FORM 10-K/A
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995 Commission file number 1-106
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. Employer Identification 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. [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant (based upon the closing price of the Registrant's Common Stock on the
American Stock Exchange on March 15, 1996 of $66 per share) was $68,254,000.
(In determining this figure, the Registrant has assumed that all of the
Registrant's directors and officers are affiliates. This assumption shall
not be deemed conclusive for any other purpose.)
The number of outstanding shares of the Registrant's Common Stock was
1,390,464 as of March 15, 1996.
DOCUMENTS INCORPORATED BY REFERENCE:
Parts I, II, and IV: Certain portions of the Annual Report of Shareholders
for the year ended December 31, 1995, a revised copy of
which is filed as an exhibit herewith.
Part III: Certain portions of the draft Proxy Statement for the 1996
Annual Meeting of Shareholders, filed as an exhibit
herewith.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item 6 is amended by incorporating herein
by reference the "Five Year Summary Selected Financial Data" in the Registrant's
Annual Report to Shareholders for the year ended December 31,1995, a revised
copy of which is filed herewith as Exhibit 13(a).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
The information required by this Item 7 is amended by incorporating herein
by reference the "Management Discussion and Analysis" in Registrant's Annual
Report to Shareholders for the year ended December 31, 1995, a revised copy of
which is filed herewith as Exhibit 13(a).
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Report of Independent Auditors and the following Consolidated Financial
Statements of the Registrant are amended by incorporating herein by reference to
the Registrant's Annual Report to Shareholders for the year ended December 31,
1995, a revised copy of which is filed herewith as Exhibit 13(a).
Consolidated Statements of Income - Years ended December 31, 1995,
1994, and 1993.
Consolidated Balance Sheets - December 31, 1995 and 1994.
Consolidated Statements of Shareholders' Equity - Years ended
December 31, 1995, 1994, and 1993.
Consolidated Statements of Cash Flows - Years ended December 31,
1995, 1994, and 1993.
Notes to Consolidated Financial Statements.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 is included under the capital
"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 1996, which
information is incorporated herein by reference to the draft of the Proxy
Statement filed herewith as Exhibit 13(b).
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is included under the capital
"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 1996, which information is incorporated herein by reference
to the draft of the Proxy Statement filed herewith as Exhibit 13(b).
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 1996,
which information is incorporated herein by reference to the draft of Proxy
Statement filed herewith as Exhibit 13(b).
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 1996, which
information is incorporated herein by reference to the draft of Proxy Statement
filed herewith as Exhibit 13(b).
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 Consolidated Financial Statements
of the Registrant are incorporated herein by reference to the Registrant's
Annual Report to Shareholders for the year ended December 31, 1995, as noted in
Item 8 hereof, a revised copy of which is filed as Exhibit 13(a).
Consolidated Balance Sheet - December 31, 1995 and 1994
Consolidated Statements of Income - Years ended December 31, 1995, 1995,
and 1993
Consolidated Statements of Shareholders' Equity - Years ended December 31,
1995, 1994, and 1993
Consolidated Statements of Cash Flows - Years ended December 31, 1995,
1994, and 1993
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
Schedule I - Condensed Financial Information of Registrant
Schedule II - Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions, or are inapplicable, and therefore have been
omitted.
(3) Exhibits:
See the Exhibit Index in this Form 10-K Annual Report. The following
Exhibits listed in the Exhibit Index are filed with this Amendment to Form 10-K
Annual Report:
13(a) - Annual Report to Shareholders for the year ended December
31, 1995, as revised.
13(b) - Draft of Proxy Statement for 1996 Annual Meeting of
Shareholders.
23(a) - Consent of Ernst & Young LLP
(c) Exhibits being filed herewith are listed in response to Item 14(a)(3)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this amendment to be signed
on its behalf by the undersigned, thereunto duly authorized.
LYNCH CORPORATION
By:s/ROBERT E. DOLAN
ROBERT E. DOLAN
Chief Financial Officer (Principal
Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Capacity Date
* MARIO J. GABELLI Chairman of the Board of
MARIO J. GABELLI Directors and Chief April 29, 1996
Executive Officer
(Principal Executive Officer)
* MORRIS BERKOWITZ Director April 29, 1996
MORRIS BERKOWITZ
* E. VAL CERUTTI Director April 29, 1996
E. VAL CERUTTI
* PAUL J. EVANSON Director April 29, 1996
PAUL J. EVANSON
* SALVATORE MUOIO Director April 29, 1996
SALVATORE MUOI0
* RALPH R. PAPITTO Director April 29, 1996
RALPH R. PAPITTO
* PAUL P. WOOLARD Director April 29, 1996
PAUL P. WOOLARD
s/ROBERT E. DOLAN Chief Financial Officer
ROBERT E. DOLAN (Principal Financial
and Accounting Officer) April 29, 1996
*by s/ROBERT A. HURWICH
ROBERT A. HURWICH
Attorney-in-fact
Lynch Corporation, 8 Sound Shore Drive, Suite 290, Greenwich,
Connecticut 06830 Telephone (203) 629-3333
lynch corporation
annual report 1995
<PAGE>
Lynch Past History
Lynch Glass Machinery Company, predecessor of Lynch
Corporation, was organized in 1917. The Company emerged in the
late twenties as a successful manufacturer of glass-forming
machinery. In 1928, Lynch Corporation was incorporated in the
State of Indiana.
In 1946, Lynch was listed on the New York Curb Exchange
the predecessor to the American Stock Exchange.
In 1964, Curtiss-Wright Corporation purchased a controlling
lever in interest in Lynch.
In 1976, M-tron Industries, Inc., a manufacturer of quartz
crystals was acquired.
Lynch 1985 - 1994
In 1985, companies affiliated with Gabelli Funds, Inc.
acquired a majority interest in Lynch's Common Stock, including
the entire interest of Curtiss-Wright Corporation. Mario J.
Gabelli was elected Chairman of the Board and Chief Executive
Officer in 1986. The price: $11.00/share.
In July 1986, Lynch issued $23 million of convertible
debentures as the first step in an acquisition program designed
to broaden Lynch's business base. Conversion price - $31/share.
In 1987, Lynch expanded the scope of its operations into the
financial services and entertainment industries with the start-up
of Lynch Capital Corporation, a securities broker dealer, and
Lynch Entertainment Corporation, a joint venture partner with a
20% interest in WHBF-TV, the CBS television network affiliate in
Rock Island, Illinois. Later in the year, the Company acquired
Tremont Partners, Inc., a Connecticut-based investment management
consulting firm. In December, Lynch added to its manufacturing
sector with the acquisition of an 83% interest in Safety Railway
Service Corporation, whose sole operating subsidiary at the time,
Entoleter, Inc., was a manufacturer of industrial processing and
air pollution control equipment.
In 1988, Lynch entered the service sector with the
acquisition of Morgan Drive Away, Inc., the largest independent
service provider to the mobile home and recreational vehicle
industry.
1989 was highlighted by Lynch's entry into the
telecommunications industry. The acquisition of Western New
Mexico Telephone Company, an independent local telephone company
servicing southwestern New Mexico, was an important first step.
Lynch second telecommunications acquisition, Inter-Community
Telephone Company of Nome, North Dakota, was completed in April
1991 followed in October of that year with the acquisition of
Cuba City Telephone Exchange Company and Belmont Telephone
Company in Wisconsin.
During 1992, Lynch acquired Bretton Woods Telephone Company
of New Hampshire; completed a rights offering to its shareholders
which resulted in the Tremont investment advisory firm becoming a
publicly traded company (OTC:TMAVA) with Lynch initially
retaining a 37% interest.
1993 saw the launching of The Morgan Group, Inc., as a
public company with an initial public offering of 1.1 million
Class A Common Shares at $9 per share. Lynch retained a 47%
equity interest and a 64% voting interest. Lynch also acquired
J.B.N. Telephone Company in Kansas from GTE Corporation. Lynch
Machinery acquired Tri-Can Systems of Aslip, IL, a manufacturer
of packaging machinery.
1994 saw the rebirth of Safety Railway Service Corporation
into Spinnaker Industries, Inc. under the stewardship of Boyle,
Fleming & Company, Inc., with the acquisition of Brown-Bridge
Industries, a manufacturer of adhesive coated stocks from
Kimberly-Clark. In addition, Lynch completed the acquisition of a
50% interest in station WOI-TV in Ames, IA, and the purchase of
Haviland Telephone Company of Kansas. Finally, all the remaining
8% Convertible Subordinated Debentures that were issued in 1986
were redeemed.
Lynch 1995
Last year, Lynch continued to make dynamic progress Morgan
bought TDI and expects to grow by positioning itself further in
the outsourcing business. On the telephone front, we completed
tuck-ins by agreeing to buy lines from Sprint and moving further
into multimedia with the creation of CLR Video, a cable operation
in Kansas.
The highlight was our affiliation with the Maytum family,
which has owned and managed Dunkirk & Fredonia Telephone Company,
one of the most efficient telephone companies in the world.
We are, on a proforma basis, the 50th largest local exchange
company. We currently operate 15,600 access lines, 49,000
cellular POPs, 4,700 cable TV subscribers and 900 Direct TV
subscribers. We are currently in the process of evaluating
providing Internet service.
In addition, during the year, Spinnaker further reinforced
its adhesive strategy by purchasing Alco Standard's Central
Products, which manufactures and markets a wide variety of carton
sealing tapes and related equipment.
Lynch
The Future
To grow Lynch's intrinsic value in 1996 and beyond, we plan
to:
Grow our multimedia operations
More local telcos.
Pursue spectrum in personal communications services (PCS)
actions.
Look for potential spectrum licenses globally.
Staff up to pursue growth in burglar alarm, long distance
reselling, cable TV tuck-ins, and penetration of the
institutional market for home video, data and information
storage.
Grow our manufacturing operations
M-tron
Work with Marty Kiousis and his management to maximize the
high quality manufacturing capacity and extensive customer base
that M-tron has. Our focus is to affiliate with a merchant
banking group which will generate product initiatives and provide
critical mass capital infusion.
Lynch Machinery
Avrum Gray, Chairman, and Bob Pando are channeling efforts
back to the historical prowess of Lynch Machinery in the glass
press manufacturing area. Lack of comprehensive strategy and
cumulative losses at Lynch packaging resulted in the exiting from
that niche.
Spinnaker Industries
Finance acquisitions more efficiently by taking advantage of the
high yield market.
Broaden adhesive strategy by exploring other sectors for
opportunistic entry.
There are now 3.4 million fully diluted shares of SPNI, of
which Lynch owns 2.2 million shares. Stated another way, there
are 1.6 shares of SPNI for each Lynch share.
Grow our Services
The Morgan Group
Morgan enjoyed a record year in 1995, overcoming a 9%
industry drop in recreational vehicle shipments, and the need to
bolster insurance reserves.
Bright spots included
Terry Russell joined Morgan Drive Away on January 4,
1996. He replaces Phil Ringo who left in May to pursue other
opportunities.
Transfer Drivers, Inc. (TDI) was acquired on May 22,
1995. While results to date have been spotty, TDI enhances
Morgan's tradition of service and further grew our outsourcing
product, in this case, equipment relocation.
Restructuring our investment by converting a preferred stock
to cash and 150,000 shares of common stock helped further
strengthen Morgan's already solid balance sheet.
Morgan's financials are on solid footing with cash of $2.9
million, receivables of $11.3 million, and book value of $15.6
million.
There are 1.0 shares of Morgan for each share of Lynch.
Look for opportunistic situations.
Our Future
Valuation accorded to EBITDA streams in both the public
market and in the private market place are rising. Moreover, the
ever increasing amount of money chasing deals is resulting in
fewer transaction opportunities for us, particularly as our job
is to build the wealth of Lynch's shareholders. In the next
twelve months, we will endeavor to use our resources,
intellectual and financial, to enhance intrinsic value on a per
unit basis. We will only issue shares if we receive at least
equal value in exchange.
<TABLE>
FINANCIAL HIGHLIGHTS
(in thousands of dollars, except for share amounts)
For the Year Ended December 31,
<CAPTION>
<C> <C> <C> <C>
1995 1994 1993 1992
Sales and Revenues:
Multimedia $ 23,597 $ 20,144 $ 16,206 $ 15,368
Services 122,303 101,880 82,829 67,141
Manufacturing 192,266 66,678 28,004 26,148
_________ _________ _________ _________
Total $338,166 $188,702 $127,039 $108,657
_________ _________ _________ _________
_________ _________ _________ _________
Earnings Before Interest, Taxes,
Depreciation and Amortization (EBITDA):
Multimedia $ 12,342 $ 10,858 $ 8,965 $ 8,522
Services 4,635 4,349 3,013 2,713
Manufacturing 16,542 4,606 1,899 3,181
Corporate Expenses-Net (2,928) (1,521) (1,366) (1,065)
_________ _________ _________ _________
Total $ 30,591 $ 18,292 $ 12,511 $ 13,351
_________ _________ _________ _________
_________ _________ _________ _________
Depreciation/Amortization:
Multimedia $ 7,350 $ 5,651 $ 4,400 $ 3,643
Services 1,264 915 803 971
Manufacturing 2,662 931 690 454
_________ _________ _________ _________
Total $11,276 $ 7,497 $ 5,893 $ 5,068
_________ _________ _________ _________
_________ _________ _________ _________
Capital Expenditures 19,569 11,598 4,356 3,244
Net Earnings From Operations
- Total $ 5,086* $ 2,402* $ 1,392* $2,151*
- Per Share $ 3.62* $ 1.80* $ 1.14* $ 1.71*
Net Income
- Total 5,145 2,328 2,953 2,169
- Per Share - Primary 3.66 1.74 2.41 1.72
- Fully Diluted 3.66 1.72 2.29 1.72
Working Capital $25,628 $22,713 $47,529 $49,449
Current Ratio 1.3 to 1 1.3 to 1 3.3 to 1 3.9 to 1
Total Assets $302,439 $185,910 $129,972 $111,374
Shareholders' Equity $ 35,512 $ 30,531 $ 24,316 $ 21,272
Per Share $ 25.76 $ 22.15 $ 19.84 $ 17.36
Shares Outstanding
(at year end) $1,378,663 $1,378,658 $1,225,677 $1,225,660
Price Per Share:
High 84 3/4 32 7/8 26 3/8 26
Low 30 22 20 3/4 15 3/4
* Net Earnings per share From Operations excludes the following
unusual items in 1995: gain of $0.04 on sale of Morgan stock;
1994: gain of $0.14 on sale of Tremont Stock and an extraordinary
loss of ($0.20) from early extinguishment of debt; 1993: gain of
$1.84 on Morgan IPO, gain of $0.39 on sale of Tremont Stock,
extraordinary loss of ($0.17) from early extinguishment of debt,
and cumulative effect charge of ($0.78) from change in accounting
for income taxes; and in 1992: extraordinary gain ($0.01) from
early extinguishment of debt, which are included in Net Income
per share.
</TABLE>
<TABLE>
PROPORTIONAL OWNERSHIP
Another way to look at the company is to examine each of our
businesses and to look at what share of those businesses we own.
This methodology is know as "proportional ownership." Simply
stated, what are the businesses Lynch owns, what are the
revenues, EBITDA, cash, debt and values. Those who are familiar
with cable TV and the oil industries are knowledgeable about the
concept. We expect 1996 will unfold into another significant
increase in these measures.
1995 Data
<CAPTION>
Traditional Proportional
Accounting Ownership
(000's) (000's)
<S> <C> <C>
Revenues -
Multimedia $ 23,597 $ 26,061
Services 122,303 60,601
Manufacturing 192,266 155,499
_______ _______
$338,166 $242,161
_______ _______
_______ _______
EBITDA - Before Corporate Management
Fees and Expenses
Multimedia $ 12,907 $ 12,707
Services 4,735 2,346
Manufacturing 16,842 14,190
_______ _______
$ 34,484 $ 29,243
_______ _______
_______ _______
Cash -
Multimedia $ 17,818 $ 15,639
Services 2,851 1,453
Manufacturing 5,403 4,662
_______ _______
$ 26,072 $ 21,754
_______ _______
_______ _______
Debt -
Multimedia $ 72,197 $ 70,926
Services 3,275 1,669
Manufacturing 102,265 83,359
_______ _______
$177,737 $155,954
_______ _______
_______ _______
The proportional ownership amounts noted above, represent the
reported revenues, EBITDA ("earnings before interest, taxes,
depreciation and amortization"), cash (including marketable
securities) and debt of the subsidiaries included in Lynch
Corporation's consolidated financial statements and other
significant minority-owned entities accounted for in the
consolidated financial statements under the equity method.
Accordingly, the above proportional ownership amounts represent
Lynch's percentage interest in the entities full reported amounts
for the respective period or date. That is, the proportional
ownership of revenues represents the entity's reported revenues
for the year ended December 31, 1995, times Lynch's ownership of
that entity throughout the year ended December 31, 1995.
Proportional ownership of cash represents all cash, including
marketable securities, of that entity, times Lynch's ownership of
that entity at December 31, 1995.
</TABLE>
CHAIRMAN'S LETTER
To Our Shareholders:
By all standards, Lynch had another creditable year in 1995. The
public price of our shares opened the year at $30 per share and
closed at $58 1/2 per share. More importantly, we again increased
the intrinsic value of our enterprise by substantially more than
25%, the annual hurdle we set as our long term corporate goal. In
this annual sharing of our results and our philosophy with you,
we thought we would step back from the day-to-day details and
talk about our ten year involvement with Lynch. But first a look
in brief at 1995.
THE LAST TWELVE MONTHS
Important dynamics in 1995 to enhance our intrinsic value were:
Multimedia during the year, we added to our telephony
holdings
Dunkirk & Fredonia Telephone Company - we announced a
relationship with the Maytum family to structure a transaction
that will provide for management continuity, family participation
in the ongoing operations particularly with a sensitivity to the
needs of the local community.
Kansas Expansion - we took ourselves to the goal line
with a transaction with Sprint in August, 1995 whereby we will
add the communities of Haddam and Morrowville, Kansas to the
service area of JBN Telephone Company.
North Dakota - we built on the existing Inter-Community
operation with the purchase from US West of 1,400 telephone lines
expected to close in mid-1996. The management of Inter-Community
Telephone Company awaits the opportunity to enhance the service
areas of Hope, Page, Sanborn, and Tower City. All was not rosy as
the Department of Defense announced its intention to shut down
our Autovon operation in that market.
CLR Video - we entered cable with the creation of CLR
Video and the purchase of 4,500 cable subscribers from Douglas
Cable Communications, L.L.C. in northeast Kansas. Lynch is the
majority partner in a three way owner partnership including
Robert Carson and Rainbow Telephone Company.
Spinnaker Blossoms - Spinnaker purchased Alco Standard
Central Products division which manufactures and markets a
variety of adhesive-backed carton sealing tapes and is the second
largest U.S. carton sealing tape manufacturer behind Minnesota
Mining & Manufacturing. Central Products has two manufacturing
facilities located in Menasha, Wisconsin and Brighton, Colorado.
While financing has not been completed, Messrs. Boyle & Fleming
are confident of their ability to complete the financing.
WOI-TV - Phil Lombardo was able to renegotiate the $14.0
million of loans outstanding and has basically reduced Lynch's
investment in WOI to its equity investment.
M-tron Industries, Inc. -- participated fully in the growth of
the telecommunications and computer industry it services.
Revenues grew 62% to $20.1 million, EBITDA increased to $2.0
million in 1995 from $200,000 in 1994. M-tron's backlog was $7.3
million at December 31, 1995, up from $3.6 million at the end of
the prior year.
Lynch Machinery, Inc. - In 1995, Lynch Machinery delivered 11
extra-large glass presses. This was extraordinary for a company
of its size.
FINANCIAL HIGHLIGHTS
EBITDA (earnings before interest, taxes, depreciation and
amortization) and before corporate expenses surged 67.5% to $34.5
million in 1995 from $20.6 million in 1994.
Revenues at $338.2 million, increased by 79.2% from the
previous year (and are expected to also grow by over 40% again in
1996).
Capital expenditures were $19.6 million in 1995,as we
continue to build our telecommunications infrastructure,compared
to $11.6 million in 1994 and $13.6 million projected for 1996.
Our reported net earnings from operations excluding
extraordinary items rose to $3.66 per share in 1995 from $1.88 in
1994.
And now back to the future --
THE FIRST TEN YEARS
Some observers might look on our first ten years as building a
business on nothing. We grew Lynch -- EBITDA from $147,000 in
1985 to $30.6 million in 1995 without an increase in our shares
outstanding. But that's history! Where are we going? Should the
next ten years be a period of harvesting the acorns that we
planted, some of which have sprouted into oaks and some of which
are still in the incubation/acceleration stage. Or should we
plant more acorns? Or should we do both. The question is easier
to articulate than the answer.
To understand our guidelines for the future, let's look at 1995
and the past transactions we structured for Lynch.
FIRST TEN YEARS "SOWING"
When we took command of the company in 1985, there were 1,364,110
shares outstanding and shareholder equity was $14.3 million. At
the end of 1995, there were 1,378,663 shares outstanding and
shareholder equity was $35.5 million. More importantly, EBITDA
was nearly $31 million versus $147,000 in 1985.
<TABLE>
<CAPTION>
1985 1995
<S> <C> <C>
Revenues $10,699,000 $338,166,000
EBITDA $ 147,000 $ 30,591,000
Shareholder Equity $14,348,000 $ 35,512,000
Number of Shares 1,364,110 1,378,663
Intrinsic Value (Pre-tax) $12 $150 +/-
Stock Price $11 $58 1/2
</TABLE>
BUILDING BLOCKS
How did we grow the company without giving away ownership? We
accomplished this by our plans to endow each operating entity
with its own shareholder base. We will now walk you through
selected transactions that proved to be building blocks to our
success. These are listed in no particular order.
Morgan Drive Away, Inc.
We purchased Morgan Drive Away, Inc. in 1988. We paid $11
million. Of this amount, $8 million was a loan from First
National Bank of Elkhart, Indiana, $2 million was subdebt from
Lynch, and $1 million represented our equity. At that time,
Warren Golden, Chairman of Morgan's parent, CLC, which was
acquired by Archer Daniel Midland, was retained to manage Morgan.
Since then, Lynch has recouped all of its investment (including
the exchange of our preferred for additional Morgan shares and
cash in 1995). Today, Lynch owns 1.35 million shares of Morgan
which is traded on the American Stock Exchange. While its shares
presently trade in the $8 range, we believe underlying values are
at least twice that amount. Of interest also is that Morgan's
revenues in the first year of our ownership were $60.6 million
and are now $122.3 million.
Western New Mexico Telephone Company
In 1989, we created a partnership with the Keen family of Western
New Mexico Telephone Company ("WNMTC") whereby we affiliated with
WNMTC primarily for cash and in turn entered into an agreement
that provided for continuing ownership of Western New Mexico by
our partners, the Keen family. Jackie Keen and Mary Beth (Baxter)
learned a great deal from their father J.C. Keen on how to care
for and nurture the local community while creating value for
shareholders. Since the time we involved ourselves with the
company, the number of telephone lines has increased from 4,100
to 5,200 a growth of 27%. They are now examining ways to enter
the Internet and to provide the cable needs of their communities.
Bottom line -- our return on equity has been the best yet. Bring us
more relationships like Western New Mexico.
Safety Railway Service Corporation (Renamed Spinnaker Industries,
Inc. in 1994)
Safety (83% to be precise) was purchased from Gurdon Wattles,
former Chairman and CEO of American Manufacturing Corporation for
$3.8 million in December 1987. Safety was energized in 1994 by
entrusting the stewardship to the Boyle, Fleming & George Group,
which received a 20% carry through the issuance of a warrant,
plus certain dilution protection on the first round of financing
with a strike price concurrent with the share price to be issued
on a subsequent financing. Reflecting two three-for-two stock
splits, Lynch's original investment of $3.8 million had a market
value at December 31 of $80 million. Indeed, there are now 1.6
shares of Spinnaker outstanding for each share of Lynch.
Tremont Advisers, Inc.
Our investment in the financial services area also turned out to
be profitable. In 1987, Lynch took a majority position in Tremont
Partners, Inc., an investment management consulting firm. As
Lynch's direction shifted to more industrial activities, we
decided to spin Tremont off to our shareholders. In 1992, Tremont
Advisers, Inc. was launched as a public entity via a rights
offering to our shareholders. Indeed, each shareholder of Lynch
has an investment in Tremont, if they exercised their rights.
Today, Tremont is flourishing and oversees over $1.6 billion in
assets.
Acquisition of Station WOI
Lynch signed a contract to buy Station WOI-TV, the ABC affiliate
in Des Moines Iowa, on September 25, 1992. On March 1, 1994,
Capital Communications Corporation, a joint venture between Lynch
and Lombardo Communications II, Inc., acquired the Station from
Iowa State University. The total consideration of the acquisition
was $14 million. Despite greater than anticipated obstacles in
closing the purchase, with our knowledge of broadcasting, our
understanding of values, and with the proven broadcasting skills
of Phil Lombardo, we were encouraged to proceed. Lynch initially
borrowed $11 million from First National Bank of Omaha. While
this was an unpopular decision when we made the acquisition, it
has returned substantial results. We believe our share of the
station over and above our capital contribution is worth $20
million, that is $15 per Lynch share. At the same time, an
examination of the operating results in our financial statements
indicates that the station contributed only $0.21 per share that
we reported for 1995. This underscores another Lynch
base-building concept, trade off reported earnings for an
increase in the intrinsic or private market value.
Not All Was Rosy
During the first ten years, we suffered many disruptions. This
included financial difficulty at Ameritrust Bank, the successor
to the National Bank of Elkhart, that helped us purchase Morgan
Drive Away, and the acquisition of the loan by a second bank and
the subsequent trend of those banks to foreclose in the winter
and spring of 1992. Things were so bleak that your Chairman paid
a "unique" visit to Morgan to assure our Morgan family of their
future.
In addition during this period, your Chairman was the subject of
extensive harassment from an "excited shareholder" as well as
regulatory inquiry into trading patterns in Lynch shares. Despite
our desire and mandate to be fair and equal to all our growing
and extended families, each has been caught up with the profits
of the legal profession that is now able to advertise its legal
services. The distraction of management from its goal of
providing quality service to its customers needs to be eliminated
in our society if in deed we are to compete in a global society
with the Germans and Japanese. If any questions arise from this
statement, refer to the movie Disclosure.
It's Time to Harvest or Is It Still Time to Sow
In examining our goals for our second ten years of stewardship,
we expect to continue to find ways to grow our intrinsic value at
the 25% hurdle rate that we set as our benchmark for growth in
our assets. While we continue to be creative and opportunistic,
we will continue husbanding resources that are at our disposal.
As your Chairman, I personally own 256,905 shares of the company,
approximately 18.5%. As the saying goes, "I eat my own cooking."
Our "prism" for the future is ever changing--should we spin-off
Spinnaker--Should we do an IPO for M-tron--should we sell
convertibles/debt/equity to broaden our base of
accessibility--should we accelerate penetration of
telephone/cable/broadcast.
New Directors
I would like to welcome two new directors to the Lynch Board,
Ralph R. Papitto, Chairman, AFC Cable Systems, Inc. and Salvatore
Muoio, Vice President of Lazard Freres & Co. L.L.C., who joined
the Lynch Board during 1995. I have known and been associated
with these two gentlemen for many years and look forward to their
contributions to Lynch Corporation.
As always, we will be cognizant of the needs of our
"stakeholders" our equity owners, our staff, our
partner/employees, our debtholders, and our communities in which
we are job creators.
Mario J. Gabelli
Chairman of the Board and
Chief Executive Officer
March 29, 1996
LYNCH CORPORATION
A ROAD MAP TO VALUES
OBJECTIVE
The stated and steadfast goal of Lynch is to grow the intrinsic
value of the company by 25% annually. It is a long-term concept
of managing an enterprise based on the cash flow generating
ability of a business and the collateral value of its assets.
Lynch plans to achieve its growth goal by acquisitions, both
strategic and opportunistic, and by internal development.
STRATEGY
The initial stage of our strategy is to make value-oriented
acquisitions, applying strict rate of return criteria. We will
only participate in "friendly" transactions that will enable us
to employ our management/shareholder partnership philosophy. We
actively seek potential acquisitions that generally have the
following characteristics:
domestic operations;
basic business -- no high technology or high research and
development;
a franchise with a protected and/or dominant market
position;
dependable and growing free cash flow;
no turnarounds or start-up companies; and
good management in place willing to continue with the
business.
An appropriate level of financial leverage is imperative to
minimize our net investment and maximize our returns. Once an
acquisition is made, we cement a management/shareholder
partnership by insuring that each local management team has an
interest in their respective business. Incentive compensation
plans reward management for operating each company
entrepreneurially by holding down operating expenses and making
capital expenditures only as prudently necessary. They are
encouraged, though, to develop and grow their businesses and will
fully participate in the upside potential. We also look to
optimize growth by structuring transactions in the most tax
efficient manner and utilizing financial engineering, such as,
access to public markets.
OUR STRUCTURE
Currently, our organization consists of four acquisition
vehicles -- Lynch Multimedia, The Morgan Group, Inc., Spinnaker
Industries, Inc. and Lynch itself. In addition, we have ownership
interests in two broadcast properties-Station WOI-TV and Station
WHBF-TV, and in two manufacturers-Lynch Machinery, Inc. and
M-tron Industries, Inc.
Lynch Multimedia-Lynch Multimedia has investments of 80% to 100%
in seven rural telephone properties throughout the United States
and a 60% investment in one cable television investment. Of late,
in private transactions, rural telephone companies have been
selling at 7 to 9 times EBITDA. On a proforma basis, Lynch's
companies consist of over 27,000 access lines, 4,700 cable
television subscribers, 49,000 cellular POPs and the right to
provide Direct Satellite TV to over 10,000 homes. Proforma
telecommunications revenues and EBITDA, (proforma for the full
year results for CLR Video, 1,400 lines to be acquired from US
West in North Dakota, 350 lines to be acquired from Sprint in
Kansas, and the consolidated operations of Dunkirk and Fredonia
Telephone Company) for the year ended December 31, 1995, were
$32.5 million and $16.5 million, respectively. At December 31,
1995, on a proforma basis, these companies held cash and cash
equivalents of $18.6 million and had total debt outstanding of
$102.2 million. The definitive agreements with US West, Sprint
and the current owners of Dunkirk and Fredonia Telephone Company
were signed in 1995 and all are expected to close in the first
half of 1996.
The Morgan Group, Inc.-Morgan is the premier outsourcer of
service to the manufactured housing and recreational vehicle
industries. Morgan Common Shares are listed on the American Stock
Exchange. There are 2.6 million common shares outstanding, of
which Lynch Corporation owns 1.35 million, or 51%. Revenues and
EBITDA in 1995 were $122.3 million and $4.6 million,
respectively. At December 31, 1995, it held cash and cash
equivalents of $2.9 million and had $3.3 million debt
outstanding.
Spinnaker Industries, Inc.-Spinnaker is an acquirer and developer
of manufacturing companies. It is traded NASDAQ Small Cap. Lynch
owns 2.2 million of the 3.4 million fully diluted common shares
(adjusted for the 3 for 2 stock splits that were effective in
December 1995 and 1994). Pro forma revenues and EBITDA, including
full year results of Central Products, were $226.6 million and
$18.8 million, respectively. At December 31, 1995, it had cash
and cash equivalents of $3.1 million and total debt outstanding
of $102.0 million. In addition to its common share interest,
Lynch holds a subordinated note from Spinnaker of $1.2 million.
Speciality Niches
Broadcasting: Lynch owns 50% (fully diluted) and 20% net
interests in Stations WOI-TV and WHBF-TV, two network affiliated
television stations. In recent transactions, network affiliates
have sold 12 to 14 times broadcast cash flow.
In 1995, WOI's full year revenues and broadcasting cash flow were
$9.2 million and $3.3 million, respectively. At December 31,
1995, it had cash and cash equivalents of $1.1 million and
outstanding debt of $14.0 million.
In 1995, WHBF's full year revenues and broadcasting cash flow
were $7.2 million and $3.1 million, respectively. At December 31,
1995, it had cash and cash equivalents of $0.2 million and
outstanding debt of $17.3 million, of which Lynch owns $2.7
million.
Lynch Machinery, Inc.: Lynch Machinery produces glass presses and
packaging machinery. Its 1995 revenues and EBITDA were $36.9
million and $7.0 million, respectively. At December 31, 1995, it
had cash and cash equivalents of $2.0 million and outstanding
debt of $1.3 million.
M-tron Industries, Inc.: M-tron produces quartz crystals and
oscillators. In 1995 it had revenues and EBITDA of $20.1 million
and $2.0 million, respectively. At December 31, 1995, it had cash
and cash equivalents of $0.2 million and outstanding debt of $2.8
million.
BUILDING FOR THE FUTURE
In the following pages our partners will present to you what they
are doing to enhance values.
LYNCH MULTIMEDIA
Lynch continues to make strides in rounding out its multimedia
portfolio. We accomplished the following in 1995 and early 1996.
On November 6, 1995 Lynch executed a contract to acquire
Dunkirk & Fredonia Telephone Company from Robert Maytum and his
family. Dunkirk & Fredonia, through two local telephone
companies, Dunkirk & Fredonia and Cassadaga Telephone Companies,
provides telephone service to 10,700 access lines in upstate New
York, approximately 30 miles south of Buffalo. The
company is one of the lowest cost independent telephone companies
in the United States. The Maytum family has been very aggressive
in complementing their telephone service with ancillary
businesses. They currently provide long distance reselling,
burglar alarm and security business, paging, and
telecommunications equipment sales and repair. In addition to
these businesses, they currently are in the process of applying
for a franchise to provide cable television service to the
Village of Fredonia and to provide Internet service to their
customer base. We currently expect to close in mid 1996. All
members of Lynch's multimedia family welcome the Maytums to our
telecommunications group.
On December 1, 1995, CLR Video closed on the acquisition of
4,500 cable television subscribers in northeast Kansas. CLR,
which is 60% owned by Lynch Corporation, is a joint venture of
Lynch, Robert L. Carson and Rainbow Telephone Company. CLR
Video's service area is adjacent to J.B.N. Telephone Company. In
addition, there are several opportunities in the area to acquire
contiguous cable properties. We welcome our association with
Rainbow Telephone Company and our continued relationship with Bob
Carson, who has been an immeasurable help in assisting our efforts in
establishing J.B.N. Telephone Company and CLR Video.
As we announced in last year's annual report, Lynch, in two
separate transactions, will acquire approximately 1,700 lines in
North Dakota and Kansas from US West and Sprint
Telecommunications, respectively. While these transactions have
not yet closed, due to regulatory hurdles, delayed in part by the
recently enacted Telecommunications Bill of 1996, both are
expected to close in the first half of 1996.
As part of the Western New Mexico Telephone Company
acquisition in 1989, Lynch acquired an interest in New Mexico
Cellular RSA #1. Two of our partners in this transaction wished
to partition this RSA into the North and South. As part of this
partition, Lynch increased its net POP share by retaining a 21%
ownership in the North partition, which includes the affluent
community of Farmington, New Mexico. In addition, as part of the
transaction, Lynch acquired the ability to sell its share in the
property to the general partner for $5.0 million in the year
2001. This transaction greatly enhances the value of this
cellular asset.
Below, our partners in our current telephone operations will
discuss with you how their companies are doing and the steps they
are taking to grow and prosper under the Lynch umbrella. The
recently enacted Telecommunications Bill of 1996, opens new
competitive environments in telephone services. In addition, it
does provide some safeguards for those providing high quality
service to rural areas. As our partners will share with you
below, we welcome the opportunity to expand our current service
offerings to our current customer service base and beyond.
Western New Mexico Telephone Company, Inc.
Western New Mexico Telephone Company continued to grow and expand
its operations in 1995 by adding over 225 access lines, a 4.5%
growth rate. This phenomenal growth is occurring in all of our
nine exchanges located in the southwestern corner of New Mexico.
Active marketing programs by local Chambers of Commerce and real
estate firms, plus having one of the finest climates in the
country, have been largely responsible for this influx of new
subscribers.
In anticipation of this continuing growth pattern, and to be in a
position to provide the latest in technological products and
services to southwestern New Mexico, we began placing fiber optic
cables between all of our exchanges and upgrading our central
office transmission facilities in 1995. This project should be
completed and turned up by the early months of 1996. Broadband
capabilities such as distance learning, remote medical care,
equal access to long distance providers, and access to the
internet services are some of the many new and interesting
challenges we will face in 1996 and beyond.
Western's management continues to be active in other Lynch
Corporation businesses. We have lent financial and operational
assistance to the Kansas telephone companies, to Lynch cellular
partnerships in New Mexico, and also to WNM Communications, Lynch's Direct
Broadcast Satellite Television Company (DBS). Recently, Western announced a
new company venture into the cable television business, with the formation
of Enchantment Cable Company. This venture will be exploring various
options to provide cable television both within and outside our current
telephone service areas.
Western's management has been actively involved with various
industry associations in 1995 and will continue to participate in
1996. The FCC and Congress continue to advance the concept of
competition in all areas of telecommunications. We will continue
to push for rules and regulations which advance and preserve the
universal service principles which have long been in policy of
the United States; but more specifically in high cost, rural
areas, such as our service territory. The future of the
information superhighway is uncertain, but holds much promise for
our company. Western will strive to be on the cutting edge of new
technology and to be the full-service provider for our service
area.
Jack C. Keen Jack W. Keen
Chairman President
Inter-Community Telephone Company
Inter-Community Telephone Company serves over 1,200 subscribers
in southeastern North Dakota. We have five exchanges that are
tied together by 98 miles of fiber optic cable. Switching service
is accomplished with a Northern Telecom DMS-10 switch utilizing a
host-remote configuration.
As of December 31, 1995, we were still in the process of
finalizing the acquisition of lines in Hope, Page, Sanborn and
Tower City exchanges from US West Communications. As a result of
the acquisition process, we postponed the upgrading of our
existing facilities so that we may upgrade all of our equipment
simultaneously. In 1996, our plans include linking these
new exchanges with our existing network, to which another
approximately 40 miles of cable will be linked. The addition of
these lines will increase our total number of subscribers to
2,600. We also plan to offer features such as Caller I.D., Equal
Access and local Internet access to all of our 2,600 subscribers.
We look upon 1996 with great anticipation. A tremendous amount of
work will have to be completed in a short time; but with that
will come a tremendous sense of accomplishment when the task is
completed.
Keith Andersen
General Manager
Cuba City Telephone Exchange Company
Belmont Telephone Company
The Cuba City and Belmont Telephone Companies continued to show
good growth during 1995. Subscribers reached 2,382 in December
1995, a 2% increase from 1994.
Long distance calling, which represents 70% of total companies
operating revenues, grew at a 7.8% rate during the year. We are
currently in the process of constructing 22 miles of fiber optic
circuits planned for early 1996 which will permit the re-routing
of long distance traffic, which increases line haul revenue, and
will bring fiber optic capability to both communities.
At year end, nineteen school districts in southwest Wisconsin
were forming a "distance learning" facility to expand school
curriculums while reducing costs. The facility is expected to be
operational by the 1997/1998 school year.
The companies anticipate participating in the emerging
technologies as they develop into viable business opportunities,
while continuing to maintain business relations with the
interexchange carriers who continue to press for reduced costs
for joint services.
LaFayette County Satellite TV, Inc. was formed in 1994 to market
the DBS 18 inch receiving dish and DirecTV programming. At year
end, subscriber count reached 190. These small dish systems
provide 175 channels of programming in areas without cable or
with limited cable service.
Richard A. Kiesling
President
Bretton Woods Telephone Company
1995 marked several accomplishments for Bretton Woods. The
Company converted to Equal Access, activated New Hampshire
statewide E911 system, completed an acquisition of access lines
from NYNEX which folded nicely into our service area, and in
December we upgraded our Northern Telecom DMS10 switch to 408.10
generic, adding several more customer enhancements. To remain
prepared to access the information super highway, we are
committed to upgrading our switch and maintaining the reliability
of our network.
The completion of additional subdivisions of residential homes in
Bretton Woods resulted in a continued increase in customers, with an even
greater projected increase in 1996.
In the future, we look forward to continuing growth in
subdivisions, improving our technology and network to give our
customers state-of-the-art service, and broadening our service
base by providing cable and security service to our customer base
and beyond.
Nancy Hubert
Senior Vice President
of Operations
JBN Telephone Company
JBN Telephone Company, located in Northeast Kansas, has completed
nearly 50% of its Network Modernization Plan. Six communities
serving over 1,100 customers were cut over to new digital central
office equipment supported with fiber optic facilities. An
agreement was also made in 1995 to purchase the telephone
properties of Haddam and Morrowville, Kansas adding 350 more
customers to JBN Telephone Company. The acquisition will be
completed in 1996 and customers in Haddam and Morrowville will
then be converted to new digital central office equipment.
Construction of a fiber optic ring serving all eight communities
will be completed in 1996, which supports uninterrupted service
in the event of a cable cut.
Construction will also begin in 1996 on new digital central
office equipment and a second fiber optic ring for seven more
communities serving another 1,600 customers. Upon completion of
this phase of our plan, all JBN Telephone Company customers will have
access to new services and features including Custom Calling Features,
Voice Mail and Switched 56 Kbs data service.
The increased demand for advanced services in the rural area
continues to grow. We are anxious to show new and existing
customers the high quality of service they can expect from JBN
Telephone Company. I feel as long as we continue offering this
kind of service, along with our personal touch to our customers,
our customers will remain loyal when competition in the local
loop becomes reality.
I look forward to the challenges and opportunities ahead.
Gene Morris
General Manager
Haviland Telephone Company
Haviland Telephone Company serves about 4,000 customers in 12
exchanges in southcentral Kansas. The company offers digital
switching capability, with attendant options, to about 75% of its
customers. About 220 customers in the town of Haviland enjoy
company-carrier CATV. Several additional services are offered
including state-wide paging, voice mail, and mobile telephone
service.
During 1995, regulated revenues were the highest in company
history and expenses have been cut to the lowest levels since
1992. Telephone related earnings before interest, taxes, and
depreciation have attained the highest level ever; 1995 was a
good year.
1995 saw several facility improvements. The company began a
buried telephone plant construction in Cullison that will replace
old subscriber carrier equipment. In select locations, the
company installed Ultraphones, the digital wireless telephone
product that uses standard subscriber telephone equipment. As a
major infrastructure improvement, the company buried about 50
miles of additional fiber optic cable. Using the fiber, the
company placed in service remote switching facilities for
Cullison and Coats. The move replaced electronic mechanical
switching equipment that has been in service for nearly 40 years.
Over $1.3 million in capital improvements to its communications
infrastructure were made.
In 1996, three more towns will enjoy remote digital node
technology that will enable the company to offer value-added
options, faster call completion time, enhanced 911 dialing, and
lower installation and maintenance costs. During 1996, five
additional towns will convert to Equal Access 1+ dialing. This
move will probably stimulate intrastate toll traffic in the towns
targeted. The company will complete the buried plant upgrade
started in 1995 which will enable affected customers to purchase
additional telephone lines. In a significant cash-improvement
move, Haviland will continue to explore the feasibility of
converting to cost-based settlements in the interstate
jurisdiction. Long-range buried plant projects that will
eliminate old subscriber carrier equipment, extend additional
line capabilities to homes, and improve service reliability will
move forward in 1996. The company will continue to use Ultraphone
for an interim solution where adequate physical facilities do not
exist and for temporary service to transient locations.
Access lines will continue to grow in eastern exchanges due to
area out-growth from metropolitan Wichita. Access lines will
probably grow in western towns as families and businesses add
lines. Network access revenues will increase, especially
interstate traffic, probably to their highest level.
Robert Ellis
President
LYNCH BROADCASTING
Lynch currently has ownership interest in two network affiliated
television stations, Station WOI-TV and Station WHBF-TV. Station
WOI is an ABC affiliate which serves the Des Moines, Iowa media
market, the 73rd largest in the United States. Station WHBF is a
CBS affiliate which serves the Quad-Cities media market in Rock
Island and Moline, Illinois, and Davenport and Bettendorf, Iowa,
the 88th largest market in the United States.
Philip J. Lombardo is our partner in both these ventures. Phil is
a well known industry player with over thirty five years of
experience in operating broadcasting properties.
STATION WOI-TV
On March 1, 1994, Capital Communications Corporation acquired the
assets of Station WOI-TV from Iowa State University for $12.7
million. Lynch Corporation owns 49% of the common shares
outstanding and a convertible preferred, which when converted,
will bring Lynch's common share ownership to 50%.
Since the acquisition, much has been done to improve the
operations of Station WOI. Operating procedures and staff have
been stream-lined to lower costs and improve efficiencies. The
station's viewing line-up has been upgraded. In the news
department, there has been significant upgrading of equipment.
Operations have been centralized to a new location near the State
Capitol Building in Des Moines. As such, despite the fact that
the Lombardo/Lynch partnership has operated the station for less
than two years, broadcast cash flow for 1995 grew to $3.3
million. In addition, the improved operating results have allowed
us to refinance the station's capital structure, so much so, that
of Lynch's $13.25 million initial investment in Station WOI-TV in
the form of Senior Debt, Subordinated Notes, Preferred Stock, and
Common Stock, all funds have been returned to Lynch, including
interest at the stated rates, save for a $250,000 anticipated
long-term investment in the common and convertible preferred.
Lynch applauds the efforts of our partner Phil Lombardo and his
management team in this improvement.
STATION WHBF-TV
In 1987, Lynch acquired a 20% interest in Station WHBF-TV. Since
its acquisition by Lombardo/Lynch, Station WHBF has shown
consistent growth in both revenues and cash flow. In 1995,
revenues and broadcast cash flow reached $7.2 million and $3.1
million, respectively. These results were slightly higher than
the 1994 reported results despite a lackluster local economy and
the absence of political advertising which bolstered 1994
results.
PERSPECTIVE
We have long believed in the value of local television stations.
These values are increasingly being recognized by industry and
marketplace in the form of higher multiples being afforded these
properties. The recently enacted Telecommunications Act of 1996
which allows companies to own television stations covering up to
35% (up from 25%) of the national population should provide
increased visibility to our ownership interest.
While the financial results of these properties are not
significant contributors to Lynch's reported financial results (a
$0.24 per share net profit in 1995, and $0.27 net loss in 1994),
their intrinsic value represents one of the many "hidden assets"
of Lynch. We will continue to look for opportunities to leverage
off these values and expand our multimedia operations both
domestically and abroad.
The Morgan Group, Inc.
The Morgan Group, Inc. ("Morgan") and its wholly owned
subsidiaries, Morgan Drive Away, Inc., Interstate Indemnity
Company, Morgan Finance Company and newly-acquired Transfer
Drivers, Inc. ("TDI") enjoyed a successful year in 1995.
The highlights were:
We believe enhancement of shareholder value can be attained
not only by polishing the Morgan Drive Away engine, but by
building on this base to expand out-sourcing services to current
and new customers. We are excited about our 1995 acquisition of
TDI, a market leader in the fragmented out-sourcing business
servicing the relocation needs of such major corporations as
Ryder System, Budget Rentals, Hertz Penske, and others.
Revenues reached $122 million, a milestone signifying our
leadership position in providing services to our customers. This
volume gain represents the third successive year of growth in
excess of 20%.
Morgan continued to emphasize our goal of servicing industry
leaders and firmed its relationship and expanded our involvement
with outstanding customers. In manufactured housing these
include: Fleetwood Enterprises, Oakwood Homes, Schult Homes,
Cavalier Homes, Skyline Corporation, Clayton Homes and Champion
Homes. For recreational vehicles, industry pace-setter and Morgan
clients include Fleetwood Enterprises, Winnebago Industries, Thor
Industries and Holiday Rambler.
Our emphasis on training and safety continued to bear
positive results and is reflected in lower accidents per mile
driven.
Terence L. Russell was named President and CEO of Morgan
Drive Away. Terry has served as President of three key divisions
of Ryder System and is a welcome addition to the Company.
Morgan's shareholder equity reached $15.6 million, bolstered
by current year operations earnings and a $450,000 equity
increase on the early retirement of the $3.0 million issue of
Lynch Corporation preferred stock. The company's balance sheet is
quite strong, with shareholders' equity of $15.6 million, cash at
close to $3.0 million, long term debt of under $2.5 million, and
available credit facilities of approximately $14.8 million.
INDUSTRY OVERVIEW
The Morgan Drive Away core operation is the leading out-sourcer
of moving services for the manufactured housing and recreational
vehicle industries. With a committed force of about 3,300
independent owner-operator drivers nationwide, Morgan is the
industry leader, arranging via its "booking agency" service about
one-fifth of the moves from manufacturers of these products to
their dealers' lots and showrooms. Morgan Drive Away also
facilitates the moving of a variety of other goods such as
commercial vehicles, van conversions, military equipment, modular
offices, semi-trailers and the like. Our national operation of
109 dispatch locations and 9 regional offices located in 39
states, our reputation for reliable service, our strong
relationship with drivers and customers built up over a sixty
year history, all provide reasons for optimism that Morgan will
maintain its position as industry leader.
We believe that a combination of factors may well sustain
Morgan's momentum in the longer term. High quality new products,
favorable demographics, healthy consumer confidence levels, and,
for manufactured housing, a relatively short supply of rental
apartments, bode well. Further, the national trend to outsourcing
in many American industries fits into our strategy of providing
services to some of the best and rapidly growing companies in the
country.
RESULTS OF OPERATIONS AND OUTLOOK
Revenues in 1995 reached an "all time" record of $122 million, a
gain of 20%. EBITDA reached $4.6 million, operating income
finished at $3.4 million, and net earnings after-taxes were a
record $2.3 million. While these results are the best ever for
Morgan, we expect better operating margins to accompany planned
double digit top line growth in the years ahead. These projected
results reflect strength in the industries served, marketing
efforts securing and expanding major accounts, attention to costs
in all facets of the business, and the aforementioned improvement
in accident and claims costs.
Morgan's future has never been brighter. The industries served
are expanding, its most important customers are the leaders
within those industries, and the company's financial wherewithal
and management commitment to maximizing shareholder value should
enable continued progress along three paths of growth: core
business improvement, acquisitions, and expansion of outsourcing
services.
Charles C. Baum
Chairman
Spinnaker Industries, Inc.
Spinnaker Industries, Inc. experienced another year of strong
growth and steep increase in shareholder value in 1995. Spinnaker
completed the major acquisition of Central Products Company,
continuing the aggressive growth trend that began with the 1994
acquisition of Brown-Bridge Industries. The company's management
team of Richard J. Boyle and Ned N. Fleming III, continuing with
the mandate of building shareholder value through acquisitions
and internal growth, has built a company with annual revenues
swiftly approaching a quarter-billion dollars. The substantial
growth seen over the last 19 months is due to the company's
dedication to all stakeholders: customers, employees, management,
the community and the shareholders. The record revenues and
EBITDA attained by Spinnaker in 1995 are illustrated in the table
below:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Figures in Thousands 1993 1994 1995
_____ ______ _______
REVENUES $6,371 $33,632 $135,289
EBITDA $ 187 $ 1,117 $ 7,940
</TABLE>
Central Products Company -- In accordance with Spinnaker's value
enhancing strategy, the recent acquisition of Central Products
Company is an important element of the adhesive backed materials
industry. The company was purchased from Alco Standard
Corporation in October of 1995 and functions as a wholly owned
subsidiary of Spinnaker. Central has been one of the nation's
leading manufacturers of carton sealing tapes for over 75 years.
Central is the only US supplier to manufacture both water
activated paper and reinforced gummed tape and pressure sensitive
polypropylene tape, and the only company to produce all three
pressure sensitive adhesive technologies to meet the diverse
needs of today's customers. Net sales from Central's operations
for the 1995 calendar year totaled approximately $122 million,
including over $30 million under Spinnaker ownership.
It is Central Products Company's strategy to be the sole source
for its customers' carton sealing tape and system needs. The
Company possesses over 50% of the water activated carton sealing
tape services, and the second largest share of the pressure
sensitive carton sealing market. Central's position as the only
supplier to offer every major carton sealing tape and technology,
provides excellent opportunities to take advantage of the growing
market and to expand its international presence. Enhanced by its
strong management team, Central remains well positioned as a
platform for the acquisition of other companies.
Brown-Bridge Industries, Inc.-Acquired from the Kimberly-Clark
Corporation in September of 1994, Brown-Bridge Industries
develops, manufactures and markets adhesive coated materials that
are converted by printers and industrial users into products for
marketing, identifying, promoting, labeling, and decorating
applications. At the time of acquisition, several key
company-wide initiatives were launched: increased product
quality, improved customer service, reduced production and
administration costs, and a reduction in working capital
investment. Evidencing Brown-Bridge's significant progress in
each of these areas, 1995 reported the highest level of sales and
earnings in the company's fifty year history, with another record
year expected in 1996.
The $3.5 billion adhesive backed materials industry enjoyed
another year of strong growth. Brown-Bridge has capitalized on
the increased demand for consumer package labeling, the
popularity of non-impact printing systems and the heavy
consumption of pressure sensitive labels and self-adhesive
materials in everyday business. While increasing its presence in
the more mature heat and water activated segments, the majority
of Brown-Bridge's growth has been from increasing its share of
the expanding pressure sensitive market.
Entoleter, Inc.-Entoleter's "back-to-basics" philosophy delivered
not only a third year of increased sales, but substantially
increased EBITDA. As a manufacturer of impact milling and
rotary-knife size reduction equipment, Entoleter's new management
team has leveraged the Company's core competencies in design and
engineering to provide the market place with products that have
clear advantages over the competition. Technological advances in
the company's air pollution control product line have further
positioned Entoleter for growth in the volatile environmental
industry.
An infusion of new talent, coupled with the implementation of new
business growth initiatives has brought strong improvements to
the company's financials. Net sales were up over 10% to a record
$7.5 million in 1995, while EBITDA rose to $0.5 million from $0.2
million giving net income a strong boost over the 1994 figure.
Spinnaker completed the year with a stock split of 3-for-2,
increasing shares outstanding to 2,715,694 shares. This effort
also moves the company closer to meeting the standards for
trading on the NASDAQ National Market.
Richard J. Boyle
Chairman
Lynch Machinery, Inc.
Lynch Machinery manufactures and markets glass forming machines
and packaging machinery in facilities located in Bainbridge,
Georgia and in suburban Chicago, Illinois.
Results of Operations
Revenues and operating income for 1995 continued to increase
dramatically. Revenues were $36.9 million, an increase of 79%
from $20.6 million in 1994. EBITDA more than doubled, increasing
to $7.0 million from $3.4 million in the prior year. We shipped
fifteen glass presses in 1995 compared to eight in 1994; of
these, eleven were advanced technology presses used for the
production of television glass in China, Korea, and India.
Emerging Markets
Many former Third World countries have been successful in
managing their economies for sustained growth. Countries such as
India, China, Indonesia, and others are now experiencing
burgeoning demand for consumer products as a result of the
overall improvement in their macroeconomic conditions. As these
economies continue to grow, demand will increase for consumer
products, including television sets, personal computers, and
household glassware. We expect our glass making customers to
continue to expand to fill market demand. They will need
additional high-efficiency production equipment, including Lynch
presses and ancillary equipment.
Control Systems
In the past it was the practice of Lynch customers to furnish
their own control systems for the press and for related equipment
in the production line. Quality and productivity requirements in
the glass industry are increasing, making precise control of the
production process more critical. At the same time, the level of
technology in machinery control is increasing, and glass
factories are hard pressed to stay abreast of these advances. To
help solve the complex problems of controls in the glass factory,
we created a stand-alone Electronic Controls Department, separate
from the Engineering Department. This new department is
responsible for designing, integrating, and assembling control
systems on all Lynch Machinery products, including retrofit
packages. We believe this department offers significant growth
opportunity for the future.
Preparations For Growth
In order to respond to recent growth and to prepare for future
growth, we have made a number of physical additions and
improvements. To accommodate our growing engineering resources,
we constructed a new, larger engineering department. We made
numerous physical improvements to the plant including renovation
or replacement of several structures. From the standpoint of
operations, we implemented project management software for
scheduling and controlling projects from the quotation process
through manufacturing and shipping. We have introduced the
workcell concept in our machine shop. As a result, some of our
most experienced employees are more productive and enjoy a more
varied work routine.
Expansion
Lynch marketing people are in continual contact with key
participants in the glass industry and we know that several
participants in the industry plan to increase production capacity
during the next few years. Our existing production facility in
Bainbridge, Georgia is not large enough to handle the anticipated
demand. Accordingly, we plan to construct additional fabrication
and assembly facilities. These plant improvements should result
in production economies which will improve the manufacturing
gross margins of our machines.
Robert T. Pando
President
M-tron Industries, Inc.
M-tron is an ISO (International Standards Organization)
registered company involved in the design, manufacture, and
sourcing of Frequency Control Products serving the
telecommunications, wireless communications, and computer
marketplaces.
Operation Improvements
Recently, there have been a number of areas which were
reorganized and expanded to meet the constantly changing needs of
the market place served by M-tron. Among these were the
Engineering, Sales/ Marketing, and the Operations departments. As
a result, significant penetration into the telecommunications
marketplace was realized.
The redirection of the Engineering department showed considerable
success in the introduction of several new products in the
Frequency Control field. These new products, although supplied to
customers in 1995, will have a major impact on M-tron's business
in 1996 and beyond. New product development will be going into
the production phase of the systems into which these new products
have been designed.
The Sales/Marketing department, with the changes implemented in
1994, showed significant maturity in 1995 resulting in the
handling of additional new bookings, which increased to $20
million from $13 million without any additional personnel. M-tron
sees additional growth in new bookings in 1996, still
anticipating no significant additions to personnel.
Operations, because of the rapid growth of new bookings in 1995,
had to address a significant increase in production capacity for
both quartz crystals and clock oscillator frequency control
products. Due to the demand for M-tron's manufactured products,
production of quartz crystals increased 60% and clock oscillators
production increased by 50%. The team concept introduced in 1994
had considerable impact on achieving this increase without
excessive capital expenditures. The second phase of team training
is currently being finalized and will be implemented in 1996.
This is expected to result in further improvement in productivity
and efficiency.
The Hong Kong Sales operation, started in the early part of 1995,
has seen considerable improvement during the year. There is still
more work to be done in this area. M-tron is recognizing more
activity in the Pacific Rim manufacturing community, and
anticipates increased profitability in 1996 and beyond.
1995 Summary of Operations
M-tron's backlog increased by 220% in the course of 1995. New
bookings increased by 154% in 1995 over 1994. Telecommunications
and like applications were responsible for 35% of the new
bookings increase, and 29% of the distribution increase. Sales
were $20.1 million in 1995 compared to $12.4 million in 1994.
EBITDA showed a significant increase in 1995 going to $2.0
million from $.2 million in 1994.
With the increasing demand for the products supplied for the
telecommunications and wireless communications marketplaces that
M-tron serves, it is expected that M-tron will continue to see an
increasing demand for its products in 1996 and beyond.
M-tron would like to take this opportunity to thank its
employees, suppliers, the Yankton community, and in particular,
its customers for the understanding and hard work necessary to
achieve a growing business in today's workplace.
Martin J. Kiousis
President
MANAGEMENT DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Year 1995 Compared to 1994
Revenues increased to $338.2 million in 1995 from $188.7 million
in 1994, a 79% increase. Acquisitions made during 1995 and 1994,
principally in the manufacturing segment, were the most
significant contributors to the increase. In the manufacturing
segment, where revenues increased by $125.6 million to $192.3
million in 1995 from $66.7 million in 1994, or 188%, the
acquisition of Brown-Bridge Industries, Inc. on September 19,
1994, contributed $97.2 million in revenues for 1995 versus $26.8
million in 1994. This represents 56% of total manufacturing
revenue increase. The acquisition of Central Products Company on
October 4, 1995, contributed $30.6 million, or 24% of the
segment's revenues increase. 1995's manufacturing revenues also
reflect $36.9 million from Lynch Machinery, Inc., compared to
$20.6 million in 1994, 13% of the segment's revenue increase. The
production of extra-large glass presses from orders contracted
for in 1994 and 1995 resulted in this additional revenue. Fifteen
glass presses were shipped in 1995, compared to eight in 1994. Of
the presses shipped in 1995, eleven were advanced technology
extra-large presses. As a result of the shipment of these presses
in 1995, Lynch Machinery glass press backlog was reduced by $11.5
million to $13.3 million at December 31, 1995 from $24.8 million
at December 31, 1994. While Lynch Machinery is in the process of
bidding for additional glass press contracts, it is not
anticipated that the level of production in 1996 will equal 1995
levels. The services segment, which represents 36% of total
revenue, increased by $20.4 million from 1994 or 20%. The Morgan
Group, Inc.'s results increased due to continued strength in
manufactured housing shipments (industry shipments up 12%) and
the acquisition of Transfer Drivers, Inc. in May 1995. In the
multimedia segment, which represents 7% of total revenue,
revenues increased by $3.5 million from 1994, or 17%. Haviland
Telephone Company, which was acquired on September 26, 1994,
contributed 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 $30.6 million in 1995 from $18.3 million in
1994, a $12.3 million, or 67% increase. Operating segment EBITDA
(prior to corporate management fees and expenses) grew to $34.5
million from $20.6 million, a 67% increase. The manufacturing
segment was the largest contributor to EBITDA with $16.6 million,
or 54% in 1995, as compared to $4.6 million, or 25% in 1994.
Spinnaker's EBITDA grew to $8.0 million from $1.1 million, a $6.9
million increase. The inclusion of Brown-Bridge for the full year
accounted for $3.9 million of the increase in 1995. Central
Products' EBITDA of $2.7 million in the fourth quarter primarily
accounted for the remaining increase. Lynch Machinery accounted
for 30% of the total increase in manufacturing EBITDA. Profit
margins associated with the production of the extra-large glass
presses were the cause of the significant improvement. The
services segment contributed $4.6 million, or 15%, of total
EBITDA in 1995, compared to $4.3 million, or 24% in 1994. This
increase was directly the result of the increased revenues offset
by a product mix shift and increases in certain operating costs.
The multimedia segment contributed 40% in total EBITDA in 1995,
or $12.3 million, as compared to $10.9 million, or 59% in total
EBITDA in 1994. The inclusion of Haviland represents 79% of this
increase. The inclusion of Central Products for the full year
plus additional acquisitions made in 1995 and anticipated to
close in 1996 are projected to increase reported EBITDA by about
50% in 1996 from 1995.
Operating profits increased to $19.3 million in 1995 from $10.8
million in 1994, a $8.4 million, or 78% increase. The breakdown
of the increases and the primary causes are the same as the above
discussion regarding EBITDA.
Investment income increased in 1995 from 1994 primarily
reflecting additional net gains in marketable securities.
Interest expense increased during 1995 primarily as a result of
the debt incurred for acquisition needs in 1995 and 1994
primarily Central Products and Brown-Bridge.
The full year effect of the financing for the Central Products
acquisition is expected to significantly increase interest
expense.
The 1995 income tax provision of $4.7 million, included federal,
state and local taxes and represents an effective rate of 39.2%
versus 40.2% in 1994. The rate is effected by a provision for the
repatriating of earnings by subsidiaries that are not
consolidated for income tax purposes (Morgan), a change in its
deferred tax reserve associated with income (1995) and losses
(1994) related to the Company's equity investee, a reduction in
taxes attributable to a special election available to Morgan's
captive insurance company. It should be noted that Morgan is
consolidated for financial statement purposes, but in accordance
with FASB 109 "Accounting for Income Taxes", a deferred tax
liability is recognized for the difference between the financial
reporting basis and the tax basis of the investment in Morgan
created by current earnings.
Income before extraordinary items was $5.1 million, or $3.66 per
share in 1995 as compared to $2.6 million, or $1.94 per share in
1994. These amounts include the gain on the sale of affiliate
stock which contributed $35,000 to net income, or $0.02 per share
in 1995 and $190,000, or $0.14 per share in 1994. During 1994,
the company recorded an extraordinary item which represented the
loss on the redemption of the company's 8% Convertible
Subordinated Debentures. This loss was $264,000, or $0.20 per
share.
RESULTS OF OPERATIONS
Year 1994 Compared to 1993
Revenues increased to $188.7 million in 1994 from $127.0 million
in 1993, a 49% increase. Acquisitions made during 1994 and 1993
were the significant contributors to the increased revenues. In
the manufacturing segment which accounted for 35% of total
revenues, revenues were increased by $38.7 million. The
acquisition of Brown-Bridge Industries, Inc., acquired on
September 19, 1994, contributed $26.8 million, or 69% of the
revenues increase. 1994's manufacturing revenues also reflect
$5.5 million from Lynch Tri-Can Industries, which was acquired on
December 15, 1993. Production of extra-large glass presses at
Lynch Machinery, Inc. from orders received in 1994 also resulted
in $6.8 million in increased revenues. In the service segment
which accounted for 54% of total revenues, revenues increased by
$19.1 million. The two acquisitions made in 1993 by The Morgan
Group, Inc., contributed $5.3 million to their overall revenue.
Morgan's results also increased due to continued strength in the
manufactured housing (industry shipments up 21%) and recreational
vehicle (industry shipments up 5%) industries and the addition of
several new accounts. In the multimedia segment, which accounted
for 11% of total revenues, revenues increased by $3.9 million.
The acquisition of J.B.N. Telephone Company on November 1, 1993,
and Haviland Telephone Company on September 26, 1994, contributed
88% of the segment's revenue increase.
EBITDA increased to $18.3 million in 1994 from $12.5 million in
1993, a $5.8 million, or 46% increase. Operating segment EBITDA
(prior to corporate management fees and expenses) grew to $20.6
million from $14.6 million in 1993, a $6.0 million or 41%
increase. All operating segments displayed improved results. The
largest contribution came from the manufacturing segment where
EBITDA grew from $1.2 million to $4.6 million. This increase
reflects contributions of $1.4 million from Brown-Bridge, plus a
significant increase in operating earnings at Lynch Machinery.
The Lynch Machinery increases were due to higher revenues and the
higher margins associated with the production of the extra-large
glass presses. EBITDA at Morgan increased to $4.3 million from
$3.0 million, reflecting higher revenues and improved operating
margins.
Operating profits increased to $10.8 million from $6.6 million in
1993, a $4.2 million or 64% increase. The breakdown of the
increases and the primary causes are the same as the above
discussion regarding EBITDA.
Investment income increased from 1993 to 1994 primarily
reflecting additional interest on the Company's temporary loans
to Capital Communications Corporation, the parent company of
Station WOI-TV.
Interest expense increased during 1994 primarily as a result of
the debt incurred for the various acquisitions plus the effect of
higher interest rates on variable-based borrowings, partially off
set by the redemption or conversion of $11.8 million of the
Company's 8% Convertible Subordinated Debentures on October 24,
1994.
The 1994 income tax provision of $2.7 million included federal,
state and local taxes and represents an effective rate of 40.2%
versus 34.0% in 1993. The rate is effected by a provision for the
repatriation of earnings by tax unconsolidated subsidiaries
(principally Morgan), a deferred tax reserve associated with
losses incurred by the Company's equity investee and a reduction
in taxes attributable to a special election available to Morgan's
captive insurance company.
Income before extraordinary items and the cumulative effect
charge was $2.6 million, or $1.94 per share in 1994, as compared
to $4.1 million, or $3.36 per share in 1993. The gain on sales of
subsidiary and affiliate stock contributed $190,000 to net
income, or $0.14 per share in 1994 and $2.7 million, or $2.22 per
share in 1993. Also in 1994, the company recorded an
extraordinary item which represents the loss on the redemption of
the Company's 8% Convertible Subordinated Debentures. This loss
was $264,000, or $0.20 per share. 1993's net income also included
an extraordinary loss on the redemption of debentures of
$206,000, or $0.17 per share. In addition, in 1993, the Company
recorded a loss from the cumulative effect of the change in
accounting for income taxes of $957,000, or $0.78 per share.
FINANCIAL CONDITION
As of December 31, 1995, the Company has current assets of $123.6
million and current liabilities of $98.0 million, working capital
of $25.6 million as compared to $22.7 million at December 31,
1994. Within the elements of working capital, trade accounts
receivable, inventories, trade accounts payable, accrued
liabilities and current maturities of long term debt, all
increased significantly from December 31, 1994 to December 31,
1995 due to the acquisition of Central Products operation from
Alco on October 4, 1995. Cash flow from operations as presented
in the Consolidated Statement of Cash Flow increased by $12.6
million from $14.6 million in 1994 to $27.2 million in 1995. The
increase primarily reflects the effect of acquisitions, the
primarily Brown-Bridge and Central Products and the higher level
of production at Lynch Machinery.
Capital expenditures were $19.6 million in 1995 and $11.6 million
in 1994 due to significant deployment of enhanced technology by
our telephone operations and the addition of Brown-Bridge in 1994
and Central Products in 1995. This increased level of capital
expenditures is expected to decline in 1996 in the multimedia
segment as upgraded programs are completed and increase in the
manufacturing segment due to the acquisition of Central Products.
Overall 1996 capital expenditures are expected to be 40% below
the 1995 level.
At December 31, 1995, the Company had $27.4 million ($31.5
million at December 31, 1994) in cash, marketable securities, and
short-term investments. At December 31, 1995, total debt was
$187.4 million, which was $89.2 million more than the $98.2
million at the end of 1994. The above items were significantly
impacted by: the acquisition of Central Products Company, for a
total of $80.0 million including cash paid and debt incurred and
assumed. Debt at year end 1995 included $92.7 million of fixed
interest rate debt, at an average cash interest rate of 7.7%
and $94.7 million of variable interest rate debt at an average
interest rate of 9.1%. Additionally, the Company had $18.5
million in unused short-term lines of credit, $11.0 million of
which was attributable to Morgan. As of December 31, 1995, the
Parent Company had borrowed $6.9 million under a $12.0 million
short-term line of credit facility. These funds were primarily
used to advance funds to the partnerships bidding in the PCS
Auction, see below. In addition, a portion of the purchase prices
of Brown-Bridge Industries, Inc. and Central Products were
financed by borrowings under a revolving line of credit, $26.8
million at December 31, 1995. While this amount is classified as
a current liability, the facility does not expire until the years
1999 and 2000.
As part of Spinnaker's acquisition of Central Products Company
from Alco Standard on October 4, 1995 (see note 2), Alco provided
two loans totaling $25 million and received the right to sell
these notes to Spinnaker and demand payment (the "Put
Agreements"). Lynch agreed to guarantee the notes and provide
funds for the Put Agreement. As of January 2, 1996, Alco
exercised its rights under the Put Agreements to sell the notes
back to Spinnaker and in connection therewith, as described
below, Spinnaker entered into a new financing agreement with the
seller and a third party to make a partial principal payment on
the note and replace the balance with a new financing
arrangement.
On April 5, 1996, Spinnaker entered into an agreement with a
third party for an $8.5 million bridge loan. The bridge loan is
due on December 30, 1996 and if not paid will convert into a 5
year term loan. The third party will be entitled to receive
warrants to purchase 2.5% of the common equity of Spinnaker for
each quarter the term loan is outstanding, up to 20%, on a fully
diluted basis, of the common equity of Spinnaker. The bridge loan
bears interest at the greater of the LIBOR reference rate or the
Treasury rate plus 5% for the first 90 days, then incrementally
increasing by .25% for every subsequent 90 day period. On April
5, 1996 the rate in effect was 10.4%. Spinnaker may also fix the
rate at 18% if the floating rate increases to or above that rate.
The bridge loan and term loan include a payment in kind ("PIK")
feature that allows Spinnaker to pay any interest in excess of
16% (the maximum cash interest) by issuing additional bridge
notes. Also on April 5, 1996, an entity affiliated with Richard
J. Boyle and Ned N. Fleming III ("BF"), the Company's Chairman and Chief
Executive Officer and President, respectively, exercised warrants to
purchase 187,467 shares of Spinnaker's common stock resulting in proceeds
of $500,000 which will be used by the Company to make scheduled interest
payments on the bridge and term loans. The agreement requires BF to
continue to exercise its warrants to provide funds to satisfy the
outstanding interest that will be due on the bridge and term loans. The
Company has pledged its shares of Spinnaker stock to secure the new
convertible subordinated notes and bridge loan. Spinnaker is pursuing
actively various alternatives to refinance the indebtedness of Spinnaker
and its subsidiaries, including refinancing the bridge loan before it
matures. There can be no assurance that Spinnaker can successfully complete
any such refinancing.
Concurrently with the closing of the bridge loan, Spinnaker paid
Alco $7.5 million of which $5.5 million was a principal payment
on the $25 million note, approximately $10 million related to
accrued interest, and $1.0 million was applied toward a $1.75
million purchase price for a warehouse facility in Denver,
Colorado. The unpaid balance of the $25 million note, together
with the balance due on the warehouse facility was restructured
into a series of new convertible subordinated notes consisting of
the following: (a) A 7%, $6 million convertible subordinated note
that automatically converts including accrued interest, into
Spinnaker common stock 30 days after the execution of the note at
a conversion price per share of $35. After conversion, Alco is
entitled to sell the shares. If the proceeds of this sale are
less than $6 million, Spinnaker is required to pay the difference
between $6 million and the sales proceeds to Alco; either in cash
or an equivalent number of common shares; (b) A 7%, $7 million
convertible subordinated note due April 1997. The note contains a
PIK feature that allows Spinnaker, at its option, to satisfy the
interest by increasing the principal amount of the note. However,
if Spinnaker selects the PIK option, the interest rate on the
note is 9%. All or any part of this note can be converted at
Alco's option into shares of the Spinnaker's common stock after
April 1, 1997 at the then current market price; and (c) A 7%,
$7.25 million convertible subordinated note due April 1998. The
note contains a PIK feature that allows Spinnaker, at it option,
to satisfy the interest by increasing the principal amount of the
note. However, if Spinnaker selects the PIK option, the interest
rate on the note is 9%. All or any part of this note can be
converted at Alco's option into shares of the Company's stock
after April 1, 1998 at the then current market price.
Backlog in the manufactured products segment at December 31, 1995
was $34.0 million versus $38.8 million at the end of 1994. At
December 31, 1995, backlog included $3.1 million from Central
Products. Backlog at Lynch Machinery was $16.9 million at
December 31, 1995, and $28.9 million at December 31, 1994. The
significant level of shipments in 1995 caused their backlog to be
reduced by $12.0 million.
Since 1987, the Board of Directors of Lynch has authorized the
repurchase of 300,000 common shares. At December 31, 1995,
Lynch's remaining authorization is to repurchase an additional
69,139 shares of common stock.
The Board of Directors has adopted a policy not to pay dividends;
and such policy is reviewed annually. This policy takes into
account the long term growth objectives of the Company;
especially its acquisition program, shareholders' desire for
capital appreciation of their holdings and the current tax law
disincentives for corporate dividend distributions. Accordingly,
no cash dividends have been paid since January 30, 1989 and none
are expected to be paid in 1996.
Lynch Corporation maintains an active acquisition program and
generally finances each acquisition with a significant component
of debt. This acquisition debt contains restrictions on the
amount of readily available funds that can be transferred to
Lynch Corporation from its subsidiaries. Lynch Corporation (the
holding company) currently has a $12 million short-term line of
credit which expires May 15, 1996. Management anticipates that
this line will be secured for one year and believes is adequate
to cover its short term operational needs, but is actively
consider-ing alternative long term financing arrangements at the
holding company and subsidiary levels to fund future growth.
The company has several entities in which it holds a minority
position and to which it has funding commitments, and which, as
of the date of this report, are participating in the auction
being conducted by the Federal Communications Commission for 30
megahertz of broadband spectrum to be used for personal
communications services, the so-called "C" Block Auction. While
the auction is not yet complete, the company anticipates that the
entities may acquire licenses to provide personal communications
services to several areas of the United States. In addition, the
Company anticipates that either directly, through the above
entities or through other potential joint ventures, it will
participate in the scheduled FCC auction of 10 megahertz of
spectrum also to be used for personal communications services the
so called "D-E-F" block auction. The funding aspects of
acquisition of licenses and the subsequent mandatory build out
requirements plus the amortization of the license, could
significantly and materially impact the company's reported net
income over the next several years. Under the current structure
the ramifications of this would not impact reported revenues and
EBITDA in the future.
<TABLE>
<PAGE>
LYNCH CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
LYNCH CORPORATION AND SUBSIDIARIES
(In Thousands)
<CAPTION>
December 31
1995 1994
_______ _______
<S> <C> <C>
Assets
CURRENT ASSETS:
Cash and cash equivalents $ 15,921 $ 18,010
Marketable securities and short-
term investments 11,432 13,511
Trade accounts receivable,
less allowances of $1,732 and
$737 in 1995 and 1994,
respectively; includes $3,602 and
$3,624 of costs in excess of
billings in 1995 and 1994,
respectively 52,306 36,454
Inventories 33,235 18,955
Deferred income taxes 3,944 2,872
Other current assets 6,810 4,083
_______ _______
TOTAL CURRENT ASSETS 123,648 93,885
PROPERTY, PLANT AND EQUIPMENT:
Land 2,068 1,893
Buildings and improvements 16,675 11,713
Machinery and equipment 128,397 79,290
_______ _______
147,140 92,896
Accumulated depreciation (36 ,093) (31,451)
_______ _______
111,047 61,445
INVESTMENTS IN AND ADVANCES
TO AFFILIATED COMPANIES 8,982 3,503
INTANGIBLE ASSETS, NET 53,060 23,518
OTHER ASSETS 5,702 3,559
_______ _______
TOTAL ASSETS $302,439 $185,910
_______ _______
_______ _______
See accompanying notes.
</TABLE>
<TABLE>
<PAGE>
LYNCH CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets (continued)
LYNCH CORPORATION AND SUBSIDIARIES
(In Thousands)
<CAPTION>
December 31
1995 1994
_______ _______
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks $ 9,622 $ 5,904
Trade accounts payable 20,147 11,999
Accrued interest payable 1,146 565
Accrued liabilities 23,612 15,759
Customer advances 3,787 7,400
Current maturities of long-term debt 39,708 29,545
_______ _______
TOTAL CURRENT LIABILITIES 98,022 71,172
LONG-TERM DEBT 138,029 62,745
DEFERRED INCOME TAXES 17,912 10,397
MINORITY INTERESTS 12,964 11,065
SHAREHOLDERS' EQUITY:
Common Stock, no par or stated value:
Authorized 10 million shares
Issued 1,471,191 shares 5,139 5,139
Additional paid-in capital 7,873 8,037
Retained earnings 23,776 18,631
Treasury stock of 92,528 and
92,533 shares, at cost (1,276) (1,276)
_______ _______
TOTAL SHAREHOLDERS' EQUITY 35,512 30,531
_______ _______
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $302,439 $185,910
_______ _______
_______ _______
See accompanying notes.
</TABLE>
<TABLE>
<PAGE>
LYNCH CORPORATION AND SUBSIDIARIES
Consolidated STATEMENTS OF INCOME
LYNCH CORPORATION AND SUBSIDIARIES
(Dollars In Thousands, Except per Share Amounts)
<CAPTION>
Year ended December 31
1995 1994 1993
_________ _________ _________
<S> <C> <C> <C>
SALES AND REVENUES:
Multimedia $ 23,597 $ 20,144 $ 16,206
Services 122,303 101,880 82,829
Manufacturing 192,266 66,678 28,004
_________ _________ _________
338,166 188,702 127,039
_________ _________ _________
COSTS AND EXPENSES:
Multimedia 17,889 14,239 11,084
Services 111,672 92,155 75,243
Manufacturing 152,568 50,064 19,243
Selling and administrative 36,722 21,449 14,851
_________ _________ _________
318,851 177,907 120,421
_________ _________ _________
OPERATING PROFIT 19,315 10,795 6,618
_________ _________ _________
Other income (expense):
Investment income 3,070 2,446 2,112
Interest expense (10,892) (6,526) (5,686)
Share of operations of
affiliated companies 398 (301) (69)
Gain on sales of subsidiary
and affiliate stock 59 190 4,326
_________ _________ _________
INCOME BEFORE INCOME TAXES, MINORITY INTERESTS,
EXTRAORDINARY ITEM AND CUMULATIVE EFFECT
OF ACCOUNTING CHANGE
11,950 6,604 7,301
Provision for income taxes (4,686) (2,652) (2,448)
Minority interests (2,119) (1,360) (737)
_________ _________ _________
INCOME BEFORE EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 5,145 2,592 4,116
Loss on early extinguishment of
debt, net of income tax benefit
of $135 and $106 -- (264) (206)
Cumulative effect to January 1, 1993
of change in accounting
for income taxes -- -- (957)
_________ _________ _________
NET INCOME $ 5,145 $ 2,328 $ 2,953
_________ _________ _________
_________ _________ _________
Weighted average shares and
share equivalents outstanding 1,407,000 1,337,000 1,226,000
Primary earnings per share:
Income before extraordinary item
and cumulative effect change $ 3.66 $ 1.94 $ 3.36
Extraordinary item -- (.20) (.17)
Cumulative effect change -- -- (.78)
_________ _________ _________
NET INCOME $ 3.66 $ 1.74 $ 2.41
_________ _________ _________
_________ _________ _________
Fully diluted earnings per share:
Income before extraordinary item and
cumulative effect change $ 3.66 $ 1.88 $ 2.98
Extraordinary item (.16) (.12)
Cumulative effect change -- (.57)
_________ _________ _________
NET INCOME $ 3.66 $ 1.72 $ 2.29
_________ _________ _________
_________ _________ _________
See accompanying notes.
</TABLE>
<TABLE>
<PAGE>
LYNCH CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
LYNCH CORPORATION AND SUBSIDIARIES
(Dollars In Thousands)
<CAPTION>
Year ended December 31
1995 1994 1993
_______ ______ ______
<S> <C> <C> <C>
Operating activities
Net income $ 5,145 $ 2,328 $ 2,953
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 11,276 7,497 5,893
Net effect of (purchases) and
sales of trading securities 2,079 5,450 --
Deferred taxes 201 (1,505) 1,830
Share of operations of
affiliated companies (398) 301 69
Minority interests 2,119 1,360 618
Gain on Morgan \ -- -- (3,851)
Changes in operating assets and
liabilities, net of effects of
acquisitions:
Receivables (3,704) (11,243) (340)
Inventories 1,539 (949) 416
Accounts payable and
accrued liabilities 10,417 12,234 2,062
Other (1,496) (1,026) (379)
Other -- 109 479
______ ______ ______
NET CASH PROVIDED BY
OPERATING ACTIVITIES 27,178 14,556 9,750
______ ______ ______
INVESTING ACTIVITIES
Acquisitions (total cost less debt assumed and cash
equivalents acquired):
Central Products Company (85,072) -- --
CLR Video (5,242) -- --
Transport Drivers, Inc. (2,806) -- --
Personal Communications
Services Partnerships (7,010) -- --
Brown-Bridge Industries Inc. -- (29,071) --
Haviland Telephone Company -- (2,854) --
JBN Telephone Company -- -- (6,698)
Other -- -- (1,141)
Capital expenditures (19,569) (11,598) (4,356)
Sales (purchases) of marketable
securities, net -- -- (4,724)
Net investment in Capital
Communications, Inc. 3,000 (2,541) (26)
Other (1,349) (288) (291)
______ ______ ______
NET CASH USED IN
INVESTING ACTIVITIES (118,048) (46,352) (17,236)
______ ______ ______
See accompanying notes.
</TABLE>
<TABLE>
<PAGE>
LYNCH CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
LYNCH CORPORATION AND SUBSIDIARIES
(Dollars In Thousands)
<CAPTION>
Year ended December 31
1995 1994 1993
_______ ______ ______
<S> <C> <C> <C>
FINANCING ACTIVITIES
Issuance of long-term debt 90,167 31,477 6,688
Payments to reduce long-
term debt (4,720) (3,439) (7,979)
Debenture redemption/conversion -- (11,835) (6,144)
Net borrowings, lines of credit 3,718 3,957 285
Sale of treasury stock -- 2,290 --
Conversion of debentures into
common stock -- 1,597 --
Minority interest transactions (220) 906 8,597
Other (164) 305 (152)
______ ______ ______
NET CASH PROVIDED BY
FINANCING ACTIVITIES 88,781 25,258 1,295
______ ______ ______
Net decrease in cash
and cash equivalents (2,089) (6,538) (6,191)
Cash and cash equivalents at
beginning of year 18,010 24,548 30,739
______ ______ ______
Cash and cash equivalents
at end of year $15,921 $18,010 $24,548
______ ______ ______
______ ______ ______
</TABLE>
<TABLE>
Consolidated Statements of
Shareholders' Equity
(Dollars In Thousands)
<CAPTION>
Shares of
Common Additional
Stock Common Paid-in Retained
Outstanding Stock Capital Earnings
__________ _______ _______ _______
<S> <C> <C> <C> <C>
Balance at January
1, 1993 1,225,660 $3,542 $7,126 $13,350
Purchase of treasury stock (13) -- -- --
Issuance of treasury stock 30 -- -- --
Net income for the year -- -- -- 2,953
________ ______ ______ ______
Balance at December
31, 1993 1,225,677 3,542 7 ,126 16,303
Sale of stock to Officer 100,000 -- 910 --
Conversion of Debentures 52,881 1,597 -- --
Issuance of treasury stock 100 -- 1 --
Net income for the year -- -- -- 2,328
________ ______ ______ ______
Balance at December
31, 1994 1,378,658 5,139 8,037 18,631
Issuance of treasury stock 5 -- -- --
Capital transactions of
The Morgan Group Inc. -- -- (164) --
Net income for the year -- -- -- 5,145
________ ______ ______ ______
Balance at
December 31, 1995 1,378,663 $5,139 $7,873 $23,776
________ ______ ______ ______
________ ______ ______ ______
See accompanying notes.
</TABLE>
<PAGE>
Lynch Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1995
1. Accounting and Reporting Policies
Principles of Consolidation: The consolidated financial
statements include the accounts of Lynch Corporation ("Company"
or "Lynch") and entities in which it has majority voting control.
Investments in affiliates in which the Company does not have
majority voting control are accounted for in accordance with the
equity method. All material intercompany transactions and
accounts have been eliminated in consolidation.
Use of Estimates: The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Cash Equivalents: Cash equivalents consist of highly liquid
investments with a maturity of less than three months when
purchased.
At December 31, 1995 and 1994, assets of $7.9 million and $13.4
million, which are classified as cash and cash equivalents, are
invested in United States Treasury money market funds for which
affiliates of the Company serve as investment managers to the
respective Funds.
Marketable Securities and Short-Term Investments: On January 1,
1994, the Company adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt
and Equity Securities" (Statement No. 115). Under Statement No.
115, the accounting for investments depends on the classification
of such securities as either held-to-maturity,
available-for-sale, or trading.
Marketable securities and short-term investments consist
principally of U.S. Treasury obligations, preferred and common
stocks and bonds. At December 31, 1995, all marketable securities
and United States Treasury money market funds classified as cash
equivalents were classified as trading, with the exception of an
equity security with a carrying value of $0.9 million which was
classified as available-for-sale. Trading and available-for-sale
securities are stated at fair value with unrealized gains or
losses on trading securities included in earnings and unrealized
gains or losses on available-for-sale securities included in a
separate component of shareholders' equity. Unrealized gains
(losses) of $408,000, and (214,000) for December 31, 1995 and
1994 on trading securities have been included in earnings. There was no
adjustment to shareholders' equity for the available-for-sale security at
December 31, 1995.
The cost of marketable securities sold is determined on the
specific identification method. Realized gains of $529,000 and
$293,000, and realized losses of $108,000 and $233,000 are
included in other income for the years ended December 31, 1995
and 1994.
Properties and Depreciation: Property, plant and equipment are
recorded at cost and include expenditures for additions and major
improvements. Maintenance and repairs are charged to operations
as incurred. Depreciation is computed for financial reporting
purposes using the straight-line method over the estimated useful
lives of the assets. For income tax purposes, accelerated
depreciation methods are used.
Excess of Cost Over Net Assets of Companies Acquired: Excess of
cost over net assets of companies acquired (goodwill) is being
amortized on a straight-line basis over periods not exceeding
forty years. The Company periodically reviews goodwill to assess
recoverability, and impairments would be recognized in operating
results if a permanent diminution in value were to occur. The
Company measures the potential impairment of recorded goodwill by
the undiscounted value of expected future operating cash flows in
relation to its net capital investment in the subsidiary. The
Company does not believe that an impairment of its goodwill has
occurred.
Multimedia: Multimedia revenues include local and intrastate
telephone company service revenues which are subject to review
and approval by state public utility commissions, and long
distance network revenues, which are based upon charges to long
distance carriers through a tariff filed by the National Exchange
Carriers Association with the Federal Communications Commission.
Revenues are based on cost studies for the Company's exchanges,
and have been estimated pending completion of final cost studies.
Services: Service revenues and related estimated costs of
transportation are recognized when transportation of the
manufactured housing, recreational vehicle or other product is
completed.
Liability insurance is maintained with a deductible amount for
claims resulting from personal injury and property damage.
Provisions are made for the estimated liabilities for the
self-insured portion of such claims as incurred.
Manufacturing: Manufacturing revenues, with the exception of
certain long-term contracts discussed below, are recognized on
shipment.
Research and Development Costs: Research and development costs
are charged to operations as incurred. Such costs approximated
$1,673,000 in 1995, $1,231,000 in 1994 and $622,000 in 1993.
Earnings Per Share: Earnings per common and common equivalent
share amounts are based on the average number of common shares
outstanding during each period, assuming the exercise of all
stock options having an exercise price less than the average
market price of the common stock using the treasury stock method.
Fully diluted earnings per share reflect the effect, where
dilutive, of the debentures when outstanding and the exercise of
all stock options having an exercise price less than the greater
of the average or the closing market price of the Common Stock of
the Company at the end of the period using the treasury stock
method.
Accounting for Long-Term Contracts: Lynch Machinery, Inc., a 90%
owned subsidiary of the Company, produces specialized machines
under long-term contracts. Because of the specialized nature of
these machines and the period of time needed to complete
production and shipping, Lynch Machinery accounts for these
contracts using the percentage of completion method.
Impairments: In 1995, the Financial Accounting Standards Board
("FASB") issued Statement No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," which is effective for fiscal years beginning after December
15, 1995. The Company is studying this Statement but does not
believe its adoption will have a material impact on the financial
statements.
Stock Based Compensation: Statement of Financial Accounting
Standards No. 123, "Accounting for Stock- Based Compensation was
issued in October 1995 and is effective for fiscal years
beginning after December 15, 1995. The Statement establishes
financial accounting and reporting standards for stock based
compensation plans. Companies may elect to account for such plans
under the fair value method or to continue previous accounting
and disclose proforma net earnings and earnings per share as if
the fair value method was applied. The Company has not yet
determined the potential financial statement impact of this
Statement, nor has it determined how it will initially adopt this
Statement.
Fair Value of Financial Instruments Cash and cash equivalents,
trade accounts receivable, short-term borrowings, trade accounts
payable and accrued liabilities are carried at cost which
approximates fair value due to the short-term maturity of these
instruments. The carrying amount of the Company's borrowings
under its revolving lines of credit approximates fair value, as
the obligations bear interest at a floating rate. The fair value
of all other long-term obligations approximate cost based on
discounted cash flows using the Company's incremental borrowing
rate for similar instruments.
Reclassifications: Certain amounts in the 1994 and 1993 financial
statements have been reclassified to conform to the 1995
presentation.
2. Acquisitions
On October 4, 1995, Central Products Acquisition Corp., a
wholly-owned subsidiary of Spinnaker Industries, Inc. (an 83%
owned subsidiary of Lynch) acquired from Alco Standard
Corporation ("Alco"), the assets and stock of Central Products
Company. Central Products manufactures and markets a wide variety
of carton sealing tapes and related equipment. The cost of the
acquisition was $80.0 million. As a result of this transaction,
the Company recorded $27.2 million in goodwill which is being
amortized over 25 years.
On September 26, 1994, Lynch Telephone Corporation VII, a
wholly-owned subsidiary of Lynch, acquired all of the outstanding
shares of Haviland Telephone Company, Inc. a local exchange
Company in Kansas, from InterDigital Communications Corporation.
The total cost of this transaction was $13.4 million. As a result
of this transaction, the Company recorded $8.2 million in
goodwill which is being amortized over 25 years.
On September 19, 1994, Brown-Bridge Industries, Inc., an 80.1%
owned subsidiary of Spinnaker Industries, Inc., acquired from
Kimberly-Clark Corporation the net assets associated with its
Brown-Bridge operation, a manufacturer of adhesive coated stock
for labels and related applications. The cost of the transaction
was $29.1 million, plus $6.9 million in current liabilities
assumed.
On March 1, 1994, Capital Communications Corporation, 49% owned
by Lynch, acquired certain assets associated with the operations
of Station WOI-TV from Iowa State University. Station WOI is an
ABC affiliate serving the Des Moines, Iowa market. The total cost
of the transaction was $13.0 million.
On November 30, 1993, Lynch Telephone VI ("Lynch Tel VI"), a 98%
owned subsidiary of Lynch, acquired all of the outstanding shares
of J.B.N. Telephone Company, Inc. ("JBN"), a local exchange
Company in Kansas from GTE Corporation. The total cost of the
transaction was $9.4 million.
All of the above transactions were accounted for as purchases,
and accordingly, the assets acquired and liabilities assumed were
recorded at their estimated fair market values.
The operating results of the acquired companies are included in
the consolidated statements of income from their respective
acquisition dates. The following unaudited combined pro forma
information shows the results of the Company's operations
presented as though the purchases of Central Products were made
at the beginning of 1994, and Haviland, Brown-Bridge, Station
WOI-TV and JBN had been made at the beginning of 1993.
<TABLE>
<CAPTION>
Year Ended
December 31
1995 1994 1993
______ ______ ______
(In Thousands,
Except per Share Data)
<S> <C> <C> <C>
Sales and revenues $429,435 $364,388 $216,331
Income before extraordinary
item and cumulative effect
of accounting change 6,145 3,980 5,176
Net income 6,145 3,716 4,013
Income per share before
extraordinary item and
cumulative effect of
accounting change 4.37 2.98 4.22
Net income per share 4.37 2.78 3.27
</TABLE>
On January 25, 1995, a contract was signed for $4.7 million with
US West Communications Inc. to acquire 1,400 access lines in
North Dakota. On November 4, 1995, a contract was signed for
$22.0 million, subject to certain conditions, to acquire Dunkirk
& Fredonia Telephone Co., a local exchange Company in New York,
with 10,700 access lines. These transactions are expected to
close during 1996.
3. Inventories
Inventories are stated at the lower of cost or market value.
Inventories valued using the last-in, first-out (LIFO) method
comprised approximately 58% and 23% of consolidated inventories
at December 31, 1995 and 1994. Inventories at Brown-Bridge, 38%
and 68% of inventories at December 31, 1995 and 1994, are valued
using the specific identification method. The balance of
inventories are valued using the first-in first-out (FIFO)
method.
<TABLE>
<CAPTION>
December 31
1995 1994
______ _____
(In Thousands)
<S> <C> <C>
Raw materials and supplies $ 10,676 $ 5,560
Work in process 10,286 7,745
Finished goods 12,273 5,650
______ _____
Total $ 33,235 $18,955
______ _____
______ _____
</TABLE>
Current cost exceeded the LIFO value of inventories by $905,000
and $961,000 at December 31, 1995 and 1994, respectively.
4. Investment in and Advances to Affiliated Companies
Certain subsidiaries of Lynch are limited partners with a 49.9%
equity interest in five partnerships which filed applications on
November 6, 1995 with the Federal Communications Commission to
bid in the FCC's C-Block Auction on Basic Trading Area licenses
for 30 MHZ of spectrum to be used for broadband wireless personal
communications services ("PCS"). Lynch has advances outstanding
to these partnerships of $7.0 million on December 31, 1995. The
Company has also committed to loan these partnerships an
additional $35.3 million over the next seven years, based on the
outcome of the Auction.
Lynch Entertainment Corporation ("LENCO"), a wholly-owned
subsidiary of the Company, has a 20% investment in Coronet
Communications Company ("Coronet"), which operates television
station WHBF-TV, a CBS affiliate in Rock Island, Illinois. Lynch
Entertainment Corporation II ("LENCO II"), a wholly-owned
subsidiary of the Company, has a 49% investment in Capital
Communications Company ("Capital"), which operates television
station WOI-TV, an ABC affiliate in Des Moines, Iowa, which it
acquired on March 1, 1994. The following represents condensed
financial information of Coronet as of and for the years ended
December 31, 1995, 1994 and 1993 and of Capital for the years
ended December 31, 1995 and 1994, both derived from audited
financial statements of the respective companies:
<TABLE>
<CAPTION>
Coronet
1995 1994 1993
______ ______ ______
(In Thousands)
<S> <C> <C> <C>
Current assets $ 4,670 $ 3,892 $ 2,627
Property and
other assets 6,842 7,108 7,134
_______ ________ _______
Total assets $11,512 $11,000 $ 9,761
_______ ________ _______
_______ ________ _______
Current liabilities,
including current
portion of
long-term debt $ 4,752 $ 3,681 $ 2,481
Long-term debt and
other liabilities 16,186 17,555 18,442
Partners' equity (deficit) (9,426) (10,236) (11,162)
_______ ________ _______
$11,512 $11,000 $ 9,761
_______ ________ _______
_______ ________ _______
Revenues $ 7,195 $ 7,069 $ 5,951
Expenses (6,385) (6,144) (6,299)
_______ ________ _______
Income (loss) $ 810 $ 925 $ (348)
_______ ________ _______
_______ ________ _______
</TABLE>
Coronet's results include depreciation and amortization expense
of $389,193, $364,377, and $493,088 for 1995, 1994, and 1993,
respectively.
<TABLE>
<CAPTION>
Capital
1995 1994
______ ______
(In Thousands)
<S> <C> <C>
Current assets $ 5,045 $ 3,961
Property and other assets 9,837 11,361
_______ ______
Total assets $14,882 $15,322
_______ ______
_______ ______
Current liabilities,
including current
portion of
long-term debt 2,818 1,996
Long-term debt
and other liabilities 13,052 12,738
Shareholder's equity (deficit) (988) 588
______ ______
$14,882 $15,322
_______ ______
_______ ______
Revenues $ 9,217 $ 7,034
Expenses (9,704) (8,549)
_______ ______
Loss before taxes (487) (1,515)
Tax benefit 98 606
_______ ______
Net loss $ (389) $ (909)
_______ ______
_______ ______
</TABLE>
Capital's results include depreciation and amortization expense
of $1,842,684 and $2,153,000 for 1995 and 1994, respectively.
The long-term debt of Coronet at December 31, 1995 is comprised
of $14.5 million due to a third party lender and $2.8 million due
to LENCO. The third party debt is due in February 1997, and is at
an average interest rate of 9.26%. The debt to LENCO is due June
15, 1997 and is at a fixed rate of 10%, composed of a quarterly
cash payment of 6% and a payment-in-kind of 4%, compounded
annually. The Company recorded interest income on this debt of
$276,000, $265,000, and $261,000 for the years ended December 31,
1995, 1994, and 1993, respectively. LENCO has a $980,000 net
investment in Coronet at December 31, 1995 and has guaranteed
$4.0 million of $11.7 million of Coronet's third party debt.
The subordinated debt and Preferred Stock A provided by LENCO II
to acquire the assets of Station WOI-TV on March 1, 1994, was
fully paid off on December 15, 1995. The third party financing
agreement between Capital Communications, Inc. ("Capital") was
refinanced during 1995 with the principal sum increasing to $14
million. The loan is to be paid off in consecutive, quarterly
principal payments until December 31, 2002 at which time the
remaining balance of the debt, $5.0 million becomes due. Interest
shall be paid at a rate per annum equal to the Prime Rate
adjusted monthly on the first business day of each month. The
interest rate at December 31, 1995 was 8.75%. LENCO II also owns
$10,000 of Preferred Stock B of Capital, which is convertible at
any time into the Common Stock of Capital in a sufficient amount
to bring LENCO II's ownership to 50%. LENCO II's investment in Capital
at December 31, 1995 has been reduced to zero as its share of net
losses would have exceeded its net investment.
On October 31, 1993, Tremont Advisers, Inc. ("Tremont") exercised
its option to acquire 1,000,000 shares of Tremont's Class B
Common Stock, $.01 par value, from Lynch at $.40 per share. This
sale and the proceeds from the option resulted in a gain of
$475,000, for which there is no tax provision, or $.39 per share
which is included in the 1993 gain on sale of subsidiary and
affiliate stock.
5. Intangible Assets
Intangible assets include acquisition intangibles of $53.1
million and $26.4 million, net of accumulated amortization of
$5.5 million and $2.9 million, at December 31, 1995 and 1994,
respectively.
6. Notes Payable and Long-term Debt
The Company maintains lines of credit with banks which aggregate
$35.8 million, of which $18.5 million was available at December
31, 1995. These lines are secured by operating assets of the
related subsidiaries ($38.1 million). The line of credit
agreements expire in 1996, are renewable annually, and are at
interest rates ranging from prime less .25%, to prime plus 1%.
The Company's outstanding balances under these lines of credit
and standby letters of credit totaled approximately $5.9 million
at December 31, 1995, securing various insurance obligations and
customer advances. Several of the credit agreements contain
covenants restricting distributions. At December 31, 1995 and
1994, $5.6 million and $5.7 million, respectively, of
subsidiaries' retained earnings were restricted under these
agreements.
Spinnaker Industries, Inc. also maintains lines of credit with
banks for working capital needs at each subsidiary which
aggregate $45.5 million. Spinnaker had cash advances of $27
million outstanding under the lines of credit as of December 31,
1995. Interest on all outstanding borrowings bear interest at
variable rates related to the prime interest rate or the lender's
base rate. At December 31, 1995, the interest rates in effect
ranged from 8.5% to 11%. Credit availability under the lines of
credit are subject to certain variables, such as the amount of
inventory and receivables eligible to be included in the
borrowing base. These lines are secured by the operating assets
of certain Spinnaker subsidiaries. Spinnaker is required to
comply with various covenants including a limitation on capital
expenditures, interest and fixed charge coverage, and minimum
levels of operating earnings, as well as various other financial
covenants. Certain of the lines of credit require the payment of
a fee based upon the face amount of each letter of credit issued.
The line of credit agreements expire in 1997 for Entoleter, 2000
for CPC, and 1997 for Brown-Bridge and are renewable annually.
Long-term debt consists of (all interest rates at December 31,
1995):
<TABLE>
<CAPTION>
December 31
1995 1994
_____ _____
(In Thousands)
<S> <C> <C>
Rural Utilities Service and
Rural Telephone Bank notes payable
in equal quarterly installments through
2023 at fixed interest rates ranging
from 2% to 7% (3.0% weighted aver-
age), secured by assets of the tele-
phone companies of $67.1 million $ 27,543 $ 24,283
Bank credit facilities utilized by certain
telephone and telephone holding
companies through 2010, $17.4 million
at a fixed interest rate averaging 10.4%
and $10.9 million at variable
interest rates averaging 8.6% 28,255 24,158
Unsecured notes issued in connec-
tion with telephone company
acquisitions at an interest rate
of 10% due from 1996 to 2003 16,149 16,266
Bank Debt associated with Central Products:
Revolving line of credit at interest
rate of (9.75%) expiring in 2000 14,126 --
Term loan at interest rate of (9.5%), due
in installments through 2002 19,625 --
Term loan at interest rate of (10.5%), due
in installments through 2002 16,000 --
Notes issued to seller:
Term loan due 2003 at fixed
interest rates of (8%) see below 15,000 --
Term loan due in installments through
2002 at fixed interest rate of (11%)
see below 10,000 --
Subordinated loan due in installments
through 1998 at fixed interest rate of (0%) 5,000 --
Bank debt associated with Brown-Bridge:
Revolving line of credit at interest
rate of prime plus 1.25% (9.75%)
expiring in 1999 12,646 13,180
Term loan at interest rate of prime
plus 1.25% (9.75%), due in install-
ments through 1999 6,691 9,000
Other 6,702 5,403
______ ______
177,737 92,290
Current maturities (45,208) (29,545)
______ ______
$132,529 $ 62,745
______ ______
______ ______
</TABLE>
As part of Spinnaker's acquisition of Central Products Company
from Alco Standard on October 4, 1995 (see note 2), Alco provided
two loans totaling $25 million and received the right to sell
these notes to Spinnaker and demand payment (the "Put
Agreements"). Lynch agreed to guarantee the notes and provide
funds for the Put Agreement. As of January 2, 1996, Alco
exercised its rights under the Put Agreements to sell the notes
back to Spinnaker and in connection therewith, as described
below, Spinnaker entered into a new financing agreement with the
seller and a third party to make a partial principal payment on
the note and replace the balance with a new financing
arrangement.
On April 5, 1996, Spinnaker entered into an agreement with a
third party for an $8.5 million bridge loan. The bridge loan is
due on December 30, 1996 and if not paid will convert into a 5
year term loan. The third party will be entitled to receive a
warrant to purchase 2.5% of the common equity of Spinnaker for
each quarter the term loan is outstanding up to 20% on a fully
diluted basis, of the common equity of Spinnaker. The bridge
loans bears interest at the greater of the LIBOR reference rate
or the Treasury rate plus 5% for the first 90 days, then
incrementally increasing by .25% for every subsequent 90 day
period.
On April 5, 1996 the rate in effect was 10.4%. Spinnaker may also
fix the rate at 18% if the floating rate increases to or above
that rate. The bridge loan and term loan include a payment in
kind ("PIK") feature that allows Spinnaker to pay any interest in
excess of 16% (the maximum cash interest) by issuing additional
bridge notes. Also on April 5, 1996, an entity affiliated with
Richard J. Boyle and Ned N. Fleming III ("BF"), the Company's
Chairman and Chief Executive Officer and President, respectively,
exercised warrants to purchase 187,467 shares of Spinnaker's
common stock resulting in proceeds of $500,000 which will be used
by the Company to make scheduled interest payments on the bridge
and term loans. The agreement requires BF to continue to exercise
its warrants to provide funds to satisfy the outstanding interest
that will be due on the bridge and term loans. Spinnaker is
pursuing actively various alternatives to refinance the
indebtedness of Spinnaker and its subsidiaries, including
refinancing the bridge loan before it matures. There can be no
assurance that Spinnaker can successfully complete any such
refinancing.
Concurrently with the closing of the bridge loan, Spinnaker paid
Alco $7.5 million of which $5.5 million was a principal payment
on the $25 million note, approximately $1.0 million related to
accrued interest, and $1.0 million was applied toward a $1.75
million purchase price for a warehouse facility in Denver,
Colorado. The unpaid balance of the $25 million note, together
with the balance due on the warehouse facility was restructured
into a series of new convertible subordinated notes consisting of
the following:
(a) A 7%, $6 million convertible subordinated note that
automatically converts including accrued interest, into Spinnaker
common stock 30 days after the execution of the note at a
conversion price per share of approximately $35. After
conversion, Alco is entitled to sell the shares. If the proceeds
of this sale are less than $6 million, Spinnaker is required to
pay the difference between $6 million and the sales proceeds to
Alco either in cash or an equivalent number of common shares;
(b) A 7%, $7 million convertible subordinated note due April
1997. The note contains a PIK feature that allows Spinnaker, at
its option, to satisfy the interest by increasing the principal
amount of the note. However, if Spinnaker selects the PIK option,
the interest rate on the note is 9%. All or any part of this note
can be converted at Alco's option into shares of Spinnaker's
common stock after April 1, 1997 at the then market price; and
(c) A 7%, $7.25 million convertible subordinated note due April
1998. The note contains a PIK feature that allows Spinnaker, at
its option, to satisfy the interest by increasing the principal
amount of the note. However, if Spinnaker selects the PIK option,
the interest rate on the note is 9%. All or any part of this note
can be converted at Alco's option into shares of Spinnaker's
stock after April 1, 1998 at the then current market price.
The Company has pledged its shares of Spinnaker stock to secure
the new convertible subordinated notes and bridge loan.
Based on the terms of the bridge loan and the restructured
subordinated notes with Alco, the Company has classified the $25
million subordinated notes to Alco as long-term.
RUS debt of $27.5 million bearing interest at 2% has been reduced
by a purchase price allocation of $3.6 million reflecting an
imputed interest rate of 5%. Unsecured notes issued in connection
with the telephone company acquisitions are predominantly held by
members of management of the telephone operating companies.
In July 1986, the Company issued $23.0 million principal amount
of 8% convertible subordinated debentures. These debentures were
unsecured obligations of the Company and were convertible into
Common Stock at a price of $31 per share prior to maturity.
Through September 21, 1994, the Company had either purchased on
the open market or redeemed $11.2 million of the original
issuance. At that date, in accordance with the terms of the
debenture indenture, the Company called for redemption all of the
remaining debentures outstanding, at 101.6% of their face amount
plus accrued interest. The redemption was completed on October
24, 1994, and $10,195,000 of the debentures were redeemed and
$1.6 million were converted into 52,881 shares of Common Stock at
$31 per share before allocation of related expenses. As a result
of the redemption, the Company recognized in 1994 an
extraordinary loss of $264,000, net of taxes. On October 18,
1993, the Company redeemed $6.0 million principal amount of
debentures at 102.4% of face value plus accrued interest to that
date. As a result of this redemption, the Company recognized in
1993 an extraordinary loss of $206,000, net of taxes.
Cash payments for interest were $10.6 million, $6.2 million and
$5.5 million for the years ended December 31, 1995, 1994 and
1993, respectively.
Aggregate principal maturities of long-term debt for each of the
next five years are as follows: 1996 - $64.7 million, 1997 - $8.9
million; 1998 - $11.6 million, 1999 - $11.8 million, and 2000 - $14.1
million.
7. Minority Interests and Related Party Transactions
In October 1989, Lynch Telephone Corporation, an 80.1% owned
subsidiary, purchased 100% of the capital stock of Western New
Mexico Telephone Company, Inc. ("Western"), an independent local
telephone company serving southwestern New Mexico. The sellers of
Western own 19.9% of Lynch Telephone Corporation and have been
granted an option to acquire stock equal to an additional 30.1%
interest of the shares currently outstanding, which was extended
in 1993 to become exercisable during a three month period
commencing October 19, 1996, at a formula price. In addition,
during 1993, Lynch secured the right to acquire stock equal to
15% of Lynch Telephone Corporation at terms similar to the
sellers' option.
On July 22, 1993, Morgan completed an initial public offering
("IPO") of 1,100,000 shares of its Class A Common Stock, $.015
par value, at $9.00 per share. In accordance with Lynch's policy
of recognizing a gain or loss on the sale of stock by a
subsidiary, a pre-tax gain of approximately $3.9 million ($2.2
million after tax, $1.84 per share) was recorded in connection
with Morgan's IPO. Lynch's ownership of 150,000 Class A shares
(acquired during 1995) and 1,200,000 Class B shares of Morgan
entitles it to a voting control and, therefore, Lynch
consolidates Morgan's results in its financial statements. In
accordance with FASB Statement No. 109, a deferred tax liability
is recognized for the difference between the financial reporting
basis and the tax basis of the Company's investment in Morgan.
On June 4, 1993, the Board of Directors of Morgan approved the
adoption of a stock option plan which provides for the granting
of incentive or nonqualified stock options to purchase up to
200,000 shares of Class A Common Stock to officers, including
members of Morgan's Board of Directors, and other key employees.
No options may be granted under this plan at less than the fair
market value of the Common Stock at the date of the grant, except
for certain nonemployee directors. Three nonemployee directors
were granted nonqualified stock options to purchase a total of
24,000 shares of Class A Common Stock at prices ranging from
$6.80 to $9.00 per share. Although the exercise period is
determined when options are actually granted, an option shall not
be exercised later than 10 years and one day after it is granted.
Stock options granted will terminate if the grantee's employment
terminates prior to exercise for reasons other than retirement,
death, or disability. Employees have been granted nonqualified
stock options to purchase 163,500 shares of Class A Common Stock
at an exercise price from $7.50 to $8.75 per share. These options
will vest over a four year period pursuant to the terms of the plan.
As of December 31, 1995, options to purchase 61,000 shares were
exercisable.
On June 13, 1994, Spinnaker entered into a series of agreements
with Boyle, Fleming & Co., Inc. ("BF"), of whom a former Director
of the Corporation is a principal, for BF to assume the
management of Spinnaker. As part of these arrangements, BF
received warrants to purchase 678,945 shares of Spinnaker Common
Stock (equating to a 20% ownership of Spinnaker) at a price of
$2.67 per share (adjusted for a 3 for 2 stock split which was
effective December 29, 1995) at any time prior to or before June
10, 1999, subject to certain conditions. On April 5, BF exercised
warrants to purchase 187,476 shares of Spinnaker's Common Stock
at the 2.67 per share. BF may also, on the occurrence of an
equity offering by Spinnaker Industries, Inc., receive warrants
to acquire additional shares of Spinnaker at terms to be
determined at the time of the offering.
During 1994, Brown-Bridge granted certain of its key executives
options to purchase up to 71,065 shares of Brown-Bridge's common
stock at various prices between $7.16 and $14.69 per share.
Brown-Bridge currently has 1,000,000 common shares outstanding.
The options become exercisable (i) in cumulative installments of
one-fifth each year if certain levels of profitability, as
defined in the plan, are met, or (ii) seven years from the date
of grant. The options were issued at not less than 100% of the
fair market value of the common stock at the date of grant.
The Company, pursuant to Indiana law and the Company's Articles
of Incorporation, has reimbursed its Chairman and Chief Executive
Officer, for $392,000 of legal fees incurred in connection with a
regulatory inquiry. Amounts relating to this reimbursement were
charged to the Company's results of operations for the years
ended December 31, 1994 ($317,000) and 1993 ($75,000).
On January 19, 1994, Lynch sold 100,000 shares of common stock
held in its treasury to its Chairman and Chief Executive Officer
at $22.875 per share, the closing price in trading of Lynch
common stock on The American Stock Exchange on that date. The
transaction was approved by the Company's shareholders at its
annual meeting held on May 5, 1994.
8. Shareholders' Equity
In 1987, 1988 and 1992, the Board of Directors authorized the
purchase of up to 300,000 shares of Common Stock. Through
December 31, 1995, 230,861 shares had been purchased at an
average cost of $13.15 per share. In January 1994, two officers
were granted stock options to purchase up to 86,000 shares of
Lynch common stock. Approximately 24,500 options were granted at
an exercise price of $23.125, the closing price on the American
Stock Exchange on January 18, 1994. These options are fully
vested and outstanding. During 1995, the balance of the options
were canceled.
On February 1, 1996, the Company adopted a plan to provide a
portion of the compensation for its directors in common shares of
the Company. The amount is fixed, and the conversion to common
stock is based upon the market price at the end of the previous
year. In February, 1996, the Company awarded 1,428 shares under
this program. Such shares will vest during 1996.
On February 29, 1996, the Company adopted a Phantom Stock Option
Plan for certain employees. To date, 7,400 of Phantom Stock
Options ("PSO") have been granted at a price of $63 per share.
Upon the exercise of a PSO, the holder is entitled to receive an
amount equal to the amount by which the market value of the
Company's common stock on the exercisable date exceeds the
exercise price of the PSO.
9. Income Taxes
The Company changed its method of accounting for income taxes in
1993 from the deferred method to the liability method required by Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("SFAS 109") The adoption of SFAS 109, which resulted in a cumulative
effect charge of $957,000 or $.78 per share, is reported in the 1993
Consolidated Statement of Income. Accordingly, prior years' financial
statements have not been restated to apply the provisions of SFAS 109.
Deferred income taxes are provided for the temporary differences
between the financial reporting basis and the tax basis of the
Company's assets and liabilities. Cumulative temporary
differences and carryforwards at December 31, 1995 and 1994 are
as follows:
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
Deferred Tax Deferred Tax
Asset Liability Asset Liability
_____ ______ _____ ______
(In Thousands)
<S> <C> <C> <C> <C>
Inventory reserve $ 485 -- $ 500 --
Fixed assets written
up under purchase
accounting and tax
over book depreciation -- $12,438 -- $ 5,622
Discount on long-term debt -- 1,398 -- 1,511
Basis difference in
subsidiary and
affiliate stock 85 1,750 165 1,686
Partnership tax losses in
excess of book losses -- 1,249 -- 1,139
Other reserves and
accruals 2,620 -- 2,331 --
Other 952 1,077 154 439
_____ ______ _____ ______
4,142 17,912 3,150 10,397
Valuation allowance (198) -- (278) --
_____ ______ _____ ______
Total deferred
income taxes $3,944 $17,912 $2,872 $10,397
_____ ______ _____ ______
_____ ______ _____ ______
</TABLE>
<TABLE>
The provision for income taxes is summarized as
follows:
<CAPTION>
1995 1994 1993
______ ______ ______
(In Thousands)
<S> <C> <C> <C>
Current payable taxes:
Federal $4,235 $3,203 $1,239
State and local 957 954 455
______ ______ ______
5,192 4,157 1,694
______ ______ ______
Deferred taxes:
Federal (446) (1,223) 397
State and local (60) (282) 357
______ ______ ______
(506) (1,505) 754
______ ______ ______
$4,686 $2,652 $2,448
______ ______ ______
______ ______ ______
</TABLE>
A reconciliation of the provision for income taxes and the amount
computed by applying the statutory federal income tax rate to
income before income taxes, minority interest, extraordinary item, and
cumulative effect of accounting change follows:
<TABLE>
<CAPTION>
1995 1994 1993
____ _____ ____
(In Thousands)
<S> <C> <C> <C>
Tax at statutory rate $4,063 $2,245 $2,482
Increases (decreases):
State and local taxes,
net of federal benefit 592 449 536
Amortization of excess
of acquired net assets
cost, net 64 1 (1)
Unremitted earnings of
domestic subsidiary 91 109 50
Deferred tax asset
recognized from
prior years -- -- (262)
Sale of subsidiary stock -- (65) (193)
Losses of unconsolidated
affiliates -- 224 --
Reduction attributable
to special election by
captive insurance
company (223) (202) (300)
Other 99 (109) 136
____ ____ ____
$4,686 $2,652 $2,448
____ ____ ____
____ ____ ____
</TABLE>
Net cash payments for income taxes were $4.2 million, $2.3
million and $1.8 million for the years ended December 31, 1995,
1994 and 1993, respectively.
10. Contingencies
Lynch has pending claims incurred in the normal course of
business. Management believes that the ultimate resolution of
these claims will not have a material adverse effect on the
consolidated financial position or the results of operations of
Lynch.
Pursuant to the Acquisition Agreement with Alco (see Note 2),
Central Products assumed sponsorship of a defined benefit pension
plan for union employees. Central Products also agreed to
establish a new defined benefit plan for its non-union employees.
Alco retained the defined benefit pension obligation for
non-union retirees as of September 30, 1995 and any non-union
employees not hired by Central Products.
The agreement requires Alco to transfer assets to Central's plans equal to
the present value of accrued benefits as of September 30, 1995, as defined
in the Agreement plus a defined rate of interest to the transfer date.
Central Products' management believes that it was the intent of Alco that
the defined benefit pension obligations for the union and non-union
employees be "fully funded" by Alco. Accordingly, Central Products has not
recorded the unfunded projected benefit obligation of $1.5 million as a
liability when recording the purchase accounting entries.
11. Segment Information
The Company is principally engaged in three business segments: multimedia,
services and manufacturing. All businesses are located domestically, and
export sales were approximately $41 million in 1995, $16.5 million in 1994
and $9.3 million in 1993. The Company does not believe it is dependent on
any single customer. The multimedia segment includes local telephone
companies and investments in two network-affiliated television stations.
The services segment includes transportation and related services. $11.8
million of the Company's accounts receivable are related to the services
segment and are principally due from companies in the mobile home and
recreational vehicle industry located throughout the United States,
including several located in the Midwest and Southeast. Services provided
to one major mobile home manufacturer accounted for approximately $29.4
million, $27.5 million, and $18.8 million in revenues of the services
segment for the years ended December 31, 1995, 1994, and 1993,
respectively. The manufacturing segment includes the manufacture and sale
of adhesive coated stock for labels and related applications, glass
forming, impact milling, adhesive tapes, and other machinery and related
replacement parts, as well as quartz crystals and oscillators. There were
no intersegment sales or transfers.
Operating profit (loss) is equal to revenues less operating expenses,
excluding unallocated general corporate expenses, interest and income
taxes. The Company allocates a portion of its general corporate expenses to
its operating segments. Such allocation was $965,000, $790,000 and $657,000
during the years ended December 31 1995, 1994 and 1993, respectively.
Identifiable assets of each industry segment are the assets used by the
segment in its operations excluding general corporate assets. General
corporate assets are principally cash and cash equivalents, short-term
investments and certain other investments and receivables.
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
_____ _____ ______
(In Thousands)
<S> <C> <C> <C>
Revenues
Multimedia $ 23,597 $ 20,144 $ 16,206
Services 122,303 101,880 82,829
Manufacturing 192,266 66,678 28,004
________ ________ ______
$338,166 $188,702 $127,039
________ ________ ______
________ ________ ______
Operating profit
Multimedia $ 4,938 $ 5,164 $ 4,520
Services 3,371 3,434 2,270
Manufacturing 13,880 3,675 1,209
Unallocated corporate
expense (2,874) (1,478) (1,381)
________ ________ ______
$ 19,315 $ 10,795 $ 6,618
________ ________ ______
________ ________ ______
Capital expenditures
Multimedia $ 14,051 $ 8,410 $ 2,138
Services 2,135 1,434 1,393
Manufacturing 3,373 1,743 825
General corporate 10 11 --
________ ________ ______
$ 19,569 $ 11,598 $ 4,356
________ ________ ______
________ ________ ______
Depreciation and
amortization
Multimedia $ 7,350 $ 5,651 $ 4,400
Services 1,264 915 803
Manufacturing 2,662 931 690
________ ________ ______
$ 11,276 $ 7,497 $ 5,893
________ ________ ______
________ ________ ______
Assets
Multimedia $102,998 $ 92,151 $ 73,043
Services 30,796 28,978 24,519
Manufacturing 162,819 62,260 18,349
General corporate 5,826 2,521 14,061
________ ________ ______
$302,439 $185,910 $129,972
________ ________ ______
________ ________ ______
</TABLE>
12. Quarterly Results of Operations (unaudited)
The following is a summary of the quarterly results of
operations for the years ended December 31, 1995 and 1994 (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
1995 Three Months Ended
____________________________________
March 31 June 30 Sept. 30 Dec. 31
______ ______ ______ ______
<S> <C> <C> <C> <C>
Sales and revenues $69,788 $76,874 $81,546 $109,958
Operating profit 4,034 4,278 4,763 6,240
Net income 1,125 1,156 1,293 1,571
Primary earnings per share:
Net income .80 .82 .92 1.13
Fully diluted earnings
per share:
Net income .80 . 82 .92 1.13
<CAPTION>
1994 Three Months Ended
____________________________________
March 31 June 30 Sept. 30 Dec. 31
_______ ______ ______ ______
<S> <C> <C> <C> <C>
Sales and revenues $36,071 $39,678 $44,687 $68,265
Operating profit 1,740 2,351 3,011 3,693
Income before
extraordinary item
and cumulative effect
of accounting change 641 206 835 910
Net income 641 206 571 910
Primary earnings per share:
Income before
extraordinary item and
cumulative effect of
accounting change .49 .15 .63 .66
Net income .49 .15 .43 .66
Fully diluted earnings
per share:
Income before
extraordinary item and
cumulative effect of
accounting change .47 .15 .52 .64
Net income .47 .15 .38 .64
</TABLE>
MARKET PRICE INFORMATION AND
COMMON STOCK OWNERSHIP (UNAUDITED)
The Common Stock of Lynch Corporation is traded on the American Stock
Exchange under the symbol "LGL." The market price highs and lows in
consolidated trading of the Common Stock during the past two years are as
follows:
<TABLE>
<CAPTION>
Three Months Ended 1995
1995 March 31 June 30 Sept 30 Dec 31
___ _______ ______ ______ _____
<S> <C> <C> <C> <C>
High 39 1/8 47 3/4 84 3/4 80 1/8
Low 30 1/8 35 1/2 46 1/8 57 3/4
1994
___
High 25 1/8 26 7/8 30 1/8 32 7/8
Low 22 3/4 25 1/8 25 1/8 28 5/8
At March 15, 1996, the Company had 1,060 shareholders of record.
</TABLE>
<PAGE>
Report of Independent Auditors
Shareholders and Board of Directors
Lynch Corporation
We have audited the accompanying consolidated balance sheets of Lynch
Corporation and subsidiaries ("Lynch Corporation") as of December 31, 1995
and 1994, and the related consolidated statements of income, shareholders'
equity, and cash flows for each of the three years in the period ended
December 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the financial
statements of Central Products Company, a wholly-owned subsidiary of
Spinnaker Industries, Inc. (an 83% owned subsidiary of Lynch Manufacturing,
a wholly-owned subsidiary of Lynch Corporation), which statements reflect
total assets of $94,492,000 as of December 31, 1995 and total revenues of
$30,581,000 for the three month period ended December 31, 1995 and the
financial statements of The Morgan Group, Inc. and subsidiaries, a
subsidiary in which the Company has a 64% voting interest, which statements
reflect total assets of $30,796,000 and $28,978,000 as of December 31, 1995
and 1994, respectively and total revenues of $122,303,000 and $101,880,000
for the years then ended and the financial statements of Coronet
Communications Company and Capital Communications Company, Inc.
(corporations in which the Company has a 20% and 49% interest,
respectively). Those statements were audited by other auditors whose
reports have been furnished to us, and our opinion, insofar as it relates
to data included for Central Products Company, The Morgan Group, Inc. and
subsidiaries, Coronet Communications Company and Capital Communications
Company, Inc., is based solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits and
the reports of other auditors provide a reasonable basis for our opinion.
Since the date of completion of our audit of the accompanying financial
statements and initial issuance of our report thereon dated February 29,
1996, which report contained an explanatory paragraph regarding the
Company's ability to continue as a going concern, the Company, as discussed
in Note 6, has completed a debt financing arrangement to refinance the $25
million subordinated notes on a long-term basis. Therefore, the conditions
that raised substantial doubt about whether the Company will continue as a
going concern no longer exist.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Lynch Corporation and
subsidiaries at December 31, 1995 and 1994, and the consolidated results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the financial statements, in 1994 the Company
changed its method of accounting for marketable securities.
As discussed in Note 9 to the financial statements, in 1993 the Company
changed its method of accounting for income taxes.
February 29, 1996, except for Note 6,
as to which the date is April 8, 1996
<TABLE>
<PAGE>
LYNCH CORPORATION
FIVE YEAR SUMMARY
SELECTED FINANCIAL DATA
(in thousand of dollars, except per share amounts)
<CAPTION>
Year Ended December 31 (a)
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
_______ _______ _______ _______ _______
Sales and revenues(a)$338,166 $188,702 $127,039 $108,657 $ 97,290
_______ _______ ______ ______ _______
EBITDA (b) 30,591 18,292 12,511 13,351 9,887
Operating Profit (c) 19,315 10,795 6,618 8,283 4,871
Net Financing
Activities (7,424) (4,381) (3,643) (4,142) (2,182)
Gain on Sales of
Subsidiary and
Affiliate Stock 59 190 4,326 -- --
_______ _______ _______ _______ ______
Income Before Income
Taxes, Minority
Interests, Extra-
ordinary Item and
Cumulative Effect of
Accounting Change 11,950 6,604 7,301 4,141 2,689
Income Tax
(Provision) (4,686) (2,652) (2,448) (1,733) (923)
Minority Interests (2,119) (1,360) (737) (257) (363)
_______ _______ _______ _______ _______
Income Before Extra-
ordinary Item 5,145 2,592 4,116 2,151 1,403
Extraordinary Item(d) -- (264) (206) 18 93
Cumulative Effect to
January 1, 1993 of
Change in Accounting
for Income Taxes(f) -- -- (957) -- --
_______ _______ _______ _______ _______
Net Income $ 5,145 $ 2,328 $ 2,953 $ 2,169 $ 1,496
_______ _______ _______ _______ _______
_______ _______ _______ _______ _______
Per Common Share(e)
Income Before Extra-
ordinary Item $ 3.66 $ 1.94 $ 3.36 $ 1.71 $ 1.09
Net Income 3.66 1.74 2.41 1.72 1.07
_______ _______ _______ _______ _______
Cash, Securities and
Short-Term
Investments $ 27,353 $ 31,521 $ 45,509 $ 44,914 $ 45,514
Total Assets 302,439 185,910 129,523 111,374 108,236
Long-term Debt 138,029 62,745 65,768 68,286 70,640
Shareholders'
Equity $ 35,512 30,531 24,316 21,272 19,647
Notes:
(a) Includes results of Inter-Community Telephone Company from April 2,
1991, Cuba City Telephone Exchange and Belmont Telephone Company from
October 31, 1991, Bretton Woods Telephone Company from February 4, 1992,
J.B.N. Telephone Company from November 30, 1993, the assets of Station
WOI-TV from March 1, 1994, the assets of Brown Bridge Division from
September 19, 1994, Haviland Telephone Company from September 26, 1994 and
Central Products Company from October 4, 1995.
(b) EBITDA is earnings before interest, taxes, depreciation and
amortization.
(c) Operating Profit (Loss) equals sales and revenues less operating
expenses, which exclude investment income, interest expense, share of
operations of affiliated companies, minority interests and taxes.
(d) Gain (Loss) on repurchase or redemption of Company's 8% convertible
subordinated debentures.
(e) Based on weighted average number of common shares outstanding.
(f) On January 1, 1993, Lynch adopted the provisions of Statement of
Financial Accounting Standard No., 109, "Accounting for Income Taxes." (See
Note 9 to the Consolidated Financial Statements.) As a result of this
adoption, for the years ended December 31, 1994 and 1993, Operating Profit
was lower by $766,000 due to the higher depreciation and amortization as a
result of increased write-ups in assets acquired in prior business
combinations. The adoption of this statement had no effect on net income,
other than the above noted "Cumulative Effect of Accounting Change
Adjustment" for that period.
(g) No dividends have been declared over the period.
</TABLE>
<PAGE>
BOARD OF DIRECTORS
Morris Berkowitz
Business Consultant
E. Val Cerutti
Business Consultant
Paul J. Evanson
President of Florida Power & Light Company
Mario J. Gabelli
Chairman of the Board and Chief Executive Officer of
Lynch Corporation and Chairman and Chief Executive
Officer of The Gabelli Funds Inc.
Salvatore Muoio
Vice President of Lazard Freres & Co.
Ralph R. Papitto
Chairman of AFC Cable Systems
Paul P. Woolard
Business Consultant
OFFICERS
Mario J. Gabelli
Chairman of the Board and Chief Executive Officer
Robert E. Dolan
Chief Financial Officer
Robert A. Hurwich
Vice President of Administration,
Secretary & General Counsel
Joseph H. Epel
Treasurer
Carmine P. Ceraolo
Assistant Controller
SUBSIDIARY INFORMATION
Western New Mexico Telephone Company
314 Yankee Street
Silver City, New Mexico 88062
Inter-Community Telephone Company
P.O. Box A
Nome, North Dakota 58062
Cuba City Telephone Exchange Company
Belmont Telephone Company
2801 International Lane
Madison, Wisconsin 53704
Bretton Woods Telephone Company
Mount Washington Place
Bretton Woods, New Hampshire 03575
J.B.N. Telephone Company
CLR Video, L.L.C.
Second & Kansas
Wetmore, Kansas 66550
Haviland Telephone Company
106 N. Main Street
Haviland, Kansas 67059
The Morgan Group, Inc.
Morgan Drive Away Inc.
28651 US 20, West
Elkhart, Indiana 46515
Spinnaker Industries, Inc.
600 N. Pearl Street
Dallas, Texas 75201
Brown-Bridge Industries, Inc.
518 E. Water Street
Troy, Ohio 45373
Central Products Company
748 Fourth Street
Menasha, WI 54952
Entoleter, Inc.
251 Welton Street
Hamden, Connecticut 06517
Lynch Machinery, Inc.
601 Independent Street
Bainbridge, Georgia 31717
M-tron Industries, Inc.
100 Douglas Avenue
Yankton, South Dakota 57078
INVESTOR RELATIONS CONTACT
Robert E. Dolan
(203) 629-3333
TRANSFER AGENT & REGISTRAR
FOR COMMON STOCK
Chemical Mellon Shareholder Services
New York, New York
TRADING INFORMATION
American Stock Exchange
Securities Symbol
Common Stock LGL
FORM 10-K
Copies of the Corporation's Form 10-K for the year ended December 31, 1995
may be obtained, without charge, by writing to Lynch Corporation, 8 Sound
Shore Drive, Greenwich, CT 06830, Attention: Robert E. Dolan.
LYNCH CORPORATION
8 Sound Shore Drive
Greenwich, Connecticut 06830
------------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY #, 1996
----------------------------------------
To The Shareholders of MAY #, 1996
LYNCH CORPORATION:
NOTICE IS HEREBY GIVEN that the Annual Meeting of
Shareholders of Lynch Corporation, an Indiana Corporation, will be held
at the Greenwich Public Library, 101 West Putnam Avenue, Greenwich,
Connecticut on Thursday, May #, 1996, at 3:00 P.M. for the following
purposes:
1. To elect seven directors to serve until the next
Annual Meeting of Shareholders and until their successors are
duly elected and qualified.
2. To consider and vote on the right to exchange
promissory notes in a principal amount of up to $25 million
that may be issued by the Corporation for convertible notes of
the Corporation under certain circumstances.
3. To transact such other business as may properly come
before the Annual Meeting or any adjournments thereof.
Information relating to the above matters is set forth
in the attached Proxy Statement. As fixed by the Board of
Directors, only Shareholders of record at the close of business
of April 30, 1996 are entitled to receive notice of,
and to vote at, the Annual Meeting and any adjournments thereof.
The Board of Directors encourages all shareholders to
personally attend the annual meeting. Your vote is very
important regardless of the number of shares you own.
Shareholders who do not expect to attend are requested to
promptly date, complete and return the enclosed proxy card in
the enclosed accompanying postage-paid envelope in order that
their shares of common stock may be represented at the
annual meeting. Your cooperation is greatly appreciated.
By Order of the Board of Directors
ROBERT A. HURWICH
Secretary
IMPORTANT: Your vote is important regardless of the number of
shares you own. Please date, sign and return your proxy promptly
in the enclosed envelope. Your cooperation is greatly
appreciated.
LYNCH CORPORATION
8 Sound Shore Drive
Greenwich, Connecticut 06830
PROXY STATEMENT
This Proxy Statement is furnished by the Board of
Directors of Lynch Corporation (the "Corporation") in
connection with the solicitation of proxies for use at the Annual
Meeting of Shareholders to be held at the Greenwich Public
Library, Greenwich, Connecticut on May 9, 1996, at 3:00
P.M. and at any adjournments thereof. This Proxy Statement and
the accompanying proxy is first being mailed to shareholders on
or about April 11, 1996.
Only shareholders of record at the close of business on
March 27, 1996 are entitled to notice of, and to vote at, the
Annual Meeting. As of the close of business on such date,
1,390,464 shares of the Corporation's common stock, no par
value (the "Common Stock"), were outstanding and eligible to
vote. Each share of Common Stock is entitled to one vote on
each matter submitted to the shareholders. Where a specific
designation is given in the proxy, the proxy will be voted in
accordance with such designation. If no such designation is
made, the proxy will be voted FOR the nominees for director named
below, FOR approval of the right to exchange promissory notes
in a principal amount of up to $25 million that may be issued
by the Corporation for convertible notes of the Corporation under
certain circumstances, and in the discretion of
the proxies with respect to any other matter that is properly
brought before the Annual Meeting. Any shareholder giving a
proxy may revoke it at any time before it is voted at the Annual
Meeting by delivering to the Secretary of the Corporation a written
notice of revocation or duly executed proxy bearing a later date or
by appearing at the Annual Meeting and revoking his or her proxy
and voting in person.
An automated system administered by the Corporation's
transfer agent tabulates the votes. Pursuant to the Indiana
Business Corporation Law and the By-laws of the Company,
shares held by persons who abstain from voting on a
proposal will be counted in determining whether a quorum is
present, but will not be counted as voting either for or against
such proposal. If a broker indicates on the proxy that it does not
have discretionary authority as to certain shares to vote on a
particular matter, those shares will not be considered as present
and entitled to vote with respect to that matter.
ELECTION OF DIRECTORS
Seven directors are to be elected at the Annual Meeting to
serve until the next Annual Meeting of Shareholders and until their
respective successors are elected. Except where authority to vote for
directors has been withheld, it is intended that the proxies received
pursuant to this solicitation will be voted for the nominees named
below. If for any reason any nominee shall not be available for
election, such proxies will
be voted in favor of the remainder of those named and may be
voted for substitute nominees in place of those who decline to be
candidates. Management, however, has no reason to expect that
any of the nominees will be unavailable for election.
The election of directors shall be determined by a
plurality of the votes cast.
All of the nominees have served as directors of the
Corporation since the last annual meeting held May 18, 1995, except for
Messrs. Papitto and Muoio. The By-laws of the Corporation provide that
Board of Directors shall consist of no less than five and no more than
thirteen members and that any vacancies on the Board of Directors for
whatever cause arising, including newly-created directorships, may be
filled by the remaining directors until the next meeting of shareholders.
Biographical summaries and ages as of April 1, 1996 of the
nominees are set forth below. Data with respect to the number
of shares of the Common Stock beneficially owned by each of them
appears on pages 4 and 5 of this Proxy Statement. All such information
has been furnished to the Corporation by the nominees.
Name; Age; Business Experience
and Principal Occupation
for Last 5 Years; and Directorships in Served as
Public Corporations and Investment Companies Director from
----------------------------------------------
Morris Berkowitz, 73
Business Consultant (since 1984);
Vice President (1970-1983) of LIN Broadcasting
Corporation, a corporation engaged in cellular telephone,
broadcasting and publishing
activities........................................ 1987
E. Val Cerutti, 56
Business Consultant (since 1992);
President and Chief Operating Officer
(1975-1992) of Stella D'oro Biscuit Co., Inc.,
producer of bakery products;
Director of The Gabelli Convertible Securities
Fund and The Gabelli Gold
Fund.............................................. 1990
Paul J. Evanson, 54
President (since 1995) of Florida Power
& Light Co.; Vice President,
Finance and Chief Financial Officer of
FPL Group, Inc. (1992-4), parent company of
Florida Power & Light; President and
Chief Operating Officer of the Corporation
(1988-1992); Chairman (1990-1992)
and President (1988-1992) of Spinnaker
Industries, Inc., a subsidiary of the Corporation
and a diversified manufacturing
firm with major subsidiaries in the specialty
adhesive-backed materials business;
Executive Vice President of Moore McCormack
Resources, Inc. (1986-1988), formerly a
diversified construction materials and natural
resources company; Director of FPL
Group, Inc., Florida Power & Light Company
and Southern Energy Homes,
Inc.............................................. 1988
Mario J. Gabelli, 53
Chairman and Chief Executive Officer of
the Corporation (since 1986);
Director of The Morgan Group, Inc., a
subsidiary of the Corporation (since 1994);
Director of Spinnaker Industries, Inc.,
a subsidiary of the Corporation (since
1995); Chairman and Chief Executive Officer
of Gabelli Funds, Inc., successor to
The Gabelli Group, Inc. (since 1980), an
investment adviser and holding company for
subsidiaries engaged in various aspects of
the securities business; Chairman,
President and Chief Investment Officer of
Gabelli Capital Series Funds, Inc. (since
1994), The Gabelli Global Multimedia Trust Inc.
(since 1994), Gabelli Gold Fund,
Inc. (since 1994), Gabelli Global Series
Funds, Inc. (since 1993), Gabelli Investor
Funds, Inc. (since 1993), Gabelli Equity Series
Funds Inc. (since 1991), The Gabelli Value Fund Inc.
(since 1989), The Gabelli Series Funds,
Inc. (since 1989), and The Gabelli Equity
Trust Inc. (since 1986); Chairman of Gabelli
International Growth Fund, Inc. (since 1994);
Trustee of The Gabelli Money Market Funds (since
1992), The Gabelli Growth Fund (since 1987)
and The Gabelli Asset Fund (since 1986) Homes,
Inc..................................................1986
Salvatore Muoio, 36
Security Analyst and Vice President
of Lazard Freres & Co., L.L.C., an
investment banking firm (since 1995);
Securities Analyst at Gabelli &
Company, Inc.(1985-1995).......................... 1995
Ralph R. Papitto, 69
Chairman and Chief Executive Officer of
AFC Cable Systems, Inc., a manufacturer
and supplier of electrical distribution
products (since 1993); Founder,
Chairman and a Director of Nortek, Inc.,
a manufacturer of con-struction products
(1967-1993); Director of AFC Cable Systems,
Inc............................................... 1995
Paul P. Woolard, 72
Business Consultant (since 1986); Senior
Executive Vice President (1975- 1986)
of Revlon, Inc.; President of Revlon Beauty
Group of Revlon, Inc., (1984-1986),
manufacturer of cosmetics and fragrances;
Director of Chemex Pharmaceutical,
Inc............................................. 1968
OPERATION OF BOARD OF DIRECTORS AND COMMITTEES
There were five (5) meetings of the Board of Directors during
1994, and the Board acted twice by unanimous written
consent.
The Board of Directors has established three standing
committees, the principal duties of which are described below:
Audit Committee: Recommends to the Board of Directors the
appointment of independent auditors; reviews annual financial reports
to shareholders prior to their publication; reviews the report by the
independent auditors concerning management procedures and policies; and
determines whether the independent auditors have received satisfactory
access to the Corporation's financial records and full cooperation of
corporate personnel in connection with their audit of the Corporation's
records. The Audit Committee met 4 times during 1995. The present members
are Messrs. Berkowitz (Chairman)and Woolard.
Executive Compensation and Benefits Committee:
Develops and makes recommendations to the Board of Directors with
respect to the Corporation's executive compensation policies; recommends
to the Board of Directors the compensation to be paid to executive
officers; administers the Lynch Corporation 401(k) Savings Plan, Phantom
Stock Plan, and Bonus Plan, as summarized on pages 7 through 10 of this
Proxy Statement; and performs such other duties as may be
assigned to it by the Board of Directors. The Executive
Compensation and Benefits Committee met 2 times during 1995.
The present members are Messrs. Woolard (Chairman) and Papitto.
Executive Committee: Exercises all the power and authority
of the Board of Directors, except as otherwise provided by Indiana law or
by the By-laws of the Corporation, in the management affairs of the
Corporation during intervals between meetings of the Board of Directors.
The Executive Committee met once and acted once during 1995. The present
members are Messrs. Gabelli (Chairman), Cerutti, Evanson and Papitto.
The Corporation does not have a nominating committee.
Nominations for directors and officers of the Corporation are
matters considered by the entire Board of Directors.
COMPENSATION OF DIRECTORS
Directors, who are not otherwise employees, receive an
annual cash retainer of $10,000 and a fee of $1,000 for each Board of
Directors meeting and each committee meeting (which lasts for at least
one hour) the Director attends, and commencing with 1996 $15,000
worth of Common Stock of the Corporation. In addition, a non-employee
director serving as a committee chairman receives an additional $2,000
payment. A director who is an employee of the Corporation is not
compensated for services as a member of the Board of Directors or any
committee thereof. In addition, the Corporation purchases
accident and dismemberment insurance coverage of $100,000
for each member of the Board of Directors and maintains a
liability insurance policy which provides for indemnification of each
Director (and officer) against certain liabilities which each may incur in
his capacity as such.
Mr. Bell, who resigned as a director of the Corporation as
of December 31, 1995, is also a director and a member of the
Compensation Committee of The Morgan Group, Inc. ("Morgan
Group") and received the normal compensation payable to directors and
committee members thereof. Mr. Cerutti received $79,000 in 1995 as a
director of and for special consulting service provided to Lynch Machinery,
Inc., a subsidiary of the Corporation. Mr. Woolard received $4,000 in 1995
as a director of Lynch Machinery, Inc. and Mr. Boyle received $9,000 as a
director of M-tron Industries, Inc., a subsidiary of the Corporation.
See Compensation Committee Interlocks and Insider Participants on page 13
for certain payments by Spinnaker Industries, Inc. ("Spinnaker") to a
company affiliated with Mr. Boyle, who resigned as a director of the
Corporation effective
January 17, 1996.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of April 1, 1996,
certain information with respect to all persons known to the Corporation
to each beneficially own more than 5% of the Common Stock of the
Corporation, which is the only class of voting stock of the Corporation
outstanding. The table also sets forth information with respect to the
Corporation's Common Stock beneficially owned by the directors, by
each of the executive officers named in the Summary Compensation
Table on page 6 of this Proxy Statement, and by all directors and executive
officers as a group. The number of shares beneficially owned is
determined under rules of the Securities and Exchange Commission, and
the information is not necessarily indicative of beneficial ownership for
any other purpose. Under such rules, beneficial ownership includes any
shares to which a person has the sole or shared voting or investment power
or any shares which the person can acquire within 60 days (e.g., through
exercise of stock options or conversions of securities). Except as
otherwise indicated, the shareholders listed in the table have sole
voting and investment powers with respect to the Common Stock set forth
in the table. The following information is either reflected in Schedule
13Ds and 13Gs or Form 3s and Form 4s that have been filed with the
Securities and Exchange Commission or which has otherwise been
furnished to the Corporation.
<TABLE>
<CAPTION>
Name of Amount and Nature Percent
Beneficial Owner* of Beneficial Ownership of Class
- - ------------------ ------------------------------ ---------
<S> <C> <C>
Bruce A. Ritzenthaler 123,048(1) 8.8%
Dimensional Fund Advisors, Inc. 84,800(2) 6.1%
Mario J. Gabelli 346,905(3) 24.9%
Morris Berkowitz 338 **
E. Val Cerutti 738(4) **
Paul J. Evanson 5,238 **
Salvatore Muoio 438 **
Ralph R. Papitto 538 **
Paul P. Woolard 2,141 **
Robert E. Dolan 235(5) **
Robert A. Hurwich 92(6)
All Directors and Executive
Officers as a group (ten in total) 356,663 25.7%
- - ------------
* The address of each holder of more than 5% of the
Common Stock is as follows: Bruce A. Ritzenthaler--7-A West Jackson Avenue,
Naperville, IL 60540;
Dimensional Fund Advisors--1299 Ocean Avenue, Santa Monica, CA
90401; and Mr. Gabelli--Corporate Center at Rye, Rye, NY 10580.
** Represents holdings of less than one percent.
(1) Does not include 2,200 shares registered in the
name of Mr. Ritzenthaler's wife with respect to which Mr.
Ritzenthaler does share investment or voting power.
(2) Because of its investment and/or voting power over
shares of Common Stock of the Corporation held in the accounts of its
investment advisory clients, Dimensional Fund Advisors, Inc., an
investment adviser ("Dimensional"), is deemed to be the beneficial owner of
84,800 shares. Dimensional disclaims beneficial ownership of all such
shares.
(3) Includes 326,905 shares of Common Stock owned directly
by Mr. Gabelli (including 2,991 held for the benefit of Mr.
Gabelli under the Corporation's 401(k) Savings Plan), and 20,000 shares
of Common Stock owned by certain family trusts. Mr. Gabelli disclaims
beneficial ownership of the shares owned by the family trusts.
(4) 500 shares are jointly owned with wife and
sharing voting and investment power.
(5) Includes 35 shares registered in the name of Mr.
Dolan's children with respect to which Mr. Dolan has voting and
investment power.
(6) Held for the benefit of Mr. Hurwich under the
Corporation's 401(k) Savings Plan.
- - -----------
</TABLE>
Spinnaker is a majority-owned subsidiary of the Corporation
whose stock is traded in the over-the-counter market and
which is listed in the National Association of Securities Dealers
Automated Quotations (NASDAQ). Mr. Gabelli beneficially owns 52,200
shares (including 15,300 shares owned by certain family trusts which Mr.
Gabelli disclaims beneficial ownership of) (2.2% of the outstanding
shares) of Spinnaker's Common Stock. He may also be deemed to be a
beneficial owner of 2,259,063 shares (83.2% of the outstanding shares)
of Spinnaker's Common Stock owned by the Corporation (through Lynch
Manufacturing Corporation, a wholly-owned subsidiary of the
Corporation) by virtue of his ownership of 24.9% of the shares of the
Common Stock of the orporation. Mr. Gabelli, however, specifically
disclaims beneficial ownership of all shares of the Common Stock of
Spinnaker held by the Corporation. Mr. Evanson owns 2,250 shares of
Spinnaker Common Stock. Mr. Dolan owns 1,225 shares of Spinnaker
Common Stock.
Morgan Group is a 47% owned subsidiary of the Corporation
whose stock is traded on the NASDAQ National Market System. Mr. Gabelli
beneficially owns 10,000 shares (0.7%) of Morgan Group's Class A Common
Stock. He may also be deemed to be a beneficial owner of 150,000 shares
of Morgan Group's Class A Common Stock and 1,200,000 shares of Morgan
Group's Class B Common Stock owned by the Corporation, by virtue of his
ownership of 24.9% of the shares of Common Stock of the Corporation.
Mr. Gabelli, however, specifically disclaims beneficial ownership of all
shares of Morgan Group stock held by the Corporation. Mr. Woolard
owns 200 shares of Morgan Group's Class A Common Stock.
EXECUTIVE COMPENSATION
The following tables set forth compensation received by
the Corporation's Chief Executive Officer and each of the other executive
officers of the Corporation for the last three fiscal years and certain
information as to stock options:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation
Long Term
Compensation
Awards All Other
Name and Stock Compen-
Principal Underlying sation
Position Year Salary($) Bonus($)1 Options ($)2
- - -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Mario J. Gabelli 1995 325,000 625,000 -- 200
Chief Executive
Officer, Chairman
of the Board 1994 150,000 0 -- 200
Chairman of the
Executive Committee 1993 150,000 250,000 -- 200
Michael J. Small3 1995 183,846 0 12,256 Shs --
Office of the
President 1994 191,538 0 37,000 Shs --
Robert E. Dolan 1995 152,700 125,000
Chief Financial
Officer 1994 140,096 0 -- 200
1993 125,096 50,000 -- 200
1992 104,469 15,000 -- 200
Robert A. Hurwich3 1995 135,200 50,000 -- 200
Vice President-
Administration,
Secretary, 1994 107,538 0 -- --
General Counsel
- - -----------
(1) Bonuses earned during any fiscal year are generally
paid during the following fiscal year. Mr. Gabelli used his
1995 bonus to purchase 10,373 shares of Common Stock from the
Corporation.
(2) The compensation reported represents contributions
made by the Corporation to the Lynch Corporation 401(k) Savings Plan. The
amount of perquisites, as determined in accordance with the rules of the
Securities and Exchange Commission relating to Executive Compensation did
not exceed 10% of
salary and bonus for 1995.
(3) Messrs. Small and Hurwich joined the Corporation in
January 1994 and February 1994, respectively. Mr. Small's employment
terminated effective September 1, 1995;
amount for 1995 includes consulting fees paid to Mr. Small
for the remainder of 1995.
</TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants Potential Realizable Value at Assumed
Annual Rates of Stock Price
Appreciation For Option Term
Number of Percent of Total
Securities Options/SARs
Underlying Granted to
Options/SARs Employees in Exercise or Base
Granted Fiscal Year Price Expiration
Name (#) ($/Sh) Date 5% ($) 10% ($)
(a) (b) (c) (d) (e) (f) (g)
Michael J. Small1 12,256 100% $33.25 1/18/99 N.A(1) N.A.(1)
- - -------------
(1) The options set forth in the table were the second
installment granted to Mr. Small pursuant to an employment agreement for
Mr. Small to serve in the Office of the President. In addition, the
employment agreement provided for a third additional option installment
of 12,256 shares, which would have had an exercise price equal to the
closing prices of the Corporation stock on January 18, 1996. All options
terminated as a result of his termination of employment effective September
1, 1995. See Transactions with Certain Affiliated Parties.
EXECUTIVE COMPENSATION AND BENEFITS COMMITTEE
REPORT ON EXECUTIVE COMPENSATION
Overview and Philosophy
The Executive Compensation and Benefits Committee
("Committee") of the Board of Directors is responsible for developing and
making recommendations to the Board of Directors with respect to the
Corporation's executive compensation policies and administering the
various executive compensation plans. In addition, the Committee recommends
to the Board of Directors the annual compensation to be paid to the Chief
Executive Officer and each of the other executive officers of the
Corporation, as well as to other key employees. The Committee is comprised
of two independent, non-employee directors.
The objectives of the Corporation's executive compensation
program are to:
o Support the achievement of desired Corporation
performance.
o Provide compensation that will attract and retain
superior talent and link reward with performance.
o Ensure that there is appropriate linkage between
executive compensation and the enhancement of shareholder value.
o Evaluate the effectiveness of the Corporation's incentive
arrangements.
The executive compensation program is designed to provide
an overall level of compensation opportunity that is competitive with
companies of comparable size, capitalization and complexity. Actual
compensation levels, however, may be greater or less than average
competitive levels based upon annual and long-term Company performance and
specific issues peculiar to the Corporation, as well as individual performance.
The Committee uses its discretion to recommend executive compensation at
levels warranted in its judgment by corporate and individual performance.
Executive Officer Compensation Program
The Corporation's executive officer compensation program
is comprised of base salary, cash bonus compensation, Executive Stock
Purchase Loan Plan, Lynch Corporation 401(k) Savings Plan, and other
benefits generally available to employees of the Corporation. In
connection with recruiting for the Office of the President in 1994, the
Corporation also awarded stock options. In 1996 the Corporation adopted
a Phantom Stock Plan application to officers and employees of the
Corporation. Mr. Gabelli elected not to participate in the Phantom Stock
Plan.
Base Salary
Base salary levels for the Corporation's executive officers
are intended to be competitive. In recommending salaries the Committee
also takes into account individual experience and performance and specific
issues particular to the Corporation. A summary of the compensation awarded
to the Chief Executive Officer and certain other executive officers is set
forth in the "Summary Compensation Table" on page 6 of this Proxy Statement.
Bonus Plan
The Corporation has in place a bonus plan that is based on an objective
measure of corporate performance and on subjective evaluation of individual
performance for its executive officers and other key personnel. In general,
the plan provides for an annual bonus pool equal to 20% of the excess of
(i) the consolidated pre-tax profits of the Corporation for a calendar
year over (ii) 25% of the Corporation's shareholders' equity at the
beginning of such year adjusted for dividends paid during the year. The
Executive Compensation and Benefits Committee at its discretion may take
into consideration other factors and circumstances in awarding bonuses
such as progress toward achievement of strategic goals and qualitative
aspects of management performance. A summary of bonuses awarded to the
Chief Executive Officer and certain other executive officers is set forth
in the "Summary Compensation Table" on page 6 of this Proxy Statement.
Lynch Phantom Stock Plan
In February 1996 the Corporation adopted a Phantom Stock Plan
pursuant to which share units equivalent to one share of Common Stock
of the Corporation may be awarded to officers and employees of the
Corporation. Mr. Gabelli elected not to participate in the Plan.
The Committee administers the Phantom Stock Plan, including selecting
the persons to be awarded share units and number of units to be awarded.
Such share units are initially valued at a trailing average price of the
Corporation's Common Stock (or such other price as the Committee
determines), vest on the first anniversary of the date of grant and
may be exercised by the grantee at any time after vesting
and prior to the fifth anniversary of the date of grant. Upon exercise
the grantee is entitled to the difference between the market price of
the Corporation's Common Stock on the date of exercise and the award value,
multiplied by the number of share units granted, and the Corporation may
elect to pay the award with Common Stock of the Corporation for up to 100%
of the value. Seven thousand one hundred units were awarded in February
1996, of which 4,000 were awarded to Mr. Dolan and 2,500 were awarded
to Mr. Hurwich at $63.03 per share units.
Executive Stock Purchase Loan Plan
In December 1994, the Corporation adopted the Executive
Stock Purchase Loan Plan ("Stock Loan Plan"). The Stock Loan Plan is
intended to encourage stock ownership in the Corporation by its executive
officers. The Corporation may loan up to one hundred percent (100%) of the
purchase price of the shares to officers of the Corporation selected by the
Chairman of the Board (who is not eligible to participate). The maximum
amount of loans under the Stock Loan Plan is $100,000 per year ($30,000
per officer per year) and $200,000 in total, which amounts may be increased
by the Board of Directors. Loans will bear interest (currently 6.34% per
annum) and will be collateralized by the shares so acquired until the loan
has been repaid. The shares may be put to the Corporation in full
satisfaction of the loan principal. To date, no such loans have been made to
any individual under the Stock Loan Plan.
Lynch Corporation 401(k) Savings Plan
All employees of the Corporation and its subsidiaries
are eligible to participate in the Lynch Corporation 401(k) Savings
Plan, other than those employed in the Corporation's telephone
entities and those covered by a collective bargaining agreement, after
having completed one year of service (as defined in the Plan) and having
reached the age of 18.
The 401(k) Plan permits employees to make contributions
by deferring a portion of their compensation. Participating
employees also share in contributions made by their respective employers.
The annual mandatory employer contribution to each participant's account
is equal to 25% of the first $800 of the participant's contribution.
In addition, the employer may make a discretionary contribution of up to
75% of the first $800 of the participant's contribution. No such
discretionary contribution was made in 1994. A participant's interest
in both employee and employer contributions and earnings thereupon are
fully vested at all times.
Employee and employer contributions are invested in guaranteed
investment contracts, certain mutual funds or Common Stock of the
Corporation, as determined by the participants. With respect to the
individuals listed in the Summary Compensation Table, employer
contributions of $200 were paid to the accounts of each of Messrs.
Gabelli, Dolan, and Hurwich, and each of such individuals deferred
$9,240 under the Plan during 1995, which amounts have been included for
such individual in the Summary Compensation Table.
Benefits
The Corporation provides medical life insurance and disability
benefits to the executive officers (in the case of Mr. Gabelli,
it shares the cost with Gabelli Funds, Inc.) that are generally
available to Corporation employees. The amount of perquisites,
as determined in accordance with the rules of the Securities and
Exchange Commission relating to executive compensation, did not
exceed 10% of salary and bonus for fiscal 1994.
Chief Executive Officer Compensation
The following table sets forth compensation received by Mr.
Gabelli since 1986 when Mr. Gabelli became Chairman and Chief
Executive Officer of the Corporation:
<TABLE>
<CAPTION>
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Salary 0 0 60,000 90,000 90,000 90,000 150,000 150,000 150,000 325,000
Bonus 0 0 30,000 0 0 0 100,000 250,000 0 625,000
</TABLE>
After considering the substantial increase in the size
and scope of the Corporation, improved financial performance as
reflected by the increase in private market value as well as public
market value, and improved return on shareholder equity, the
Compensation Committee recognized that Mr. Gabelli's 1994 and prior
years' compensation was materially below that of chief executive officers
of comparable companies, even after considering that Mr. Gabelli's
service to the Corporation is not full time. Therefore, the Committee
increased Mr. Gabelli's salary to $500,000 per year effective July 1,
1995. In addition, the Committee recognizes the role of leadership,
particularly that of the Chief Executive Officer, in developing existing
businesses and in making strategic acquisitions. Therefore, it is considering
other forms of "at risk" incentive compensation for Mr. Gabelli to
maximize both the intrinsic value of the Corporation's assets and the
market price of the Company's stock. In order to further identify Mr.
Gabelli's interests with that of the Corporation, the Corporation authorized
the sale by the Corporation to Mr. Gabelli of $625,000 of Common Stock
(equal to Mr. Gabelli's 1995 bonus), which resulted in the purchase of
10,373 shares. The Corporation had a good year in 1995 including
record earnings and the undertaking and/or completion of several
important strategic steps, and executive officers, especially Mr. Gabelli,
made substantial contributions to the Corporation's performance which is
reflected in the bonus awarded to Mr. Gabelli as well as other executives.
Paul P. Woolard, Chairman
Ralph R. Papitto
Members of the Executive Compensation
and Benefits Committee
<PAGE>
PERFORMANCE GRAPH
The graph below compares the cumulative total shareholder
return on the Common Stock of the Corporation for the last five fiscal
years ended December 31, 1995 with the cumulative total return on the
broad market by the American Stock Exchange Market Value Index, and the
peer group, as measured by the Amex Service Industry Subindex over the
same period (assuming the investment of $100 in the Corporation's Common
Stock, and each of the indexes on December 31, 1990, and reinvestment of
all dividends).
INVESTMENT OF $100 DOLLARS ON DECEMBER 31, 1990
WITH REINVESTMENT OF DIVIDENDS
[GRAPH]
ITEM 2
TO CONSIDER AND VOTE ON THE EXCHANGE RIGHT IN
PROMISSORY NOTES IN A PRINCIPAL AMOUNT OF UP TO $25 MILLION THAT MAY BE
ISSUED BY THE CORPORATION
The Corporation may require funds for general corporate purposes,
including, without limitation, advances to Spinnaker, investment in
personal communication services ("PCS") and acquisitions. If those funds
are required, the Corporation may request Gabelli Funds, Inc. ("GFI")
to assist the Corporation in obtaining up to $25 million of those funds.
Mr. Gabelli is the principal shareholder of, and controls, GFI. GFI or its
Proprietary Accounts may provide some or all of those funds. To the extent
GFI assists in obtaining funds from persons other than GFI or its Proprietary
Accounts, the Corporation would pay GFI customary fees for such services,
as determined and approved by the Board of Directors of the Corporation.
Proprietary Accounts shall mean the accounts of (i) all subsidiaries of
GFI, (ii) all directors, officers and key employees of GFI and its
subsidiaries, including Mr. Gabelli, (iii) all accounts of members of the
immediate family of a person included in clause (ii), i.e., spouse and
minor children living with such person, and (iv) all accounts in which
(a) any one of the persons or entities listed in clauses (i) through (iii)
has at least a 10% interest or (b) in which persons or entities listed
in clauses (i) through (iii) in the aggregate have at least a 25% interest.
It is anticipated that any such funds that are raised would be
in the nature of borrowings represented by promissory notes (the
"Notes"). It is anticipated that the Notes would bear interest at 8%
per annum, with principal and interest payable not earlier than
120 days after the issue date of the Notes. It is further anticipated
that the Notes may be secured by a pledge of the stock of certain
subsidiaries of the Corporation (which may, at the time, be subject to
a prior security interest) and possibly other security.
It is anticipated that the holder(s) of the Notes would be entitled
after the occurrence of a payment default on the Notes to exchange
the Notes for Convertible Notes of the Corporation (the "Convertible
Notes"). It is anticipated that the Convertible Notes would have a
maturity of up to 10 years, and would contain such terms as the Board of
Directors may authorize, including a right to be converted into Common
Stock at a conversion price equal to the lowest of (i) $60 per share,
(ii) the closing price of the Common Stock on the last trading day before
issuance of the Notes or (iii) the average market price of the Common Stock
during an agreed period before the default. The closing price of the
Common Stock on the American Stock Exchange on April , 1996, was
$_________.
It is anticipated that any Notes held by GFI or its Proprietary
Accounts would provide that in the event of a payment default the
Corporation would use its best efforts to register with the Securities
and Exchange Commission, Convertible Notes equal to the principal
amount of Notes (plus accrued but unpaid interest thereon) held by
such party or parties and the shares of Common Stock into which the
Convertible Notes may be convertible, for offering by the Corporation
to all shareholders of the Corporation, including Mr. Gabelli, on a
basis such that each shareholder would be entitled to acquire a
portion of such Convertible Notes as nearly equal as possible to that
portion of the outstanding shares of Common Stock owned by such shareholder
on the date the registration is declared effective. It is anticipated that
Mr. Gabelli would be able to pay for his allocable portion of the
Convertible Notes by exchanging Notes held by GFI and its Propriety
Accounts valued at the principal amount of Notes so exchanged plus
accrued but unpaid interest thereon. It is anticipated that the
Corporation may use any net proceeds from that offering to pay any
Notes that shall not have been exchanged for Convertible Notes. If
the Notes qualify for listing on the American Stock Exchange, the
Corporation anticipates that it would seek to have the Convertible
Notes listed.
The Corporation hereby incorporates by reference the financial
statements, the supplementary financial information and management's
discussion and analysis of financial condition in the Corporation's
1995 Annual Report to Shareholders delivered to shareholders with
this Proxy Statement. In addition, reference is made to the pro forma
financial information in Exhibit A hereto.
The Board believes that, in a circumstance in which the Notes
would become convertible into Convertible Notes (i.e., after a payment
default on the Notes), and if the Notes (or a substantial portion thereof)
were converted, the default might be cured. The Board considers the
exchange provision of the Notes to be reasonable and appropriate under
the circumstances.
NOTWITHSTANDING SUBMISSION OF THIS PROPOSAL TO SHAREHOLDERS, THE
CORPORATION, WHETHER OR NOT THIS PROPOSAL IS APPROVED, RESERVES THE RIGHT
TO ISSUE, WITHOUT SHAREHOLDER APPROVAL, SUCH SECURITIES AS THE CORPORATION
DEEMS ADVISABLE, INCLUDING WITHOUT LIMITATION PROMISSORY NOTES WHICH
MAY OR MAY NOT BE SIMILAR TO THE NOTES AND CONVERTIBLE NOTES WHICH MAY
OR MAY NOT BE SIMILAR TO THE CONVERTIBLE NOTES.
THE BOARD OF DIRECTORS (OTHER THAN MR. GABELLI, WHO IS MAKING NO
RECOMMENDATION) RECOMMENDS A VOTE IN FAVOR OF APPROVAL OF THE EXCHANGE
RIGHT.
Approval of this Item 2 requires the affirmative vote of a
majority of the shares of Common Stock of the Corporation voting on the
proposition, excluding any abstentions. Mr. Gabelli has not indicated how
he intends to vote the shares beneficially owned by him on this matter.
TRANSACTIONS WITH CERTAIN AFFILIATED PERSONS
Mr. Gabelli is affiliated with various entities which
he directly or indirectly controls and which are engaged in various
aspects of the securities business, such as an investment advisor to
various institutional and individual clients including registered
investment companies and pension plans, as a broker-dealer, and as
managing general partner of various private investment partnerships.
On March 12, 1996, the Corporation paid Mr. Gabelli his 1995 bonus
of $625,000 and sold him 10,373 shares of Common Stock for $625,000,
or $60.25 per share, the closing price of the Common Stock on March 11,
1996. In addition, the Corporation loaned Mr. Gabelli $212,000 for the
period from March 15, 1996 until March 31, 1996, at 6% interest, for
the payment of withholding taxes on Mr. Gabelli's 1995 bonus paid in
Common Stock. During 1995, the Corporation and its subsidiaries engaged
in various transactions with certain of these entities and the amount of
commissions, fees, and other remuneration paid to such entities,
excluding reimbursement of certain expenses related to Mr. Gabelli's
employment by the Corporation, was less than $60,000. Pursuant to
Indiana law and the Corporation's Articles of Incorporation and as
previously reported, the Corporation indemnified Mr. Gabelli for outside
legal fees of $391,575 incurred in connection with a regulatory inquiry.
See also Item 2 above.
Michael J. Small ceased to be an officer and employee of
the Corporation effective September 1, 1995, and his employment
agreement and stock options terminated as of that date. The Corporation
agreed to pay Mr. Small consulting fees of $350,000 over a three and
one-quarter year period plus an additional $600,000, half of which was
paid at year-end 1995 and the other half to be paid over three years.
See Compensation Committee Interlocks and Insider Participation below.
Compensation Committee Interlocks and Insider Participants
Mr. Boyle, who is the Chairman and Chief Executive Officer of
Spinnaker, served as a member of the Executive Compensation and Benefits
Committee from August 17, 1995 until his resignation as a director
of the Corporation on January 17, 1996 and attended one meeting on
December 7, 1995. Messrs. Gabelli and Dolan serve as directors of
Spinnaker, which does not have a compensation committee.
In June 1994, Spinnaker and Boyle, Fleming, George & Co., Inc.
("BF") entered into a Management Agreement (the "Management Agreement"),
pursuant to which BF agreed to provide to Spinnaker operations
management, strategic planning, acquisition analysis and implementation,
investment banking and financial advisory services and supervision of
Spinnaker's financial reporting and regulatory obligations. Mr. Boyle, a
director of the Corporation through January 17, 1996, is a director,
chief executive officer and a principal owner of BF and pursuant to the
Management Agreement became a director and Chairman of the Board and
chief executive officer of Spinnaker.
The Management Agreement had an initial term of one year,
and is automatically renewable for a term of one additional year
unless either party gives notice of termination not less than 90 days
prior to the end of the first anniversary of the Agreement. Thereafter,
the Agreement is terminable on 90 days' notice by either party. Pursuant
to the Management Agreement BF received a management fee of $200,000 in
1995, plus reimbursement of expenses. The management fee for 1996 has
been raised to $400,000 reflecting, among other things, the increased
size and complexity of Spinnaker. Mr. Boyle does not receive a salary
from Spinnaker, nor does Mr. Fleming, the President of Spinnaker.
Spinnaker and BF also entered into a Warrant Purchase Agreement
(the "Warrant Purchase Agreement") in June 1994, pursuant to which
BF received a Warrant (the "A Warrant") to purchase 678,945 shares
of Common Stock of Spinnaker for a price of $2.67 per share (adjusted
for the three for two stock split in December 1994 and December 1995)
at any time on or before June 10, 1999. BF may also receive a warrant to
purchase additional Spinnaker shares under certain circumstances on the
occurrence of an equity offering by Spinnaker.
When Spinnaker acquired an 80.1% interest in Brown-Bridge
Industries, Inc., an acquisition opportunity developed by BF prior to
entering into the Management Agreement, certain affiliates of BF loaned
Spinnaker $322,000 at an interest rate of 18% to help Spinnaker fund its
portion of Spinnaker's acquisition and acquired 6.2% of the Brown-Bridge
stock on the same terms and conditions as Spinnaker.
INDEPENDENT AUDITORS
The Board of Directors upon the recommendation of its Audit
Committee, has reselected the firm of Ernst & Young, independent
auditors, to audit the consolidated financial statements of the
Corporation for the fiscal year ending December 31, 1996. Management
has not followed the practice of presenting the selection of auditors
to the shareholders for their approval. Representatives of Ernst & Young
are expected to be available at the Annual Meeting with the
opportunity to make a statement if they desire to do so
and to answer appropriate questions.
Effective March 19, 1996, Morgan replaced Arthur
Anderson LLP ("Arthur Anderson") and retained Ernst &Young LLP
("Ernst &Young"), which are the auditors for the Corporation, as Morgan's
public accountants. Ernst & Young had expressed reliance on Arthur
Anderson's audit. Arthur Anderson's report on the company's financial
statements during the 1994 and 1995 fiscal year prior to its replacement
contained no adverse opinion or disclaimer of opinions, and was not
qualified or modified as to uncertainty, audit scope or accounting
principles. The decision to change auditors was approved by Morgan's
Board of Directors and the Corporation's Audit Committee.
During the 1995 fiscal year and until its replacement
there were no disagreements between Morgan or the Corporation and
Arthur Anderson on any matters of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Arthur Anderson,
would have caused it to make a reference to the subject matter of the
disagreement in connection with it reports.
SECTION 16(a) REPORTING
Section 16(a) of the Securities and Exchange Act of
1934, as amended, requires the Corporation's directors, executive
officers and holders of more than 10% of the Corporation's Common Stock
to file with the Securities and Exchange Commission and American Stock
Exchange initial reports of ownership and reports of changes in the ownership
of Common Stock and other equity securities of the Company. Such persons
are required to furnish the Corporation with copies of all Section 16(a)
filings. Based solely on the Corporation's review of the copies of such
filings it has received and written representations of directors and
officers, the Corporation believes that during the fiscal year ended
December 31, 1995, its officers, directors, and 10% shareholders
are in compliance with all Section 16(a) filing requirements applicable
to them, except that the initial filing when Mr. Muoio became a director
was inadvertently filed approximately one week late.
PROPOSALS OF SHAREHOLDERS
Proposals of shareholders intended to be presented at the 1997
Annual Meeting of Shareholders must be received by the Office of the
Secretary, Lynch Corporation, 8 Sound Shore Drive, Greenwich, Connecticut
06830, by no later than December 14, 1995, for inclusion in the Corporation's
proxy statement and form of proxy relating to the 1996 Annual Meeting.
MISCELLANEOUS
The Board of Directors knows of no other matters which are likely
to come before the Annual Meeting. If any other matters should properly
come before the Annual Meeting, it is the intention of the persons
named in the accompanying form of proxy to vote on such matters in
accordance with their best judgment.
The solicitation of proxies is made on behalf of the Board
of Directors of the Corporation, and the cost thereof will be borne by
the Corporation. The Corporation has employed the firm of Morrow & Co.
Inc., 909 Third Avenue, New York, New York, 10022 to assist in this
solicitation at a cost of $3,500, plus out-of-pocket expenses. The
Corporation will also reimburse brokerage firms and nominees for their
expenses in forwarding proxy material to beneficial owners of the Common
Stock of the Corporation. In addition, officers and employees of the
Corporation (none of whom will receive any compensation therefor in
addition to their regular compensation) may solicit proxies. The
solicitation will be made by mail and, in addition, may be made by
telegrams and personal interviews, and the telephone.
ANNUAL REPORT
The Corporation's Annual Report to Shareholders for the fiscal year
ended December 31, 1995, has been sent herewith to each shareholder.
Such Annual Report, however, is not to be regarded as part of the
proxy soliciting material.
By Order of the Board
of
Directors
ROBERT A. HURWICH
Secretary
Dated: April 11, 1996
<PAGE>
<TABLE>
Exhibit A
LYNCH CORPORATION
PRO FORMA FINANCIAL STATEMENTS
DECEMBER 31, 1995
<CAPTION>
Conversion
As of Debt
Reported Adjustments Pro Forma
- - --------------------------------------------------------------------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $15,921 $ 15,921
Marketable securities and
short-term investments
11,432 11,432
Trade accounts receivable,
less allowances of $1,732 and
$737 in 1995 and 1994,
respectively includes $3,602
and $3,624 of costs in excess
of billings at 1995 and 1994,
respectively 52,306 52,306
Inventories 33,235 33,235
Deferred income taxes 3,944 3,944
Other current assets 6,810 6,810
--------------------------------------
TOTAL CURRENT ASSETS 123,648 0 123,648
PROPERTY, PLANT AND EQUIPMENT:
Land 2,068 2,068
Buildings and improvements 16,675 16,675
Machinery and equipment 128,397 128,397
--------------------------------------
147,140 0 147,140
Accumulated depreciation (36,093) (36,093)
---------------------------------------
111,047 0 111,047
INVESTMENTS IN AND ADVANCES TO
AFFILIATED COMPANIES 8,892 8,982
INTANGIBLE ASSETS, NET 53,060 53,060
OTHER ASSETS 5,702 5,702
----------------------------------------
TOTAL ASSETS $302,439 0 $302,439
-----------------------------------------
-----------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks $ 9,622 $ 9,622
Trade accounts payable 20,147 20,147
Accrued interest payable 1,146 1,146
Accrued liabilities 23,612 23,612
Customer advances 3,787 3,787
Current maturities of long-
term debt 39,708 39,708
------------------------------------------
TOTAL CURRENT LIABILITIES 98,022 0 98,022
LONG-TERM DEBT 138,029 (25,000) 113,029
DEFERRED INCOME TAXES 11,687 11,687
MINORITY INTERESTS 12,964 12,964
SHAREHOLDERS' EQUITY
Common Stock, no par or stated
value: Authorized 10 million
shares Issued 1,471,191 and
1,887,857 shares 5,139 25,000 30,139
Additional paid-in capital 7,873 7,873
Retained earnings 23,776 23,776
Treasury stock of 92,528 and
92,533 shares, at cost (1,276) (1,276)
-----------------------------------------
TOTAL SHAREHOLDERS' EQUITY 35,512 25,000 60,512
-----------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $302,439 0 $302,437
-----------------------------------------
</TABLE>
<TABLE>
LYNCH CORPORATION
PRO FORMA FINANCIAL STATEMENTS
DECEMBER 31, 1995
IN THOUSNADS, EXCEPT SHARE DATA
<CAPTION>
Conversion
of Convertible
Notes
Pro Forma Adjustments Pro Forma
----------------------------------------
<S> <C> <C> <C>
SALES AND REVENUES $429,435 $429,435
COST AND EXPENSES 400,874 400,874
----------------------------------------
OPERATING PROFIT 28,561 0 28,561
OTHER INCOME (EXPENSE):
Investment income 3,070 3,070
Interest expense (17,004) 2,000 (15,004)
Share of operations of
affiliated companies 398 398
Gain on sales of subsidiary
and affiliate stock 59 59
----------------------------------------
INCOME BEFORE INCOME TAXES AND
MINORITY INTEREST
15,084 2,000 17,084
Provision for income taxes (5,936) (680) (6,616)
Minority interests (2,380) (2,380)
----------------------------------------
NET INCOME $ 6,768 1,320 $ 8,088
Weighted average shares and share
equivalents outstanding 1,407,000 416,667 1,823,067
EARNINGS PER SHARE $4.81 $4.44
- - ----------------------
Notes:
(1) Assumes central products acquisition occurred on January 1,1995.
(2) Assumes conversion of $25 million of convertible notes and that the
conversion price is $60 per share.
(3) Central products pro forma adjustments as filed in Form 8-K/A(1)
as filed by Lynch as of October 4, 1996.
(4) All numbers except per share numbers are in thousands.
</TABLE>
Consent of Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form
10-K/A) of Lynch Corporation of our report dated February 29, 1996 (except
for Note 6, as to which the date is April 8, 1996), included
in the 1995 Annual Report to Shareholders of Lynch Corporation.
Our audits also included the financial statement schedules of Lynch
Corporation listed in Item 14(a). These schedules are the responsibility
of the Company's management. Our responsibility is to express an opinion
based on our audits. In our opinion, the financial statement schedules
referred to above, when considered in relation to the basic financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
Stamford, Connecticut
April 29, 1996
