. There can be no
assurance that LM can obtain orders for additional large glass pressing
orders to replace its existing orders.
LM believes that it is the largest supplier to glass companies
that do not manufacture their own pressware machines in the worldwide
pressware market. Competitors include various companies in Italy, Japan,
France, Germany and elsewhere.
While several of the largest domestic and international
producers of glass pressware frequently build their own glass-forming
machines and produce spare parts in-house, nearly all pressware producers
have made purchases of machines and/or spare parts from LM.
Packaging Machinery. Effective in January 1996, LM
discontinued the manufacturing of automated case packers and related
equipment; however, it will continue to sell parts for existing machines. In
mid-1996, LM discontinued and sold its Tri-Can International operation, which
manufactured packaging machines. In connection therewith, LM recognized a
charge to income in 1996 of approximately $832,470.
International Sales. During 1996, approximately 88% of LM's
sales were made to international customers, and 100% of its large glass
pressing machine orders were from international customers in East Asia. The
profitability of international sales is equivalent to that of domestic sales.
Because many international orders require partial advance deposits, with the
balance often secured by irrevocable letters of credit from banks in the
international country, the Registrant believes that some of the credit risks
commonly associated with doing business internationallt are minimized. The
Registrant avoids currency exchange risk by transacting all international
sales in United States dollars.
Backlog. LM had an order backlog of approximately $6.6
million at December 31, 1996, compared with approximately $16.9 million at
December 31, 1995. The decrease in backlog is attributable to the smaller
number of orders for large presses booked in 1996. LM believes that all of
the December 31, 1996 backlog will be shipped during 1997. LM includes as
backlog those orders which are subject to written contract, written purchase
orders and telephone orders from long standing customers who maintain
satisfactory credit ratings. LM has historically experienced only
insignificant cancellations of the orders included in its backlog.
Raw Materials. Raw materials are generally available to LM in
adequate supply from a number of suppliers.
C. M-tron Industries, Inc. ("M-tron")
M-tron, 94% owned subsidiary of the Registrant, is a
manufacturer and importer of quartz crystal products and clock oscillator
modules used for clocking digital circuits, precision time base references
and telecommunications equipment. A quartz crystal is an oscillating
component which performs the clocking function in a circuit. Crystals and
clock oscillator modules are used primarily in microprocessor-related
equipment and telecommunications equipment. Frequency and time related
products essentially use crystals or clock oscillators, with the addition of
electronic circuitry vertically integrating the product. Crystal and clock
oscillators are sold to original equipment manufacturers, both directly and
through commissioned representatives and distributors.
For 1996, 1995, and 1994, M-tron's sales consisted of (in
thousands):
1996 1995 1994
Crystals............................ $10,594 $13,778 $7,179
Oscillator Modules.................. 7,839 6,434 5,254
Total $18,433 $20,118 $12,433
Competition. Quartz crystals and clock oscillators are sold in a
highly competitive industry. There are numerous domestic and international
manufacturers who are capable of providing quartz crystals and clock
oscillators comparable in quality and performance to M-tron's products.
International competitors, particularly from the Far East, continue to
dominate the United States market. M-tron seeks to manufacture smaller
specialty orders of crystals and oscillators, which it believes it can
competitively fill based upon price, quality and order response time. M-tron
also performs quality control tests on all products it imports from the Far
East and resells domestically and internationally.
International Sales. M-tron's international sales in 1996 were
approximately 15% of total sales and were concentrated in Canada and Western
Europe. The profitability of international sales is substantially equivalent
to that of domestic sales. Because sales are ordinarily spread over a number
of customers in a number of developed countries with no individually
significant shipments, the Registrant believes that risks commonly associated
with doing business in international countries are minimized.
Backlog. M-tron had backlog orders of approximately $5,049,000 at
December 31, 1996, compared with $6,435,000 at December 31, 1995. M-tron
includes as backlog those orders which are subject to specific production
release orders under written contracts, verbal and written orders from
distributors with which M-tron has had long-standing relationships, as well
as written purchase orders from sales representatives. M-tron believes that
all of the backlog at December 31, 1996 will be shipped during 1997.
Raw Material. To the extent possible, M-tron's raw materials are
purchased from multiple sources. Of primary significance are quartz crystal
bars and the bases used for mounting certain finished crystals. M-tron
currently has at least two qualified vendors for each of these items. No
shortages have occurred in the recent past nor are any anticipated in the
near future.
IV. OTHER INFORMATION
While the Registrant holds licenses and patents of various types,
Registrant does not believe they are critical to its overall operations,
except for (1) the television-broadcasting license of WHBF-TV and WOI-TV;
(2)Registrant's telephone subsidiaries franchise certificates to provide
local-exchange telephone service within its service areas; (3) Western's FCC
licenses to operate point-to-point microwave systems; (4) licenses held by
partnerships and corporations in which Western, Inter-Community and UPTC own
minority interests to operate cellular radio systems covering areas in New
Mexico, North Dakota and Michigan, and (5) CLR Video's franchises to provide
cable television service within its service areas.
The Registrant conducts product development activities with respect
to each of its major lines of manufacturing business. Currently, such
activities are directed principally toward the improvement of existing
products, the development of new products and/or diversification. The cost
of such activities, which have been funded entirely by the Registrant,
amounted to approximately $1,627,000 in 1996, $1,673,000 in 1995, $1,231,000
in 1994.
The capital expenditures, earnings and competitive position of
Registrant have not been materially affected by compliance with current
federal, state, and local laws and regulations relating to the protection of
the environment; however, Registrant cannot predict the effect of future laws
and regulations. The Registrant has not experienced difficulties relative to
fuel or energy shortages but substantial increases in fuel costs or fuel
shortages could adversely affect the operations of Morgan.
No portion of the business of the Registrant is regarded as
seasonal, except that, in the case of Morgan, fewer shipments are scheduled
during the winter months in those parts of the country where weather
conditions limit highway use.
There were no customers in 1996 or 1995 that represents 10% or more
of consolidated revenues. The Registrant does not believe that it is
dependent on any single customer.
Excluding the following for The Morgan Group, Inc.: approximately
1,720 independent owner-operators and 1,300 drive-away drivers, the
Registrant had a total of 1,910 employees at December 31, 1996 and 1,986
employees at December 31, 1995.
Additional information with respect to each of the Registrant's
lines of business is included in Note 14 to the Consolidated Financial
Statements included as Item 14(a) below.
V. FORWARD LOOKING INFORMATION
This Form 10-K contains certain forward looking information,
including without limitation examining the possibility of a spin-off (pg.2),
Item 1-I.A "Regulatory Environment" and possible changes thereto and
"Competition" (pgs. 4-6), Item 1-I.C "Personal Communications Services
("PCS")" (pgs. 8-10), Item 1-II. Morgan "Growth Strategy" (p.11), Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operation," particularly Financial Condition, and Notes to Financial Statements
(Item 14(a) below). It should be recognized that such information are estimates
or forecasts based upon various assumptions, including the matters referred to
therein, as well as meeting the Registrant's internal performance assumptions
regarding expected operating performance and the expected performance of the
economy and financial markets as it impacts Registrant's businesses. As a
result, such information is subject to uncertainties, risks and inaccuracies.
VI. EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction G (3) of Form 10-K, the following
list of executive officers of the Registrant is included in Part 1 of this
Annual Report on Form 10-K in lieu of being included in the Proxy Statement
for the 1997 Annual Meeting of Shareholders. Such list sets forth the names
and ages of all executive officers of Registrant indicating all positions and
offices with the Registrant held by each such person and each such person's
principal occupations or employment during the past five years.
Offices and
Name Positions Held Age
Mario J. Gabelli Chairman and Chief Executive Officer 54
(since May 1986); Chairman and
Chief Executive Officer (since March,
1980) of Gabelli Funds Inc. (successor
to The Gabelli Group, Inc.),
holding company for subsidiaries
engaged in various aspects of the
securities business
Robert E. Dolan Chief Financial Officer (since February 45
1992) and Controller (since May 1990);
Corporate Controller (1984-1989)
of Plessey North America Corporation,
formerly the United States subsidiary
of a United Kingdom defense electronics/
telecommunications company.
Robert A. Hurwich Vice President-Administration, Secretary 55
& General Counsel (since February 10,
1994); Private Law Practice (1991-1993);
Vice President, Secretary & General
Counsel of Moore McCormack
Resources, Inc. (1975-1989).
The executive officers of the Registrant are elected annually by the
Board of Directors at its organizational meeting in May and hold office until
the organizational meeting in the next subsequent year and until their
respective successors are chosen and qualified.
ITEM 2. PROPERTIES
Lynch leases space containing approximately 3,400 square feet for
its executive offices in Greenwich, Connecticut.
LM's operations are housed in two adjacent buildings situated on
3.19 acres of land in Bainbridge, Georgia. In January 1997, LM completed an
expansion of its manufacturing capacity at this site, which added
approximately 15,000 square feet, bringing total manufacturing space to
approximately 73,000 square feet. Finished office area in the two buildings
totals approximately 17,000 square feet. All such properties are subject to
security deeds relating to loans.
M-tron's operations are housed in two separate facilities in
Yankton, South Dakota. These facilities contain approximately 34,000 square
feet in the aggregate. One facility owned by M-tron contains approximately
18,000 square feet and is situated on 5.34 acres of land. This land and
building are subject to a mortgage executed in support of a bank loan. The
other Yankton facility containing approximately 16,000 square feet is leased,
which lease expires on September 30, 1997.
Spinnaker's corporate headquarters is located in Dallas, Texas,
where it shares office space with an affiliate of its principal executive
officers.
Brown-Bridge owns two manufacturing facilities, Plant One and Plant
Two, in Troy, Ohio. Plant One is a 200,000 square foot complex located on
approximately five acres of land adjacent to the Miami River and Plant Two is
a 98,000 square foot facility located on approximately five aces of land
nearby. There are approximately five undeveloped acres of land adjacent to
Plant Two that are available for expansion. Both facilities house
manufacturing, administrative and shipping operations.
Central Products owns one manufacturing facility in Menasha,
Wisconsin and leases another in Brighton, Colorado. The Menasha facility
contains approximately 160,000 square feet and the Brighton facility whose
lease expires in 2014, contains approximately 210,000 square feet. The
corporate office and center for administrative services are located in a 20,000
square foot facility adjacent to the Menasha plant. Central Products also
maintain two leased distribution centers in Neenah, WI (90,000 square feet), and
Denver, CO (100,000 square feet).
Entoleter owns a manufacturing plant containing 72,000 square feet
located on approximately 5 acres of land in Hamden, Connecticut. The land
and building are subject to a mortgage and security agreement executed in
support of a bank loan. Entoleter also owns approximately 6 unimproved acres
located in Hamden, Connecticut adjacent to its property.
During 1996 and 1995, Registrant's manufacturing facilities operated
in the aggregate at a relatively high level of capacity utilization.
Morgan owns approximately 24 acres of land with improvements in
Elkhart, Indiana. The improvements include a 23,000 square foot office
building used as Morgan's principal office, a 7,000 square foot leased
building containing additional offices leased to one of its customers, a
9,000 square foot building used for Morgan's safety and driver service
departments and also for storage and an 8,000 square foot building used as a
garage to service company-owned vehicles. Most of Morgan's 11 regional and
127 dispatch offices are situated on leased property. Morgan also owns and
leases property for parking and storage of equipment at various locations
throughout the United States, usually in proximity to manufacturers of
products moved by Morgan. The property leases have lease term commitments of
a minimum of thirty days and a maximum of three years, at monthly rental
ranging from $100 to $9,750. The Elkhart facility is currently mortgaged to
one of Morgan's lenders. In total, Morgan owns 73 acres of land throughout
the United States, including the Elkhart facilities. Morgan is in the
process of selling 38 acres located at four property locations, two of which
are associated with exiting the "truckaway" operation.
Western New Mexico Telephone Company owns a total of 16.4 acres at
twelve sites located in southwestern New Mexico. Its principal operating
facilities are located in Silver City, where Western owns a building
comprising a total of 6,480 square feet housing its administrative offices
and certain storage facilities. In Cliff, Western owns five buildings with a
total of 14,055 square feet in which are located additional offices and
storage facilities as well as a vehicle shop, a wood shop, and central office
switching equipment. Smaller facilities, used mainly for storage and for
housing central office switching equipment, with a total of 8,384 square
feet, are located in Lordsburg, Reserve, Magdalena and five other localities.
In addition, Western leases 1.28 acres on which it has constructed four
microwave towers and a 120 square-foot equipment building. Western has the
use of 34 other sites under permits or easements at which it has installed
various equipment either in small company-owned buildings (totaling 4,757
square feet) or under protective cover. Western also owns 3,221 miles of
buried copper cable and 421 miles of buried fiber optic cable running through
rights-of-way within its 15,000 square-mile service area. All Western's
properties described herein are encumbered under mortgages held by the Rural
Utilities Service.
Inter-Community Telephone Company owns 12 acres of land at 10 sites.
Its main office at Nome, ND, contains 4,326 square feet of office and storage
space. In addition, it has 4,400 square feet of garage space and 5,035
square feet utilized for its switching facilities. Inter-Community has 1,728
miles of buried copper cable and 172 miles of buried fiber optic cable. All
of Inter-Community's properties described herein are encumbered under
mortgages held by the National Bank for Co-Operatives ("Co-Bank").
Cuba City Telephone is located in a 3,800 square foot brick building
on 0.4 of an acre of land. The building serves as the central office,
commercial office, and garage for vehicle and material storage. The company
also owns a cement block storage building of 800 square feet on 0.1 of an
acre. In Madison, Wisconsin, Cuba City leases 900 square feet for
administrative headquarters and financial functions. Belmont company is
located in a cement block building of 800 square feet on .5 acre of land in
Belmont, Wisconsin. The building houses the central office equipment for
Belmont. The companies own a combined total of 217 miles of buried copper
cable and 26 miles of fiber optic cable. All of Cuba City's and Belmont's
property described herein are encumbered under mortgages held by the REA and
Rural Telephone Bank, respectively.
J.B.N. Telephone Company owns a total of approximately 2.25 acres at
fifteen sites located in northeast Kansas. Its administrative and commercial
office consisting of 2,820 square feet along with a 1,600 square feet garage
and warehouse facility are located in Wetmore, Kansas. In addition, J.B.N.
owns thirteen smaller facilities housing central office switching equipment
and over 947 miles of buried copper cable. All properties described herein
are encumbered under mortgages held by the Rural Utilities Service.
Haviland Telephone Company owns a total of approximately 3.9 acres
at 20 sites located in south central Kansas. Its administrative and
commercial office consisting of 4,450 square feet is located in Haviland,
Kansas. Its addition, Haviland owns 19 smaller facilities housing garage,
warehouse, and central office switching equipment and over 1,500 miles of
buried copper cable. All properties described herein are encumbered under a
mortgage to Co-Bank.
Dunkirk & Fredonia Telephone Company (including its subsidiaries)
own a total of approximately 9 acres at 10 sites located in western New York.
Its host central office switching equipment, administrative and commercial
offices consisting of 18,297 square feet is located in Fredonia, New York.
In addition, Dunkirk & Fredonia owns nine other smaller facilities housing
garage, warehouse and central office switching equipment and over 111 miles
of buried copper cable and 19 miles of fiber optic cable.
CLR has its headquarters in leased space in Wetmore, Kansas. It
also owns one small parcel of land and leases 22 small sites, which it uses
for its cable receiving and transmission equipment. All properties described
herein are encumbered under a mortgage to Co-Bank.
It is the Registrant's opinion that the facilities referred to above
are in good operating condition and suitable and adequate for present uses.
ITEM 3. LEGAL PROCEEDINGS
Registrant is a party to certain lawsuits in the ordinary course of
business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
MARKET PRICE INFORMATION AND
COMMON STOCK OWNERSHIP
The Common Stock of Lynch Corporation is traded on the American
Stock Exchange under the symbol "LGL." The market price high and lows in
consolidated trading of the Common Stock during the past two years is as
follows:
Three Months Ended
1996 March 31 June 30 Sept 30 Dec 31
High 72 1/2 92 1/2 90 1/2 77
Low 56 70 67 1/2 63 1/2
1995
High 39 1/8 47 3/4 84 3/4 80
Low 30 35 1/2 46 1/8 57 3/4
At March 20, 1997, the Company had 1,070 shareholders of record.
The Registrant did not declare any dividends in 1996 or 1995. See Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations below.
ITEM 6. SELECTED FINANCIAL DATA
(in thousand of dollars, except per share amounts)
Year Ended December 31 (a)
1996 1995 1994 1993 1992
Revenues(a).................$451,880 $333,627 $183,241 $127,021 $108,657
EBITDA(b)................... 33,921 31,096 18,379 12,527 13,351
Operating Profit(c)......... 16,940 19,847 10,942 6,634 8,283
Net Financing Activities.... (14,689) (7,376) (4,333) (3,643) (4,142)
Gain on Sales of Subsidiary and
Affiliate Stock........... 5,146 59 190 4,326 --
Income from Continuing Operations
Before Income Taxes, Minority
Interests, Discontinued Operating
and Extraordinary Item.... 7,397 12,530 6,799 7,317 4,141
Provision for Income Tax... (3,021) (4,906) (2,726) (2,454) (1,733)
Minority Interests......... 418 (2,155) (1,372) (737) (257)
Income from Continuing Operations
Before Discontinued Operations
and Extraordinary Items
and Cumulative Effect of
Accounting Change......... 4,794 5,469 2,701 4,126 2,151
Discontinued Operations(d) (750) (324) (109) (10) --
Extraordinary Item(e)...... (1,348) -- (264) (206) 18
Cumulative Effect to January 1,
1993 of Change in Accounting
for Income Taxes(f) -- -- -- (957) --
Net Income................. $ 2,696 $ 5,145 $ 2,328 $2,953 $ 2,169
Per Common Share (g).......
Income from Continuing
Operations................ $ 3.41 $ 3.89 $ 2.02 $ 3.37 $ 1.71
Net Income................ 1.92 3.66 1.74 2.41 1.72
Cash, Securities and Short-
Term Investments.......... $ 36,102 $ 27,353 $ 31,521 $45,509 $ 44,914
Total Assets............... 392,620 302,439 185,910 129,523 111,374
Long-term Debt............. 219,579 138,029 62,745 65,768 68,286
Shareholders' Equity(h)..... $ 38,923 $ 35,512 $ 30,531 $24,316 $ 21,272
Notes:
(a) Includes results of Inter-Community Telephone Company from April
2, 1991, Cuba City Telephone Exchange and Belmont Telephone
Company from October 31, 1991, Bretton Woods Telephone Company
from February 4, 1992, J.B.N. Telephone Company for November 30,
1993, the assets of Station WOI-TV from March 1, 1994, the assets
of Brown Bridge Division from September 19, 1994, Haviland
Telephone Company from September 26, 1994, Central Products
Company from October 4, 1995 and Dunkirk and Fredonia Telephone
Company from November 26,1996.
(b) EBITDA is earnings before interest, taxes, depreciation and
amortization.
(c) Operating Profit (Loss) is sales and revenues less operating
expenses, which excludes investment income, interest expense,
share of operations of affiliated companies, minority interests
and taxes.
(d) Discontinued operations of Lynch Tri-Can International.
(e) Gain (Loss) on repurchase or redemption of Company's 8%
convertible subordinated debentures for years 1994, 1993, and 1992
and early extinguishment of debt at Spinnaker in 1996.
(f) On January 1, 1993, Lynch adopted the provisions of Statement of
Financial Accounting Standard No., 109, "Accounting for Income
Taxes." (See Note 9 to the Consolidated Financial Statements.)
As a result of this adoption, for the years ended December 31,
1994 and 1993, Operating Profit was lower by $766,000 due to the
higher depreciation and amortization as a result of increased
write-ups in assets acquired in prior business combinations. The
adoption of this statement had no effect on net income, other than
the above noted "Cumulative Effect of Accounting Change
Adjustment" for that period.
(g) Based on weighted average number of common shares outstanding.
(h) No dividends have been declared over the period.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
RESULTS OF OPERATIONS
YEAR 1996 COMPARED TO 1995
Revenues increased to $451.9 million in 1996 from $333.6
million in 1995, a 35.5% increase. Acquisitions made during late 1995,
principally in the manufacturing segment, were the most significant
contributors to the increase. In the manufacturing segment, revenues
increased by $103.4 million to $291.1 million versus $187.7 million in 1995,
or 55%. Central Products Company, which was acquired on October 4, 1995,
contributed $126.4 million in 1996 versus $30.6 million in 1995. 1996's
manufacturing revenues also reflect $26.1 million from Lynch Machinery, Inc.,
a decrease of $6.2 million when compared with 1995 results. This decline was
a result of lower production activities associated with extra-large glass
presses versus 1995. Three extra-large glass presses were shipped in 1996
versus eleven in 1995. The services segment, which represents 29.3% of total
revenue, increased by $9.9 million from 1995 or 8%. In the multimedia
segment, which represents 6.3% of total revenue, revenues increased by $5.0
million. The inclusion of CLR Video for the full year($1.4 million),
increased revenues at Western New Mexico($1.8 million) and the acquisition of
Dunkirk & Fredonia Telephone ($.9 million) were the major factors
contributing to the growth in the multimedia segment.
Earnings before interest, taxes, depreciation and amortization
(EBITDA) increased to $33.9 million in 1996 from $31.1 million in 1995, a
$2.8 million, or a 9% increase. Operating segment EBITDA (prior to corporate
management fees and expenses) grew to $37.3 million from $35.0 million, a 7%
increase. The manufacturing segment represented 67% of EBITDA or $22.8
million, an increase of $5.7 million versus 1995. The full year inclusion of
Central Products whose EBITDA contribution was $10.9 million in 1996 versus
$2.7 million in 1995 accounted for $8.2 million of the increase. This
increase was offset by lower EBITDA at Lynch Machinery of $2.6 million when
compared to 1995 results due to lower sales volume of the extra-large glass
presses. The services segment had negative EBITDA of ($1.8) million versus
$4.7 million in 1995. The decline was attributable to (a)a $3.5 million loss
reserve taken by Morgan relating to the closing of the Truckaway Division and
related real estate and (b) a decrease in recreational vehicle margins due to
reduced demand and higher driver pay and insurance claims. The multimedia
segment contributed $15.3 million or 45.0% of total EBITDA versus $12.3
million in 1995.
Operating profits for 1996 were $16.9 million in 1996, a
decrease of $2.9 million or 15% versus 1995. Operating profits in the
services segment declined by $6.6 million due to the same factors impacting
EBITDA. This decline was partially offset by improvements in the
manufacturing, multimedia and corporate segments of $1.5 million, $1.7
million and $.5 million, respectively.
Investment income decreased by $.9 million to $2.2 million in
1996 versus 1995. The decrease was related to lower dollar investments in
generating current income.
Interest expense increased by $6.2 million in 1996 when
compared to 1995. The increase is due primarily to the full year effect of
financing the acquisition of CPC in late 1995.
Gain on sales of subsidiary and affiliate stock increased by
$5.1 million in 1996. This increase is the result of the conversion of a $6.0
million Spinnaker Note into Spinnaker Common Stock in 1996 and other
transactions.
The 1996 tax provision of $3.0 million, included federal,
state and local taxes and represents an effective rate of 40.8% versus 39.2%
in 1995.
Results of discontinued operations reflect the disposal Tri-Can
International, a manufacturer of packaging machinery. The assets sold
consisted primarily of inventory and intangibles. As a result of this
disposal, a loss of $.5 million net of taxes and minority interest was
recorded. In addition, the operating results of Tri-Can have been classified
as discontinued operations and result in net operating losses of $.3 million
in 1996 versus $.3 million in 1995.
Loss on early extinguishment of debt, net of taxes and
minority interest, resulted in an extraordinary charge to income of $1.3
million in 1996. The early extinguishment of debt is the result of Spinnaker
Industries issuing $115 million of Senior secured debt due in 2006. The debt
proceeds were used to extinguish substantially all bank debt, bridge loans
and lines of credit at Spinnaker and its major operating subsidiaries.
YEAR 1995 COMPARED TO 1994
Revenues increased to $333.6 million in 1995 from $183.2
million in 1994, an 82% increase. Acquisitions made during 1995 and 1994,
principally in the manufacturing segment, were the most significant
contributors to the increase. In the manufacturing segment, where revenues
increased by $126.5 million to $187.7 million in 1995 from $61.2 million in
1994, or 207%. The acquisition of Brown-Bridge Industries, Inc. on September
19, 1994, contributed $97.2 million in revenues for 1995 versus $26.8 million
in 1994. This represents 56% of the total manufacturing increase. The
acquisition of Central Products Company on October 4, 1995, contributed $30.6
million, or 24% of the segment's revenues increase. 1995's manufacturing
revenues also reflect $32.3 million from Lynch Machinery, Inc. compared to
$15.1 million in 1994, 14% of the segment's revenue increase. The production
of extra-large glass presses from orders contracted for in 1994 and 1995
resulted in this additional revenue. Fifteen glass presses were shipped in
1995, compared to eight in 1994. Of the presses shipped in 1995, eleven were
advanced technology extra-large presses. As a result of the shipment of
these presses in 1995, Lynch Machinery glass press backlog was reduced by
$11.5 million to $13.3 million at December 31, 1995 from $24.8 million at
December 31, 1994. While Lynch Machinery is in the process of bidding for
additional glass press contracts, it is not anticipated that the level of
production in 1996 will equal 1995 levels. The services segment, which
represents 37% of total revenue, increased by $20.4 million from 1994 or 20%.
The Morgan Group, Inc.'s results increased due to continued strength in
manufactured housing shipments (industry shipments up 12%) and the
acquisition of Transfer Drivers, Inc. in May 1995. In the multimedia
segment, which represents 7% of total revenue, revenues increased by $3.5
million from 1994, or 17%. Haviland Telephone Company, which was acquired on
September 26, 1994, contributed 74% of the increase. The inclusion of
Central Products for the full year plus additional acquisitions contracted
for in 1995 and anticipated to close in 1996 are projected to increase
reported revenues by about 40% in 1996 from 1995.
Earnings before interest, taxes, depreciation and amortization
(EBITDA) increased to $31.1 million in 1995 from $18.4 million in 1994, a
$12.7 million, or 69% increase. Operating segment EBITDA (prior to corporate
management fees and expenses) grew to $ 35.0 million from $20.6 million, a
70% increase. The manufacturing segment was the largest contributor to
EBITDA with $17.1 million, or 55% in 1995, as compared to $4.7 million, or
26% in 1994. Spinnaker's EBITDA grew to $8.0 million from $1.1 million, a
$6.9 million increase. The inclusion of Brown-Bridge for the full year
accounted for $3.9 million of the increase in 1995. Central Products' EBITDA
of $2.7 million in the fourth quarter primarily accounted for the remaining
increase. Lynch Machinery accounted for 32% of the total increase in
manufacturing EBITDA. Profit margins associated with the production of
extra-large glass were the cause of the significant improvement. The
services segment contributed $4.6 million, or 15%, compared to $4.3 million,
or 24% in 1994. This increase was directly the result of the increased
revenues offset by a product mix shift and increases in certain operating
costs. The multimedia segment contributed 40% of total EBITDA in 1995, or
$12.3 million, as compared to $10.9 million, or 59% of total EBITDA in 1994.
The inclusion of Haviland represents 79% of this increase. The inclusion of
Central Products for the full year plus additional acquisitions made in 1995
and anticipated to close in 1996 are projected to increase reported EBITDA by
about 50% in 1996 from 1995.
Operating profits increased to $19.8 million in 1995 from
$10.9 million in 1994, $8.9 million or 82% increase. The breakdown of the
increases and the primary causes are the same as the above discussion
regarding EBITDA.
Investment income increased in 1995 from 1994 primarily
reflecting additional net gains in marketable securities.
Interest expense increased during 1995 primarily as a result
of the debt incurred for acquisition needs in 1995 and 1994 for Central
Products and Brown-Bridge.
The full year effect of the financing for the Central Products
acquisition is expected to significantly increase interest expense.
The 1995 income tax provision of $4.9 million, included
federal, state and local taxes and represents an effective rate of 39.2%
versus 40.1% in 1994. The rate is effected by a provision for the
repatriating of earnings by subsidiaries that are not consolidated for income
tax purposes (Morgan), a change in its deferred tax reserve associated with
income (1995) and losses (1994) related to the Company's equity investee, a
reduction in taxes attributable to a special election available to Morgan's
captive insurance company. It should be noted that Morgan is consolidated
for financial statement purposes, but in accordance with FASB 109 "Accounting
for Income Taxes", a deferred tax liability is recognized for the difference
between the financial reporting basis and the tax basis of the investment in
Morgan created by current earnings.
Income before extraordinary items and discontinued operations
was $5.5 million, or $3.89 per share in 1995 as compared to $2.7 million or
$2.02 in 1994. These amounts include the gain on the sale of affiliate stock
which contributed $35,000 to net income, or $.02 per share in 1995 and
$190,000, or $0.14 per share in 1994. Results of discontinued operations
reflect the operating results of Tri-Can which has been re-classified as
discontinued. During 1994, the Company recorded an extraordinary item which
represented the loss on the redemption of the Company's 8% Convertible
Subordinated Debentures. This loss was $264,000, or $0.20 per share.
FINANCIAL CONDITION
As of December 31, 1996, the Registrant had current assets of
$140.1 million and current liabilities of $98.5 million. Working capital was
therefore $41.6 million as compared to $25.6 million at December 31, 1995,
primarily due to the decline in current maturities of long-term debt as a
result of the high yield offering at Spinnaker Industries and acquisitions
made during 1995.
Within the elements of current assets, cash and cash
equivalents increased by $18.0 million, primarily due to the sale of
marketable securities and short-term investments of $9.4 million, inclusion
of Dunkirk and Fredonia ($4.4 million) and an increase of approximately $6.5
million at Spinnaker due to changes in working capital demands offset by a
reduction of $1.5 million at Lynch Machinery (see Consolidated Statement of
Cash Flow for additional elements). Inventories increased by $3.6 million
primarily due to increases at Central Products and Brown Bridge. Within
current liabilities, notes due to banks increased by $7.8 million, primarily
due to borrowing under the holding company's line of credit. Cash flow from
operations as presented in the Consolidated Statement of Cash Flow increased
by $1.9 million, primarily due to increased EBITDA from the Company's
operating entities, and net sales of trading securities offset by an increase
in other net working capital components.
Capital expenditures were $25.5 million in 1996 and $19.6
million in 1995 due to significant deployment of enhanced technology by our
telephone operations, installation of the silicone paper coating machine at
Brown-Bridge and the inclusion of Central Products for the full year in 1996.
This increased level of capital expenditures is expected to decline in 1997
in the multimedia segment as upgrade programs wind down and absence of large
machine investments in manufacturing. Overall 1997 capital expenditures are
expected to be approximately 15% - 20% below the 1996 level.
At December 31, 1996, total debt was $260.8 million, which was
$73.4 million more than the $187.4 million at the end of 1995. Total debt
was significantly impacted by: the acquisition of Dunkirk and Fredonia
Telephone Company, with a total of $25.8 million of debt incurred and assumed
and Registrant's investment in PCS partnerships of $27.1 million, with the
remainder attributable principally to Spinnaker. Debt at year end 1996
included $234.9 million of fixed interest rate debt, at an average cash
interest rate of 9.1% and $25.8 million of variable interest rate debt at an
average interest rate of 8.2 %. Additionally, the Company had $50.8 million
in unused short-term lines of credit of which $39.3 million was attributed to
Spinnaker, and $4.2 million of which was attributable to Morgan. As of
December 31, 1996, the Parent Company borrowed $11.9 million under a $12.0
million short-term line of credit facility. These funds were primarily used
to fund the bids by affiliated partnerships in the PCS Auctions. This short-
term line of credit expires April 15, 1997. Management anticipates that this
line will be renewed for one year but there is no assurance that it will be.
Backlog in the manufactured products segment at December 31,
1996 was $20.9 million versus $34.0 million at the end of 1995. Backlog at
Lynch Machinery was $6.6 million at December 31, 1996, and $16.9 million at
December 31, 1995. The lack of significant orders coupled with the
elimination of product lines caused the decrease. Orders of $9 million were
booked in early 1997, somewhat compensating for the decline in 1996. Backlog
at Brown-Bridge declined by $2.6 million in 1996 to $3.1 million at December
31, 1996. Backlog at Central Products increased by $1.4 million in 1996 to
$4.5 million at December 31, 1996.
Since 1987, the Board of Directors of Lynch has authorized the
repurchase of 300,000 common shares. At December 31, 1996, Lynch's remaining
authorization is to repurchase an additional 69,139 shares of common stock.
The Board of Directors has adopted a policy not to pay
dividends; and such policy is reviewed annually. This policy takes into
account the long term growth objectives of the Company; especially its
acquisition program, shareholders' desire for capital appreciation of their
holdings and the current tax law disincentives for corporate dividend
distributions. Accordingly, no cash dividends have been paid since January
30, 1989 and none are expected to be paid in 1997.
Lynch Corporation maintains an active acquisition program and
generally finances each acquisition with a significant component of debt.
This acquisition debt contains restrictions on the amount of readily
available funds that can be transferred to Lynch Corporation from its
subsidiaries.
Registrant has a minority position in several entities to
which it has funding commitments. These entities participated in two of the
auctions conducted by the Federal Communications Commission for 30 megahertz
and 10 megahertz of broadband spectrum to be used for personal communications
services, the so-called "C" and "F" Block Auction, respectively. In the C-Block
Auction, such entities acquired 30 licenses to provide personal
communications services to geographic areas of the United States with a total
population of 7.0 million. The cost of these licenses was $216.2 million,
$194.0 million of the cost of these licenses was funded via a loan from the
United States Government. The loan requires quarterly interest payments at
7% (Registrant argues strenuously that the interest rate should have been
6.51%, the applicable treasury rate at the time the licenses were awarded),
and with quarterly principal amortization in years 7, 8, 9, and 10. As of
December 31, 1996, Registrant invested $598,000 in partnership equity and
$20.4 million in loans and has funding commitments to provide an additional
$20.2 million in loans, including funding quarterly interest on the
Government debt of $3.4 million. In the F-Block Auction, an entity in which
Lynch holds a minority position acquired five licenses to provide personal
communications services in geographic areas of the United States with a total
populations of 20 million. The cost of these licenses was $19.9 million.
$16.5 of the cost of the licenses will be financed with a loan from the
United States Government. The interest rate on the loan will be the long-
term Government rate at the date of issuance and with quarterly principal
amortization in years 3 to 10. As of December 31, 1996 Registrant has
invested $99,000 in partnership equity and provided the entity with a loan of
$11.8 million funded by a short-term secured borrowing by the Registrant. $10
million of this loan was returned in January 1997; however, Registrant
continues to have a funding commitment to provide $10 million in loans to the
entity. Registrant is currently seeking alternatives to minimize or raise
funds for its funding commitments to the entities, but currently expects to
fund required interest payments. There are many risks associated with
personal communications services. In addition, funding aspects of
acquisition of licenses and the subsequent mandatory build out requirements
plus the amortization of the license, could significantly and materially
impact the Registrant's reported net income over the next several years. Of
note, under the current structure the ramifications of this should not impact
reported revenues and EBITDA in the future.
In mid-March 1997, Registrant acquired 60% of the stock of
Upper Peninsula Telephone Company for approximately $15.3 million with a
short-term secured bridge financing. Registrant is currently seeking
permanent financing to replace the bridge financing and to finance the
acquisition of the remaining stock of Upper Peninsula.
In December, 1996, the Registrant's Board of Directors
announced that it is examining the possibility of splitting, through a
"Spin-off", either its communications operations or its manufacturing
operations. A spin-off could improve management focus, facilitate and enhance
financings and set the stage for future growth, including acquisitions. A split
could also help surface the underlying values of the company as the different
business segments appeal to differing "value" and "growth" cultures in the
investment community. There are a number of matters to be examined in
connection with a possible spin-off, including tax consequences, and there is
no assurance that such a spin-off will be effected.
Lynch Corporation has a significant need for resources to fund
the operation of the holding company, and meet its current funding
commitments, including those related to personal communications services, and
fund future growth. Lynch is currently considering various alternative long
and short-term financing arrangements. One such alternative would be to sell
a portion or all of certain investment in operating entities. Additional
debt and/or equity financing vehicles are also being considered. While
management expects to obtain adequate financing resources to enable the company
to meet its obligations, there is no assurance that such can be readily obtained
or at reasonable costs.
See Item 1.V above re Forward Looking Information.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
In March 1994, The Morgan Group, Inc., a publicly traded
subsidiary of the Registrant, approved Arthur Andersen LLP to replace Ernst &
Young as its auditors for 1994 and 1995. For 1996, Ernst & Young,
Registrant's auditors, replaced Arthur Andersen LLP as auditors for The
Morgan Group, Inc. See Registrant's Form 8-K dated March 19, 1996 which is
incorporated herein by reference.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 is included under the
caption "Executive Officers of the Registrant" in Item 1 hereof and included
under the captions "Election of Directors" and "Section 16(a) Reporting" in
Registrant's Proxy Statement for its Annual Meeting of Shareholders for 1997,
which information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is included under the
caption "Compensation of Directors," under the captions "Executive
Compensation," "Executive Compensation and Benefits Committee Report on
Executive Compensation" and "Performance Graph" in Registrant's Proxy
Statement for its Annual Meeting of Shareholders for 1997, which information
is incorporated herein by reference. The Performance Graph in the Proxy
Statement shows that Registrant's Common Stock under performed the American
Stock Exchange Market Value Index and the American Stock Exchange Service
Industry Index in 1993 and over performed said indices in 1992, 1994, 1995
and 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is included under the
caption "Security Ownership of Certain Beneficial Owners and Management," in
the Registrant's Proxy Statement for its Annual Meeting of Shareholders for
1997, which information is included herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is included under the
caption "Executive Compensation", "Transactions with Certain Affiliated
Persons" and "Compensation Committee Interlocks and Insider Participants" in
the Registrant's Proxy Statement for its Annual Meeting of Shareholders for
1997, which information is included herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form 10-K
Annual Report:
(1) Financial Statements:
The Report of Independent Auditors and the following
Consolidated Financial Statements of the Registrant are included herein:
Consolidated Balance Sheets - December 31, 1996 and 1995
Consolidated Statements of Income - Years ended December 31,
1996, 1995, and 1994.
Consolidated Statements of Shareholders' Equity - Years ended
December 31, 1996, 1995, and 1994
Consolidated Statements of Cash Flows - Years ended December
31, 1996, 1995, and 1994
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
Schedule I - Condensed Financial Information of Registrant
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
LYNCH CORPORATION
CONDENSED STATEMENT OF INCOME
Year Ended
December 31
1996 1995 1994
(In Thousands ofdollars)
Interest, Dividends & Gain on Sales
of Marketable Securities $ 649 $ 232 $ 344
Interest, Dividend & Other Income
from Subsidiaries 621 715 84
Gain on Sale of Subsidiary and
Affiliate Stock:
Brown-Bridge Industries, Inc. 203
Tremont Advisors, Inc. -- 190
TOTAL INCOME 1,473 947 618
Costs and Expenses:
Unallocated Corporate Administrative
Expense $2,312 $ 2,869 $ 1,454
Interest Expense 669 448 858
Interest Expense to Subsidiaries 249
TOTAL COST AND EXPENSES 3,230 3,317 2,312
LOSS BEFORE INCOME TAXES, EQUITY
IN NET INCOME OF SUBSIDIARIES AND
EXTRAORDINARY ITEM (1,758) (2,370) (1,694)
Income Tax Benefit 515 779 786
Equity in net income of subsidiaries 3,939 6,736 3,500
INCOME BEFORE EXTRAORDINARY ITEM 2,696 5,145 2,592
Loss on early extinguishment of debt -- -- (264)
NET INCOME $2,696 $ 5,145 $ 2,328
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE A - DIVIDENDS FROM SUBSIDIARIES
Cash dividends paid to Lynch Corporation from the Registrant's consolidated
subsidiaries were $1,811,000 in 1996, $1,166,000 in 1995, and $277,000 in
1994. No other dividends were received from subsidiaries or investees.
NOTE B - SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR ADDITIONAL
INFORMATION
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
LYNCH CORPORATION
CONDENSED BALANCE SHEETS
December 31
1996 1995
(In Thousands ofdollars)
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 68 $ 498
Marketable Securities and
Short Term Investments 573 770
Deferred Income Tax Benefits 738 479
Other Current Assets 11 44
Total Current Assets 1,390 1,791
OFFICE EQUIPMENT (Net of Depreciation) 26 16
OTHER ASSETS (Principally Investment in
and Advances to Subsidiaries) 61,836 44,498