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LYNCH CORPORATION
ANNUAL REPORT--1996
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LYNCH CORPORATION, 8 SOUND SHORE DRIVE, SUITE 290, GREENWICH, CONNECTICUT 06830
TELEPHONE (203) 629-3333
===============================================================================
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DUNKIRK & FREDONIA TELEPHONE COMPANY
On November 25, 1996, Lynch Corporation completed the acquisition of Dunkirk &
Fredonia Telephone Company from the Maytum family, who owned Dunkirk & Fredonia
for 100 years. Dunkirk & Fredonia serves approximately 11,100 access lines in
western New York including the community of Fredonia, the Village of Cassadaga
and the Hamlet of Stockton. We are pleased to form this partnership with the
management and associates of Dunkirk & Fredonia.
WESTERN NEW YORK NEW YORK
[MAP] [MAP]
HISTORY OF DUNKIRK & FREDONIA
Dunkirk and Fredonia Telephone Company (D&F) was founded in February of 1898 by
Arthur Maytum and served 60 customers in the Fredonia area at the time of
incorporation. Since its inception, the company has been a family operated
business through five generations. Today D&F serves over 9,800 customers in the
Fredonia area. In 1983, D&F purchased the Cassadaga Telephone Corporation which
is adjacent to D&F and serves 1,300 subscribers. D&F has several subsidiary
companies, Comantel, MACOM, D&F Cellular Telephone and Erie Shore
Communications. D&F and its subsidiaries provide their customers with the
highest quality and up to date telecommunications services. Services offered
through the family of companies include not only traditional telephone service
but also toll resale, PBX and key system sales, fire and intrusion alarm
installation, alarm monitoring, pocket paging, authorized Motorola radio
installation and sales, Internet provisioning and web page design, voice mail
and gift shop.
Dunkirk & Fredonia provides 1,770 CENTREX lines to Fredonia State University
College located in the Village of Fredonia. Its toll resale, alarm and
communications businesses operate in Fredonia and the surrounding communities.
The radio sales and installation business provides service in the New York and
Pennsylvania counties. D&F's Internet business provides Internet access and web
page design throughout all of Chautauqua County. One way paging service is
provided in one New York county and five Pennsylvania counties in conjunction
with GET of Erie, Pennsylvania. The paging business is expected to expand into
two additional counties in New York. MACOM is one of twenty four partners in New
York providing STP services for companies utilizing SS-7 technology. Erie Shore
Communications has received a franchise and New York State approval to provide
cable TV services in the Village of Fredonia in direct competition to the
current service provider.
Today Dunkirk and Fredonia Telephone Company is headquartered in Fredonia, New
York and provides full digital communication services through two central
offices in the Fredonia and Cassadaga area. The central offices are linked to
neighboring telephone companies through a self healing and SONET based fiber
optic ring. A total of 21 miles of fiber optic cable are in use today. In 1996,
along with three other service providers, D&F installed a fiber optic based
Distance Learning system that connects 26 school districts in western New York.
We welcome the following associates to the Lynch Family:
ASSOCIATES
Pamela Arnold, Cindy Bartkowski, Mary K. Beach, Raymond P. Beach, Ann H. Berndt,
Diane S. Boccolucci, Roger M. Britz, Karleen M.Brown, Douglas J. Carman, Bruce
H. Clark, Diana L. Clark, Justin E. Cobb, Russell A. Conti, Darlene B. Cooley,
John R. Coulter, Michelle E. Coyle, Brian A. Dechert, James F. Degolyer, Jr.,
David G. Derider, Laura A. Deyo, Brad D. Dietzen, Judy E. Drummond, Julie D.
Dubois, Theresa A. Dubois, Julie E. Essek, Robert D. Farnham, Ronald H. Gage,
Susan D. Gatto, Sharon Gollnitz, Nicholas J. Green, Kevin C. Greenough, Robert
D. Greenwald, Lori A. Hause, Thomas L. Haynes, Dennis M. Hughes, Guy A. Hunt,
Michael J. Keller, R. Steven Lesch, Wade B. Levan, Raymond J. Lewandowski,
Lawrence G. Ludemann, Lisa Marie Ludemann, Barry M. Lundmark, Julie S. Maytum,
Kurt W. Maytum, Marilyn S. Maytum, Mark R. Maytum, Robert Maytum, Robert A.
Maytum, Jeffrey S. Novelli, Barbara A. Ortolano, Sandra H. Paschke, Edward J.
Pfleuger, David T. Pihl, Joel D. Pomroy, Michael J. Porpiglia, David A. Prince,
Tammy L. Reichard, Patricia J. Reiman, Marcy Jo Rickard, Nancy A. Rizzo,
Kathleen G. Ryczko, Todd A. Schaefer, Paul J. Sellari, Janice D. Slaton, Brian
B. Smith, David C. Stanton, Trudy A. Steger, Adele A. Thomas, E. Susan Thompson,
H. David Thompson, Gary R. Thuman, Christopher R. Todd, W. Scott Washington,
Rosemary J. Watrous, Laurie L. Weatherlow, Wade A. Weatherlow, William R.
Westin, James K. Wilcox, James A. Willey, Jeffory C. Williams, Robert J.
Winters, Bonnie J. Woodbury, Cynthia F.M. Wragge
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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. To better reflect its broader markets
and corporate strategy, in 1997 Lynch Machinery will be repositioned under
Lynch Display Technologies, Inc.
- - 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 interest in
Lynch.
- - In 1976, M-tron Industries, Inc., a manufacturer of quartz crystals was
acquired.
LYNCH -- 1985 - 1995
- - 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, Entoleter,
Inc., was a manufacturer of industrial processing and air pollution control
equipment.
- - In 1988, Lynch entered the service sector with the acquisition of Morgan
Drive Away, Inc., the largest independent service provider to the mobile
home and recreational vehicle industry.
- - 1989 was highlighted by Lynch's entry into the telecommunications industry.
The acquisition of Western New Mexico Telephone Company, an independent
local telephone company servicing southwestern New Mexico, was an important
first step.
- - Lynch's second telecommunications acquisition, Inter-Community Telephone
Company of Nome, North Dakota, was completed in April 1991, followed in
October of that year with the acquisition of Cuba City Telephone Exchange
Company and Belmont Telephone Company.
- - During 1992, Lynch acquired Bretton Woods Telephone Company of New
Hampshire; and 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.
- - In 1995 Lynch continued to make progress.
- In multimedia, we partnered with CLR Video, a cable operator in
Kansas, commercialized DirectTV, structured our PCS strategy and
commenced bidding in the "C" Block auction.
- Morgan bought TDI and positioned itself to develop critical mass in
the outsourcing business.
- 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.
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PROPORTIONAL OWNERSHIP
In this Annual Report you will find Lynch Corporation's reported results
presented in a traditional accounting format. 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, debt
and values. Those who are knowledgeable about cable TV are familiar with the
concept.
1996 DATA
<TABLE>
<CAPTION>
Traditional Proportional
Accounting Ownership
- ---------------------------------------------------------------------------------------------
(000's) (000's)
<S> <C> <C>
Revenues -
Telecommunications $ 28,608 $ 24,185
Broadcasting -- 5,882
Services 132,208 67,360
Manufacturing 291,064 221,671
-------- --------
$451,880 $319,098
======== ========
EBITDA - Before Corporate Management
Fee and Expenses, and Special Charges
Telecommunications $ 15,863 $ 13,284
Broadcasting -- 1,687
Services 1,835* 935
Manufacturing 23,051 18,089
-------- --------
$ 40,749 $ 33,995
======== ========
Cash -
Telecommunications $ 23,516 $ 20,136
Broadcasting -- 948
Services 1,308 666
Manufacturing 10,559 7,918
-------- --------
$ 35,383 $ 29,668
======== ========
Debt -
Telecommunications $117,845 $107,114
Broadcasting -- 9,257
Services 4,206 2,143
Manufacturing 118,608 87,317
-------- --------
$240,659 $205,831
======== ========
</TABLE>
The amounts noted above include the 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.
The proportional ownership amounts represent Lynch's percentage interest in the
entities' fully reported amounts for the respective period or date. The
proportional ownership of revenues represent the entity's reported revenues for
the year ended December 31, 1996, times Lynch's ownership of that entity as of
December 31, 1996. Proportional ownership of cash represents all cash, including
marketable securities, of that entity, times Lynch's ownership of that entity at
December 31, 1996.
* Services' EBITDA excludes a $3.5 million charge associated with exiting the
Truckaway operation.
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FINANCIAL HIGHLIGHTS
(IN THOUSANDS OF DOLLARS, EXCEPT FOR SHARE AMOUNTS)
<TABLE>
<CAPTION>
For the Year Ended December 31,
------------------------------------------------------------------------
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales and Revenues:
Multimedia $ 28,608 $ 23,597 $ 20,144 $ 16,206 $ 15,368
Services 132,208 122,303 101,880 82,829 67,141
Manufacturing 291,064 187,727 61,217 27,986 26,148
-------- -------- -------- -------- --------
Total $451,880 $333,627 $183,241 $127,021 $108,657
======== ======== ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------
Earnings Before Interest, Taxes,
Depreciation and Amortization (EBITDA):
Multimedia $ 15,331 $ 12,342 $ 10,858 $ 8,965 $ 8,522
Services (1,765) 4,635 4,349 3,013 2,713
Manufacturing 22,751 17,047 4,693 1,915 3,181
-------- -------- -------- -------- --------
EBITDA $ 36,317 $ 34,024 $ 19,900 $ 13,893 $ 14,416
Corporate Expenses-Net (2,396) (2,928) (1,521) (1,366) $ (1,065)
-------- -------- -------- -------- --------
Total $ 33,921 $ 31,096 $ 18,379 $ 12,527 $ 13,351
======== ======== ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------
Depreciation/Amortization:
Multimedia $ 8,660 $ 7,350 $ 5,651 $ 4,400 $ 3,643
Services 1,498 1,264 915 803 971
Manufacturing 6,823 2,662 931 690 454
-------- -------- -------- -------- --------
Total $ 16,981 $ 11,276 $ 7,497 $ 5,893 $ 5,068
======== ======== ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------
Capital Expenditures $ 25,518 $ 19,569 $ 11,598 $ 4,356 $ 3,244
- ------------------------------------------------------------------------------------------------------------------------
Net Income - Total $ 2,696 $ 5,145 $ 2,328 $ 2,953 $ 2,169
- Per Share - Primary 1.92 3.66 1.74 2.41 1.72
- Fully Diluted 1.92 3.66 1.72 2.29 1.72
- ------------------------------------------------------------------------------------------------------------------------
Working Capital $ 41,632 $ 25,626 $ 22,713 $ 47,529 $ 49,449
Current Ratio 1.4 to 1 1.3 to 1 1.3 to 1 3.3 to 1 3.9 to 1
Total Assets $392,620 $302,439 $185,910 $129,972 $111,374
Shareholders' Equity $ 38,923 $ 35,512 $ 30,531 $ 24,316 $ 21,272
Per Share $ 27.98 $ 25.76 $ 22.15 $ 19.84 $ 17.36
- ------------------------------------------------------------------------------------------------------------------------
Price Per Share: High $ 921/2 $ 84 3/4 $ 32 7/8 $ 26 3/8 $ 26
Low 56 30 22 20 3/4 15 3/4
Shares Outstanding (at year end) 1,391,034 1,378,663 1,378,658 1,225,677 1,225,660
December 31, Closing Price $ 70 1/2 $ 58 1/2 $ 30 $ 23 $ 26
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
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CHAIRMAN'S LETTER
TO OUR SHAREHOLDERS:
By all standards, Lynch ended 1996 on a solid note. The public price of our
shares opened the year at $58 1/2 per share and closed at $70 1/2 per share, a
gain of 21%. This was on top of a near doubling in 1995. 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.
THE ECONOMY IN THE U.S. UNFOLDED
The outlook for the U.S. economy continues to be of steady economic growth,
low inflation and abundant financial liquidity.
The election of President Clinton for a second term coupled with the
election of a Republican legislature provides a backdrop for continued policy of
checks and balances.
For Lynch, we must grow intrinsic value, attract capital and duplicate
ourselves in the next ten years. There are always concerns: we'll list several
potential "gremlins" at work--
- The balance of trade, notably with Japan, should prove mettlesome in
1997 particularly as the effects of currency changes work through the
system.
- China's new leadership and the relationship with Hong Kong will
attract attention (an area that is important to Lynch because of
commercial activities at Lynch Display Technologies).
- Oil policy that ignores rising demand and, increasing dependency on
politically fragile sources of supply (we should raise taxes on
gasoline not lower them).
- Failure to allow capital to flow to its highest rate of return by not
focusing on a more "enlightened" method of taxing capital
gains--particularly the inflation portion of the gain. (In other
words, we need to lower the rate on capital gains.)
- Prices of "deals" at ever increasing rates--make it harder for us to
find attractively priced companies to partner with.
- The two tiered stock market--only earnings momentum and not value is
appreciated by Wall Street.
LYNCH -- 1996
Last year was another vigorous year for Lynch--
- - On the telephony front--
- Consummated the affiliation with the Maytum family and Dunkirk &
Fredonia.
- Completed the purchase of approximately 1,300 lines from U.S. West and
350 lines from Sprint.
- Agreed to purchase the Upper Peninsula Telephone Company from L.G.
Matthews and related shareholders (which we consummated in March
1997).
- - Morgan closed on Transit Homes of America, Inc., an innovative leader in
mobile homes under the aegis of Larry Kling, further consolidating its role
as the leader in the still fragmented mobile home outsourcing business.
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- - Streamlined the balkanized financial structure at Spinnaker with the
issuance of $115 million Senior Secured Notes Due 2006 through Bankers
Trust.
- - Refinanced our investment in television station WOI.
- - Initiated plans to split Lynch into more efficient components with an
earnings-oriented manufacturing company and a value-oriented interactive
communications company.
- - Organized and bid on Personal Communications Services licenses in the
so-called "C" block and "F" block auctions. This area is critical to
Lynch and so far our foray has been mixed.
FINANCIAL HIGHLIGHTS--1996
- - EBITDA (earnings before interest, taxes, depreciation and amortization)
before corporate expenses increased 6.8% to an all time record of $36.3
million in 1996 from $34.0 million in 1995.
- - Revenues at $451.9 million, increased by 35% from $333.6 million recorded
in 1995.
- - Capital expenditures grew to $25.5 million in 1996--as we continued to
build our telecommunications and manufacturing infrastructure--compared to
$19.6 million in 1995. Roughly $20 million is projected for 1997.
- - Our reported net earnings from operations excluding extraordinary items and
discontinued operations was $3.41 per share in 1996 versus $3.89 in 1995.
<TABLE>
<CAPTION>
- - Of note: at December 31, 1996 Lynch owned the following: 12/31//96 Price
---------------
<S> <C> <C> <C>
2,237,203 Spinnaker (SPNI: NASDAQ Small Cap) 30 BID
2,259,063 Spinnaker A (SPNIA: NASDAQ Small Cap) 40 BID
150,000 Morgan A (MG:AMEX) 7 1/2 CLOSE
1,200,000 Morgan B (MG:AMEX) 7 1/2 CLOSE
</TABLE>
AND NOW BACK TO THE FUTURE --
OUR FUTURE -- PROJECT "DOLLY"
Valuations accorded to EBITDA streams in both the public market and in the
private market place are rising. Moreover, the ever larger amount of money
chasing opportunities is resulting in fewer transaction opportunities for us,
which is critical 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.
An essential element to maintain our past growth and achieve the financial
and operational critical mass that the market place of the future mandates has
led us to the decision to split Lynch into two parts. The financial community is
divided into those that believe in private market value or intrinsic value of
measuring an enterprise and those that focus solely on growth in earnings on a
per share basis. Moreover, Lynch has two broad clusters of business that present
different challenges to focus and maintain momentum. In other words, despite our
success, we have grown "smaller" in financial strength when compared to the
global competition.
Simply stated, we need to "clone ourselves" to duplicate in the next ten
years the success we enjoyed over the past ten. We need to raise capital. We
need focus. In this regard, Lynch recruited Mark Cushing to assist your
Chairman. Mark comes to us from Automated Wagering International, Inc., where he
was President of a $90 million manufacturer of computer terminals and systems
serving the gaming industry.
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FIRST ELEVEN YEARS "SOWING"
To understand our guidelines for the future, let's look at 1996 and the past
transactions we structured for Lynch. 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 1996, there were 1,391,034 shares outstanding and
shareholder equity was $38.9 million. More importantly, EBITDA was nearly $36.3
million versus $0.1 million in 1985.
<TABLE>
<CAPTION>
1985 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues $10,699,000 $451,880,000
EBITDA $ 147,000 $ 36,317,000
Shareholder Equity $14,348,000 $ 38,923,000
(Traditional Accounting)
Number of Shares 1,364,110 1,391,034
Intrinsic Value (Pre-tax)/Share $12 $200 +/-
Stock Price $11 $70 1/2
</TABLE>
IT'S STILL TIME TO SOW
In examining our goals for our second year in our second decade of
stewardship at Lynch, 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 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 255,100
shares of the company, approximately 18%. As the saying goes, "I eat my own
cooking."
Our "prism" for the future is ever changing--should we partner PCS--should we
do an IPO for M-tron--should we sell convertible/debt/equity to broaden our base
of accessibility--should we accelerate penetration of
telephone/cable/broadcast--should we do Project Dolly.
As always, we will be cognizant of the needs of our "stakeholders"--our
equity owners, our staff, our partner/associates, our debtholders, and our
communities in which we are job creators.
Mario J. Gabelli
Chairman of the Board and
Chief Executive Officer
March 27, 1997
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REPORT BY THE CHIEF FINANCIAL OFFICER
Lynch consists of an array of entrepreneurial operating entities with a
common goal of building intrinsic value. From Bretton Woods Telephone Company, a
360 access line telephone company in rural New Hampshire, which has recently
established an Internet access provider, to Central Products Company, a $125
million manufacturer of adhesive-backed tape which is looking to expand
globally, each business is empowered with the ability to leverage off its
current operations and accelerate growth.
Lynch's corporate team provides long-term strategic vision to these
businesses, supports the efforts of these businesses to grow via acquisitions
and provides overall financial guidance. In addition, we look to implement new
venture strategies and through financial engineering provides our shareholders
with the opportunity to realize and participate more directly in the growth of
our investments.
Emblematic of this growth, Lynch was listed as #44 in the 1996 list of
Fortune Magazine's fastest growing companies.
ACQUISITIONS
We look for value oriented investments and apply strict rate of return
criteria to all potential acquisitions. An appropriate level of financing
leverage is imperative to minimize our net investment and maximize returns. 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, albeit we would prospect for spectrum in non-U.S.
market licenses;
- - 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.
OPERATING PHILOSOPHY
Once acquired, our objective is to have each subsidiary run as if the local
managers were the actual owners. It is our belief that managerial independence
promotes efficiency and longevity of financial success. To effect this
management/shareholder partnership, many of our local managements have ownership
interests in their business units. Because each operating unit is self-financed,
and each has local ownership, management has an incentive to keep costs down. As
a result, operating expenses and capital expenditures are incurred only as
prudently necessary. Moreover, each unit is self-motivated to attain high levels
of customer satisfaction achieved through significant interaction between the
operation and the consumer. Such satisfaction not only increases the value of
local management's investment, but also adds to the value of Lynch.
Despite the managerial independence which our subsidiaries enjoy, it is
essential that Lynch and each operating unit strive to achieve the same goals:
to increase intrinsic value and shareholder wealth. Therefore, we maintain
constant communication with each of our operating units as to the direction of
the overall economy and, more specifically, the future of the industry in which
they operate.
PERSONAL COMMUNICATIONS SERVICES ("PCS")
During 1996, Lynch consummated the first leg of its personal communications
service or "PCS," strategy. Through five separate 49.9%-owned limited
partnerships, Lynch participated in the FCC "C-Block" Auction of 30 MHZ of PCS
spectrum. As a result of that auction, these partnerships acquired the rights to
provide PCS service to selective geographic areas within the United States,
covering a population of over seven million. The cost of these licenses was
$216.2 million, or $30.67 per POP. The details of the auction results are
presented in the PCS section below.
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Lynch additionally participated in the subsequent F-Block Auction through a
different 49.9% limited partnership, which was high bidder in licenses that hold
the right to provide personal communications services of 10MHz of spectrum to
selective geographic areas in the United States covering a population of 20
million. The cost of these licenses was $19.0 million, or $0.95 per POP. These
licenses are expected to be awarded in the first half of 1997.
SPIN-OFF
As part of our continuing efforts to increase shareholder value, we are
currently exploring the spin-off of Lynch's manufacturing interests from our
telecommunications companies and Morgan. Each Lynch shareholder would receive
one share of the spin-off company while maintaining each share of the remaining
company.
The spin-off would enable each group (Manufacturing and Telecommunications)
to focus on their unique markets and growth opportunities. Each of these
industries has different requirements for management, operations,
infrastructure, capital, internal development and acquisitions. Each in turn
captures different valuations, research and analysis from the financial and
investment community.
We will evaluate this strategic opportunity and pursue a tax-free ruling from
the IRS for the spin-off dividend. If all conditions are satisfied, we expect to
move forward with this plan, enabling our shareholders to maintain equity in
both our manufacturing and telecommunications holdings. Both groups would
continue to pursue and develop significant high growth opportunities with strong
returns on equity.
FINANCIAL CHALLENGE
Perhaps the most significant challenge facing Lynch over the coming year is
developing additional financial resources for us to continue to grow. We will
explore the use of various financial tools to provide efficient funding.
Harvesting of current investments, access to public markets at the holding
company and subsidiaries, and strategic and financial joint ventures with
respect to PCS interests will all be explored.
CLOSING
As we have traditionally done, our current partners will share with you over
the next several pages, their insight into what they are doing to enhance and
grow their individual operations and build toward the future. I am particularly
proud to introduce two new individuals, Eugene P. Connell and Mark L. Cushing.
Gene Connell came to us after 36 years at NYNEX, the last four running
NYNEX's United Kingdom cable operation, which was brought to the market on a
global basis at a $2 billion valuation. Gene is Chairman of Lynch Interactive
and provides invaluable counsel to our telephone partners.
Mark Cushing, who is Assistant to the Chairman and Chief Operating Officer of
Lynch Manufacturing, is developing the human and financial resources necessary
to accelerate the growth of our manufacturing operations, most particularly
Lynch Display Technologies and M-tron Industries.
We welcome these individuals to Lynch. It's truly a pleasure to work with
them as well as all the talented and dedicated associates within the
Corporation.
Robert E. Dolan
Chief Financial Officer
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THANK YOU WARREN BUFFETT
As a prelude to your reviewing the remainder of the Lynch Annual Report,
please read the following (presented without change from Berkshire Hathaway 1996
Annual Report), and just substitute Lynch. This is how your Chairman thinks.
THE RELATIONSHIP OF INTRINSIC VALUE TO MARKET PRICE
In last year's letter, with Berkshire shares selling at $36,000, I told you:
(1) Berkshire's gain in market value in recent years had outstripped its gain in
intrinsic value, even though the latter gain had been highly satisfactory; (2)
that kind of overperformance could not continue indefinitely; (3) Charlie and I
did not at that moment consider Berkshire to be undervalued.
Since I set down those cautions, Berkshire's intrinsic value has increased
very significantly--aided in a major way by a stunning performance at GEICO that
I will tell you more about later--while the market price of our shares has
changed little. This, of course, means that in 1996 Berkshire's stock
underperformed the business. Consequently, today's price/value relationship is
both much different from what it was a year ago and, as Charlie and I see it,
more appropriate.
Over time, the aggregate gains made by Berkshire shareholders must of
necessity match the business gains of the company. When the stock temporarily
overperforms or underperforms the business, a limited number of
shareholders--either sellers or buyers--receive outsized benefits at the expense
of those they trade with. Generally, the sophisticated have an edge over the
innocents in this game.
Though our primary goal is to maximize the amount that our shareholders, in
total, reap from their ownership of Berkshire, we wish also to minimize the
benefits going to some shareholders at the expense of others. These are goals we
would have were we managing a family partnership, and we believe they make equal
sense for the manager of a public company. In a partnership, fairness requires
that partnership interests be valued equitably when partners enter or exit: in a
public company, fairness prevails when market price and intrinsic value are in
sync. Obviously, they won't always meet that ideal, but a manager--by his
policies and communications--can do much to foster equity.
Of course, the longer a shareholder holds his shares, the more bearing
Berkshire's business results will have on his financial experience--and the less
it will matter what premium or discount to intrinsic value prevails when he buys
and sells his stock. That's one reason we hope to attract owners with long-term
horizons. Overall, I think we have succeeded in that pursuit. Berkshire probably
ranks number one among American corporations in the percentage of its shares
held by owners with a long-term view.
Let me add a few thoughts about your own investments. Most investors, both
institutional and individual, will find that the best way to own common stocks
is through an index fund that charges minimal fees. Those following this path
are sure to beat the net results (after fees and expenses) delivered by the
great majority of investment professionals.
Should you choose, however, to construct your own portfolio, there are a few
thoughts worth remembering. Intelligent investing is not complex, though that is
far from saying that it is easy. What an investor needs is the ability to
correctly evaluate selected businesses. Note that word "selected": You don't
have to be an expert on every company, or even many. You only have to be able to
evaluate companies within your circle of competence. The size of that circle is
not very important; knowing its boundaries, however, is vital.
9
<PAGE> 13
To invest successfully, you need not understand beta, efficient markets,
modern portfolio theory, option pricing or emerging markets. You may, in fact,
be better off knowing nothing of these. That, of course, is not the prevailing
view at most business schools, whose finance curriculum tends to be dominated by
such subjects. In our view, though, investment students need only two
well-taught courses--How to Value a Business, and How to Think About Market
Prices.
Your goal as an investor should simply be to purchase, at a rational price, a
part interest in an easily-understandable business whose earnings are virtually
certain to be materially higher five, ten and twenty years from now. Over time,
you will find only a few companies that meet these standards--so when you see
one that qualifies, you should buy a meaningful amount of stock. You must also
resist the temptation to stray from your guidelines: If you aren't willing to
own a stock for ten years, don't even think about owning it for ten minutes. Put
together a portfolio of companies whose aggregate earnings march upward over the
years, and so also will the portfolio's market value.
Though it's seldom recognized, this is the exact approach that has produced
gains for Berkshire shareholders: Our look-through earnings have grown at a good
clip over the years, and our stock price has risen correspondingly. Had those
gains in earnings not materialized, there would have been little increase in
Berkshire's value.
The greatly enlarged earnings base we now enjoy will inevitably cause our
future gains to lag those of the past. We will continue, however, to push in the
directions we always have. We will try to build earnings by running our present
businesses well--a job made easy because of the extraordinary talents of our
operating managers--and by purchasing other businesses, in whole or in part,
that are not likely to be roiled by change and that possess important
competitive advantages.
10
<PAGE> 14
LYNCH INTERACTIVE CORPORATION
TELEPHONY
1996 was a stellar year for Lynch Interactive, our new name for all our
communications related activities. We experienced strong growth in our core
business, access lines, intra and interstate revenues. Virtually all of our
central offices were digital by year's end. Rapid expansion of our fiber network
continued throughout the year.
Dunkirk & Fredonia became part of the Lynch family on November 25, 1996. D&F
is a company with nearly 100 years of outstanding tradition serving the
communities of Fredonia & Cassadaga in upstate New York (see inside front
cover). The Maytum family has owned and operated this company its entire
history. It serves over 11,000 access lines, provides Internet Service through
its company owned facilities, as well as a long-distance reseller, a security
alarm business and a paging business.
Its central offices are all digital and extensive fiber placement has been
taking place for several years. We are delighted to have this high quality, well
managed company join the Lynch Family of companies.
In 1996, Lynch entered into a contract (closed in March 1997) to acquire 60%
of Upper Peninsula Telephone Company in Michigan with the intent to acquire the
remainder. UP is an outstanding telephone company owned and operated by the
Matthews family for over 45 years. UP serves 6,200 access lines and owns
minority interests in two cellular licenses covering a net population of 59,000.
We are looking forward to the year 2000. Most of our telephone companies are
offering or are about to offer in the near future access to the Internet. We are
also awaiting the full implementation of the Telecommunications Act of 1996. It
is becoming more apparent that the proper safeguards are being put in place for
rural high quality telecommunications providers.
Each of our units are being encouraged to expand their horizontal as well as
vertical businesses to take advantage of the explosive rate of growth in the
telecommunications and multi-media industries.
Eugene P. Connell
Chairman
Lynch Interactive Corporation
WHY RURAL TELEPHONE COMPANIES
- - Domestic, franchise business
- - Stable, predictable cash flow
- - Growth potential--access lines, usage, technology, cellular
- - Move to incentive regulation
- - Lynch partnership philosophy for family business
- - Leverageable transactions
TELECOMMUNICATIONS OVERVIEW
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997(p)
---- ---- ---- ---- -------
($ Millions)
<S> <C> <C> <C> <C> <C>
Revenues 16.136 20.016 23.456 28,468 46,900
EBITDA 8,896 10,744 12.202 15,192 23.000
Capex 2,138 8,410 14,051 11,056 10,000
</TABLE>
TELECOMMUNICATIONS ACCESS LINES AND CELLULAR POPS
<TABLE>
<CAPTION>
ACQUIS.
ACQUISITIONS COST WHEN
DATE (SM) ACQUIRED 12/31/96
------------ ---- -------- --------
ACCESS LINES
------------
<S> <C> <C> <C> <C>
Western
New Mexico Oct. 19, 1989 44.3 4,200 5,596
Inter-Community Apr. 2, 1991 5.7 1,200 2,555
Cuba City/Belmont Oct. 31 1991 7.2 2,200 2,442
Bretton Woods Feb. 1, 1992 1.7 250 360
J.B.N. Nov. 30. 1993 7.2 2,300 2,658
Haviland Sept. 27, 1994 13.0 3,800 3,890
Dunkirk &
Fredonia Nov. 26, 1996 28.0 11,129 11,129
Upper Peninsula Mar. 18, 1997 6,200 6,200
------ ------
31,279 34,830
CELLULAR POPS 74,234
-------------
DIRECT TV 1,355
---------
CABLE 4,454
-----
</TABLE>
11
<PAGE> 15
WESTERN NEW MEXICO TELEPHONE COMPANY
Western New Mexico Telephone Company serves nine exchanges in rural
southwestern New Mexico with telephone service. Western has approximately 5,600
access lines, spread out over 15,000 square miles. All of the exchanges have
digital switching, connected by 380 miles of fiber optics, and are served by a
well trained and dedicated service department.
In 1996, Western added approximately 400 access lines (7.6% growth), cut over
the remaining digital remote switch connecting it to the DMS-100 host switch at
Cliff, and began training programs to prepare employees for the competitive
future. In addition, Western's Management has been doing long range planning for
its affiliate company, WNM Communications. WNM is an unregulated company, which
serves 1,400 customers with DBS satellite television service, and is going to
roll out an Internet offering in Silver City, New Mexico, and all of Western's
telephone exchanges, early in 1997.
Management is involved in several projects in anticipation of becoming the
full service, one stop inter-active company serving southwestern New Mexico.
The following projects are either under way or are under analysis:
1. Equal access.
2. Becoming a long distance provider.
3. Conversion of Western's switching capabilities to signaling system
seven (SS7).
4. Begin offering paging services.
5. Joining a partnership to provide fiber optic connection between
El Paso, Texas and Tucson, Arizona.
6. Joining with other New Mexico independent telephone companies in
establishing a statewide toll network.
Western's Management looks forward to a busy and productive future. Change is
coming to the telephone industry and Western will be pro active in the pursuit
of new business opportunities.
Jack C. Keen Jack W. Keen
Chairman President
INTER-COMMUNITY TELEPHONE COMPANY
The Inter-Community Telephone Companies serve approximately 2,600 subscribers
in southeastern North Dakota. When all of our current construction is completed
we will have linked together 9 exchanges with 165 miles of fiber optic cable
using a Northern Telecom DMS-10 host-remote configuration.
On June 1, 1996, we completed the purchase of the following exchanges in
North Dakota from US West: Hope, Page, Sanborn and Tower City. We look forward
to offering the same quality service in these exchanges that we offer in our
original 5 exchanges.
In 1997, Inter-Community begins its 50th year of operation. We are still on
track to offer enhanced SS7 features, Equal Access and local Internet access
early in the year. In the future we also plan to construct another 30 miles of
fiber optic cable that will provide us with SONET capabilities. This span of
cable will also allow us to provide Interactive TV to several area schools and
for us to become a Competitive Local Exchange Carrier ("CLEC") beyond our
current service area.
Keith Andersen
General Manager
12
<PAGE> 16
BELMONT TELEPHONE COMPANY, CUBA CITY TELEPHONE EXCHANGE COMPANY,
LAFAYETTE COUNTY SATELLITE TV, INC.
In 1996, the companies completed the installation of fiber optic circuits
between Cuba City and Belmont. These circuits allowed the companies to reroute a
portion of the toll traffic over their facilities in the late fall. The
remaining toll traffic is scheduled for rerouting in early 1997.
In Cuba City the company will be providing the local network for "distance
learning" at the high school in 1997.
Facilities planned for the next two years include the switch upgrade in Cuba
City to provide up to date calling features such as caller identification, voice
mail, and other customer enhancements. The switch will also be modified to act
as a host switch for Belmont. Conversion of Belmont to a remote switch is
planned for early 1998.
Subscriber growth, during 1996, continued at 2% reaching a total of 2,442 at
year end.
Long distance calling maintained its strong growth reaching 1.1 million
minutes per month, an increase of 7% over 1995.
Richard A. Kiesling
President
BRETTON WOODS TELEPHONE COMPANY
Our smallest but one of our most aggressive Telcos provides a wide range of
services to their more than 300 customers.
The latest offering, Internet, through their World Surfer company, was
introduced in early January 1997 after considerable planning in the fourth
quarter of 1996.
The switch serving Bretton Woods' customers is state of the art and providing
excellent service.
Bretton Woods has been very successful in offering Centrex Service to the
business community.
Plans to introduce Intra-lata prescription are being worked on with an
introduction in the Summer of 1997.
Bretton Woods continues to meet their customer's needs in an ever expanding
world of telecommunications.
Nancy Hubert
Senior Vice President
of Operations
JBN TELEPHONE COMPANY, INC.
JBN Telephone Company serves fifteen exchanges in Northeast Kansas,
approximately 45 miles north of Topeka, Kansas. The company's serving area is
predominately rural and small businesses.
JBN received the necessary regulatory approvals to purchase and begin
operating two exchanges from Sprint/United Telephone Company, effective
September 1, 1996. This purchase brought the company's access lines up to 2,658
by year end.
JBN began providing Internet access to all of its customers during the latter
part of 1996 by concurring in a Southwestern Bell and United Telephone tariff
which allows all JBN customers access to the Internet provider of their choice.
Although JBN enjoyed a busy and successful year in 1996, the company has
plans for improving its service offerings in 1997.
In February, JBN converted all of its offices to Equal Access.
In March, the company began providing SS7 and CLASS features, and is already
aggressively marketing its advanced custom calling options.
The management and staff at JBN Telephone Company are proud of its
accomplishments, excellent service record, and looks forward to 1997 as a
challenging and successful year.
Gene Morris
Vice President & General Manager
13
<PAGE> 17
HAVILAND TELEPHONE COMPANY, INC.
1996 was another profitable year for Haviland Telephone Company with
telephone revenues reaching the highest level ever. The Company invested nearly
$1 million in telephone facilities, mostly in buried copper plant upgrades to
provide greater line capacity and more reliable service. The most potent driver
of profitability last year, Interstate access revenue, grew a brisk 16%, in line
with increased access usage. In fact, company EBITDA grew at over 14% again a
record for company history.
During 1997, several exchanges will provide local Internet access. Both
market study and continued informal inquiries indicate a strong customer
interest in local Internet access.
Investment in plant will again be a large priority. At least one major buried
copper facility upgrade will be completed. By mid-year all exchanges will have
digital switching facilities and be InterLATA Equal Access capable.
Early 1997 will see implementation of Kansas quality of service standards for
the company. This new measure will provide the company with quantifiable
assessment of our customers line reliability.
During 1997 paging service will expand its coverage area with high antennas
and more transmitter power, providing greater saleability for the service.
Essentially, 1997 will provide the company with good access revenue while
giving opportunity for the company to entrench itself in retail service
offerings.
Robert Ellis
President
CLR VIDEO, L.L.C.
In November 1995, CLR acquired twenty three (23) cable systems from Douglas
Cable Company and began operation on December 1, 1995. The early months of
operations presented various challenges that were overcome throughout 1996.
Since then, CLR has made massive improvements to the system, so that at year
end 1996, the customer base has been stabilized.
There are additional system improvements planned for 1997 to further improve
service to our customers. We look forward to the challenges in the year ahead.
Robert C. Carson
President
14
<PAGE> 18
WIRELESS TELECOMMUNICATIONS
Wireless telecommunications is clearly one of the fastest growing industries
in the world today. Since the birth of the cellular industry in 1984, annual
subscriber growth has averaged 67% with the industry currently growing in excess
of 30%. There were 44 million cellular subscribers at the end of 1996 far
surpassing initial expectations while industry service revenues neared $24
billion, up 24% versus 1995. Annual cellular subscriber growth rates in the
United States have been in excess of 40%, far surpassing initial expectations.
With service and telephone hand sets pricing continuing to decline, industry
analysts continue to see a large and growing demand for wireless telephony. The
consensus projections are that the cellular penetration of 17% today will grow
to an overall total wireless telecommunications penetration of well over 40% by
year 2005 or nearly 120 million wireless customers. Most of the growth will be
garnered by digital systems.
Advantages in digital wireless communications are numerous. We are free from
being locked into "waiting for the important call." Moreover, we are provided
additional convenience, and perhaps more importantly, security. At the same
time, wireless offers new ways for businesses to enhance productivity and
improve service at lower costs.
PERSONAL COMMUNICATIONS SERVICES
Personal Communications Services ("PCS") is a second generation low-cost
digital wireless service utilizing voice, video or data devices that allow
people to interact at anytime and virtually anywhere.
Since broadband PCS will be digital from the outset, operators will be able
to offer enhanced digital services such as caller-ID and voice messaging to
customers which up to now have been unavailable from traditional analog cellular
operators. Moreover, these new digital networks will have significantly more
capacity than existing analog networks which will facilitate larger battery
lives and offer greater call privacy and clarity. Therefore, in large cities
with congested cellular networks, PCS operators will have an opportunity to
offer better overall service at lower prices than the cellular incumbents.
Over the past three years, the Federal Communications Commission ("FCC")
auctioned off approximately two thousand PCS licenses, a total of 120 MHZ of
spectrum, falling within six separate frequency blocks labeled A through F.
Frequency blocks C and F were designated by the FCC as "entrepreneurial blocks."
Certain qualifying small businesses were afforded bidding credits in the
auctions as well as government financing of the licenses acquired.
For auction purposes, the FCC segmented the United States utilizing two
different service areas based on Rand McNally's major trading areas ("MTAs") and
basic trading areas ("BTAs"). MTAs divide the country into 51 contiguous,
non-overlapping areas and were used in the A and B block auctions. BTAs divided
the country in 493 contiguous, non-overlapping areas and were utilized in the C,
D, E and F block auctions.
Under the FCC rules, one-third of the population covered by these licenses
and must be constructed within five years of the award of the license; and,
two-thirds must be served within ten years. Failure to comply could result in
loss of the license.
Starting December, 1994, the FCC held its first simultaneous multiple round
auction for 99 licenses to provide broadband PCS over 30 MHZ of spectrum over
the 51 major trading areas, A and B blocks. The auction concluded on March 13,
1995. In the spring of 1996, the FCC finalized the auction of 493 BTA licenses
of 30 MHZ of spectrum on frequency block C, and in January 1997 the FCC
concluded auctions for 1,479 BTA licenses for 10 MHZ of spectrum on frequency
blocks D, E & F.
LYNCH PCS
Lynch, as a limited partner in six small business entities, participated in
the C and F block auctions, the so called "Entrepreneurial Blocks", which
carried special financial incentives for qualified small businesses. These
partnerships were eligible for the bidding credits to be used during the auction
and long-term government financing at long-term Treasury rates that the FCC
offered to qualified small businesses. Lynch subsidiaries hold a 49.9% equity
interest in each of these partnerships and have funding commitments for which
they will receive interest and commitment fees at stated rates.
Further, in compensation for providing certain services, Lynch will receive a
carried interest in licenses acquired in the D and E block auctions by an
affiliated entity.
15
<PAGE> 19
[MAP]
The above map denotes areas in which Fortunet or Aer Force won either 30 or
10 megahertz of spectrum in the PCS Auction.
FORTUNET
In the C block auction, Lynch partnerships won a total of 31 licenses in 17
states covering a population of 7,029,291 million. Areas under license include
the state capital cities, Tallahassee, Florida; Hartford, Connecticut; Des
Moines, Iowa; and Cheyenne, Wyoming. In addition to these capitals, the
partnerships acquired licenses in contiguous areas in Florida, Iowa, and Wyoming
as well as selected areas of Georgia, Illinois, Idaho, Kansas, Maryland,
Minnesota, New Hampshire, New Mexico, New York, Pennsylvania, Oregon, Texas,
Virginia, and Wisconsin. It is expected that these licenses will be rolled into
one partnership, Fortunet Communications, L.P. of which a Lynch subsidiary will
have a 49.9% partnership interest.
The total cost of these licenses was $216.2 million, or $30.76 per 30 MHZ
POP, after the 25% bidding credit that the FCC provided to small businesses. In
addition, the FCC provided long-term financing principal amortizing quarterly in
years seven through ten at Treasury interest rates at 6.51% (though the FCC
staff has yet to figure out the appropriate interest rate benchmark to
"charge"). $194.6 million, or 90%, of the cost of the licenses acquired was
financed by the U.S. Government. We expect interest payments, which are now due
quarterly, to be made on an "annual basis," if not in a "PIK" format (Wall
Street terminology for payment in kind).
AER FORCE II AND RIVGAM COMMUNICATORS
In the F block auction, which concluded in January 1997, Aer Force
Communications B was the winning bidder for 5 licenses, covering a population of
19,990,673 million, including licenses in two of the top ten markets, the high
profile cities of Los Angeles and Washington, D.C. The Partnership also won
licenses in Sarasota, Florida; Reno, Nevada, and Santa Barbara, California. The
total cost of these licenses was $19.0 million, or $0.95 per 10MHz POP, after
the 25% bidding credit that the FCC provided to small businesses. The license
are expected to be awarded in the first half of 1997. Under the auction rules,
financing will be provided for 80% of the cost of the licenses won at auction,
$15.2 million at Treasury rates at the time of the award. Principal amortization
will be quarterly in years two to ten.
In compensation for certain services during the PCS auction as well as
certain on going service requirements, a Lynch subsidiary will also have a
profit participation after cash "hurdle" interest in certain PCS licenses won by
Rivgam Communicators, L.L.C. in the 10 megahertz D and E block auctions. An
affiliate of Lynch Corporation's Chairman and Chief Executive Officer own
Rivgam. Rivgam won licenses covering 33,085,351 POPs in eleven markets, three of
which, Los Angeles, Washington and Reno, Nevada overlap with Aer Force's
licenses, along with Philadelphia, PA, San Diego, CA, Baltimore, MD and Cruses,
New Mexico. The total cost of the licenses won by Rivgam was $84.9 million at an
average cost of $2.39 per 10 megahertz POP, no bidding credit or government
financing was provided to participants in the D&E Block Auction.
As noted above, we see excellent opportunities in the provision of wireless
PCS services. However, there will be challenges. The large amount of spectrum
that has recently been made available by the FCC has created a huge inventory
currently beyond initial needs. In addition, the bidding on C-Block spectrum
grew to much higher levels than had been anticipated. This high cost of the
C-Block as well as the abundance of spectrum looking for financing, has made
financing of the build-out of this spectrum more difficult than anticipated. As
such, the company will be mindful of the appropriateness of the value of this
highly leveraged investment as it continues to pursue various alternative
financing strategies.
With regard to the F-block licenses, the lower cost of the licenses coupled
with the location in major markets, like Los Angeles and Washington D.C. is
expected to ease the burden of obtaining financing.
In conclusion, we look to our participation in the unfolding PCS dynamic with
a considerable degree of optimism but not without the realization of the
significant risk inherent in the successful execution of this strategy. Each
license presents a unique set of opportunities and challenges. We and the
partnerships intend to look for joint ventures with strategic, operational and
financial partners to realize the value of each property.
16
<PAGE> 20
LYNCH BROADCASTING
Lynch currently has ownership interests in two network affiliated television
stations, Station WOI-TV and Station WHBF-TV. Station WOI-TV is an ABC affiliate
which serves the Des Moines, Iowa media market, the 72nd largest in the United
States with 372,000 households. Station WHBF-TV 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 with 299,000
total households. On a short-term financial reporting basis, both stations
reported slightly lower revenues and EBITDA in 1996 versus 1995, but operating
improvements have been implemented and a rebound is anticipated at both
properties in 1997.
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
In 1994, Capital Communications Corporation acquired the assets of Station
WOI-TV from Iowa State University. 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%. Lynch's initial investment in Station
WOI-TV was $13.25 million in the form of Senior Debt, Subordinated Notes,
Preferred Stock, Convertible Preferred Stock and Common Stock. Less than one
year later, all funds were returned to Lynch, including interest at the stated
rates, save for the $250,000 anticipated long-term investment in the common and
convertible preferred.
Revenues during 1996 were $9.1 million and broadcast cash flow was $2.9
million. The 1995 amounts were $9.2 million and $3.3 million, respectively.
Despite an off year in reported results, we are still extremely enthusiastic
about the operations of this station as well as the demographic characteristics
of the area. Such enthusiasm was recently bolstered by the fact that the NBC
affiliate that serves the Des Moines market, Station WHO-TV, was sold in 1996
for a purchase price of $71.0 million.
STATION WHBF-TV
In 1987, Lynch made an initial investment in Station WHBF-TV of $7.0 million
in the form of subordinated notes and a 20% partnership equity interest. Over
the years, due to the success of the station, the majority of the subordinated
notes were repaid along with the stated interest. In early 1997, as part of a
major refinancing, the remaining principal and interest associated with the
subordinated notes was repaid, leaving Lynch with a net $250,000 remaining
investment in our original partnership interest.
Revenues during 1996 were $7.1 million and broadcast cash flow was a very
healthy $3.0 million. The 1995 amounts were $7.2 million and $3.2 million,
respectively.
PERSPECTIVE
We have long believed in the intrinsic value of local network-affiliated
television stations. This belief caused us to make substantial investments in
both these properties at the time of their initial acquisition. Their subsequent
success resulted in the return of substantially all of our initial investment at
reasonable rates of return. Today we reap the benefit of our commitments: we
hold investments in two extremely valuable properties at a minimal cost basis to
Lynch. Under current accounting rules, these values are not reflected in our
reported financial statements, but represent a significant "hidden value" within
Lynch Corporation.
17
<PAGE> 21
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
Transfer Drivers, Inc. ("TDI") had an eventful year in 1996.
The highlights for 1996 and the areas of emphasis in the years ahead are:
Consolidation: Morgan, through its Morgan Drive Away division, is the
long-time industry leader in its niche market, arranging for the shipment of
manufactured houses. We have built a number one market share over the years by
forging a reputation for quality service, and we have now begun to leverage that
by acquisitions. We added three companies in 1993-1995, and announced our most
significant acquisition at year-end 1996: the purchase of Transit Homes of
America. Transit, as does Morgan, serves a number of the nation's leading
producers of manufactured housing, including Fleetwood Enterprises, Champion
Enterprises, Redman Homes, Palm Harbor, and Cavalier Homes. We believe that our
market share in shipment of manufactured houses--now over 30%--will allow us
efficiencies and strengths to be a formidable force in the field.
Restructuring: As we sharpen our focus in manufactured housing and
outsourcing, we find it beneficial to exit certain segments of the RV/Transport
operations. Our "Truckaway" division, which delivered van conversions and small
trucks, operated in highly competitive environment, necessitated high capital
spending and fixed costs, and sustained large losses in 1996, detracting from
the success of our manufactured housing division. By closing/selling this
operation, we not only cut out a drag on operating income but also generated
positive cash flow from the sale of assets--cash to be used in developing our
more profitable manufactured housing and outsourcing operations. While this
created "special changes" to our 1996 results, the future benefits of this
action will be important. Hand-in-hand with cutting our fixed costs, we also
have set upon a path to cut our overhead, including our centralized selling,
general, and administrative costs.
Outsourcing: The trend toward manufacturers' outsourcing the arrangement of
transporting their vehicles is accelerating. This is an estimated $500,000,000
market, involving the annual shipment of some 750,000 commercial vehicles
- -buses, vans, garbage trucks, fire engines, UPS and Fedex vehicles and the like.
Increasingly, manufacturers are turning to outside specialists to deliver their
products to the point of sale or work site. The 1995 acquisition of Transport
Drivers, Inc. ("TDI") propelled Morgan into multi-industry outsourcing, adding
some balance as well as growth to our business. This, like manufactured housing
shipment, is a highly fragmented industry, marked by dozens of small companies
and only a few national competitors capable of providing full service to the
largest manufacturers. Our growth has been rapid, tripling over the past four
years to around $2.3 million, but we feel we have just begun our efforts.
INDUSTRY OVERVIEW
The Morgan Drive Away core operation is the leading provider of outsourcing
transportation for the manufactured housing, recreational vehicle and commercial
truck industries in the United States. Morgan Drive Away also facilitates the
moving of a variety of other goods such as commercial vehicles, motor homes,
modular offices, semi-trailers and the like.
We believe that a combination of factors bode well for the long-term health
of the industries we serve. High quality new products, attractive demographics,
healthy consumer confidence levels, and, a relatively short supply of rental
apartments are favorable trends in manufactured housing. Further, the national
trend toward outsourcing in many American industries fits into our strategy of
providing services to some of the most rapidly growing companies in the country.
RESULTS OF OPERATIONS AND OUTLOOK
Revenues in 1996 reached an all time high of $132.2 million, up 8% from last
year. Profits, however, were not satisfactory, reflecting a special charge
related to the continuance of the truckaway operation, losses in 1996 from the
truckaway operation, higher driver pay, and claims. Consequently, EBITDA before
special charges dropped to $2.0 million in 1996, down from $4.6 million in 1995
and after tax loss, after giving effect to the $3.5 million of special charges,
was $1.9 million versus net income of $2.0 million in the prior year.
Having cut away unprofitable operations and focusing on our areas of dominant
market position and growth, Morgan's future is bright. The industries served are
expanding, our most important customers are the leaders within those industries,
and the company's financial wherewithal and management commitment to maximizing
shareholder value should result in sharp profit improvement in 1997 and beyond.
Charles C. Baum
Chairman
18
<PAGE> 22
LYNCH MANUFACTURING CORPORATION
Lynch Corporation manages its manufacturing interests through a 100%-owned
subsidiary, Lynch Manufacturing. Lynch Manufacturing holds investments of
approximately 72% in Spinnaker Industries, 90% in Lynch Machinery and 94% in
M-tron Industries. To better reflect its broader markets and corporate strategy,
in 1997 Lynch Machinery will be repositioned under Lynch Display Technologies,
Inc.
Each of these companies is strategically positioned in global growth
industries. Spinnaker concentrates on adhesive-backed materials, Lynch Display
Technologies focuses on manufacturing technologies for electronic displays and
consumer glass, and M-tron provides frequency control components for
telecommunications and computer applications. Each company has an experienced
management team coupled with high quality manufacturing and engineering
processes. Lynch's commitment is to work with each company to explore and
develop strategic resources to sustain steady, profitable growth on a
year-to-year basis.
Mark L. Cushing
Assistant to the Chairman
SPINNAKER INDUSTRIES, INC.
Spinnaker Industries, Inc. finished its third consecutive year of strong
growth, record sales, and increased shareholder value. 1996 revenues were
approximately $245 million. The management team of Richard J. Boyle and Ned N.
Fleming III led a refinancing of the company through the issuing of $115 million
in senior notes and secured a revolving credit line of $40 million. The
refinancing greatly enhances the company's ability to grow in the
adhesive-backed materials industry; strengthening its ability to invest in
capital expenditures and acquisitions.
Central Products Company--Spinnaker benefited from the first full year of
operations of Central Products, which it acquired in October of 1995 from Alco
Standard Corporation. One of the nation's leading manufacturers of carton
sealing tape for over 75 years, Central enjoys a greater than 50% share of the
water sensitive carton sealing tape market, where its revenues are twice that of
the next largest competitor. Central is one of the three largest producers in
the rapidly growing pressure sensitive carton sealing tape market segment and
the only producer of all three of the major pressure sensitive technologies.
1996 sales reached a record $126 million, affirming the company's ability to
grow internally while providing an excellent platform for continued
acquisitions. Utilizing its established distribution network including strong
relationships with two multi-billion dollar distributors, Central is well
positioned to acquire more and varied product lines, enhancing its reputation as
the only one-stop manufacturer of private label products in the carton sealing
tape market.
Brown-Bridge Industries, Inc.--The company experienced record sales of $112
million for 1996 by expanding its share of the growing pressure sensitive labels
and the overall adhesive-backed label stock market which approximates $2 billion
dollars. Brown-Bridge's greatest success has been its peel and stick postage
products, of which sales increased from $3 million in 1995 to $20 million in
1996. Consumer demand for peel and stick products exceeded all expectations in
1996, and Brown-Bridge was awarded a second contract to supply the Bureau of
Engraving and Printing (the "BEP") with pressure sensitive postage material,
strengthening its position as the BEP's sole provider for these products.
Capital investment was highlighted by the addition of a $4 million silicone
coating line placed in production during December. This expenditure alone is
expected to reduce material costs by over $2 million in 1997. Spinnaker acquired
Brown-Bridge from Kimberly-Clark Corporation in September of 1994. Brown-Bridge
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.
Entoleter, Inc.--Entoleter also experienced record sales of $7.9 million for
a fifth year of revenue growth. Entoleter produces impact milling and
rotary-knife size reduction equipment along with air pollution products. The
company services a broad array of customers, including the plastics industry,
with its precision granulating technology.
The Board of Spinnaker paid a stock dividend through the issuance of one
share of common stock for each outstanding share of existing common stock. The
newly issued common stock (now referred to as Common Stock) has a one-tenth vote
per share, compared to one vote per share for the existing common stock, now
referred to as Class A Common Stock. The stock dividend, an effective "2-for-1"
split, enables shareholders to retain substantially all of their voting power
while decreasing their equity position.
Spinnaker Industries' 1996 financial results demonstrate management's ability
to execute their strategy of growing core businesses while pursuing and
integrating innovative acquisitions.
Richard J. Boyle
Chairman
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<PAGE> 23
LYNCH DISPLAY TECHNOLOGIES, INC.
Through Lynch Display Technologies, Inc., Lynch Machinery designs, develops,
manufactures and markets a broad range of manufacturing equipment for the
electronic display and consumer glass industries. The company's technology
serves two major markets: cathode ray tube (CRT) displays for use in television
sets and computer monitors, and the manufacture of consumer glass products such
as tableware and ovenware. In the past two years, the company has broadened its
product offerings to include electronic control systems and ancillary equipment
used in glass production lines.
RESULTS OF OPERATIONS
Revenues and operating income for 1996 continued near the historic high
levels of 1995. Revenues were $26.1 million compared with $32.3 million in 1995.
EBITDA totaled $4.9 million compared with $7.5 million in the prior year. Net
income from continuing operations was $2.7 million or 10% of revenues.
EXPANDED FACILITIES
We have taken several steps to enlarge and improve our production facilities
in Bainbridge, Georgia. In January, the company completed construction of a
15,000 square foot assembly building named in honor of recently-deceased
long-time Director of Engineering, Ken Hileman. The building features a 50-ton
crane spanning the 85 foot wide building. With 35 feet of clearance from the
floor to the crane hook, we now have the ability to assemble, disassemble, and
load for shipment the very large pieces of equipment required by the television
glass industry. We also purchased an adjacent tract of land for future
expansion.
CONTINUED MARKET GROWTH AND HDTV
The market for television sets and computers continues to grow. Industry
sources project increases in display production from 257 million units in 1996
to 380 million units in 2002. The CRT display manufacturing industry is
concentrated outside the United States. 84% of Lynch Machinery's sales from
1994-1996 were to companies in Korea, China, Indonesia and India.
The most significant market opportunity for Lynch Machinery is tied to the
FCC's adoption of High Definition Television (HDTV) as the new standard for
digital television broadcasting and display in the United States. The FCC
approved HDTV as its final act in 1996. HDTV has been available in Japan for
three years and is expected to become a global broadcasting technology. After 15
years of research, development, industry negotiation and rule-making, the FCC
has adopted new standards for digital, high-definition broadcasting. HDTV will
provide for movie-quality, high resolution television viewing with CD-level
audio.
Over the next five years, HDTV is expected to provide a significant boost to
consumer demand worldwide for larger screen television sets. Larger screen sets
(31" and up) and a wider aspect ratio (16:9) are required by consumers to
capture the enhanced viewing value of HDTV. Every consumer electronics
manufacturer is gearing up to meet this demand. Average screen sizes have
increased in recent years from 19" to 25"; with HDTV standard sizes will
increase to the 31"-38" range.
In anticipation of this developing market, Lynch Machinery has designed,
manufactured and marketed a unique HDTV press to accommodate industry needs for
HDTV production sizes and quality.
STREAMLINED OPERATIONS
Early in 1996 we discontinued the manufacture in Bainbridge of packaging
machinery. The Miller-Hydro product line was sold to a Canadian company which
continues to manufacture the equipment under the historic name. Lynch continues
to furnish replacement parts for the large installed base of these machines.
Completing our withdrawal in 1996 from the manufacture of packaging machines, we
sold Lynch Tri-Can International, a company purchased out of a bankruptcy
proceeding two years earlier. Operating losses and the write-down of assets
resulting from the discontinuance of the packaging machinery operations totaled
$1.1 million, all of which was reflected in reduced results for 1996. From a
strategic point of view, our resources are better utilized in the display and
consumer glass equipment industry.
PRODUCT DEVELOPMENT
New products are vital to the future of Lynch Machinery. Our recent growth
has been fueled by technical innovations--in fact, we have made more advances
than any other supplier to the industry. In only our second year of marketing
control systems and retrofit technologies, we achieved $6.2 million in 1996
sales of these new products--equal to Lynch Machinery's entire revenues for
1992. We have put together an engineering and product development group capable
of reaching Lynch Machinery's goal of being the leading provider of capital
equipment to the electronic display and consumer glass industries.
Robert T. Pando
President
20
<PAGE> 24
M-TRON INDUSTRIES, INC.
M-tron Industries is certified as an ISO 9001 (International Standards
Organization) manufacturing company. We were pleased to receive ISO 9002
certification in 1996 for M-tron's purchasing organization and procedures. This
applies to documentation quality in the design, manufacture, and sourcing of
frequency control products for the telecommunication, wireless communications,
computer, and computer peripheral marketplaces.
THE MARKETS
The Sales/Marketing department was re-organized in 1995 to meet the changing
demands of the technical markets served by M-tron. This resulted in the addition
of major electronic component distributors servicing significant portions of the
industries using products supplied by M-tron. We have upgraded and consolidated
our distributor base, dramatically improving annual sales ratios per
distributor. Many of our multi-national customers are served by M-tron's
overseas representatives as well as M-tron's Hong Kong office. In its second
year of operations, M-tron Hong Kong is showing significant growth and customer
activity. In 1997 this office will also provide product sourcing services.
M-tron's product and sales strategies focus on the telecommunications and
wireless communications industries. Our re-organization has enabled us to
utilize sales and engineering staff specifically devoted to these areas in
technical applications assistance and customer service. For example, in the
wireless area M-tron is a major supplier of manufactured quartz crystals to
large suppliers of equipment for automatic wireless meter reading such as gas,
water and electricity. We expect to service an expanding range of products for
the emerging wireless marketplace. 1996 also saw continued growth in the
performance of our higher-end manufactured oscillators. M-tron's marketing and
product engineering strategy is to continue to design and manufacture high
performance frequency components, while distributing lower to medium range
products procured from overseas manufacturing sources.
OPERATIONS
M-tron started internally to develop team programs in 1995. Based on
productivity benchmarks, our overall team improvement percentage was 23.75% in
1996. The trend line indicates continuing upward progress in the 30% to 40%
range. The results of a team incentive program made M-tron a more competitive
employer. M-tron moved to a second level of team training in 1996 and will
continue this in 1997.
1996 SUMMARY OF OPERATIONS
Although revenues fell short of the 1995 high mark of $20.1million, the 1996
results of $18.7 million represent a significant growth from 1993 and 1994, and
we are confident that M-tron is in a position to launch a new phase of
profitable growth. The supply of M-tron's products is heavily dependent on the
semi-conductor industry which was significantly off in 1996; however, the latter
part of 1996 showed significant increased activity. Even though revenues
declined in 1996, EBITDA only decreased to $1.8 million from $1.9 million.
With our emphasis on the telecommunications and wireless marketplaces, the
strategic and technical approach of our Sales/Marketing team and the development
of new products for these applications, M-tron looks forward to increasing
demand for its products in 1997 and beyond.
M-tron would like to take this opportunity to thank its employees, suppliers,
the Yankton community and in particularly its customers for the understanding
and hard work necessary to grow and succeed in a very competitive international
marketplace.
Martin J. Kiousis
President
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<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
RESULTS OF OPERATIONS
YEAR 1996 COMPARED TO 1995
Revenues increased to $451.9 million in 1996 from $333.6 million in 1995, a
35.5% increase. Acquisitions made during late 1995, principally in the
manufacturing segment, were the most significant contributors to the increase.
In the manufacturing segment, revenues increased by $103.4 million to $291.1
million versus $187.7 million in 1995, or 55%. Central Products Company, which
was acquired on October 4, 1995, contributed $126.4 million in 1996 versus $30.6
million in 1995. 1996's manufacturing revenues also reflect $26.1 million from
Lynch Machinery, Inc., a decrease of $6.2 million when compared with 1995
results. This decline was a result of lower production activities associated
with extra-large glass presses versus 1995. Three extra-large glass presses were
shipped in 1996 versus eleven in 1995. The services segment, which represents
29.3% of total revenue, increased by $9.9 million from 1995 or 8%. In the
multimedia segment, which represents 6.3% of total revenue, revenues increased
by $5.0 million. The inclusion of CLR Video for the full year($1.4 million),
increased revenues at Western New Mexico ($1.8 million) and the acquisition of
Dunkirk & Fredonia Telephone ($.9 million) were the major factors contributing
to the growth in the multimedia segment.
Earnings before interest, taxes, depreciation and amortization (EBITDA)
increased to $33.9 million in 1996 from $31.1 million in 1995, a $2.8 million,
or a 9% increase. Operating segment EBITDA (prior to corporate management fees
and expenses) grew to $37.3 million from $35.0 million, a 7% increase. The
manufacturing segment represented 67% of EBITDA or $22.8 million, an increase of
$5.7 million versus 1995. The full year inclusion of Central Products whose
EBITDA contribution was $10.9 million in 1996 versus $2.7 million in 1995
accounted for $8.2 million of the increase. This increase was offset by lower
EBITDA at Lynch Machinery of $2.6 million when compared to 1995 results due to
lower sales volume of the extra-large glass presses. The services segment had
negative EBITDA of ($1.8) million versus $4.7 million in 1995. The decline was
attributable to (a) a $3.5 million loss reserve taken by Morgan relating to the
closing of the Truckaway Division and related real estate and (b) a decrease in
recreational vehicle margins due to reduced demand and higher driver pay and
insurance claims. The multimedia segment contributed $15.3 million or 45.0% of
total EBITDA versus $12.3 million in 1995.
Operating profits for 1996 were $16.9 million in 1996, a decrease of $2.9
million or 15% versus 1995. Operating profits in the services segment declined
by $6.6 million due to the same factors impacting EBITDA. This decline was
partially offset by improvements in the manufacturing, multimedia and corporate
segments of $1.5 million, $1.7 million and $.5 million, respectively.
Investment income decreased by $.9 million to $2.2 million in 1996 versus
1995. The decrease was related to lower dollar investments generating current
income.
Interest expense increased by $6.2 million in 1996 when compared to 1995. The
increase is due primarily to the full year effect of financing the acquisition
of Central Products in late 1995.
Gain on sales of subsidiary and affiliate stock increased by $5.1 million in
1996. This increase is the result of the conversion of a $6.0 million Spinnaker
Note into Spinnaker Common Stock in 1996 and other transactions.
The 1996 tax provision of $3.0 million, included federal, state and local
taxes and represents an effective rate of 40.8% versus 39.2% in 1995.
Results of discontinued operations reflect the disposal Tri-Can
International, a manufacturer of packaging machinery. The assets sold consisted
primarily of inventory and intangibles. As a result of this disposal, a loss of
$.5 million net of taxes and minority interest was recorded. In addition, the
operating results of Tri-Can have been classified as discontinued operations and
result in net operating losses of $.3 million in 1996 versus $.3 million in
1995.
Loss on early extinguishment of debt, net of taxes and minority interest,
resulted in an extraordinary charge to income of $1.3 million in 1996. The early
extinguishment of debt is the result of Spinnaker Industries issuing $115
million of Senior secured debt due in 2006. The debt proceeds were used to
extinguish substantially all bank debt, bridge loans and lines of credit at
Spinnaker and its major operating subsidiaries.
22
<PAGE> 26
RESULTS OF OPERATIONS
YEAR 1995 COMPARED TO 1994
Revenues increased to $333.6 million in 1995 from $183.2 million in 1994, an
82% increase. Acquisitions made during 1995 and 1994, principally in the
manufacturing segment, were the most significant contributors to the increase.
In the manufacturing segment, where revenues increased by $126.5 million to
$187.7 million in 1995 from $61.2 million in 1994, or 207%. The acquisition of
Brown-Bridge Industries, Inc. on September 19, 1994, contributed $97.2 million
in revenues for 1995 versus $26.8 million in 1994. This represents 56% of the
total manufacturing increase. The acquisition of Central Products Company on
October 4, 1995, contributed $30.6 million, or 24% of the segment's revenues
increase. 1995's manufacturing revenues also reflect $32.3 million from Lynch
Machinery, Inc. compared to $15.1 million in 1994, 14% of the segment's revenue
increase. The production of extra-large glass presses from orders contracted for
in 1994 and 1995 resulted in this additional revenue. Fifteen glass presses were
shipped in 1995, compared to eight in 1994. Of the presses shipped in 1995,
eleven were advanced technology extra-large presses. As a result of the shipment
of these presses in 1995, Lynch Machinery glass press backlog was reduced by
$11.5 million to $13.3 million at December 31, 1995 from $24.8 million at
December 31, 1994. While Lynch Machinery is in the process of bidding for
additional glass press contracts, it is not anticipated that the level of
production in 1996 will equal 1995 levels. The services segment, which
represents 37% of total revenue, increased by $20.4 million from 1994 or 20%.
The Morgan Group, Inc.'s results increased due to continued strength in
manufactured housing shipments (industry shipments up 12%) and the acquisition
of Transfer Drivers, Inc. in May 1995. In the multimedia segment, which
represents 7% of total revenue, revenues increased by $3.5 million from 1994, or
17%. Haviland Telephone Company, which was acquired on September 26, 1994,
contributed 74% of the increase. The inclusion of Central Products for the full
year plus additional acquisitions contracted for in 1995 and anticipated to
close in 1996 are projected to increase reported revenues by about 40% in 1996
from 1995.
Earnings before interest, taxes, depreciation and amortization (EBITDA)
increased to $31.1 million in 1995 from $18.4 million in 1994, a $12.7 million,
or 69% increase. Operating segment EBITDA (prior to corporate management fees
and expenses) grew to $ 35.0 million from $20.6 million, a 70% increase. The
manufacturing segment was the largest contributor to EBITDA with $17.1 million,
or 55% in 1995, as compared to $4.7 million, or 26% in 1994. Spinnaker's EBITDA
grew to $8.0 million from $1.1 million, a $6.9 million increase. The inclusion
of Brown-Bridge for the full year accounted for $3.9 million of the increase in
1995. Central Products' EBITDA of $2.7 million in the fourth quarter primarily
accounted for the remaining increase. Lynch Machinery accounted for 32% of the
total increase in manufacturing EBITDA. Profit margins associated with the
production of extra-large glass presses were the cause of the significant
improvement. The services segment contributed $4.6 million, or 15%, compared to
$4.3 million, or 24% in 1994. This increase was directly the result of the
increased revenues offset by a product mix shift and increases in certain
operating costs. The multimedia segment contributed 40% of total EBITDA in 1995,
or $12.3 million, as compared to $10.9 million, or 59% of total EBITDA in 1994.
The inclusion of Haviland represents 79% of this increase. The inclusion of
Central Products for the full year plus additional acquisitions made in 1995 and
anticipated to close in 1996 are projected to increase reported EBITDA by about
50% in 1996 from 1995.
Operating profits increased to $19.8 million in 1995 from $10.9 million in
1994, $8.9 million or 82% increase. The breakdown of the increases and the
primary causes are the same as the above discussion regarding EBITDA.
Investment income increased in 1995 from 1994 primarily reflecting additional
net gains in marketable securities.
Interest expense increased during 1995 primarily as a result of the debt
incurred for acquisition needs in 1995 and 1994 for Central Products and
Brown-Bridge.
The full year effect of the financing for the Central Products acquisition is
expected to significantly increase interest expense.
The 1995 income tax provision of $4.9 million, included federal, state and
local taxes and represents an effective rate of 39.2% versus 40.1% in 1994. The
rate is effected by a provision for the repatriating of earnings by subsidiaries
that are not consolidated for income tax purposes (Morgan), a change in its
deferred tax reserve associated with income (1995) and losses (1994) related to
the Company's equity investee, a reduction in taxes attributable to a special
election available to Morgan's captive insurance company. It should be noted
that Morgan
23
<PAGE> 27
is consolidated for financial statement purposes, but in accordance with FASB
109 "Accounting for Income Taxes", a deferred tax liability is recognized for
the difference between the financial reporting basis and the tax basis of the
investment in Morgan created by current earnings.
Income before extraordinary items and discontinued operations was $5.5
million, or $3.89 per share in 1995 as compared to $2.7 million or $2.02 in
1994. These amounts include the gain on the sale of affiliate stock which
contributed $35,000 to net income, or $.02 per share in 1995 and $190,000, or
$0.14 per share in 1994. Results of discontinued operations reflect the
operating results of Tri-Can which has been re-classified as discontinued.
During 1994, the Company recorded an extraordinary item which represented the
loss on the redemption of the Company's 8% Convertible Subordinated Debentures.
This loss was $264,000, or $0.20 per share.
FINANCIAL CONDITION
As of December 31, 1996, the Company had current assets of $140.1 million and
current liabilities of $98.5 million. Working capital was therefore $41.6
million as compared to $25.6 million at December 31, 1995, primarily due to the
decline in current maturities of long-term debt as a result of the high yield
offering at Spinnaker Industries and acquisitions made during 1995.
Within the elements of current assets, cash and cash equivalents increased by
$18.0 million, primarily due to the sale of marketable securities and short-term
investments of $9.4 million, inclusion of Dunkirk and Fredonia ($4.4 million)
and an increase of approximately $6.5 million at Spinnaker due to changes in
working capital demands offset by a reduction of $1.5 million at Lynch Machinery
(see Consolidated Statement of Cash Flow for additional elements). Inventories
increased by $3.6 million primarily due to increases at Central Products and
Brown Bridge. Within current liabilities, notes due to banks increased by $7.8
million, primarily due to borrowing under the holding company's line of credit.
Cash flow from operations as presented in the Consolidated Statement of Cash
Flow increased by $1.9 million, primarily due to increased EBITDA from the
Company's operating entities, and net sales of trading securities offset by an
increase in other net working capital components.
Capital expenditures were $25.5 million in 1996 and $19.6 million in 1995 due
to significant deployment of enhanced technology by our telephone operations,
installation of the silicone paper coating machine at Brown-Bridge and the
inclusion of Central Products for the full year in 1996. This increased level of
capital expenditures is expected to decline in 1997 in the multimedia segment as
upgrade programs wind down and absence of large machine investments in
manufacturing. Overall 1997 capital expenditures are expected to be
approximately 15%-20% below the 1996 level.
At December 31, 1996, total debt was $260.8 million, which was $73.4 million
more than the $187.4 million at the end of 1995. Total debt was significantly
impacted by: the acquisition of Dunkirk and Fredonia Telephone Company, with a
total of $25.8 million of debt incurred and assumed and The Company's investment
in PCS partnerships of $27.1 million, with the remainder attributable
principally to Spinnaker. Debt at year end 1996 included $234.9 million of fixed
interest rate debt, at an average cash interest rate of 9.1% and $25.8 million
of variable interest rate debt at an average interest rate of 8.2 %.
Additionally, the Company had $50.8 million in unused short-term lines of credit
of which $39.3 million was attributed to Spinnaker, and $4.2 million of which
was attributable to Morgan. As of December 31, 1996, the Parent Company borrowed
$11.9 million under a $12.0 million short-term line of credit facility. These
funds were primarily used to fund the bids by affiliated partnerships in the PCS
Auctions. This short-term line of credit expires April 15, 1997. Management
anticipates that this line will be renewed for one year but there is no
assurance that it will be.
Backlog in the manufactured products segment at December 31, 1996 was $20.9
million versus $34.0 million at the end of 1995. Backlog at Lynch Machinery was
$6.6 million at December 31, 1996, and $16.9 million at December 31, 1995. The
lack of significant orders coupled with the elimination of product lines caused
the decrease. Orders of $9 million were booked in early 1997, somewhat
compensating for the decline in 1996. Backlog at Brown-Bridge declined by $2.6
million in 1996 to $3.1 million at December 31, 1996. Backlog at Central
Products increased by $1.4 million in 1996 to $4.5 million at December 31, 1996.
Since 1987, the Board of Directors of Lynch has authorized the repurchase of
300,000 common shares. At December 31, 1996, Lynch's remaining authorization is
to repurchase an additional 69,139 shares of common stock.
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<PAGE> 28
The Board of Directors have adopted a policy not to pay dividends; and such
policy is reviewed annually. This policy takes into account the long term growth
objectives of the Company; especially its acquisition program, shareholders'
desire for capital appreciation of their holdings and the current tax law
disincentives for corporate dividend distributions. Accordingly, no cash
dividends have been paid since January 30, 1989 and none are expected to be paid
in 1997.
Lynch Corporation maintains an active acquisition program and generally
finances each acquisition with a significant component of debt. This acquisition
debt contains restrictions on the amount of readily available funds that can be
transferred to Lynch Corporation from its subsidiaries.
The Company subsidiaries has a minority position in several entities to which
they have funding commitments. These entities participated in two of the
auctions conducted by the Federal Communications Commission for 30 megahertz and
10 megahertz of broadband spectrum to be used for personal communications
services, the so-called "C" and "F" Block Auction, respectively. In the C-Block
Auction, such entities acquired 31 licenses to provide personal communications
services to geographic areas of the United States with a total population of 7.0
million. The cost of these licenses was $216.2 million. $194.0 million of the
cost of these licenses was funded via a loan from the United States Government.
The loan requires quarterly interest payments at 7% (The Company argues
strenuously that the interest rate should have been 6.51%, the applicable
treasury rate at the time the licenses were awarded), and with quarterly
principal amortization in years 7, 8, 9, and 10. As of December 31, 1996,
Company subsidiaries invested $598,000 in partnership equity and $20.4 million
in loans and have funding commitments to provide an additional $20.2 million in
loans, including funding quarterly interest on the Government debt of $3.4
million. In the F-Block Auction, an entity in which a Lynch subsidiary holds a
minority position acquired five licenses to provide personal communications
services in geographic areas of the United States with a total populations of 20
million. The cost of these licenses was $19.0 million. $15.2 million of the cost
of the licenses will be financed with a loan from the United States Government.
The interest rate on the loan will be the long-term Government rate at the date
of issuance and with quarterly principal amortization in years 3 to 10. As of
December 31, 1996 Company subsidiary has invested $99,000 in partnership equity
and provided the entity with a loan of $11.8 million funded by a short-term
secured borrowing by the Company. $10 million of this loan was repaid in January
1997; however, the Company subsidiary continues to have a funding commitment to
provide $10 million in loans to the entity. The Company subsidiaries are
currently seeking alternatives to minimize or raise funds for their funding
commitments to the entities, but currently expect to fund required interest
payments. There are many risks associated with personal communications services.
In addition, funding aspects of acquisition of licenses and the subsequent
mandatory build out requirements plus the amortization of the license, could
significantly and materially impact the Company's reported net income over the
next several years. Of note, under the current structure the ramifications of
this should not impact reported revenues and EBITDA in the future.
In mid-March 1997, the Company acquired 60% of the stock of Upper Peninsula
Telephone Company for approximately $15.3 million with a short-term secured
bridge financing. The Company is currently seeking permanent financing to
replace the bridge financing and to finance the acquisition of the remaining
stock of Upper Peninsula.
In December, 1996, the Company's Board of Directors announced that it is
examining the possibility of splitting, through a "Spin-off", of either its
communications operations or its manufacturing operations. A spin-off could
improve management focus, facilitate and enhance financings and set the stage
for future growth, including acquisitions. A split could also help surface the
underlying values of the company as the different business segments appeal to
differing "value" and "growth" cultures in the investment community. There are a
number of matters to be examined in connection with a possible spin-off,
including tax consequences, and there is no assurance that such a spin-off will
be effected.
The Company has a significant need for resources to fund the operation of the
holding company, and meet its current funding commitments, including those
related to personal communications services, and fund future growth. Lynch is
currently considering various alternative long and short-term financing
arrangements. One such alternative would be to sell a portion or all of certain
investment in operating entities. Additional debt and/or equity financing
vehicles are also being considered. While management expects to obtain adequate
financing resources to enable the company to meet its obligations, there is no
assurance that such can be readily obtained or at reasonable costs.
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<PAGE> 29
LYNCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 31
1996 1995
------- -------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................................................. $ 33,946 $ 15,921
Marketable securities and short-term investments.......................................... 2,156 11,432
Trade accounts receivable, less allowances of $1,525 and $1,732 in 1996 and
1995, respectively includes $9,624 and $3,602 of costs in excess of
billings at 1996 and 1995, respectively.................................................. 52,963 52,306
Inventories............................................................................... 36,859 33,235
Deferred income taxes..................................................................... 5,571 3,944
Other current assets...................................................................... 8,598 6,810
-------- --------
TOTAL CURRENT ASSETS.................................................................... 140,093 123,648
PROPERTY, PLANT AND EQUIPMENT:
Land...................................................................................... 1,367 2,068
Buildings and improvements................................................................ 21,334 16,675
Machinery and equipment................................................................... 155,370 128,397
-------- --------
178,071 147,140
Accumulated depreciation................................................................... (46,707) (36,093)
-------- --------
131,364 111,047
INVESTMENTS IN AND ADVANCES TO PCS ENTITIES................................................ 34,116 6,412
INVESTMENTS IN AND ADVANCES TO AFFILIATED COMPANIES........................................ 2,529 2,570
EXCESS OF COSTS OVER FAIR VALUE OF NET ASSETS ACQUIRED..................................... 69,206 53,060
OTHER ASSETS............................................................................... 15,312 5,702
-------- --------
TOTAL ASSETS............................................................................... $392,620 $302,439
======== ========
</TABLE>
See accompanying notes.
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<PAGE> 30
LYNCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 31
1996 1995
------- -------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks ............................................................ $ 17,419 $ 9,622
Trade accounts payable ............................................................ 20,998 20,147
Accrued interest payable .......................................................... 1,230 1,146
Accrued liabilities ............................................................... 28,663 23,612
Customer advances ................................................................. 6,382 3,787
Current maturities of long-term debt .............................................. 23,769 39,708
--------- ---------
TOTAL CURRENT LIABILITIES ........................................................ 98,461 98,022
LONG-TERM DEBT ..................................................................... 219,579 138,029
DEFERRED INCOME TAXES .............................................................. 22,389 17,912
MINORITY INTERESTS ................................................................. 13,268 12,964
SHAREHOLDERS' EQUITY:
Common Stock, no par or stated value:
Authorized 10 million shares
Issued 1,471,191 shares ......................................................... 5,139 5,139
Additional paid-in capital ....................................................... 8,417 7,873
Retained earnings ................................................................ 26,472 23,776
Treasury stock of 80,157 and 92,528 shares, at cost .............................. (1,105) (1,276)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY ......................................................... 38,923 35,512
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ......................................... $ 392,620 $ 302,439
========= =========
</TABLE>
See accompanying notes.
27
<PAGE> 31
LYNCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year ended December 31
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
SALES AND REVENUES:
Multimedia.......................................................... $ 28,608 $ 23,597 $ 20,144
Services............................................................ 132,208 122,303 101,880
Manufacturing....................................................... 291,064 187,727 61,217
--------- --------- ---------
451,880 333,627 183,241
--------- --------- ---------
COSTS AND EXPENSES:
Multimedia.......................................................... 21,435 17,889 14,239
Services............................................................ 127,236 111,672 92,155
Manufacturing....................................................... 241,683 147,497 44,456
Selling and administrative.......................................... 44,586 36,722 21,449
--------- --------- ---------
OPERATING PROFIT..................................................... 16,940 19,847 10,942
--------- --------- ---------
Other income (expense):
Investment income................................................... 2,203 3,070 2,446
Interest expense.................................................... (17,011) (10,844) (6,478)
Share of operations of affiliated companies......................... 119 398 (301)
Gain on sales of subsidiary and affiliate stock..................... 5,146 59 190
--------- --------- ---------
(9,543) (7,317) (4,143)
--------- --------- ---------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES, MINORITY INTERESTS, DISCONTINUED
OPERATIONS AND EXTRAORDINARY ITEM.................................. 7,397 12,530 6,799
Provision for income taxes........................................... (3,021) (4,906) (2,726)
Minority interests................................................... 418 (2,155) (1,372)
--------- --------- ---------
INCOME FROM CONTINUING OPERATIONS BEFORE
DISCONTINUED OPERATIONS AND EXTRAORDINARY ITEM..................... 4,794 5,469 2,701
Discontinued operations:
Loss from operations of discontinued Lynch Tri-Can International
(less applicable income taxes of $149, $220 and $74 and minority interest
effects of $29, $36 and $12 in 1996, 1995 and 1994, respectively).. (263) (324) (109)
Loss on disposal of Lynch Tri-Can International (less applicable
income taxes of $167 and minority interest effect of $54).......... (487) -- --
--------- --------- ---------
INCOME BEFORE EXTRAORDINARY ITEM..................................... 4,044 5,145 2,592
Loss on early extinguishment of debt, net of income tax benefit
of $953 and $135 in 1996 and 1994 and minority interest
effect of $495 in 1996............................................. (1,348) -- (264)
--------- --------- ---------
NET INCOME........................................................... $ 2,696 $ 5,145 $ 2,328
========= ========= =========
Weighted average shares outstanding.................................. 1,405,000 1,407,000 1,337,000
Primary earnings per share:
Income before discontinued operations and extraordinary item....... $ 3.41 $ 3.89 $ 2.02
Loss from discontinued operations.................................. (.53) (.23) (.08)
Extraordinary item................................................. (.96) -- (.20)
--------- --------- ---------
NET INCOME........................................................... $ 1.92 $ 3.66 $ 1.74
========= ========= =========
Fully diluted earnings per share:
Income before discontinued operations and extraordinary item....... $ 3.41 $ 3.89 $ 1.95
Loss from discontinued operations.................................. (.53) (.23) (.07)
Extraordinary item................................................. (.96) -- (.16)
--------- --------- ---------
NET INCOME........................................................... $ 1.92 $ 3.66 $ 1.72
========= ========= =========
</TABLE>
See accompanying notes.
28
<PAGE> 32
LYNCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year ended December 31
1996 1995 1994
------- ------ ------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income........................................................... $ 2,696 $ 5,145 $ 2,328
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization.................................... 16,981 11,276 7,497
Extraordinary charge on early extinguishment of debt............. 1,348 -- --
Net effect of purchases and sales of trading securities.......... 9,276 2,079 5,450
Deferred taxes................................................... 2,082 201 (1,505)
Share of operations of affiliated companies...................... (119) (398) 301
Minority interests............................................... (500) 2,119 1,360
Morgan special charge............................................ 3,500 -- --
Gain on sale of stock by subsidiaries............................ (5,146) (59) (190)
Changes in operating assets and liabilities, net of effects of
acquisitions:
RECEIVABLES.................................................. 407 (3,704) (11,243)
Inventories.................................................. (3,374) 1,539 (949)
Accounts payable and accrued liabilities..................... 3,743 10,417 12,234
Other........................................................ (1,810) (1,437) (836)
Other............................................................ -- -- 109
------- ------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES............................ 29,084 27,178 14,556
------- ------ ------
INVESTING ACTIVITIES
Acquisitions (total cost less debt assumed and cash equivalents acquired):
Personal Communications Services Partnerships.................. (27,106) (7,010) --
U.S. West Lines................................................ (5,518) -- --
Dunkirk and Fredonia........................................... (17,788) -- --
Central Products Company....................................... -- (85,072) --
CLR Video...................................................... -- (5,242) --
Transport Drivers, Inc......................................... -- (2,806) --
Brown-Bridge Industries Inc.................................... (2,295) -- (29,071)
Haviland Telephone Company..................................... -- -- (2,854)
Capital expenditures............................................... (25,518) (19,569) (11,598)
Investment in Capital Communications, Inc.......................... -- 3,000 (2,541)
Other.............................................................. (1,597) (1,349) (288)
------- ------ ------
NET CASH USED IN INVESTING ACTIVITIES................................ (79,822) (118,048) (46,352)
------- ------ ------
</TABLE>
See accompanying notes.
29
<PAGE> 33
LYNCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year ended December 31
1996 1995 1994
------- ------ ------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Issuance of long-term debt......................................... 166,358 90,167 31,477
Payments to reduce long-term debt.................................. (101,708) (4,720) (3,439)
Debenture redemption/conversion.................................... -- -- (11,835)
Net borrowings (repayments), lines of credit....................... 7,797 3,718 3,957
Deferred financing costs........................................... (7,139) -- --
Sale (purchase) of treasury stock.................................. 755 -- 2,290
Conversion of debentures into common stock......................... -- -- 1,597
Sale of minority interests......................................... 3,642 (220) 906
Other.............................................................. (942) (164) 305
-------- ------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES............................ 68,763 88,781 25,258
-------- ------- -------
Net increase (decrease) in cash and cash equivalents................. 18,025 (2,089) (6,538)
Cash and cash equivalents at beginning of year....................... 15,921 18,010 24,548
-------- ------- -------
Cash and cash equivalents at end of year............................. $ 33,946 $15,921 $18,010
======== ======= =======
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
Common Additional
Stock Common Paid-in Retained
Outstanding Stock Capital Earnings
---------- ------- ------- --------
<S> <C> <C> <C> <C>
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
Issuance of treasury stock .................................. 12,371 -- 584 --
Capital transactions of the Morgan Group Inc. ............... -- -- (40) --
Net income for the year ..................................... -- -- -- 2,696
--------- ------ ------ ------
Balance at December 31, 1996 .................................. 1,391,034 $5,139 $8,417 $26,472
========= ====== ====== =======
</TABLE>
See accompanying notes.
30
<PAGE> 34
LYNCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. ACCOUNTING AND REPORTING POLICIES
Principles of Consolidation: The consolidated financial statements include the
accounts of Lynch Corporation ("Company" or "Lynch") and entities in which it
has majority voting control. Investments in affiliates in which the Company does
not have majority voting control are accounted for in accordance with the equity
method. All material intercompany transactions and accounts have been eliminated
in consolidation.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
The Company has a significant need for resources to fund the operations of the
holding company, and meets its current funding commitments, including those
related to personal communications services, and fund future growth. The Company
is currently considering various alternative long and short-term debt financing
arrangements. One such alternative would be to sell a portion or all of certain
investments in operating entities. Additional debt and/or equity financing
vehicles are also being considered. While management expects to obtain adequate
financing resources to enable the Company to meet its obligations, there is no
assurance that such can be readily obtained or at reasonable costs.
Cash Equivalents: Cash equivalents consist of highly liquid investments with a
maturity of less than three months when purchased.
At December 31, 1996 and 1995, assets of $14.4 million and $7.9 million, which
are classified as cash and cash equivalents, are invested in United States
Treasury money market funds for which affiliates of the Company serve as
investment managers to the respective Funds.
Marketable Securities and Short-Term Investments: On January 1, 1994,
the Company adopted Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS" No.
115). Under Statement No. 115, the accounting for investments depends on the
classification of such securities as either held-to-maturity,
available-for-sale, or trading.
Marketable securities and short-term investments consist principally of U.S.
Treasury obligations, and preferred and common stocks and bonds. At December 31,
1996, all marketable securities and United States Treasury money market funds
classified as cash equivalents were classified as trading, with the exception of
an equity security with a carrying value of $.9 million which was classified as
available-for-sale. Trading and available-for-sale securities are stated at fair
value with unrealized gains or losses on trading securities included in earnings
and unrealized gains or losses on available-for-sale securities included in a
separate component of shareholders' equity. Unrealized gains (losses) of
$628,000, $408,000 and ($214,000) on trading securities has been included in
earnings for the year ended December 31, 1996, 1995, and 1994, respectively.
There was no adjustment to shareholders' equity for the available-for-sale
security at December 31, 1996 and 1995, respectively.
The cost of marketable securities sold is determined on the specific
identification method. Realized gains of $102,000, $529,000 and $293,000, and
realized losses of $112,000, $108,000 and $233,000 are included in other income
for the years ended December 31, 1996, 1995, and 1994, respectively.
Properties and Depreciation: Property, plant and equipment are recorded at cost
and include expenditures for additions and major improvements. Maintenance and
repairs are charged to operations as incurred. Depreciation is computed for
financial reporting purposes using the straight-line method over the estimated
useful lives of the assets which range from 3 years to 35 years. For income tax
purposes, accelerated depreciation methods are used.
Excess of Cost Over Net Assets of Companies Acquired: Excess of cost over net
assets of companies acquired (goodwill) is being amortized on a straight-line
basis over periods not exceeding forty years. The Company periodically reviews
goodwill to assess recoverability, and impairments would be recognized in
operating results if a permanent diminution in value were to occur. The Company
measures the potential impairment of recorded goodwill by the undiscounted value
of expected future cash flows in relation to its net capital investment in the
subsidiary. Based on its review, the Company does not believe that an impairment
of its goodwill has occurred.
Multimedia: Multimedia revenues include local and intrastate telephone company
service revenues which are subject to review and approval by state public
utility commissions, and long distance network revenues, which are based upon
charges to long distance carriers through a tariff filed by the National
Exchange Carriers Association with the Federal Communications
31
<PAGE> 35
Commission. Revenues are based on cost studies for the Company's exchanges, and
have been estimated pending completion of final cost studies.
Services: Service revenues and related estimated costs of transportation are
recognized when transportation of the manufactured housing, recreational vehicle
or other product is completed.
Liability insurance is maintained with a deductible amount for claims resulting
from personal injury and property damage. Provisions are made for the estimated
liabilities for the self-insured portion of such claims as incurred.
Manufacturing: Manufacturing revenues, with the exception of certain long-term
contracts discussed below, are recognized on shipment.
Research and Development Costs: Research and development costs are charged to
operations as incurred. Such costs approximated $1,626,870 in 1996, $1,673,000
in 1995 and $1,231,000 in 1994.
Earnings Per Share: Earnings per common and common equivalent share amounts are
based on the average number of common shares outstanding during each period,
assuming the exercise of all stock options having an exercise price less than
the average market price of the common stock using the treasury stock method.
Fully diluted earnings per share reflect the effect, where dilutive, of the
debentures when outstanding and the exercise of all stock options having an
exercise price less than the greater of the average or the closing market price
of the Common Stock of the Company at the end of the period using the treasury
stock method.
Accounting for Long-Term Contracts: Lynch Machinery, Inc., a 90% owned
subsidiary of the Company is engaged in the manufacture and marketing of glass
forming machines and specialized manufacturing machines. Certain sales
contracts require an advance payment (usually 15% of the contract price) which
is accounted for as a customer advance. The contractual sales prices are paid
either (i) as the manufacturing process reaches specified levels of completion
or (ii) based on the shipment date. Guarantees by letter of credit from a
qualifying financial institution are required for most sales contracts.
Because of the specialized nature of these machines and the period of time
needed to complete production and shipping, Lynch Machinery accounts for these
contracts using the completed contract method.
Impairments: Effective January 1, 1996, the Company adopted SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets to be Disposed Of". The
Company periodically assesses the net realizable value of its long-lived assets
and evaluates such assets for impairment whenever events or changes in
circumstances indicate the carrying amount of an asset may not be recoverable.
For assets to be held, impairment is determined to exist if estimated
undiscounted future cash flows are less than the carrying amount. For assets to
be disposed of, impairment is determined to exist if the estimated net
realizable value is less than the carrying amount.
Stock Based Compensation: During 1996, the Company adopted SFAS No. 123,
"Accounting for Stock Based Compensation". SFAS No. 123 establishes a fair value
method of accounting and reporting standards for stock based compensation plans.
However as permitted by SFAS No. 123, the Company has elected to continue to
apply the provisions of Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees" and related interpretations. Under
APB No. 25, because the exercise price of the Company's employee stock options
were not less than the market price of the underlying stock on the date of
grant, no compensation expense is recognized. The Company is required to
disclose the pro forma net income (loss) and net income (loss) per share as if
the fair value method defined in SFAS No. 123 had been applied to all grants
made on or after January 1, 1995. See Note 10 for pro forma disclosures.
Fair Value of Financial Instruments: Cash and cash equivalents, trade accounts
receivable, short-term borrowings, trade accounts payable and accrued
liabilities are carried at cost which approximates fair value due to the
short-term maturity of these instruments. The carrying amount of the Company's
borrowings under its revolving lines of credit approximates fair value, as the
obligations bear interest at a floating rate. The fair value of all other
long-term obligations approximate cost based on discounted cash flows using the
Company's incremental borrowing rate for similar instruments.
Reclassifications: Certain amounts in the 1994 and 1995 financial statements
have been reclassified to conform to the 1996 presentation.
2. ACQUISITIONS
On December 30, 1996, The Morgan Group, Inc., 51% owned by Lynch, acquired the
operating assets of Transit Homes of America, Inc., a provider of transportation
services to a number of producers in the manufactured housing industry. The
purchase price was approximately $4.4 million, including assumed obligations.
On November 26, 1996, Lynch Telephone Corporation VIII, a wholly-owned
subsidiary of Lynch, acquired all of the outstanding shares of Dunkirk &
Fredonia Telephone
32
<PAGE> 36
Company, a local exchange company serving portions of western New York. The
total cost of this transaction was $27.7 million. As a result of this
transaction, the Company recorded $13.8 million in goodwill which is being
amortized over 25 years.
On June 3, 1996, Inter-Community Telephone, a Lynch Telephone Corporation II
subsidiary acquired four telephone exchanges in North Dakota containing
approximately 1,400 access lines from U.S. West Communications, Inc. for
approximately $4.7 million.
On October 4, 1995, Central Products Acquisition Corp., a wholly-owned
subsidiary of Spinnaker Industries, Inc. ( a 73% owned subsidiary of Lynch)
acquired from Alco Standard Corporation ("Alco"), the assets and stock of
Central Products Company, a manufacturer of carton sealing tapes and related
equipment. The cost of the acquisition was $80.0 million. As a result of this
transaction, the Company recorded $27.2 million in goodwill which is being
amortized over 25 years.
On September 26, 1994, Lynch Telephone Corporation VII, a wholly-owned
subsidiary of Lynch, acquired all of the outstanding shares of Haviland
Telephone Company, Inc., a local exchange Company in Kansas, from Interdigital
Communications Corporation. The total cost of this transaction was $13.4
million. As a result of this transaction, the Company recorded $8.2 million in
goodwill which is being amortized over 25 years.
On September 19, 1994, Brown-Bridge Industries, Inc., a wholly-owned subsidiary
of Spinnaker Industries, Inc., acquired from Kimberly Clark Corporation the net
assets associated with its Brown-Bridge operation, a manufacturer of adhesive
coated stock for labels and related applications. The cost of the transaction
was $29.1 million, plus $6.9 million in current liabilities assumed.
On March 1, 1994, Capital Communications Corporation, 49% owned by Lynch,
acquired certain assets associated with the operations of Station WOI-TV from
Iowa State University. Station WOI is an ABC affiliate serving the Des Moines,
Iowa market. The total cost of the transaction was $13.0 million.
All of the above transactions were accounted for as purchases, and accordingly,
the assets acquired and liabilities assumed were recorded at their estimated
fair market values.
The operating results of the acquired companies are included in the Consolidated
Statements of Income from their respective acquisition dates. The following
unaudited combined pro forma information shows the results of the Company's
operations presented as though the purchase of Transit Homes and Dunkirk and
Fredonia were made at the beginning of 1995, and Central Products, Haviland,
Brown-Bridge, and Station WOI-TV had been made at the beginning of 1994.
<TABLE>
<CAPTION>
Year Ended
December 31
1996 1995 1994
------- ------- -------
(In Thousands,
Except per Share Data)
<S> <C> <C> <C>
Sales .......................... $492,383 $467,720 $358,927
Income from continuing
operations ................... 7,510 4,843 2,634
INCOME FROM DISCONTINUED
operations ................... (750) (324) (109)
Extraordinary item ............. (1,348) -- (264)
-------- -------- --------
Net income ..................... $ 5,412 $ 4,519 $ 2,261
======== ======== ========
Income per common share:
Income from continuing
operations ................... 5.34 3.44 1.97
Income from discontinued
operations ................... (.53) (.23) (.08)
Extraordinary item ........... (.96) -- (.20)
-------- -------- --------
Net income per share ........... $ 3.85 $ 3.21 $ 1.69
======== ======== ========
</TABLE>
On March 18, 1997, the Company acquired approximately 60% ($15.3 million) of the
stock of Upper Peninsula Telephone Co., a local exchange company in Michigan,
with 6,200 access lines, with the intent of acquiring the rest of the company.
3. DISCONTINUED OPERATIONS
Morgan Drive Away, a 50.1% owned subsidiary of the Company, recorded in the
fourth quarter of 1996, special charges of $3,500,000 before taxes relating to
exiting the truckaway operation and a write down of properties in accordance
with SFAS 121. In addition in the fourth quarter, Morgan recorded a pre-tax
charge of $750,000 of increased insurance reserves and insurance costs primarily
related to 1996 accidents. These charges have been included in the Company's
results of continuing operations.
The Board of Directors of Lynch Machinery, a 90% owned subsidiary of the
Company, decided to discontinue the operations of Tri-Can International, Ltd.
("Tri-Can") and sell the assets of the operation. The sale of Tri-Can was
completed in August, 1996. Accordingly, Tri-Can is reported as a discontinued
operation for the years ended December 31, 1996, 1995 and 1994. Tri-Can which
was previously reported in the manufacturing segment due to the insignificance
of the Company's financial statements, is treated as a discontinued operation as
its products and customers are different than those of Lynch Machinery.
As a result of this disposal, the Registrant recorded a provision for loss of
$487,000 after-taxes, to reflect the writedown of certain assets and costs
estimated to be incurred prior to disposal and a provision of $263,000
33
<PAGE> 37
after-tax for operating losses prior to the sale. The operating results of
Tri-Can are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
Year Ended
December 31
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Sales ................................ $2,797 $4,539 $5,461
====== ====== ======
Loss before tax benefit .............. $(441) $(580) $(195)
Income tax benefit ................... 149 220 74
Minority interest .................... 29 36 12
------ ------ ------
Loss from operations ................. (263) (324) (109)
------ ------ ------
Loss on disposal before
income tax benefit ................. (708) -- --
Income tax benefit ................... 167 -- --
Minority interest .................... 54 -- --
------ ------ ------
Loss on disposal ..................... (487) -- --
------ ------ ------
Total loss on discontinued
operations ......................... $(750) $(324) $(109)
====== ====== ======
</TABLE>
Components of net assets (liabilities) of discontinued operations included in
the Balance Sheet is as follows:
<TABLE>
<CAPTION>
December 31
1996 1995
----- -------
<S> <C> <C>
Current assets ....................... $59,027 $1,273,000
Property, plant and
equipment, net ..................... -- 295,000
Other assets ......................... -- 245,000
Current liabilities .................. -- (2,304,000)
------- ----------
$59,027 $(491,000)
======= =========
</TABLE>
4. INVENTORIES
Inventories are stated at the lower of cost or market value. Inventories valued
using the last-in, first-out (LIFO) method comprised approximately 53% and 58%
of consolidated inventories at December 31, 1996 and 1995. Inventories at
Brown-Bridge, 42% and 38% of inventories at December 31, 1996 and 1995, are
valued using the specific identification method. The balance of inventories are
valued using the first-in first-out (FIFO) method.
<TABLE>
<CAPTION>
December 31
1996 1995
----- -----
(In Thousands)
<S> <C> <C>
Raw materials and supplies ................... $10,987 $10,470
Work in process .............................. 3,950 4,044
Finished goods ............................... 21,922 18,721
------- -------
TOTAL ........................................ $36,859 $33,235
======= =======
</TABLE>
Current cost exceeded the LIFO value of inventories by $973,457 and $905,000 at
December 31, 1996 and 1995, respectively.
5. PERSONAL COMMUNICATIONS SERVICES
Lynch subsidiaries through limited partnerships, participated in the auctions
conducted by the Federal Communications Commission ("FCC") for 30 megahertz and
10 megahertz of broadband spectrum to be used for personal communications
services, the "C-Block" and "F-Block" Auctions, respectively. These two
auctions, which were part of six auctions conducted by the FCC for a total 90
megahertz of spectrum, were specially designated by the FCC to encourage small
businesses to participate in the wireless telecommunications industry, so-called
"entrepreneurial blocks." To effectuate this, the FCC provided certain
designated bidders a 25% bidding credit to be used during the auction as well as
long-term financing for a substantial portion of the cost of the licenses
acquired. The licenses represent the right to provide wireless communications
services to territorial areas of the United States. Under FCC regulations,
service must be provided to one-third of the population within the area of the
license within five years of the date of the award and two-thirds of the
population within ten years of the date of award. Failure to comply may result
in the forfeiture of the license. The subsidiaries hold a 49.9% limited
partnership interest position in each of these partnerships and have committed
to funding the government interest and certain other expenses up to a specified
amount as discussed below.
Lynch subsidiaries are limited partners in five separate partnerships which
participated in the C-Block auction, which ended in May 1996. Such partnerships
acquired 31 licenses at a net cost, after the bidding credit, of $216 million.
These licenses were awarded in September 1996. The FCC provided 90% of the
financing of the cost of these licenses at an interest rate of 7% per annum with
interest due quarterly for years one through six and principal amortization and
interest due quarterly in years seven through ten. Lynch subsidiaries have
agreements to provide a total of $41.8 million of funding to such partnerships,
of which $20.4 million was funded through December 31, 1996. These loans carry
an annual commitment fee of 20% and an interest rate of 15% which are payable
when the loans mature in 2003. For accounting purposes, all cost and expenses,
including interest expense, associated with the licenses are currently being
capitalized until service is provided. The proforma combined balance sheet of
these partnerships at December 31, 1996 is as follows (in thousands):
<TABLE>
<S> <C>
ASSETS
Cost of license acquired...................... $223,064
--------
Total assets.................................. $223,064
========
LIABILITIES AND DEFICIT
Due to the Department of Treasury............. $198,486
Due to Lynch Subsidiaries..................... 31,461
Partnership Deficit........................... (6,883)
--------
Total liabilities and deficit................. $223,064
========
</TABLE>
34
<PAGE> 38
A Lynch subsidiary is a limited partner in Aer Force Communications B, L.P.,
which participated in the "F-Block Auction" which began in August 1996. Under
the auction rules, in order for a bidder to bid on a designated area, it had to
have on deposit with the FCC, $0.60 for each person within that designated area.
Aer Force put $12 million on deposit with the FCC. The bidding concluded during
January 1997 and Aer Force was high bidder for five licenses at a net bid of
$19.0 million. These licenses have not yet been awarded. Once the licenses are
awarded, the FCC will finance 80% of the cost of the licenses with interest due
quarterly in years one and two and principal amortization and interest only due
quarterly in years three through ten. The interest rate will be determined on
the date of the award based on the long-term treasury rate at that time. $11.8
million of the $12 million deposited with the FCC was financed from a facility
from Gabelli Funds, Inc. ("GFI"), an affiliate of the Chairman and CEO of the
Company (see Note 8 for the description of the terms of this loan). In January,
$10.0 million of this loan was repaid with monies returned from the FCC.
Currently, Aer Force has on deposit with the FCC $1.9 million, or 10% of the
cost of the licenses for which it was high bidder. Once the licenses have been
awarded, Aer Force will be required to make the remaining 10% down payment,
which is expected to be financed through a draw-down by Lynch on the facility
with GFI. Lynch subsidiaries have committed a total of $11.8 million, based on
the award of licenses for which Aer Force is currently high bidder. The balance
sheet of Aer Force at December 31, 1996 is as follows (in thousands):
<TABLE>
ASSETS
<S> <C>
Deposit with FCC.............................. $12,000
-------
Total assets.................................. $12,000
=======
LIABILITIES AND DEFICIT
Due to Lynch subsidiary....................... $13,395
Partnership (deficit)......................... (1,395)
-------
Total liabilities and (deficit)............... $12,000
=======
</TABLE>
A wholly-owned Lynch subsidiary will also receive a 10% net profit interest
(after a capital charge) in certain PCS Licenses won by Rivgam Communications,
L.L.C. in compensation for certain services during the PCS "D and E" block
auctions. Rivgam is a subsidiary of GFI.
6. INVESTMENTS IN AFFILIATED COMPANIES
Lynch Entertainment Corporation ("LENCO"), a wholly-owned subsidiary of the
Company, has a 20% investment in Coronet Communications Company ("Coronet"),
which operates television station WHBF-TV, a CBS affiliate in Rock Island,
Illinois. Lynch Entertainment Corporation II ("LENCO II"), a wholly-owned
subsidiary of the Company, has a 49% investment in Capital Communications
Company ("Capital"), which operates television station WOI-TV, an ABC affiliate
in Des Moines, Iowa.
At December 31, 1996 and 1995, LENCO's net investment in Coronet is $1,214,000
and $995,000, respectively. Long-term debt of Coronet, at December 31, 1996, is
comprised of $13.2 million due to a third party lender and $2.9 million due to
LENCO. All of this debt was repaid on February 3, 1997 from the proceeds of a
$16.1 million term loan from a third party lender which is due quarterly through
December 31, 2003. The Company recorded interest income on the LENCO debt of
$287,000, $276,000, and $265,000 for the years ended December 31, 1996, 1995,
and 1994, respectively. LENCO guaranteed $3.75 million of $16.1 million of
Coronet's third party debt.
At December 31, 1996 and 1995, LENCO II's investment in Capital is carried at
zero as its share of net losses recognized to date would have exceeded in net
investment. LENCO II also owns $10,000 of Preferred Stock B of Capital, which is
convertible at any time into the Common Stock of Capital in a sufficient amount
to bring LENCO II's ownership to 50%.
7. EXCESS OF COSTS OVER FAIR VALUE OF NET ASSETS ACQUIRED
Excess of costs over fair value of net assets acquired include acquisition
intangibles of $69.2 million and $53.1 million, net of accumulated amortization
of $7.9 million and $5.5 million, at December 31, 1996 and 1995, respectively.
35
<PAGE> 39
8. NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt consists of (all interest rates are at December 31, 1996):
<TABLE>
<CAPTION>
December 31
1996 1995
------ ------
(In Thousands)
<S> <C> <C>
Spinnaker Industries, Inc. 10.75%
Senior Secured Notes due 2006 .................. $ 115,000 --
Rural Electrification Administration and
Rural Telephone Bank notes payable in equal
quarterly installments through 2023 at fixed
interest rates ranging from 2% to 7.03%
(4.2% weighted average), secured by assets
of the telephone companies of $77.2 million .... 34,734 $ 27,543
Bank credit facilities utilized by certain
telephone and telephone holding companies
through 2008, $37.6 million at a fixed
interest rate averaging 9.1% and $3.9
million at variable interest rates
averaging 8.3% ................................. 41,513 28,255
Unsecured notes issued in connection with telephone
company acquisitions; $28.0 million at fixed
interest rates averaging 9% and $1.8 million at a
variable rate of 7.75% ......................... 29,783 16,149
Gabelli Funds, Inc. loan issued in
connection with FCC F-Block Auction
at fixed rate of 10% due in 1997 ............... 11,800 --
Bank Debt associated with Central Products:
Revolving line of credit with interest at
9.75% expiring in 2000 ......................... -- 14,126
Term loan with interest at 9.5%, due in
installments through 2002 ...................... -- 19,625
Term loan with interest rate at 10.5%,
due in installments through 2002 ............... -- 16,000
Alco loan at no interest, due in
installments through 1998 ...................... -- 5,000
Alco loan at fixed rate of 8%, due 2003 .......... -- 15,000
Alco loan at fixed rate of 11%, due in
installments through 2002 ...................... 10,000
Bank debt associated with Brown-Bridge:
Revolving line of credit at interest rate
of prime plus 1.25% (8.5%) expiring
in 1999 ........................................ -- 12,646
Term loan at interest rate of prime
plus 1.25% (9.75%), due in
installments through 1999 ...................... -- 6,691
Other .............................................. 10,518 6,702
--------- ---------
243,348 177,737
Current maturities ............................... (23,769) (39,708)
--------- ---------
$ 219,579 $ 138,029
========= =========
</TABLE>
On October 23, 1996, Spinnaker Industries, Inc. completed the issuance of
$115,000,000 of 10.75% senior-secured debt due 2006. The debt proceeds were used
to extinguish substantially all existing bank debt, bridge loans and lines of
credit at Spinnaker and its two major operating subsidiaries, Central Products
and Brown-Bridge. The early extinguishment of debt resulted in an extraordinary
charge to fourth quarter earnings of $1,348,000 net of applicable taxes and
minority interest. In addition, Spinnaker established a $40 million asset-backed
senior-secured revolving credit facility. Financing costs were incurred by
Spinnaker in conjunction with the issuance of the 10.75% senior secured notes.
These financing costs are deferred and amortized over the term of the related
debt. Unamortized financing costs of approximately $6,200,000 at December 31,
1996 are included in other assets.
RUS debt of $13.4 million bearing interest at 2% has been reduced by a purchase
price allocation of $3.0 million reflecting an imputed interest rate of 5%.
Unsecured notes issued in connection with the telephone company acquisitions are
predominantly held by members of management of the telephone operating
companies.
The Company maintains lines of credit with banks which aggregate $47.0 million,
of which $11.1 million was unused at December 31, 1996. These lines along with
the long-term debt facilities are secured by the operating assets of the related
subsidiaries as well as pledges of stock of certain subsidiaries. The line of
credit agreements expire in 1997, are renewable annually, and are at interest
rates ranging from LIBOR plus 1.25%, to prime plus .25%. The Company's
outstanding balances under these lines of credit totaled $17.4 million and
standby letters of credit totaled approximately $3.6 million at December 31,
1996, securing various insurance obligations and customer advances. Several of
the credit agreements contain restrictive covenants. Due to certain of these
restrictive covenants and working capital requirements of the subsidiaries, cash
distributions from these subsidiaries are limited. At December 31, 1996 and
1995, $8.4 million and $5.6 million, respectively, of subsidiaries' retained
earnings were restricted under these agreements.
Spinnaker's subsidiaries have unused short-term credit facilities available for
future use, including revolving credit agreements with a maximum aggregate
availability of $40,000,000. Borrowings under these credit lines totaled
$686,000 at December 31, 1996. Interest on the outstanding balances under these
credit facilities are at variable rates with an interest rate in effect at
December 31, 1996 of 10.0%. Spinnaker is required to comply with various
covenants including a limitation on capital expenditures, and minimum levels of
current ratio, interest coverage, and net worth, as well as various other
financial covenants. Spinnaker's line of credit agreement expires in 2001.
In conjunction with the "F-Block" auction discussed in Note 5, a deposit of
$12.0 million was deposited with the FCC. Lynch borrowed $11.8 million of this
deposit from GFI on August 12, 1996 which is due and payable in one year. The
interest rate on this loan is fixed at 10% and in addition a commitment fee of
1% per annum is being charged on the principal amount of GFI's commitment ($11.8
million) including funds actually borrowed. GFI
36
<PAGE> 40
will also receive 10% of Lynch's subsidiary's share of net profits of Aer Force
Communications B, L.P. In January 1997, $10.0 million of this loan was repaid
with monies returned from the FCC.
In July 1986, the Company issued $23.0 million principal amount of 8%
convertible subordinated debentures. These debentures were unsecured obligations
of the Company and were convertible into Common Stock at a price of $31 per
share prior to maturity. Through September 21, 1994, the Company had either
purchased on the open market or redeemed $11.2 million of the original issuance.
At that date, in accordance with the terms of the debenture indenture, the
Company called for redemption all of the remaining debentures outstanding, at
101.6% of their face amount plus accrued interest. The redemption was completed
on October 24, 1994, and $10,195,000 of the debentures were redeemed and $1.6
million were converted into 52,881 shares of Common Stock at $31 per share
before allocation of related expenses. As a result of the redemption, the
Company recognized in 1994 an extraordinary loss of $264,000, net of taxes.
Cash payments for interest were $16.7 million, $10.6 million and $6.2 million
for the years ended December 31, 1996, 1995 and 1994, respectively.
Aggregate principal maturities of long-term debt for each of the next five years
are as follows: 1997--$23.8 million; 1998--$6.2 million, 1999--$5.8 million,
2000--$13.5 million and 2001--$5.7 million.
9. MINORITY INTERESTS AND RELATED PARTY TRANSACTIONS
On June 13, 1994, Spinnaker entered into a management agreement (the "Management
Agreement") with Boyle, Fleming & Co., Inc. ("BF"), of whom a former Director of
the Company is a principal, to assume the management of Spinnaker. Effective
August 31, 1996, the Management Agreement was terminated at which time Messrs.
Boyle, and Fleming became employees of Spinnaker and continued to be Chairman
and Chief Executive Officer and President, respectively, of Spinnaker. Spinnaker
and BF also entered into a Warrant Purchase Agreement in 1994, pursuant to which
BF received warrants to purchase common stock of Spinnaker (equating to a 20%
ownership of Spinnaker) at any time on or before June 30, 1999, subject to
certain restrictions. As of December 31, 1996 there were approximately 490,000
warrants outstanding to purchase one share each of Class A Common Stock and
Common Stock at a total price of $2.67 per warrant exercise (adjusted for the 3
for 2 stock splits in December 1995 and 1994, and a stock dividend in August
1996).
On May 5, 1996, Alco converted a $6.0 million note, issued in connection with
the purchase of CPC, into Spinnaker Common Stock. In accordance with the
Company's policy, as a result of this and other transactions, the Company
recognized a gain on sales of subsidiary and affiliate stock of $5.1 million in
1996.
On October 23, 1996, concurrent with the issuance of the $115 million senior
notes (see Note 8), Spinnaker acquired the remaining 25% minority interest in
its Brown-Bridge subsidiary. The terms of the acquisition involved a cash
payment of approximately $2.3 million and the issuance of 9,613 shares of
Spinnaker Common Stock. In addition, as part of the consideration for the shares
of capital stock of Brown-Bridge, the minority shareholders received the right
to a contingent payment, which is exercisable at any time during the period
beginning October 1, 1998 and ending September 30, 2000. The value of the
contingent payment is equal to the percentage of the capital stock of the former
town-Bridge entity owned by such stockholder at the time of the merger
multiplied by 75% of the fair value of the capital stock of Brown-Bridge, as
determined in accordance with certain economic assumptions, as of the date such
right is exercised, less the consideration received at closing. The contingent
price is payable through the issuance of Common Stock of Spinnaker, unless
Spinnaker elects to pay the contingent price in cash. If such payments are made
in cash, they could give rise to a default under the Senior Notes, unless there
is sufficient availability under provisions regarding restricted payments
contained in the Senior Notes.
In connection with the purchase of the Brown-Bridge minority interest, all the
Brown-Bridge options were accelerated and in turn certain key executives of
Brown-Bridge management exercised those options to purchase 71,065 shares of
Brown-Bridge common stock at various prices between $7.16 and $14.69 per share,
for a total of approximately $670,000. The options were originally granted in
1994 and were issued at not less than 100% of the fair market value of the
common stock at the date of grant.
The Company, pursuant to Indiana law and the Company's Articles of
Incorporation, has reimbursed its Chairman and Chief Executive Officer, for
$392,000 of legal fees incurred in connection with a regulatory inquiry.
Relating to this reimbursement, the Company charged results of operations for
the year ended December 31, 1994 in the amount of $317,000.
On January 19, 1994 and March 12, 1996, Lynch sold 100,000 and 10,373,
respectively, shares of common stock held in its treasury to its Chairman and
Chief Executive Officer at the market price per share, the closing price in
trading of Lynch common stock on The American Stock Exchange on those dates was
$22.875
37
<PAGE> 41
and $60.25, respectively. The January 19, 1994 transaction was approved by the
Company's shareholders at its annual meeting held on May 5, 1994.
10. STOCK OPTION PLANS
On June 4, 1993, the Board of Directors of Morgan approved the adoption of a
stock option plan which provides for the granting of incentive or non-qualified
stock options to purchase up to 200,000 shares of Class A Common Stock to
officers, including members of Morgan's Board of Directors, and other key
employees. No options may be granted under this plan at less than the fair
market value of the Common Stock at the date of the grant, except for certain
nonemployee directors. Three nonemployee directors were granted non-qualified
stock options to purchase a total of 24,000 shares of Class A Common Stock at
prices ranging from $6.80 to $9.00 per share. Although the exercise period is
determined when options are actually granted, an option shall not be exercised
later than 10 years and one day after it is granted. Stock options granted will
terminate if the grantee's employment terminates prior to exercise for reasons
other than retirement, death, or disability. Morgan employees have been granted
non-qualified stock options to purchase 175,500 shares of Class A Common Stock,
net of cancellations and exercises, at prices ranging from $7.38 to $8.75 per
share. Stock options vest over a four year period pursuant to the terms of the
plan. As of December 31, 1996, there were 88,375 options to purchase shares
granted to employees and non-employees directors which were exercisable based
upon the vesting terms, and 4,000 shares had option prices less than the closing
price of $7.50.
In accordance with Spinnaker's directors stock option plan, Spinnaker may grant
stock options to directors who are not employees of Spinnaker. Effective
February 15, 1996, Spinnaker granted 30,000 stock options for the purchase of
one share each of Spinnaker Class A Common Stock and Spinnaker Common Stock at a
total price of $40 per option exercise (adjusted for the stock dividend in
August 1996) to qualifying directors. The options vest over a two year period
with 15,000 options becoming exercisable one year after the grant date and the
remaining 15,000 options becoming exercisable two years after the grant date.
The options expire on the fifth anniversary after the grant date or 30 days
after the director ceases to be a director.
The Company has adopted the provisions of SFAS No. 123, "Accounting for Stock
Based Compensation" and as permitted by SFAS No. 123, the Company and its
subsidiaries have elected to account for all of the above option plans under APB
No. 25 and as such no compensation expense was recorded. Pro forma information
regarding net income and earnings per share is required by SFAS No. 123, and has
been determined as if the Company and its subsidiaries had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for the Spinnaker options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions: risk-free interest rates of 5.58%; dividend yields of 0%;
volatility factors of expected market price of the Spinnaker's common stock of
.50; and a weighted-average expected life of the options of three years. For
purposes of pro forma disclosures, the estimated fair value of the options is
amortized to expense over the options' vesting period. The estimated
weighted-average fair value per option is approximately $5.20. The pro forma
effect on the Company's 1996 operations is as follows:
<TABLE>
<CAPTION>
Net Income
Net Income Per Share
---------- -------------
(In Thousands)
<S> <C> <C>
As reported ............................. $2,696 $1.92
Pro forma ............................... $2,607 $1.86
</TABLE>
11. SHAREHOLDERS' EQUITY
In December 1996, the Company's Board of Directors announced that it is
examining the possibility of splitting, through a "spin-off", either its
communications operations or its manufacturing operations. A spin-off could
improve management focus, facilitate and enhance financings and set the stage
for future growth, including acquisitions. A split could also help surface the
underlying values of the Company as the different business segments appeal to
differing "value" and "growth" cultures in the investment community. There are a
number of matters to be examined in connection with a possible spin-off,
including tax consequences, and there is no assurance that such a spin-off will
be effected.
In 1987, 1988 and 1992, the Board of Directors authorized the purchase of up to
300,000 shares of Common Stock. Through December 31, 1996, 230,861 shares had
been purchased at an average cost of $13.15 per share.
In January 1994, an officer was granted stock options to purchase up to 24,516
shares of Lynch common stock at an exercise price of $23.125, the closing price
on the American Stock Exchange on January 18, 1994. These options were exercised
in January, 1997.
On February 1, 1996, the Company adopted a plan to provide a portion of the
compensation for its directors in common shares of the Company. The amount of
common stock is based upon the market price at the end of the previous year. In
February 1996 and January 1997, the Company awarded 1,428 and 1,284,
respectively, shares under this program.
38
<PAGE> 42
On February 29, 1996, the Company adopted a Phantom Stock Option Plan for
certain employees. To date, 39,100 of Phantom Stock Options ("PSO") have been
granted at prices ranging from $63 to $70 per share. Upon the exercise of a PSO,
the holder is entitled to receive an amount equal to the amount by which the
market value of the Company's common stock on the exercisable date exceeds the
exercise price of the PSO.
12. INCOME TAXES
Deferred income taxes for 1996 and 1995 are provided for the temporary
differences between the financial reporting basis and the tax basis of the
Company's assets and liabilities. Cumulative temporary differences and
carryforwards at December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
Deferred Tax Deferred Tax
Asset Liability Asset Liability
----- --------- ----- ---------
(In Thousands)
<S> <C> <C> <C> <C>
Inventory reserve ................ $ 435 -- $ 485 --
Fixed assets written
up under purchase
accounting and tax
over book depreciation ......... -- $ 14,818 -- $ 12,438
Discount on long-term debt ....... -- 1,286 -- 1,398
Basis difference in subsidiary
and affiliate stock ............ -- 3,486 85 1,750
Partnership tax losses in
excess of book losses .......... -- 1,669 -- 1,249
Other reserves and accruals ...... 5,104 -- 2,620 --
Other ............................ 194 1,130 952 1,077
-------- -------- -------- --------
5,733 22,389 4,142 17,912
Valuation allowance .............. (162) -- (198) --
-------- -------- -------- --------
Total deferred
income taxes ................... $ 5,571 $ 22,389 $ 3,944 $ 17,912
======== ======== ======== ========
</TABLE>
The provision for income taxes is summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
(In Thousands)
<S> <C> <C> <C>
Current payable taxes:
Federal ................... $695 $4,420 $3,265
State and local ........... 193 992 966
------ ------ ------
888 5,412 4,231
------ ------ ------
Deferred taxes:
Federal ................... 1,495 (446) (1,223)
State and local ........... 638 (60) (282)
------ ------ ------
2,133 (506) (1,505)
------ ------ ------
$3,021 $4,906 $2,726
====== ====== ======
</TABLE>
A reconciliation of the provision for income taxes from continuing operations
and the amount computed by applying the statutory federal income tax rate to
income before income taxes, minority interest, extraordinary item, and
cumulative effect of accounting change follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ----- ----
(In Thousands)
<S> <C> <C> <C>
Tax at statutory rate ................ $2,515 $4,260 $2,312
Increases (decreases):
State and local taxes,
net of federal benefit ............ 543 615 452
Amortization of excess of
acquired net assets over
cost, net ......................... 132 64 1
Unremitted earnings of
domestic subsidiary ............... (65) 91 109
Sale of subsidiary stock ........... -- -- (65)
Losses of unconsolidated
affiliates ........................ -- -- 224
Reduction attributable
to special election by
captive insurance
company ........................... (216) (223) (202)
Other ................................ 112 99 (105)
------ ------ ------
$3,021 $4,906 $2,726
====== ====== ======
</TABLE>
Net cash payments for income taxes were $3.5 million, $4.2 million and $2.3
million for the years ended December 31, 1996, 1995 and 1994, respectively.
13. CONTINGENCIES
Lynch has pending claims incurred in the normal course of business. Management
believes that the ultimate resolution of these claims will not have a material
adverse effect on the consolidated liquidity, financial position or results of
operations of Lynch.
Pursuant to the CPC acquisition agreement, CPC assumed sponsorship of a defined
benefit pension plan for union employees per their collective bargaining
agreement and also agreed to establish a new defined benefit plan for non-union
employees hired by CPC. The seller retained the defined benefit pension
obligation for non-union retirees as of September 30, 1995 and any non-union
employees not hired by CPC.
The acquisition agreement required the seller to transfer assets to the CPC
plans equal to the present value of accrued benefits as of September 30, 1995 as
defined in the agreement plus a defined rate of interest to the transfer date.
The assets were transferred by the seller to the CPC union and non-union plans
in January 1997.
39
<PAGE> 43
14. SEGMENT INFORMATION
The Company is principally engaged in three business segments: multimedia,
services and manufacturing. All businesses are located domestically, and export
sales were approximately $25 million in 1996, $41 million in 1995 and $16.5
million in 1994. The Company does not believe it is dependent on any single
customer. The multimedia segment includes local telephone companies, the
investment in PCS entities and investments in two network-affiliated television
stations. The services segment includes transportation and related services.
$11.6 million of the Company's accounts receivable are related to the services
segment and are principally due from companies in the mobile home and
recreational vehicle industry located throughout the United States, including
several located in the Midwest and Southeast. Services provided to one major
mobile home manufacturer accounted for approximately $24.3 million, $29.4
million and $27.5 million in revenues of the services segment for the years
ended December 31, 1996, 1995, and 1994, respectively. The manufacturing segment
includes the manufacture and sale of adhesive coated stock for labels and
related applications, glass forming, impact milling, adhesive tapes, and other
machinery and related replacement parts, as well as quartz crystals and
oscillators. There were no intersegment sales or transfers.
Operating profit (loss) is equal to revenues less operating expenses, excluding
unallocated general corporate expenses, interest and income taxes. The Company
allocates a portion of its general corporate expenses to its operating segments.
Such allocation was $932,000, $965,000 and $790,000 during the years ended
December 31 1996, 1995 and 1994, respectively. Identifiable assets of each
industry segment are the assets used by the segment in its operations excluding
general corporate assets. General corporate assets are principally cash and cash
equivalents, short-term investments and certain other investments and
receivables.
<TABLE>
<CAPTION>
Year ended December 31
1996 1995 1994
-------- -------- ------
(In Thousands)
REVENUES
<S> <C> <C> <C>
Multimedia .......... $ 28,608 $ 23,597 $ 20,144
Services ............ 132,208 122,303 101,880
Manufacturing ....... 291,064 187,727 61,217
-------- -------- --------
$451,880 $333,627 $183,241
======== ======== ========
OPERATING PROFIT
Multimedia .......... $ 6,611 $ 4,938 $ 5,164
Services ............ (3,263) 3,371 3,434
Manufacturing ....... 15,928 14,412 3,822
Unallocated corporate
expense ........... (2,336) (2,874) (1,478)
-------- -------- --------
$ 16,940 $ 19,847 $ 10,942
======== ======== ========
CAPITAL EXPENDITURES
Multimedia .......... $ 11,056 $ 14,051 $ 8,410
Services ............ 1,007 2,135 1,434
Manufacturing ....... 13,438 3,373 1,743
General corporate ... 17 10 11
-------- -------- --------
$ 25,518 $ 19,569 $ 11,598
======== ======== ========
DEPRECIATION AND
AMORTIZATION
Multimedia .......... $ 8,660 $ 7,350 $ 5,651
Services ............ 1,498 1,264 915
Manufacturing ....... 6,823 2,662 931
-------- -------- --------
$ 16,981 $ 11,276 $ 7,497
======== ======== ========
ASSETS
Multimedia .......... $168,354 $102,998 $ 92,151
Services ............ 33,066 30,796 28,978
Manufacturing ....... 186,299 162,819 62,260
General corporate ... 4,901 5,826 2,521
-------- -------- --------
$392,620 $302,439 $185,910
======== ======== ========
</TABLE>
40
<PAGE> 44
15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the years
ended December 31, 1996 and 1995 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1996--Three Months Ended
-------------------------------------
March 31 June 30 Sept.30 Dec. 31
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Sales and revenues .............. $109,475 $113,493 $117,321 $111,591
OPERATING PROFIT ................ 5,938 5,383 6,714 (1,095)
Income from continuing
operations before
discontinued operations
and extraordinary items ....... 1,224 3,215 1,249 (894)
Discontinued operations ......... (23) (720) -- (7)
Extraordinary item .............. -- -- -- (1,348)
Net income .................... 1,201 2,495 1,249 (2,249)
Primary earnings per share:
Net income .................... 86 1.77 .89 (1.60)
Fully diluted earnings per share:
Net income .................... 86 1.77 .89 (1.60)
</TABLE>
<TABLE>
<CAPTION>
1995--Three Months Ended
-------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- ------- ------ -------
<S> <C> <C> <C> <C>
Sales and revenues ...................... $68,686 $75,382 $80,600 $108,959
Operating profit ........................ 4,001 4,309 4,919 6,618
INCOME FROM CONTINUING
OPERATIONS BEFORE
discontinued operations ............... 1,113 1,184 1,408 1,764
Discontinued operations ................. 12 (28) (115) (193)
Net income .............................. 1,125 1,156 1,293 1,571
Primary earnings per share:
Net income ............................ .80 .82 .92 1.11
Fully diluted earnings per share:
Net income ............................ .80 .82 .92 1.11
</TABLE>
- -------------------------------------------------------------------------------
FORWARD LOOKING INFORMATION
This Annual Report contains certain forward looking information, including
without limitation information in the Chairman's Letter, the summary reports of
the Company's various businesses, Management's Discussion and Analysis of
Financial Condition and Results of Operations, particularly Financial Condition,
and Notes to Financial Statements. It should be recognized that such information
are estimates or forecasts based upon various assumptions, including the matters
referred to therein, as well as meeting the Company's internal performance
assumptions regarding expected operating performance and the expected
performance of the economy and financial markets as it impacts the Company's
businesses. As a result, such information is subject to uncertainties, risks and
inaccuracies.
41
<PAGE> 45
[ERNST & YOUNG LETTERHEAD]
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, 1996 and
1995, and the related consolidated statements of income, shareholders' equity,
and cash flows for each of the three years in the period ended December 31,
1996. 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. (a 73% and 83% owned subsidiary of Lynch Manufacturing, as of December 31,
1996 and 1995, respectively, a wholly-owned subsidiary of Lynch Corporation),
which statements reflect total assets of $97,300,000 and $94,492,000 as of
December 31, 1996 and 1995, respectively, and total revenues of $126,383,000 and
$30,581,000 for the year ended December 31, 1996 and the three month period
ended December 31, 1995, respectively, and the financial statements of Dunkirk
and Fredonia, a wholly-owned subsidiary of Lynch Telephone VIII (a wholly-owned
subsidiary of the Company) which statements reflect total assets of $17,715,373
as of December 31, 1996 and total revenues of $575,000 for the two month period
ended December 31, 1996 and the financial statements CLR Video, L.L.C., a
wholly-owned subsidiary of Lynch Multimedia (a wholly-owned subsidiary of the
Company) which statements reflect total assets of $5,834,000 as of December 31,
1996 and total revenues $1,399,000 for the year ended December 31, 1996 and the
financial statements of The Morgan Group, Inc. and subsidiaries, a subsidiary in
which the Company has 64% voting interest, which statements reflect total assets
of $30,796,000 as of December 31, 1995 and total revenues of $122,303,000 and
$101,880,000 for the years ended December 31, 1995 and 1994, respectively, 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, Dunkirk and Fredonia, CLR Video,
L.L.C., The Morgan Group, Inc. and subsidiaries, Coronet Communications Company
and Capital Communications Company, Inc., is based solely on the reports of the
other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Lynch Corporation and
subsidiaries at December 31, 1996 and 1995, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996, 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.
/s/ ERNST & YOUNG LLP
Stamford, Connecticut
March 27, 1997
42
<PAGE> 46
LYNCH CORPORATION
FIVE YEAR SUMMARY
SELECTED FINANCIAL DATA
(IN THOUSAND OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year Ended December 31 (a)
---------------------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenues (a) .................... $ 451,880 $ 333,627 $ 183,241 $ 127,021 $108,657
------- --------- --------- --------- --------
EBITDA (b) ...................... 33,921 31,096 18,379 12,527 13,351
Operating Profit (c) ............ 16,940 19,847 10,942 6,634 8,283
Net Financing Activities ........ (14,689) (7,376) (4,333) (3,643) (4,142)
Gain on Sales of Subsidiary and
Affiliate Stock ............... 5,146 59 190 4,326 --
--------- --------- --------- --------- --------
Income from Continuing Operations
Before Income Taxes and
Minority Interests ............ 7,397 12,530 6,799 7,317 4,141
Provision for Income Tax ........ (3,021) (4,906) (2,726) (2,454) (1,733)
Minority Interests .............. 418 (2,155) (1,372) (737) (257)
--------- --------- --------- --------- --------
Income from Continuing Operations
Before Extraordinary Items
and Cumulative Effect of
Accounting Change ............. 4,794 5,469 2,701 4,126 2,151
Discontinued Operations (d) ..... (750) (324) (109) (10) --
Extraordinary Item (e) .......... (1,348) -- (264) (206) 18
Cumulative Effect to January 1,
1993 of Change in Accounting
for Income Taxes (f) .......... -- -- -- (957) --
--------- --------- --------- --------- --------
Net Income ...................... $ 2,696 $ 5,145 $ 2,328 $ 2,953 $ 2,169
========= ========= ========= ========= ========
Per Common Share (e)
Income from Continuing ........ $ 3.41 $ 3.89 $ 2.02 $ 3.37 $1.71
Net Income .................... 1.92 3.66 1.74 2.41 1.72
--------- --------- --------- --------- --------
Cash, Securities and Short-Term
Investments ................... $ 36,102 $ 27,353 $ 31,521 $ 45,509 $ 44,914
Total Assets .................... 392,620 302,439 185,910 129,523 111,374
Long-term Debt .................. 219,579 138,029 62,745 65,768 68,286
Shareholders' Equity ........... $ 38,923 $ 35,512 $ 30,531 $ 24,316 $ 21,272
</TABLE>
NOTES:
(a) Includes results of Inter-Community Telephone Company from April 2, 1991,
Cuba City Telephone Exchange and Belmont Telephone Company from October 31,
1991, Bretton Woods Telephone Company from February 4, 1992, J.B.N.
Telephone Company for November 30, 1993, the assets of Station WOI-TV from
March 1, 1994, the assets of Brown Bridge Division from September 19, 1994,
Haviland Telephone Company from September 26, 1994, Central Products Company
from October 4, 1995 and Dunkirk and Fredonia Telephone Company from
November 26,1996.
(b) EBITDA is earnings before interest, taxes, depreciation and amortization.
(c) Operating Profit (Loss) is sales and revenues less operating expenses,
which excludes investment income, interest expense, share of operations of
affiliated companies, minority interests and taxes.
(d) Discontinued operations of Lynch Tri-Can International.
(e) Gain (Loss) on repurchase or redemption of Company's 8% convertible
subordinated debentures for years 1994, 1993, and 1992 and early
extinguishment of debt at Spinnaker in 1996.
(f) On January 1, 1993, Lynch adopted the provisions of Statement of Financial
Accounting Standard No., 109, "Accounting for Income Taxes." (See Note 9 to
the Consolidated Financial Statements.) As a result of this
43
<PAGE> 47
adoption, for the years ended December 31, 1994 and 1993, Operating Profit
was lower by $766,000 due to the higher depreciation and amortization as a
result of increased write-ups in assets acquired in prior business
combinations. The adoption of this statement had no effect on net income,
other than the above noted "Cumulative Effect of Accounting Change
Adjustment" for that period.
(g) Based on weighted average number of common shares outstanding.
(h) No dividends have been declared over the period.
===============================================================================
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 high and lows in consolidating
trading of the Common Stock during the past two years are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------
1996 MARCH 31 JUNE 30 SEPT 30 DEC 31
--- ------- ------ ------ -----
<S> <C> <C> <C> <C>
High 72 1/2 92 1/2 90 1/2 77 1/8
Low 56 1/8 70 67 1/2 63 1/2
1995
---
High 39 1/8 47 3/4 84 3/4 80 7/8
Low 30 1/8 35 1/2 46 1/8 57 3/4
</TABLE>
At March 20, 1997, the Company had 1,070 shareholders of record. The Registrant
did not declare any dividends in 1996 or 1995. See Management's Discussion and
Analysis of Financial Condition and Results of Operation.
44
<PAGE> 48
BOARD OF DIRECTORS
------------------------------------------------------------
MORRIS BERKOWITZ
Business Consultant
E. VAL CERUTTI
Business Consultant
PAUL J. EVANSON
President of Florida Power & Light Company
JOHN C. FERRARA
Business Consultant
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
Managing Member of S. Muoio & Co. LLC
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
MARK L. CUSHING
Assistant to the Chairman
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
LYNCH INTERACTIVE CORPORATION
EUGENE P. CONNELL
Chairman
JAMES W. TOMAN
Chief Financial Officer
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
DUNKIRK & FREDONIA TELEPHONE COMPANY
40 Temple Street
Fredonia, New York 14063
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, 1996 MAY
BE OBTAINED, WITHOUT CHARGE, BY WRITING TO LYNCH CORPORATION, 8 SOUND SHORE
DRIVE, GREENWICH, CT 06830, ATTENTION: ROBERT E. DOLAN.
