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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997 Commission file number 1-106
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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LYNCH CORPORATION
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(Exact name of Registrant as specified in its charter)
Indiana 38-1799862
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State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization
8 Sound Shore Drive, Suite 290, Greenwich, CT 06830
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (203) 629-3333
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, No Par Value American Stock Exchange
Securities registered pursuant to section 12(g) of the Act: None
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Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by mark if disclosure of delinquent filers pursuant to Item
405 of Regulations S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K, or any
amendment to this Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of
the Registrant (based upon the closing price of the Registrant's Common Stock
on the American Stock Exchange on March 23, 1998 of $103.875 per share) was
$112,428,587. (In determining this figure, the Registrant has assumed that all
of the Registrant's directors and officers are affiliates. This assumption
shall not be deemed conclusive for any other purpose.)
The number of outstanding shares of the Registrant's Common Stock was
1,418,248 as of March 23, 1998.
DOCUMENTS INCORPORATED BY REFERENCE:
Part II: Certain portions of Registrant's Annual Report to Shareholders for
the year ended December 31, 1997.
Part III: Certain portions of Registrant's Proxy Statement for the 1998
Annual Meeting of Shareholders.
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FORWARD LOOKING INFORMATION
This Form 10-K contains certain forward looking information, including
without limitation examining the possibility of a spin-off (pg.2), Item 1-I.A
"Regulatory Environment" and possible changes thereto and "Competition" (pgs.
4-6), Item 1-I.C "Personal Communications Services ("PCS")", including possible
write downs of Registrant subsidiary's investment in Fortunet (pgs. 9-10), Item
1-II. Morgan "Growth Strategy" (p.12), Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and Notes to
Financial Statements (Item 14(a) below). It should be recognized that such
information are estimates or forecasts based upon various assumptions,
including the matters referred to therein, as well as meeting the Registrant's
internal performance assumptions regarding expected operating performance and
the expected performance of the economy and financial markets as it impacts
Registrant's businesses. As a result, such information is subject to
uncertainties, risks and inaccuracies.
PART I
ITEM 1. BUSINESS
The Registrant, Lynch Corporation ("Lynch"), incorporated in 1928
under the laws of the State of Indiana, is a diversified holding company with
subsidiaries engaged in multimedia, services and manufacturing. Lynch's
executive offices are located at 8 Sound Shore Drive, Greenwich, Connecticut
06830, but are expected to become 401 Theodore Fremd Avenue, Rye, New York
10580-1430 in April 1998. Its current telephone number is 203-629-3333.
Registrant's business development strategy is to expand its existing
operations through internal growth and acquisitions. It may also, from time to
time, consider the acquisition of other assets or businesses that are not
related to its present business. For the year ended December 31, 1997,
multimedia operations provided 10% of the Registrant's consolidated revenues;
services operations provided 32% of the Registrant's consolidated revenues; and
manufacturing operations provided 58% of the Registrant's consolidated
revenues. As used herein, the Registrant includes subsidiary corporations.
Registrant is pursuing segmentation of its business, through a
spin-off of either its multimedia operations or its manufacturing operations.
There are a number of matters to be examined in connection with a possible
spin-off, including tax consequences (Registrant expects to file a ruling
request in the second quarter of 1998 with the Internal Revenue Service with
respect thereto) and there is no assurance that the ruling request will be
filed, and if filed, granted in a form acceptable to Registrant or that such a
spin-off will be effected.
I. MULTIMEDIA
A. TELECOMMUNICATIONS
Operations. The Registrant conducts its telecommunications operations
through subsidiary corporations. The telecommunications segment is expanding
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through the selective acquisition of local exchange telephone companies serving
rural areas and by offering additional services to existing customers. From
1989 through 1997, Registrant has acquired ten telephone companies, five of
which have indirect minority ownership of 2% to 19%, whose operations range in
size from less than 500 to over 9,500 access lines. As of December 31, 1997,
total access lines were 36,525, 100% of which are served by digital switches.
These subsidiaries' principal line of business is providing
telecommunications services. These services fall into four major categories:
local network, network access, long distance and other. Toll service to areas
outside franchised telephone service territory is furnished through switched
and special access connections with intrastate and interstate long distance
networks.
At December 31, 1997, the Registrant owned minority interests in
certain entities that provide wireless cellular telephone service in several
Rural Service Areas ("RSA's") in New Mexico and North Dakota, covering areas
with a total population of approximately 393,133, of which the Registrant's
proportionate interest is approximately 15,116. Operating results through 1997
have not been significant to date.
Inter-Community Telephone Company's participation in the Defense
Commercial Telecommunications Network/Defense Switching Network (DCTN/DSN) was
terminated in early 1996.
The Company holds franchises, licenses and permits adequate for the
conduct of its business in the territories which it serves.
Future growth in telephone operations is expected to be derived from
the acquisition of additional telephone companies, from providing service to
new establishments, from upgrading existing customers to higher grades of
service, and from offering related services such as Internet. The following
table summarizes certain information regarding the Registrant's telephone
operations.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
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1997 1996 1995
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<S> <C> <C> <C>
Telephone Operations
Access lines* . . . . . . . . . . . . . . . . . 36,525 28,984 15,586
% Residential . . . . . . . . . . . . . . . . 75% 74% 78%
% Business (nonresidential) . . . . . . . . . 25% 26% 22%
Total revenues ($000's) . . . . . . . . . . . . 43,824 28,608 23,328
% Local service . . . . . . . . . . . . . . . 17% 14% 13%
% Network access and long distance. . . . . . 73% 73% 69%
% Other . . . . . . . . . . . . . . . . . . . 10% 13% 17%
</TABLE>
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* An "access line" is a single or multi-party circuit between the customer's
establishment and the central switching office.
Telephone Acquisitions. The Registrant pursues an active program of
acquiring operating telephone companies. From January 1, 1989 through December
31, 1997, Lynch has acquired ten telephone companies serving a total of
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approximately 30,950 access lines at the time of these acquisitions for an
aggregate consideration totaling approximately $135 million. In November 1996,
a subsidiary of Registrant acquired the stock of Dunkirk & Fredonia Telephone
Company and its subsidiaries, Cassadaga Telephone Corporation and Comantel,
Inc. (collectively "DFT") for approximately $22 million. DFT serves
approximately 11,600 access lines in western New York, including the community
of Fredonia, the Village of Cassadaga and the Hamlet of Stockton. DFT also
owns and operates other telecommunications businesses, including Internet, long
distance resale, security systems, and sales and servicing of
telecommunications equipment. In the spring of 1997, Registrant acquired the
stock of Upper Peninsula Telephone Company ("UPTC") for approximately $26.5
million. UPTC serves approximately 6,600 access lines located primarily in the
Upper Peninsula of Michigan.
The Registrant continually evaluates acquisition opportunities
targeting domestic rural telephone companies with a strong market position,
good growth potential and predictable cash flow. In addition, Registrant seeks
companies with excellent local management already in place who will remain
active with their company. Telephone holding companies and others actively
compete for the acquisition of telephone companies and such acquisitions are
subject to the consent or approval of regulatory agencies in most states.
While management believes that it will be successful in making additional
acquisitions, there can be no assurance that the Registrant will be able to
negotiate additional acquisitions on terms acceptable to it or that regulatory
approvals, where required, will be received.
Regulatory Environment. Operating telephone companies are regulated
by state regulatory agencies with respect to its intrastate telephone services
and the Federal Communications Commission ("FCC") with respect to its
interstate telephone service and, with the enactment of the Telecommunications
Act of 1996 (the "1996 Act"), certain other matters relating principally to
fostering local and intrastate competition.
The Registrant's telephone subsidiaries participate in the National
Exchange Carrier Association ("NECA") common line and traffic sensitive tariffs
and participate in the access revenue pools administered by NECA for interstate
services. Where applicable, the Company's subsidiaries also participate in
similar pooling arrangements approved by state regulatory authorities for
intrastate services. Such interstate and intrastate arrangements are intended
to compensate local exchange carriers ("LEC's"), such as the Registrant's
operating telephone companies, for the costs, including a fair rate of return,
of facilities furnished in originating and terminating interstate and
intrastate long distance services.
In addition to access pool participation, certain of the Registrant's
subsidiaries are compensated for their intrastate costs through billing and
keeping access charge revenues (without participating in an access pool). The
access charge revenues are developed based on intrastate access rates filed
with the state regulatory agency.
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In addition, a 1989 FCC decision provided for price cap regulation for
certain interstate services. The price cap approach differs from traditional
rate-of-return regulation by focusing primarily on the prices of communications
services. The intention of price cap regulation is to focus on productivity
and the approved plan for telephone operating companies. This allows for the
sharing with its customers of profits achieved by increasing productivity.
Alternatives to rate-of-return regulation have also been adopted or proposed in
some states as well. Inter-Community Telephone Company is an example of one
such subsidiary which has elected a price cap limitation on local exchange
access charges. However, management does not believe that this agreement will
have a material effect on the Registrant's results. In certain states,
regulators have ordered the restructuring of local service areas to eliminate
nearby long distance calls and substitute extended calling areas.
Various aspects of federal and state telephone regulation have in
recent years been subject to re-examination and on-going modification. In
February 1996, the 1996 Act, which is the most substantial revision of
communication law since the 1930's, became law. The Act is intended generally
to allow telephone, cable, broadcast and other telecommunications providers to
compete in each other's businesses, while loosening regulation of those
businesses. Among other things, the Act (i) would allow major long distance
telephone companies and cable television companies to provide local exchange
telephone service; (ii) would allow new local telephone service providers to
connect into existing local telephone exchange networks and purchase services
at wholesale rates for resale; (iii) would provide for a commitment to
universal service for high-cost, rural areas and authorizes state regulatory
commissions to consider their status on certain competition issues; (iv) would
allow the Regional Bell Operating Companies to offer long distance telephone
service and enter the alarm services and electronic publishing businesses; (v)
would remove rate regulation over non-basic cable service in three years; and
(vi) would increase the number of television stations that can be owned by one
party.
Although the FCC has completed numerous regulatory proceedings
required to implement the 1996 Act, the FCC is still in the process of
promulgating new regulations covering these and related matters. For certain
issues, the FCC bifurcated the proceedings between price cap and rate-of-return
companies or in the case of the Universal Service Fund (USF) between rural and
non-rural companies. In several cases, the regulations for the price-cap (or
non-rural) local exchange carriers (LECs) have been or are being determined
first, followed by separate proceedings for rate-of-return (or rural)
companies. Since all of the Registrant's telephone subsidiaries are rural,
rate-of-return companies for the interstate jurisdiction, many of the issues
are yet to be resolved by the FCC for the Registrant's subsidiaries. Current
or anticipated proceedings, which could have significant revenue impacts for
rural, rate-of-return companies, include changes in access charge regulations,
jurisdictional separations rules and permanent USF procedures.
In May 1997, the FCC adopted interim USF procedures effective January
1, 1998 which continue to use actual embedded costs for rural companies. The
interim procedures transferred the Weighted DEM and Long-Term Support (LTS) to
the USF and required all telecommunications companies (including the
Registrant's telephone subsidiaries) to contribute to the fund. In addition, a
cap was implemented on the amount of corporate expense allowable for the
computation of USF. The interim
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rules will be in effect until January 1, 2001, when the rural companies will
begin transitioning to USF revenues based on forward-looking economic costs.
The transition is currently scheduled to be complete January 1, 2004 at which
time the USF revenue would be exclusively computed based on forward-looking
economic costs. It is impossible to determine the impact of these proposed
changes on the Registrant's ten telephone companies at this time.
In May 1997, the FCC also ordered several changes for price cap
companies to the rules applicable to interstate access charges which long
distance telephone carriers pay to local exchange companies. It is anticipated
that the FCC may commence a proceeding in early 1998 to propose that
rate-of-return companies adopt those same changes. In October 1997, the FCC
initiated a proceeding where companies provided comments to the FCC regarding
how costs should be allocated between the state and interstate jurisdictions.
In October 1998, the FCC is expected to begin the process of determining a
forward-looking economic cost model for determining permanent USF procedures
for rural telephone carriers. The FCC is currently in the process of
determining USF procedures for non-rural carriers. Since interstate revenues
constituted approximately 51% of the revenues of the Registrant's ten telephone
companies in 1997, modifications to access charges, separations, and/or USF
could have a material effect.
Registrant cannot predict the effect of the 1996 Act, state
initiatives and new proposed Federal and state regulations, but because its
telecommunications and multimedia properties (other than its television
stations interests) are primarily in high-cost, rural areas, Registrant expects
competitive changes to be slower in coming.
Competition. All of the Registrant's current telephone companies are
currently monopoly providers in their respective area of local telephone
exchange service; although there can be no assurance that this will continue.
However, as a result of the 1996 Act, FCC and state regulatory authority
initiatives and judicial decisions, competition has been introduced into
certain areas of the toll network wherein certain providers are attempting to
bypass local exchange facilities to connect directly with high-volume toll
customers. For example, in the last few years the States of New York,
Michigan, Wisconsin and Kansas passed or amended telecommunications bills
intended to introduce more competition among providers of local services and
reduce regulation. Regulatory authorities in certain states have taken steps
to promote competition in local telephone exchange service, including in New
York, by requiring certain companies to offer wholesale rates to resellers. A
substantial impact is yet to be seen on Registrant's telephone companies. The
Registrant's subsidiaries do not expect bypass to pose a significant near-term
competitive threat due to a limited number of high-volume customers they serve.
In addition, cellular radio or similar radio-based services, including personal
communication services ("PCS"), and internet based service could provide an
alternative local telephone exchange service as well as possible competition
from electric companies.
B. BROADCASTING
STATION WHBF-TV - Lynch Entertainment Corporation ("Lynch Entertainment I"), a
wholly-owned subsidiary of Registrant, and Lombardo Communications, Inc.,
wholly-owned by Philip J. Lombardo, are the general partners of Coronet
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Communications Company ("Coronet"). Lynch Entertainment I has a 20% interest
in Coronet and Lombardo Communications, Inc. has an 80% interest. Coronet owns
a CBS-affiliated television station WHBF-TV serving Rock Island and Moline,
Illinois and Davenport and Bettendorf, Iowa.
STATION WOI-TV - Lynch Entertainment Corporation II ("LEC-II"), a wholly-owned
subsidiary of Registrant, owns 49% of the outstanding common shares of Capital
Communications Corporation ("Capital") and a convertible preferred stock, which
when converted, would bring LEC-II's common share ownership to 50%. On March
1, 1994, Capital acquired the assets of WOI-TV for $12.7 million. WOI-TV is an
ABC affiliate and serves the Ames/Des Moines, Iowa market. Lombardo
Communications, Inc. II, controlled by Philip J. Lombardo, has the remaining
share interest in Capital.
Operations. Revenues of a local television station depend to some
extent upon its relationship with an affiliated network. In general, the
affiliation contracts of WHBF-TV and WOI-TV with CBS and ABC, respectively,
provide that the network will offer to the affiliated station the programs it
generates, and the affiliated station will transmit a number of hours of
network programming each month. The programs transmitted by the affiliated
station generally include advertising originated by the network, for which the
network is compensated by its advertisers.
The affiliation contract provides that the network will pay to the
affiliated station an amount which is determined by negotiation, based upon the
market size and rating of the affiliated station. Typically, the affiliated
station also makes available a certain number of hours each month for network
transmission without compensation to the local station, and the network makes
available to the affiliated station certain programs which will be broadcast
without advertising, usually public information programs. Some network
programs also include "slots" of time in which the local station is permitted
to sell spot advertising for its own account. The affiliate is permitted to
sell advertising spots preceding, following, and sometimes during network
programs.
A network affiliation is important to a local station because network
programs, in general, have higher viewer ratings than non-network programs and
help to establish a solid audience base and acceptance within the market for
the local station. Because network programming often enhances a station's
audience ratings, a network-affiliated station is often able to charge higher
prices for its own advertising time. In addition to revenues derived from
broadcasting network programs, local television stations derive revenues from
the sale of advertising time for spot advertisements, which vary from 10
seconds to 120 seconds in length, and from the sale of program sponsorship to
national and local advertisers. Advertising contracts are generally short in
duration and may be canceled upon two-weeks notice. WHBF-TV and WOI-TV are
represented by a national firm for the sale of spot advertising to national
customers, but have local sales personnel covering the service area in which
each is located. National representatives are compensated by a commission
based on net advertising revenues from national customers.
Competition. WHBF-TV and WOI-TV compete for revenues with local
television and radio stations, cable television, and other advertising media,
such as newspapers, magazines, billboards and direct mail. Generally,
television stations
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such as WHBF-TV and WOI-TV do not compete with stations in other markets.
Other sources of competition include community antenna television
("CATV") systems, which carry television broadcast signals by wire or cable to
subscribers who pay a fee for this service. CATV systems retransmit
programming originated by broadcasters, as well as providing additional
programming that is not originated on, or transmitted from, conventional
broadcasting stations. In addition, some alternative media operators, such as
multipoint distribution service owners, provide for a fee and on a subscription
basis, programming that is not a part of regular television service.
Additional program services are provided by low-power television stations and
direct broadcast satellites provide video services as well.
Federal Regulation. Television broadcasting is subject to the
jurisdiction of the FCC under the Communications Act of 1934, as amended (the
"Communications Act"). The Communications Act, and/or the FCC's rules, among
other things, (i) prohibit the assignment of a broadcast license or the
transfer of control of a corporation holding a license without the prior
approval of the FCC; (ii) prohibit the common ownership of a television station
and an AM or FM radio station or daily newspaper in the same market, although
AM-FM station combinations by itself are permitted; (iii) prohibit ownership of
a CATV system and television station in the same market; (iv) restrict the
total number of broadcast licenses which can be held by a single entity or
individual or entity with attributable interests in the stations and prohibits
such individuals and entities from operating or having attributable interests
in most types of stations in the same service area (loosened in the 1996 Act);
and (v) limit foreign ownership of FCC licenses under certain circumstances.
See Regulatory Environment under A. above for a description of certain
provisions of the 1996 Act including in particular those which would remove the
regulations over non-basic cable service in three years and permit telephone
service providers to provide cable service. In calculating media ownership
interests, Registrant's interests may be aggregated under certain circumstances
with certain other interests of Mr. Mario J. Gabelli, Chairman and Chief
Executive Officer of the Registrant, and certain of his affiliates.
Television licenses are issued for terms of eight years and are
renewable for terms of eight years. The current licenses for WHBF-TV and
WOI-TV expire on December 1, 2005 and February 1, 2006, respectively.
OTHER
On December 1, 1995, CLR Video LLC, a 60% owned subsidiary of
Registrant acquired 23 cable television systems in northeast Kansas serving
approximately 4,500 subscribers for $5.2 million. Certain of the systems
cluster with local telephone exchanges owned by J.B.N. Telephone. Registrant
also owns a small cable system in Haviland, Kansas.
Registrant also has the right to market direct broadcasting TV
services via satellite to approximately 5,398 households in New Mexico and had
approximately 1,390 customers at December 31, 1997. Operating results have not
been material to date.
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C. PERSONAL COMMUNICATIONS SERVICES ("PCS").
A subsidiary of Registrant is a 49.9% limited partner in Fortunet
Communications, L.P. ("Fortunet"). Fortunet is the successor to five
partnerships that won 30 megahertz personal communications services licenses in
the FCC's C-Block auction (restricted to small businesses and certain other
qualifying bidders), which concluded in 1996. Fortunet won 31 licenses in 17
states covering a population of approximately 7 million people. The licenses
had an aggregate purchase price of $216 million after a 25% bidding credit.
Under FCC rules, Fortunet made a down payment equal to 10% of the cost
(net of bidding credits) of the licenses ($21.6 million). The Government
provided 10 year installment financing, interest only for the first six years
at an interest rate of 7% per annum. Registrant's subsidiary has loaned
Fortunet an aggregate of $24.0 million to fund the down payments and the first
interest payment on the licenses. The 50.1% general partner has no obligation
to provide loans or additional funds to Fortunet. Due to changed circumstances
there may probably be no obligation of the limited partner to provide
additional loans or funds.
Certain C-Block licensees, including Fortunet, have experienced
substantial financial problems in connection with servicing the FCC installment
debt and/or building out the licenses. At least two major C-Block licenses
have filed for protection under the Federal Bankruptcy Act. As a result, the
FCC in March 1997, suspended interest payments on the FCC installment debt
while it examined the situation. In September 1997 the FCC gave C-Block
licensees four choices (one of which was the resumption of principal and
interest payments) with respect to their licenses. The three other options, as
modified in March 1998, are (i) giving up all C-Block licenses in any
Metropolitan Trading Areas ("MTA"); for licenses returned, the licensee may
either opt (a) to rebid on those licenses in the reauction and forfeit 100% of
the down payment or (b) to forego the opportunity to rebid on those licenses
and receive a credit of 70% of the down payment to be used to prepay any
licenses retained, (ii) using 70% of the down payments (100% in the case of
licenses to be paid up) to prepay licenses in any MTA while giving up the
licenses not prepaid, and (iii) giving up 15 MHZ of the 30 MHZ licenses in any
MTAs for forgiveness of 50% of the debt; a licensee who elects to resume
installment payments on the remaining portion would be entitled to a credit
towards debt service equal to 40% of the down payments on the spectrum given
up while a licensee who elects to prepay the retained licenses would receive a
credit towards prepayment equal to 70% of the down payments on the spectrum
given up. The FCC has not yet given a specific date for licensees to make
their elections, but it will not be before late May 1998. Fortunet has not yet
determined what election it intends to make.
In the third quarter of 1997, Registrant provided a reserve of 30% of
its subsidiary's investment in Fortunet ($4.6 million after-tax). Depending on
the election made, Registrant may have to write-down substantially all of its
investment in Fortunet.
Another subsidiary of Registrant, Lynch PCS Corporation F ("LPCSF"),
was a 49.9% limited partner in Aer Force Communications B, L.P. ("Aer
Force").In the FCC's F-Block Auction (restricted to small businesses and
certain other qualifying bidders) of 10 megahertz PCS licenses, Aer Force won
five licenses in four states covering a population of approximately 20 million
people. The licenses have an aggregate purchase price of $19 million after a
25% bidding credit. In December 1997, East/West Communications, Inc.
("East/West") succeeded to the assets and liabilities of Aer Force with LPCSF
receiving 49.9% of the common stock. Immediately thereafter, Registrant spun
off 39.9% of the common stock of East/West
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to Registrant's shareholders and transferred 10% of East/West stock to Gabelli
Funds, Inc. ("GFI") in satisfaction of an obligation to pay it 10% of the net
profits of Aer Force (after an assumed cost of capital). Registrant also has
7,800 shares ($7,800,000 par and liquidation value) of 5% payment-in-kind
preferred stock of East/West redeemable in 2009, subject to earlier payment in
certain circumstances. East/West has certain financial and operating hurdles to
overcome in the near term.
Another subsidiary of the Registrant, Lynch PCS Corporation G
("LPCSG") has an agreement with Rivgam Communications L.L.C. ("Rivgam"), a
subsidiary of GFI, which won licenses in the FCC's D and E Block PCS Auctions
for 10 megahertz PCS licenses, to receive a fee equal to 10% of the realized
net profits of Rivgam (after an assumed cost of capital) in return for
providing bidding and certain other services. Rivgam won 12 licenses in seven
states covering a population of 33 million, with an aggregate cost of $85.1
million. For a variety of reasons, and subject to any limitations of law and
FCC regulation, East/West might enter into joint venture and/or working or
other arrangements with Rivgam.
LPCSG also has an agreement with Bal/Rivgam LLC (in which GFI has a
49.9% equity interest), which won licenses in FCC's Wireless Communications
Services ("WCS") Auction in 1997, to receive a fee equal to 5% of the realized
net profits of Bal/Rivgam (after an assumed cost of capital), in return for
providing bidding and certain other services to Bal/Rivgam. Bal/Rivgam won 5
WCS licenses covering a population of approximately 42 million with an
aggregate cost of $0.7 million. LPCSG also has an agreement to provide
BCK\Rivgam L.L.C., in which GFI has a 49.9% equity interest, with similar
services in connection with the FCC's Local Multipoint Distribution Services
("LMDS") Auction ended on March 25, 1998. Subject to final grant, BCK\Rivgam
won 3 licenses covering a population of 1.3 million with an aggregate cost of
$6.1 million. LPCSG has an agreement to receive 5% of the net profits of
BCK\Rivgam (after an assumed cost of capital).
FCC rules impose build-out requirements that require PCS licensees to
provide adequate service to at least one-third of the population in the
licensed area within five years from the date of grant and two-thirds within
ten years, as well as build out requirements for WCS and LMDS licenses.
Neither Fortunet nor East/West has begun any build out of their licenses.
There are also substantial restrictions on the transfer of control of C and F
Block PCS licenses, WCS licenses and LMDS licenses.
There are many risks relating to PCS communications including without
limitation, the high cost of PCS licenses, the fact that it involves start-up
businesses, raising the substantial funds required to pay for the licenses and
the build out, determining the best way to develop the licenses and which
technology to utilize, the small size and limited resources of Fortunet and
East/West compared to other potential competitors, existing and changing
regulatory requirements, additional auctions of wireless telecommunications
spectrum and actually building out and operating new businesses profitably in a
highly competitive environment (including already established cellular
telephone operators and other new PCS licensees). There are also similar risks
as to WCS and LMDS licenses. There can be no assurance that any licenses
granted to Fortunet or East/West can be successfully sold or financed or
developed, with Registrant's subsidiaries recovering their debt and equity
investments.
II. SERVICES
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A. THE MORGAN GROUP, INC.
The Morgan Group Inc. ("Morgan") is the Registrant's only service
subsidiary. On July 22, 1993, Morgan completed an initial public offering
("IPO") of 1,100,000 shares of its Class A common Stock, $.015 par value, at
$9.00 per share. As a result of this offering, Lynch's equity ownership in
Morgan was reduced from 90% to 47%, represented by its ownership of 1,200,000
shares of Class B common stock. In December 1995, Lynch acquired from Morgan
150,000 shares of Class A common stock (plus $1.3 million in cash plus accrued
dividends) in exchange for its 1,493,942 shares of Series A Preferred Stock of
Morgan. At December 31, 1997, Lynch's equity ownership in Morgan is
approximately 51%. Because the Class B common stock is entitled to two votes
per share, its voting interest in Morgan is approximately 66% and, therefore,
Lynch continues to consolidate Morgan's results in its financial statements.
Morgan Class A Common Stock is listed on the American Stock Exchange under the
symbol "MG."
Morgan is the leading provider of outsourcing transportation services
to the manufactured housing and recreational vehicle ("RV") and commercial
truck industries in the United States and has been operating since 1936.
Morgan provides outsourcing transportation services through a national network
of approximately 1,560 independent owner-operators and 1,350 drive-away
drivers. Morgan dispatches its drivers from 123 locations in 35 states.
Morgan's largest customers include Fleetwood Enterprises, Inc., Oakwood Homes
Corporation, Winnebago Industries, Inc., Champion Enterprises, Inc., Cavalier
Homes, Inc., Clayton Homes, Skyline Corporation and Ryder Systems. Morgan's
services also include arranging for transporting other products, including
commercial vehicles and office trailers.
In May 1995, Morgan acquired the assets of Transfer Drivers, Inc.
("TDI"), which focuses on relocating rental equipment for companies such as
Ryder Systems, Budget Rentals and Penske Truck Leasing and also delivery of new
equipment from manufacturers including Utilimaster, Grumman Olson and Bluebird
Bus. TDI had revenues of $5.3 million in 1995. On December 30, 1996, Morgan
acquired the operating assets of Transit Homes of America ("Transit") which had
more than 400 independent contract drivers and serves a number of leading
producers in the manufactured housing industry. Transit had revenues of $29.5
million in 1996.
As of December 31, 1997, Morgan owned transportation equipment
consisted of 23 tractors, having disposed of all of its trailers in
conjunction with the sale and discontinuance of the "truckaway" operation (see
below).
Morgan also provides certain insurance and financing services to its
owner-operators. Morgan currently provides physical damage insurance to the
owners of equipment under lease to the Company through a captive insurance
subsidiary. In addition, Morgan provides financing and certain guarantees of
equipment loans through its finance subsidiary.
In the first half of 1997, Morgan discontinued the "truckaway"
operation of the Specialized Transport Division taking a special charge to
income in the fourth quarter of 1996. Truckaway is a line of business which
focused on the transportation of van conversions, tent campers, and automotive
product utilizing Company-owned equipment. The truckaway operation had
revenues of $12,900,000,
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<PAGE> 12
$14,400,000, and $20,600,000 and estimated losses of $1,800,000, $1,200,000 and
estimated profits of $1,200,000 for the years ended December 31, 1996, 1995,
and 1994, respectively.
Industry Information. Morgan's business is substantially dependent
upon the manufactured housing and recreational vehicle industries. Both of
these industries are subject to broad production cycles. The manufactured
housing industry was essentially flat in 1997, while the recreational vehicle
industry was down in 1997.
Growth Strategy. Morgan's strategy is to (i) capitalize on its
stronger market position in the manufactured housing business, growing
internally and through acquisitions and (ii) emphasize the Company's role in
the large outsourcing transport industry which encompasses arranging for
deliveries of numerous types of consumer and commercial vehicles.
Morgan's initiatives for improved margins are to exit lines of
business which are unrewarding, reducing corporate overhead, and improving the
Company's safety record. There is no assurance that such strategy and
initiatives will be successful in light of changing economics market and
competitive conditions.
Morgan is continuously reviewing and negotiating potential
acquisitions. There can be no assurance that any future acquisitions will be
effected or, if effected, that they can be successfully integrated with
Morgan's business.
Customers and Marketing. Morgan's ten largest customers accounted for
approximately 66%, 58.8% and 58.6% of its revenues in 1997, 1996, and 1995.
Competition. All of Morgan's activities are highly competitive. In
addition to fleets operated by manufacturers, Morgan competes with several
large national interstate carriers and numerous small regional or local
interstate and intrastate carriers. Morgan's principal competitors in the
manufactured housing and RV marketplaces are privately owned. In the
commercial transport market, Morgan competes with large national interstate
carriers, many of whom have substantially greater resources than Morgan.
Morgan also competes for certain services with railroad carriers. No assurance
can be given that Morgan will be able to maintain its competitive position in
the future.
Competition among carriers is based on the rate charged for services,
quality of service, financial strength, insurance coverage and the geographic
scope of the carrier's authority and operational structure. The availability
of tractor equipment and the possession of appropriate registration approvals
permitting shipments between points required by the customer may also be
influential.
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Selected Operating Information. The following table sets forth
certain operating information for each of the five years ended December 31,
1997.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1993 1994 1995 1996 1997
---------------------------------------------------------------
(Revenues in thousands)
<S> <C> <C> <C> <C> <C>
MANUFACTURED HOUSING GROUP:
Shipments . . . . . . . 95,184 121,604 135,750 144,601 178,533
Revenues. . . . . . . . $ 39,930 $ 53,520 $ 63,353 $ 72,616 $ 93,092
DRIVER OUTSOURCING:
Shipments . . . . . . . 30,978 32,060 49,885 58,368 45,857
Revenues. . . . . . . . $ 13,416 $ 15,197 $ 19,842 $ 23,090 $ 20,163
SPECIALIZED TRANSPORT:
Shipments . . . . . . . 38,618 41,934 44,406 41,255 34,457
Revenues . . . . . . . $ 25,835 $ 28,246 $ 29,494 $ 26,169 $ 19,173
OTHER SERVICE REVENUES $ 3,612 $ 4,917 $ 9,614 $ 10,333 $ 13,726
--------- -------- -------- --------- --------
Total operating
Revenues . . . . . . . $ 82,793 $101,880 $122,303 $132,208 $146,154
======== ======== ======== ======== ========
</TABLE>
INDUSTRY PARTICIPATION. The following tables set forth participation in the
two principal industries the company operates in where industry information is
available:
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MANUFACTURED HOMES:
Industry production(1). . 374,126 451,646 505,819 553,133 558,435
Shipments . . . . . . . . 76,188 98,181 114,890 121,136 154,389
Shares of units shipped . 20.4% 21.7% 22.7% 21.9% 27.6%
RECREATIONAL VEHICLES:
Industry productions(2) . 406,300 426,100 380,300 376,400 362,700
Units moved(3) . . . . . 71,792 67,502 64,303 57,703 39,102
Shares of units shipped(3) 17.7% 15.8% 16.9% 15.3% 10.8%
</TABLE>
- -----------------------------
(1) Based on reports of Manufactured Housing Institute ("MHI").
To calculate shares of homes shipped, Morgan assumes two
unit shipments for each multi-section home.
(2) Based on reports of Recreational Vehicle Industry
Association ("RVIA"), excluding van campers, truck campers,
pick-up truck conversions, and sport utility vehicles
conversions. RVIA began reporting truck and sport utility
vehicle conversions in their industry shipment data in
1994.
(3) Shares of units shipped calculation includes travel
trailers, two types of motor homes, van conversions, and
tent campers and truck conversions in 1994 - 1997.
Morgan's share of units shipped are based on units moved
compared to industry production rather than shipped are
based on units moved compared to industry production rather
than shipments because certain RV shipments include more
than one unit per move.
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<PAGE> 14
Risk Management, Safety and Insurance. The risk of substantial losses
arising from traffic accidents is inherent in any transportation business.
Morgan carries insurance to cover such losses up to $25 million per occurrence
with a deductible of up to $250,000 per occurrence for personal injury and
property damage. The frequency and severity of claims under the Company's
liability insurance affect the cost, and potentially the availability, of such
insurance. If Morgan is required to pay substantially greater insurance
premiums, or incurs substantial losses above $25 million or substantial losses
below its $250,000 deductible, its results of operations can be materially
adversely affected. There can be no assurance that Morgan can continue to
maintain its present insurance coverage on acceptable terms.
Interstate Indemnity Company ("Interstate"), a wholly-owned insurance
subsidiary of the Company, makes available physical damage insurance coverage
for the Company's owner-operators. Interstate also writes performance surety
bonds for Morgan Drive Away, Inc.
Regulation. Morgan's interstate operations are subject to regulation
by the Federal Highway Administration, which is an agency of the United States
Department of Transportation ("D.O.T."). Effective August 26, 1994,
essentially all motor common carriers were no longer required to file
individually determined rates, classifications, rules or practices with the
Interstate Commerce Commission ("I.C.C.") Effective January 1, 1995, the
economic regulation of certain intrastate operations by various state agencies
was preempted by federal law. The states will continue to have jurisdiction
primarily to insure that carriers providing intrastate transportation services
maintain required insurance coverage, comply with all applicable safety
regulations, and conform to regulations governing size and weight of shipments
on state highways. Most states have adopted D.O.T. safety regulations and
conform to regulations governing size and weight of shipments on state highway,
and actively enforce them in conjunction with D.O.T. personnel.
Carriers normally are required to obtain authority from the I.C.C. or
its successor as well as various state agencies. Morgan is approved to provide
transportation from, to, and between all points in the continental United
States.
Morgan provides contract and non-contract transportation services to
the shipping public pursuant to governing rates and charges maintained at its
corporate and various dispatching offices. A contract carrier provides
transportation services pursuant to a written contract designed to meet a
customer's specific shipping needs or by dedicating equipment exclusively to a
given customer for the movement of a series of shipments during a specified
period of time.
Federal regulations govern not only operating authority and
registration, but also such matters as the content of agreements with
owner-operators, required procedures for processing of cargo loss and damage
claims, and financial reporting. Morgan believes that it is in substantial
compliance with all material regulations applicable to its operations.
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<PAGE> 15
The D.O.T. regulates safety matters with respect to the interstate
operations of Morgan. Among other things, the D.O.T. regulates commercial
driver qualifications and licensing; sets minimum levels of carrier liability
insurance; requires carriers to enforce limitations on drivers' hours of
service; prescribes parts, accessories and maintenance procedures for safe
operation of freight vehicles; establishes noise emission and employee health
and safety standards for commercial motor vehicle operators; and utilizes
audits, roadside inspections and other enforcement procedures to monitor
compliance with all such regulations. In 1997, the D.O.T. has established
regulations which mandate random, periodic, pre-employment, post-accident and
reasonable cause drug testing for commercial drivers. The D.O.T. has also
established similar regulations for alcohol testing. Morgan believes that it
is in substantial compliance with all material D.O.T. requirements applicable
to its operations.
From time to time, tax authorities have sought to assert that owner
operators in the trucking industry are employees, rather than independent
contractors. No such tax claim has been successfully made with respect to
Morgan. Under existing industry practice and interpretations of federal and
state tax laws, as well as Morgan's current method of operation, Morgan, based
on the advice of counsel, maintains that its owner operators are not employees.
Whether an owner operator is an independent contractor or employee is, however,
generally a fact-sensitive determination and the laws and their interpretations
can vary from state to state. There can be no assurance that tax authorities
will not successfully challenge this position, or that such tax laws or
interpretations thereof will not change. If the owner operators were
determined to be employees, such determination could materially increase
Morgan's employment tax and workers' compensation exposure.
Interstate, Morgan's insurance subsidiary, is a captive insurance
company incorporated under Vermont law. It is required to report annually to
the Vermont Department of Banking, Insurance & Securities and must submit to an
examination by this Department on a triennial basis. Vermont regulations
require Interstate to be audited annually and to have its loss reserves
certified by an approved actuary. Morgan believes Interstate is in substantial
compliance with Vermont insurance regulations.
III. MANUFACTURING
A. SPINNAKER INDUSTRIES, INC. ("SPINNAKER")
Spinnaker's Common Stock and Class A Common Stock are publicly
traded. In August 1996, Spinnaker changed the name of its existing Common
Stock to Class A Common Stock and declared a stock dividend of one share of a
new Common Stock for each share of Class A Common Stock outstanding. At March
1, 1998, Registrant owned 2,237,203 shares of Spinnaker Common Stock,
approximately 62% of the outstanding, and 2,259,063 shares of Class A Common
Stock, approximately 63% of the outstanding.
In June 1994, Spinnaker entered into an agreement with Boyle, Fleming,
Inc. ("BF"), for BF to provide operating and strategic management to Spinnaker
and for Messrs. Boyle and Fleming to become Chairman and President. In
addition to a management fee, BF received a warrant to purchase 678,945 shares
of Spinnaker
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<PAGE> 16
Class A Common Stock and Common Stock (20%) at a price of $2.67 for one share
of both Common Stock and Class A Common Stock (adjusted for the 3 for 2 stock
splits in December 1994 and December 1995 and the August 1996 Common Stock
Dividend). In August 1996, the Management Agreement with BF was terminated and
Messrs. Richard J. Boyle and Ned Fleming III became employees of Spinnaker.
All BF warrants have now been exercised.
Spinnaker is a leading manufacturer and marketer of adhesive carton
sealing tape and adhesive-backed label stock, primarily for the carton sealing
tape and pressure sensitive label stock markets. Spinnaker's products are
grouped into two principal businesses that accounted for the following
percentages of 1997 net sales: industrial sealing tape (51.6%) and
adhesive-backed label stock (46.0%). For the fiscal year ended December 31,
1997, Spinnaker had net sales of $232 million.
Spinnaker has four 100% owned subsidiaries: Spinnaker Coating, Inc.,
(formerly called Brown-Bridge Industries, Inc.) ("Spinnaker Coating"), 80.1% of
which was acquired in September 1994, Central Products Company ("Central
Products"), acquired in October 1995, Spinnaker Coating-Maine, Inc.
("Coating-Maine"), and Entoleter, Inc. ("Entoleter"), which it has owned since
Registrant acquired Spinnaker in 1987. In October 1996, Spinnaker acquired the
remaining 19.9% of outstanding stock of Spinnaker Coating (plus management stock
options), which were owned by the management of Spinnaker Coating, BF and
Registrant. Spinnaker Coating and Coating - Maine are in the adhesive-backed
label stock industry. Central Products manufactures industrial sealing tape.
Entoleter manufactures a line of industrial process equipment and a line of air
pollution equipment.
In March 1998, Coating-Maine acquired the Pressure Sensitive
Business of S.D. Warren Company ("Warren") for an aggregate purchase price of
approximately $51.8 million plus the assumption of certain liabilities
(excluding substantially all trade payables). The Pressure Sensitive Business
manufactures standard pressure sensitive products that are primarily used for
EDP labels and consumer products labels that are sold to major forms
manufacturers and distributors. The Pressure Sensitive Business operates at
S.D. Warren's Westbrook, Maine facility and had sales of approximately $62.1
million for its fiscal year ended October 1, 1997. The purchase price was paid
by the issuance of a 10% subordinated convertible note (the "Note") to Warren,
in the original principal amount of $7.0 million, and the remainder with funds
available under Spinnaker's asset-backed working capital revolving credit
facility with BT Commercial Corporation (The "Revolving Credit Facility"),
which was concurrently amended to increase the aggregate facility amount to $60
million.
The principal amount outstanding under the Note is prepayable by
Spinnaker at any time without penalty. The Note has a payment-in-kind ("PIK")
feature that allows Spinnaker to pay interest accrued during the first year
with an additional subordinated note having substantially similar terms as the
Note, and Spinnaker may also issue such a PIK note if at a future interest
payment date a default or event of default exists, or would be caused by the
payment of interest in cash, under the Revolving Credit Facility. Payments of
principal and interest are subject to restrictions contained in, and in any
event are junior and subordinate in right of payment to, the payment of
indebtedness outstanding under the Revolving Credit Facility and Spinnaker's 10
3/4% Senior Secured Notes due 2006. The Note matures on January 31, 2002,
however it is expected to be prepaid earlier if certain conditions or events
occur. Prepayments of principal in an amount equal to 30% and 70% of the
original principal amount are due on March 31, 1999 and on March 31, 2000,
respectively, subject to there being sufficient unused availability and no
existing default or event of default under the Revolving Credit Facility. The
Note is convertible for shares of Spinnaker's common stock, no par value
("Common Stock"), on the basis of 40 shares per $1,000 of the outstanding
principal amount of the Note (or $25 per share), subject to adjustment as set
forth in the Note. Upon conversion of the Note, the holder thereof will be
entitled to certain registration rights with respect to the shares of Common
Stock received upon such conversion.
CENTRAL PRODUCTS
Central Products' carton sealing tape is used for the packaging of
goods for shipment by manufacturing, retail or distribution companies. Central
Products manufactures pressure sensitive tape with all three primary adhesive
technologies: acrylic, hot melt and natural rubber. It also offers three types
of water sensitive tape: paper tape, fiberglass reinforced tape and box tape.
Central Products believes it is the only United States supplier to manufacture
both pressure sensitive tape and water sensitive tape, and is the only company
to produce pressure sensitive tape utilizing all three pressure sensitive
adhesive technologies.
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<PAGE> 17
Pressure Sensitive Tape. Pressure sensitive tape is manufactured
primarily through the coating of plastic film with a thin layer of acrylic, hot
melt or natural rubber adhesive. The adhesive is applied to various grades of
high-quality, low-stretch polypropylene film for use in most applications as
well as PVC and polyester films which are used for certain specialized
applications. Acrylic adhesives, which are noted for their clarity,
non-yellowing properties, good temperature resistance and low application cost,
are best suited for manual applications on light and medium carton sealing
situations. Hot melt adhesives, noted for their quiet release and easy unwind
during application, are the most widely used pressure sensitive adhesives
because they satisfy 90% of all carton sealing requirements. Natural rubber
adhesives are unique because of their aggressive adhesion properties and,
although they are ideal for recycled content cartons and cartons requiring hot,
humid or cold packing, transportation and storage, they can be used for a wide
variety of surface conditions and extreme temperature tolerances. Central
Products' pressure sensitive tapes are sold under the trade names Alltac and
Central.
Water Sensitive Tape. Water sensitive tape is generally manufactured
through the application of a thin layer of water sensitive adhesive to gumming
kraft paper. It is offered as either non-reinforced (paper) tape or fiberglass
reinforced tape. Non-reinforced tape is made by applying an adhesive to a
single layer of high tensile strength kraft paper coated with Central Products'
patented starch-based adhesive. Non-reinforced tapes are totally biodegradable
and are used in light to medium carton sealing applications. Fiberglass
reinforced tape contains a layer of fiberglass yarn placed between two layers
of kraft paper, and is typically used to seal heavy packages or on cartons that
will be subject to a high level of abuse during shipping and is also favored in
shipping high value goods due to its strong sealing qualities. Both
non-reinforced tape and fiberglass reinforced tape are available in light,
medium and heavy grades. Central Products' water sensitive carton sealing tapes
are sold under the trade names Glasseal, Central, Green Core and Tru-Seal.
Central Products also supplies tape dispensing equipment manufactured
by other companies. It currently offers a broad line of carton sealing
equipment for pressure sensitive tape, which ranges from hand held dispensers
to automatic random sizing equipment. Central Products also offers two types of
table top dispensers for water sensitive tape, a manual dispenser and a more
expensive electric dispenser.
SPINNAKER COATING
Spinnaker Coating develops, manufactures and markets adhesive-backed
label stock that is converted by printers and industrial users into products
that are utilized for marking, identifying, labeling and decorating
applications and products. Spinnaker Coating is a major supplier of
adhesive-back label stock for use in United States postage stamps. Spinnaker
Coating's products are offered in three primary adhesive categories: pressure
sensitive, water sensitive and heat sensitive.
Pressure Sensitive. Pressure sensitive products, which are activated
by the application of pressure, are manufactured with a three element
construction consisting of face stock, adhesive coating and silicone coated
release liner. The adhesive product is sold in roll or sheet form for further
conversion into
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<PAGE> 18
products used primarily for marking, identification and promotional labeling.
Spinnaker Coating's pressure sensitive products are sold under the trade names
Strip Tac and Strip Tac Plus . Roll pressure sensitive products are generally
sold to label printers that produce products used primarily for informational
labels (shipping labels, price labels, warning labels, etc.), product
identification and postage stamps. Sheet pressure sensitive products are sold
to commercial sheet printers, who provide information labels and other products
(such as laser printer stock). During 1997, pressure sensitive products
constituted approximately 87% of Spinnaker Coating's net sales of
adhesive-backed label stock products.
Water Sensitive. Water sensitive products, which are activated by the
application of water, include a broad range of paper and cloth materials,
coated with a variety of adhesives. The adhesive coated products are sold in
roll or sheet form for further conversion to postage and promotional stamps,
container labels, inventory control labels, shipping labels and splicing,
binding and stripping tapes. The water sensitive line is sold under the trade
name Pancake and consists of three product groups: dry process, conventional
gummed and industrial. Dry process is sold primarily for label and business
form uses. Conventional gum products serve many of the same end uses for hand
applied labels as dry process stock. A major portion of these products is sold
for government postage and promotional stamp uses. Industrial products are sold
in several niche markets, such as electrical and other specialty markets.
Heat Sensitive. Heat sensitive products, which are activated by the
application of heat, are manufactured by coating a face stock with either a hot
melt coating or an emulsion process adhesive. The heat sensitive product line
is sold primarily for labeling end uses, such as pharmaceutical bottles, meat
and cheese packages, supermarket scales, cassettes and bakery packages. The
adhesive coated product is sold in roll or sheet form for further conversion.
Brown-Bridge's heat sensitive products are sold under the trade name Heat Seal.
Marketing and Customers
Spinnaker markets its broad range of products to a variety of
customers. During 1997, no single customer accounted for more than 10% of
Spinnaker's net sales.
Central Products' marketing and sales strategy emphasizes supplying a
full line of both water sensitive and pressure sensitive tape products to the
carton sealing tape industry. Central Products sells its products directly to
over 1,500 paper distributors (customers), who in turn resell these tape
products to the end user markets. In addition, Central Products sells
private-brand carton closure tapes direct to large customers who in turn
distribute the products under their name to end users. Central Products
provides its distributor customers with a high level of product education to
enable them to better sell the Company's products.
Spinnaker Coating generally markets its products through its own sales
representatives to regional and national printers, converters and merchants.
The majority of sales represent product sold and shipped from Spinnaker
Coating's facilities in Troy, Ohio. However, to broaden its market penetration,
Spinnaker Coating also contracts with seven regional processors throughout the
United States, with whom Spinnaker Coating stores product until sold. Generally,
these processors perform
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<PAGE> 19
both slitting and distribution services for Spinnaker Coating.
Manufacturing and Raw Materials
Spinnaker produces all adhesive technologies for carton sealing tape
and adhesive-backed label stock. It produces carton sealing tapes and label
stock for a variety of standard and custom applications requiring water,
pressure and heat sensitive technologies. Spinnaker believes its strong
manufacturing capabilities enable it to maintain high product quality and low
operating costs and respond to customers' needs quickly and efficiently.
Raw materials are the most significant cost component in Spinnaker's
production process. The material component accounts for approximately 65% of
the total cost of its products, with the most important raw materials being
paper (gumming kraft and face stock), adhesive materials, fiberglass, and
polypropylene resin. These materials are currently readily available and are
procured from numerous suppliers.
Among Spinnaker's manufacturing strengths at its Central Products
water sensitive tape operation are fully integrated, computerized coating and
laminating machines, fully automated slitting, rewinding and packaging machines
and a state of the art print shop. At its pressure sensitive tape operation,
they include an in-house film line for production of polypropylene film and an
advanced computerized coating machine for each of the three adhesive
technologies. Spinnaker Coating has installed at its Troy, Ohio, facilities a
new production line for silicone coating.
See Item 2 below for a description of manufacturing and distribution
facilities.
Competition
The adhesive-backed materials industry is highly competitive, and
Spinnaker competes with both national and regional suppliers. As a result of
the competitive environment in the markets in which Spinnaker operates,
Spinnaker faces (and will continue to face) pressure on sales prices of its
products. As a result of such pricing pressures, Spinnaker may in the future
experience reductions in the profit margins on its sales, or may be unable to
pass future raw material price increases to its customers (which would also
reduce profit margins). Spinnaker operates in markets characterized by a few
large diversified companies selling products under recognized trade names and a
number of smaller public and privately-held companies selling to the market. In
addition to branded products, some companies in the industry produce
private-label products to enhance supply relationships with large buyers.
Central Products competes with other manufacturers of carton sealing
tape products as well as manufacturers of alternative carton closure products.
Competition in the carton sealing market is based primarily on price and
quality, although other factors may enhance a company's competitive position,
including product performance characteristics, technical support, product
literature and customer support. There are a wide range of participants in the
carton sealing industry, including large diversified corporations (principally
in pressure sensitive) and small private companies (principally in water
sensitive tape).
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<PAGE> 20
Central Products is one of the leading manufactures of water sensitive tape. 3M
Corporation is the largest manufacturer of pressure sensitive tape in the
carton sealing market in the United States.
The adhesive-backed label stock market is fragmented. Spinnaker
Coating competes with several national manufacturers, including Avery-Dennison,
Bemis, 3M Corporation and a number of smaller regional manufacturers. Spinnaker
believes that Avery-Dennison, Bemis and 3M Corporation are the only competitors
with national production facilities and Avery-Dennison and 3M Corporation are
the only competitors with nationally recognized brand names.
Environmental Regulations
Spinnaker's operations are subject to environmental laws and
regulations governing emissions to the air, discharges to waterways, and
generation, handling, storage, transportation, treatment and disposal of waste
materials. Spinnaker is also subject to other federal and state laws and
regulations regarding health and safety matters. Environmental laws and
regulations are constantly evolving and it is impossible to predict the effect
that these laws and regulations will have on Spinnaker in the future. While
Spinnaker believes it is currently in substantial compliance with all such
environmental laws and regulations, there can be no assurance that it will at
all times be in complete compliance with all such requirements. In addition,
although Spinnaker believes that any noncompliance is unlikely to have a
material adverse affect on Spinnaker, it is possible that such noncompliance
could have a material adverse affect on Spinnaker. Spinnaker has made and
will continue to make capital expenditures to comply with environmental
requirements. As is the case with manufacturers in general, if a release of
hazardous substances occurs on or from Spinnaker's properties or any associated
offsite disposal location, or if contamination from prior activities is
discovered at any of Spinnaker's properties, Spinnaker may be held liable and
the amount of such liability could be material.
Patents and Trademarks
Patents are held by Spinnaker with respect to the manufacture of
certain of its products, but its management does not consider such patents to
be important to Spinnaker's operations. The patents expire over various lengths
of time with the last patent expiring in about 10 years. Spinnaker has
registered several of its trade names and trademarks for adhesive-backed
materials.
International Sales
Spinnaker's international sales were $14.2 million, $11.5 million and
$10.4 million 1997, 1996, and 1995, respectively. Of the $14.2 million in 1997
international sales, approximately 85% were represented by exports of Spinnaker
Coating and Central Products adhesive-backed materials. The substantial
majority of these sales were to Canadian customers and, consequently, Spinnaker
believes that the risks commonly associated with doing business in
international countries are minimal. The profitability of foreign sales
is substantially equivalent to that of domestic sales. Because international
sales are transacted in United States dollars, payments in many cases are
secured by irrevocable letters of credit.
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<PAGE> 21
Backlog
The Company's backlog believed to be firm was $7.1 million at December
31, 1997, as compared to $9.2 million at December 31, 1996.
Industrial Process Equipment Business
Through its Entoleter subsidiary, the Company engineers, manufactures
and markets a line of industrial process equipment and a line of air pollution
control equipment. Entoleter's net sales consist entirely of sales to
commercial and industrial customers. Spinnaker is exploring strategic
alternative with respect to Entoleter, including a possible spin-off of the
Entoleter stock to its shareholders. There can be no assurance, however, that
any transaction involving Entoleter will occur.
Employees
As of December 31, 1997, Spinnaker employed approximately 945 persons,
of which 542 were Central Products employees, 357 were Spinnaker Coating
employees, and 36 were Entoleter employees. All employees other than management
are paid on an hourly basis. A majority of its hourly employees are not
represented by unions. Central Products has a labor agreement expiring in 1998
with the United Paperworkers International Union AFL-CIO covering 184 hourly
employees at the Menasha, Wisconsin plant. Entoleter's 15 hourly-paid
production employees are members of the United Electrical, Radio and Machine
Workers of America Union. The current collective bargaining agreement expires
on April 30, 1999. Spinnaker believes that its relations with its employees are
good; however, there can be no assurance that the Company will not experience
work stoppages or slowdowns in the future.
B. LYNCH SYSTEMS, INC. (FORMERLY CALLED LYNCH MACHINERY, INC.)
Lynch Systems, Inc. ("LS"), a 90% owned subsidiary of Registrant and
the initial part of the Lynch Display Technologies group, designs, develops,
manufactures and markets a broad range of manufacturing equipment for the
electronic display and consumer glass industries. LS also produces replacement
parts for various types of packaging and glass container-making machines which
LS does not manufacture.
CRT Display and Consumer Glass Manufacturing Technologies. LS
manufactures glass-forming presses and electronic controls to provide
high-speed automated systems to form different sizes of face panels and tubes
for television screens and computer monitors. LS produces an HDTV model press
to build large-screen televisions for the HDTV (high definition television)
market. LS manufactures and installs presses to form table ware such as glass
tumblers, plates, cups, saucers and commercial optical glass. LS also
manufactures and installs electronic controls and retrofit systems for CRT
display and consumer glass presses. LS shipped 6 controls and retrofit
systems amounting to approximately $2.8 million in 1997.
-21-
<PAGE> 22
The production of glass pressware entails the use of machines which
heat glass and, using great pressure, form an item by pressing it into a
desired shape. Because of the high cost of bringing the machine and materials
up to temperature, a machine for producing glass pressware must be capable of
running 24 hours a day, 365 days a year.
During 1997, LS delivered 9 glass press machines, compared to 4
machines in 1996; however, revenues are recognized on a percentage of
completion basis. At December 31, 1997, LS had orders for, and had in various
stages of production, 9 glass press machines, at a total sales price of
approximately $17.4 million, which are scheduled for delivery in 1998 and
beyond. One order for $16 million of machines with an Asian purchaser, permits
the purchaser to cancel the order on the payment of a $2.4 million penalty.
The customer has currently put a hold on this order and LS does not expect
significant production during 1998. There can be no assurance that LS can
obtain orders for additional large glass pressing orders to replace its
existing orders.
LS believes that it is the largest supplier to glass companies that do
not manufacture their own pressware machines in the worldwide pressware market.
Competitors include various companies in Italy, Japan, France, Germany and
elsewhere.
While several of the largest domestic and international producers of
glass pressware frequently build their own glass-forming machines and produce
spare parts in-house, nearly all pressware producers have made purchases of
machines and/or spare parts from LS.
Packaging Machinery. Effective in January 1996, LS discontinued the
manufacturing of automated case packers and related equipment. In mid-1996, LS
discontinued and sold its Tri-Can International operation, which manufactured
packaging machines. In connection therewith, LS recognized a charge to income
in 1996 of approximately $0.8 million (after tax).
International Sales. During 1997, approximately 81% of LS's sales
were made to international customers, and 100% of its large glass pressing
machine orders were from international customers in Asia. The profitability of
international sales is equivalent to that of domestic sales. Because many
international orders require partial advance deposits, with the balance often
secured by irrevocable letters of credit from banks in the international
country, the Registrant believes that some of the credit risks commonly
associated with doing business in international countries are minimized. The
Registrant avoids currency exchange risk by transacting all international sales
in United States dollars. LS is unable to predict how great an adverse impact
the current East Asia financial crisis will have on its international business.
Backlog. LS had an order backlog of approximately $18.6 million at
December 31, 1997, compared with approximately $6.6 million at December 31,
1996. LS includes as backlog those orders which are subject to written
contract, written purchase orders and telephone orders from long standing
customers who maintain satisfactory credit ratings. LS has historically
experienced only insignificant cancellations of the orders included in its
backlog; however, see above for the right of a purchaser to cancel an order
upon the payment of a penalty.
-22-
<PAGE> 23
Raw Materials. Raw materials are generally available to LS in
adequate supply from a number of suppliers.
C. M-TRON INDUSTRIES, INC. ("M-TRON")
M-tron, a 91% owned subsidiary of the Registrant, is a manufacturer
and importer of quartz crystal products and clock oscillator modules used for
clocking digital circuits, precision time base references and
telecommunications equipment. A quartz crystal is an oscillating component
which performs the clocking function in a circuit. Crystals and clock
oscillator modules are used primarily in microprocessor-related equipment and
telecommunications equipment. Frequency and time related products essentially
use crystals or clock oscillators, with the addition of electronic circuitry
vertically integrating the product. Crystal and clock oscillators are sold to
original equipment manufacturers, both directly and through commissioned
representatives and distributors.
For 1997, 1996, and 1995, M-tron's sales consisted of (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Crystals............................ $12,611 $10,594 $13,778
Oscillator Modules.................. 10,217 7,839 6,434
------- ------ ------
Total $22,828 $18,433 $20,212
======= ======= =======
</TABLE>
Competition. Quartz crystals and clock oscillators are sold in a
highly competitive industry. There are numerous domestic and international
manufacturers who are capable of providing quartz crystals and clock
oscillators comparable in quality and performance to M-tron's products.
International competitors, particularly from the Far East, continue to dominate
the United States market. M-tron seeks to manufacture smaller specialty orders
of crystals and oscillators, which it believes it can competitively fill based
upon price, quality and order response time. M-tron also performs quality
control tests on all products it imports from the Far East and resells
domestically and internationally.
International Sales. M-tron's international sales in 1997 were
approximately 43% of total sales and were concentrated in Canada and Western
Europe. The profitability of international sales has been substantially
equivalent to that of domestic sales. M-tron is unable to predict what effect
the East Asian financial crisis will have on its business. However, because
sales are ordinarily spread over a number of customers in a number of developed
countries with no individually significant shipments, the Registrant believes
that risks commonly associated with doing business in international countries
are minimized.
Backlog. M-tron had backlog orders of approximately $5,215,000 at
December 31, 1997, compared with $5,049,000 at December 31, 1996. M-tron
includes as backlog those orders which are subject to specific production
release orders under written contracts, verbal and written orders from
distributors with which M-tron has had long-standing relationships, as well as
written purchase orders from sales representatives. M-tron believes that all
of the backlog at December 31, 1997, will be shipped during 1998.
-23-
<PAGE> 24
Raw Material. To the extent possible, M-tron's raw materials are
purchased from multiple sources. Of primary significance are quartz crystal
bars and the bases used for mounting certain finished crystals. M-tron
currently has at least two qualified vendors for each of these items. No
shortages have occurred in the recent past nor are any anticipated in the near
future.
IV. OTHER INFORMATION
While the Registrant holds licenses and patents of various types,
Registrant does not believe they are critical to its overall operations, except
for (1) the television-broadcasting license of WHBF-TV and WOI-TV; (2)
Registrant's telephone subsidiaries franchise certificates to provide
local-exchange telephone service within its service areas; (3) Western's FCC
licenses to operate point-to-point microwave systems; (4) licenses held by
partnerships and corporations in which Western and Inter-Community own minority
interests to operate cellular radio systems covering areas in New Mexico and
North Dakota, (5) CLR Video's franchises to provide cable television service
within its service areas and (6) personal communications services licenses held
by companies in which Lynch subsidiaries have investments.
The Registrant conducts product development activities with respect to
each of its major lines of manufacturing business. Currently, such activities
are directed principally toward the improvement of existing products, the
development of new products and/or diversification. The cost of such
activities, which have been funded entirely by the Registrant, amounted to
approximately $1,022,000 in 1997, $1,627,000 in 1996, and $1,673,000 in 1995.
The capital expenditures, earnings and competitive position of
Registrant have not been materially affected by compliance with current
federal, state, and local laws and regulations relating to the protection of
the environment; however, Registrant cannot predict the effect of future laws
and regulations. The Registrant has not experienced difficulties relative to
fuel or energy shortages but substantial increases in fuel costs or fuel
shortages could adversely affect the operations of Morgan.
Registrant has initiated a comprehensive review of its computer
systems to identify the systems that could be affected by the "Year 2000" issue
and is developing an implementation plan to resolve the issue. The Year 2000
problem is the result of computer programs being written using two digits
(rather than four) to define the applicable year. Any of the Registrant's
programs or programs utilized by vendors to the Registrant that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a major system failure or
miscalculations. Of Registrant's subsidiaries, the most potential exposure
exists at the telephone companies, both with the switching equipment and third
party billing vendors, and at Morgan. Registrant presently believes that, with
modifications to existing software and converting to new software, the Year
2000 problem will not pose significant operational problems for Registrant's
computer systems as so modified and converted. However, if such modifications
and conversions are not completed timely, the Year 2000 problem may have a
material impact on the operations of Registrant. Registrant cannot yet
estimate the cost of such modifications or conversions.
-24-
<PAGE> 25
No portion of the business of the Registrant is regarded as seasonal,
except that, in the case of Morgan, fewer shipments are scheduled during the
winter months in those parts of the country where weather conditions limit
highway use.
There were no customers in 1997 or 1996 that represents 10% or more of
consolidated revenues. The Registrant does not believe that it is dependent on
any single customer.
Excluding the following for The Morgan Group, Inc.: approximately
1,560 independent owner-operators and 1,350 drive-away drivers, the Registrant
had a total of 1,881 employees at December 31, 1997 and 1,910 employees at
December 31, 1996.
Additional information with respect to each of the Registrant's lines
of business is included in Note 14 to the Consolidated Financial Statements
included as Item 14(a) below.
V. EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction G (3) of Form 10-K, the following list
of executive officers of the Registrant is included in Part 1 of this Annual
Report on Form 10-K in lieu of being included in the Proxy Statement for the
1998 Annual Meeting of Shareholders. Such list sets forth the names and ages
of all executive officers of Registrant indicating all positions and offices
with the Registrant held by each such person and each such person's principal
occupations or employment during the past five years.
<TABLE>
<CAPTION>
NAME OFFICES AND AGE
---- POSITIONS HELD ---
--------------
<S> <C> <C>
Mario J. Gabelli Chairman and Chief Executive Officer
(since May 1986); Chairman and Chief
Executive Officer (since March 1980)
of Gabelli Funds Inc. (successor to
The Gabelli Group, Inc.), holding
Company for subsidiaries engaged in
various aspects of the securities
business. 55
Robert E. Dolan Chief Financial Officer (since
February 1992) and Controller (since
May 1990). 46
</TABLE>
-25-
<PAGE> 26
<TABLE>
<S> <C> <C>
Robert A. Hurwich Vice President-Administration,
Secretary & General Counsel (since
February 1994); Private Law Practice
(1991-1993); Vice President,
Secretary & General Counsel of Moore
McCormack Resources, Inc.
(1975-1989). 56
</TABLE>
The executive officers of the Registrant are elected annually by the
Board of Directors at its organizational meeting in May and hold office until
the organizational meeting in the next subsequent year and until their
respective successors are chosen and qualified.
ITEM 2. PROPERTIES
Effective April 1998, Lynch will lease space containing approximately
4,000 square feet for its executive offices in Rye, New York.
LS's operations are housed in two adjacent buildings situated on 3.19
acres of land in Bainbridge, Georgia. In January 1997, LS completed an
expansion of its manufacturing capacity at this site, which added approximately
15,000 square feet, bringing total manufacturing space to approximately 73,000
square feet. Finished office area in the two buildings totals approximately
17,000 square feet. All such properties are subject to security deeds relating
to loans.
M-tron's operations are housed in two separate facilities in Yankton,
South Dakota. These facilities contain approximately 34,000 square feet in the
aggregate. One facility owned by M-tron contains approximately 18,000 square
feet and is situated on 5.34 acres of land. This land and building are subject
to a mortgage executed in support of a bank loan. The other Yankton facility
containing approximately 16,000 square feet is leased, which lease expires on
September 30, 2000, with options to extend the lease to 2006.
Spinnaker's corporate headquarters is located in Dallas, Texas, where
it shares office space with an affiliate of its principal executive officers.
Spinnaker Coating owns two manufacturing facilities, Plant One and
Plant Two, in Troy, Ohio. Plant One is a 200,000 square foot complex located
on approximately five acres of land adjacent to the Miami River and Plant Two
is a 98,000 square foot facility located on approximately five aces of land
nearby. There are approximately five undeveloped acres of land adjacent to
Plant Two that are available for expansion. Both facilities house
manufacturing, administrative and shipping operations.
Central Products owns two manufacturing facilities, one in Menasha,
Wisconsin and the other in Brighton, Colorado. The Menasha facility contains
approximately 160,000 square feet and the Brighton facility contains
approximately 210,000 square feet. The corporate office and center for
administrative services are located in a 20,000 square foot facility adjacent
to the Menasha plant.
-26-
<PAGE> 27
Central Products also maintain two leased distribution centers in Neenah, WI
(90,000 square feet), and Denver, CO (100,000 square feet).
Entoleter owns a manufacturing plant containing 72,000 square feet
located on approximately 5 acres of land in Hamden, Connecticut. The land and
building are subject to a mortgage and security agreement executed in support
of a bank loan. Entoleter also owns approximately 6 unimproved acres located
in Hamden, Connecticut adjacent to its property.
In connection with Spinnaker's acquisition of the Pressure Sensitive
Business of S.D. Warren in March 1998, the parties entered into the Site Lease,
which provides for Warren's lease of a portion of its Westbrook, Maine facility
to Spinnaker. Such lease is for a term of 99 years, provides for nominal rent
of $1.00 per year, and permits Spinnaker to lease additional space for
expansion at the site.
During 1997 and 1996, Registrant's manufacturing facilities (except
for LS) operated in the aggregate at a relatively high level of capacity
utilization.
Morgan owns approximately 24 acres of land with improvements in
Elkhart, Indiana. The improvements include a 23,000 square foot office
building used as Morgan's principal office, a 7,000 square foot leased building
containing additional offices, a 9,000 square foot building used for Morgan's
safety and driver service departments and also for storage and an 8,000 square
foot building used for driver training and commercial driver licensing, testing
and certification. Most of Morgan's 93 regional and 110 dispatch offices are
situated on leased property. Morgan also owns and leases property for parking
and storage of equipment at various locations throughout the United States,
usually in proximity to manufacturers of products moved by Morgan. The
property leases have lease term commitments of a minimum of thirty days and a
maximum of five years, at monthly rental ranging from $100 to $11,048. The
Elkhart facility is currently mortgaged to one of Morgan's lenders. In total,
Morgan owns 69 acres of land throughout the United States, including the
Elkhart facilities.
Western New Mexico Telephone Company owns a total of 16.9 acres at
fourteen sites located in southwestern New Mexico. Its principal operating
facilities are located in Silver City, where Western owns a building comprising
a total of 6,480 square feet housing its administrative offices and certain
storage facilities. In Cliff, Western owns five buildings with a total of
14,055 square feet in which are located additional offices and storage
facilities as well as a vehicle shop, a wood shop, and central office switching
equipment. Smaller facilities, used mainly for storage and for housing central
office switching equipment, with a total of 8,384 square feet, are located in
Lordsburg, Reserve, Magdalena and five other localities. In addition, Western
leases 1.28 acres on which it has constructed four microwave towers and a 120
square-foot equipment building. Western has the use of 38 other sites under
permits or easements at which it has installed various equipment either in
small company-owned buildings (totaling 2,403 square feet) or under protective
cover. Western also owns 3,248 miles of buried copper cable and 421 miles of
buried fiber optic cable running through rights-of-way within its 15,000
square-mile service area. All Western's properties described herein are
encumbered under mortgages held by the Rural Utilities Service ("RUS").
-27-
<PAGE> 28
Inter-Community Telephone Company owns 12 acres of land at 10 sites.
Its main office at Nome, ND, contains 4,326 square feet of office and storage
space. In addition, it has 4,400 square feet of garage space and 5,035 square
feet utilized for its switching facilities. Inter-Community has 1,743 miles of
buried copper cable and 172 miles of buried fiber optic cable. All of
Inter-Community's properties described herein are encumbered under mortgages
held by the National Bank for Co-Operatives ("Co-Bank").
Cuba City Telephone Company is located in a 3,800 square foot brick
building on 0.4 of an acre of land. The building serves as the central office,
commercial office, and garage for vehicle and material storage. The company
also owns a cement block storage building of 800 square feet on 0.1 of an acre.
In Madison, Wisconsin, Cuba City leases 900 square feet for administrative
headquarters and financial functions. Belmont Telephone Company is located in
a cement block building of 800 square feet on .5 acre of land in Belmont,
Wisconsin. The building houses the central office equipment for Belmont. The
companies own a combined total of 217 miles of buried copper cable and 22 miles
of fiber optic cable. All of Cuba City's and Belmont's property described
herein are encumbered under mortgages held by the RUS and Rural Telephone Bank,
respectively.
J.B.N. Telephone Company owns a total of approximately 2.25 acres at
fifteen sites located in northeast Kansas. Its administrative and commercial
office consisting of 2,820 square feet along with a 1,600 square feet garage
and warehouse facility are located in Wetmore, Kansas. In addition, J.B.N.
owns thirteen smaller facilities housing central office switching equipment and
over 1,186 miles of buried copper cable and 186 miles of buried fiber optic
cable. All properties described herein are encumbered under mortgages held by
the RUS.
Haviland Telephone Company owns a total of approximately 3.9 acres at
20 sites located in south central Kansas. Its administrative and commercial
office consisting of 4,450 square feet is located in Haviland, Kansas. In
addition, Haviland owns 19 smaller facilities housing garage, warehouse, and
central office switching equipment and over 1,500 miles of buried copper cable.
All properties described herein are encumbered under a mortgage to Co-Bank.
Dunkirk & Fredonia Telephone Company (including its subsidiaries) own
a total of approximately 16.4 acres at 5 sites located in western New York. Its
host central office switching equipment, administrative and commercial offices
consisting of 18,297 square feet is located in Fredonia, New York. In
addition, Dunkirk & Fredonia owns 4 other smaller facilities housing garage,
warehouse and central office switching equipment and over 62 miles of buried
copper cable and 21 miles of fiber optic cable.
Upper Peninsula Telephone Company owns a total of approximately 25
acres at 19 sites located principally in the Upper Peninsula of Michigan. Its
host central office switching equipment, administrative and commercial offices
consisting of 11,200 square feet is located in Carney, Michigan. In addition,
Upper Peninsula owns 25 other smaller facilities housing garage, warehouse and
central office switching equipment and over 2,100 miles of buried copper cable
and 95 miles of fiber optic cable. All properties described herein are
encumbered under mortgages held by the RUS and Co-Bank.
CLR Video has its headquarters in leased space in Wetmore, Kansas. It
also
-28-
<PAGE> 29
owns one small parcel of land and leases 22 small sites, which it uses for its
cable receiving and transmission equipment. All properties described herein
are encumbered under a mortgage to Co-Bank.
It is the Registrant's opinion that the facilities referred to above
are in good operating condition and suitable and adequate for present uses.
ITEM 3. LEGAL PROCEEDINGS
Registrant is a party to certain lawsuits in the ordinary course of
business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The information required by this Item 5 is incorporated herein by
reference to "Market Price Information and Common Stock Ownership" in
Registrant's Annual Report to Shareholders for the year ended December 31,
1997.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item 6 is incorporated herein by
reference to "Five Year Summary Selected Financial Data" in Registrant's Annual
Report to Shareholders for the year ended December 31, 1997.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The information required by this Item 7 is incorporated herein by
reference to "Management Discussion and Analysis of Financial Condition and
Results of Operations" in Registrant's Annual Report to Shareholders for the
year ended December 31,1997.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Report of Independent Auditors and the following Consolidated
Financial
-29-
<PAGE> 30
Statements of the Registrant are incorporated herein by reference to
Registrant's Annual Report to Shareholders for the year ended December 31,
1997.
Consolidated Balance Sheets - December 31, 1997, and 1996.
Consolidated Statements of Operations - Years ended December
31, 1997, 1996, and 1995.
Consolidated Statements of Shareholders' Equity - Years ended
December 31, 1997, 1996, and 1995.
Consolidated Statements of Cash Flows - Years ended December
31, 1997, 1996, and 1995.
Notes to Consolidated Financial Statements
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
On August 25, 1997, Registrant's majority-owned subsidiary Spinnaker
Industries, Inc. ("Spinnaker") dismissed Deloitte & Touche LLP, independent
accountants ("DT"), as the principal accountant for Central Products Company, a
wholly owned subsidiary of Spinnaker ("Central Products"), and expanded the
auditing responsibility of Registrant's and Spinnaker's principal accountants,
Ernst & Young LLP ("EY"), to include Central Products operations. EY has
served as the Registrant's and Spinnaker's principal independent accountant
since at least 1988. EY referred to DT's audits of Central Products' financial
statements as of December 31, 1995 and 1996 and for the year ended December 31,
1996 and the three months ended December 31, 1995, in its reports regarding its
audits of the financial statements of Registrant and Spinnaker.
Spinnaker's Audit Committee, with the knowledge of Registrant's Audit
Committee, recommended the foregoing change in accountants to Spinnaker's Board
of Directors, who approved such action on August 12, 1997. The Spinnaker Audit
Committee's recommendation was based upon its desire to consolidate its annual
audit process under one independent accounting firm.
The reports of DT on Central Products' financial statements as of
December 31, 1996 and 1995 and for the year ended December 31, 1996 and the
three months ended December 31, 1995, have not contained an adverse opinion or
a disclaimer of an opinion, nor were they qualified or modified as to
uncertainty, audit scope, or
-30-
<PAGE> 31
accounting principles. There were no disagreements with DT or any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure during those two periods and in the subsequent interim
periods, which, if they had not been resolved to the satisfaction of DT, would
have caused it to make reference to such disagreement in its report on Central
Products' financial statements. Spinnaker filed a Form 8-K dated August 25,
1997, with respect to such change.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 is included under the captions
"Executive Officers of the Registrant" in Item 1 hereof and included under the
captions "Election of Directors" and "Section 16(a) Reporting" in Registrant's
Proxy Statement for its Annual Meeting of Shareholders for 1998, which
information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is included under the captions
"Compensation of Directors," "Executive Compensation," "Executive Compensation
and Benefits Committee Report on Executive Compensation" and "Performance
Graph" in Registrant's Proxy Statement for its Annual Meeting of Shareholders
for 1998, which information is incorporated herein by reference. The
Performance Graph in the Proxy Statement shows that Registrant's Common Stock
underperformed the American Stock Exchange Market Value Index and a combined
peer group index (telephone communications, except radio telephone operations;
converted paper and paperboard; and trucking except local) in 1993 and out
performed said indices through 1994, 1995, 1996, and 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is included under the caption
"Security Ownership of Certain Beneficial Owners and Management," in the
Registrant's Proxy Statement for its Annual Meeting of Shareholders for 1998,
which information is included herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is included under the caption
"Executive Compensation", and "Transactions with Certain Affiliated Persons" in
the Registrant's Proxy Statement for its Annual Meeting of Shareholders for
1998, which information is included herein by reference.
-31-
<PAGE> 32
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form 10-K
Annual Report:
(1) Financial Statements:
The Report of Independent Auditors and the following Consolidated
Financial Statements of the Registrant are incorporated herein by reference to
the Registrant's Annual Report to Shareholders for the year ended December 31,
1997, as noted on Page 29-30 in Item 8 hereof:
Consolidated Balance Sheets - December 31, 1997 and 1996
Consolidated Statements of Operations - Years ended December 31, 1997,
1996, and 1995
Consolidated Statements of Shareholders' Equity - Years ended December
31, 1997, 1996, and 1995
Consolidated Statements of Cash Flows - Years ended December 31, 1997,
1996, and 1995
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
Schedule I - Condensed Financial Information of Registrant
Schedule II - Valuation and Qualifying Accounts
Other Financial Statement Schedules have been excluded because
they are not required.
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<PAGE> 33
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
LYNCH CORPORATION
CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------
1997 1996 1995
---- ---- ----
(In Thousands of Dollars)
<S> <C> <C> <C>
Interest, Dividends & Gain on Sales of Marketable Securities $ 377 $ 649 $ 232
Interest, Dividend & Other Income from Subsidiaries 35 621 715
Gain on Sale of Subsidiary and Affiliate Stock:
Brown-Bridge Industries, Inc. - 203 -
----- ------ ------
TOTAL INCOME 412 1,473 947
Costs and Expenses:
Unallocated Corporate Administrative Expense $ 1,436 $ 2,312 $ 2,869
Interest Expense 1,257 669 448
Interest Expense to Subsidiaries 741 249 --
------- ------- -------
TOTAL COST AND EXPENSES 3,434 3,230 3,317
------- ------- -------
LOSS BEFORE INCOME TAXES, EQUITY IN NET INCOME (LOSS)
OF SUBSIDIARIES (3,022) (1,758) (2,370)
Income Tax Benefit 1,142 515 779
Equity in Net Income (Loss) of Subsidiaries (998) 3,939 6,736
-------- ------- -------
NET INCOME $(2,878) $ 2,696 $ 5,145
======= ======= =======
</TABLE>
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE A - DIVIDENDS FROM SUBSIDIARIES
Cash dividends paid to Lynch Corporation from the Registrant's consolidated
subsidiaries were $1,195,000 in 1997, $1,811,000 in 1996, and $1,166,000 in
1995. No other dividends were received from subsidiaries or investees.
NOTE B - SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR ADDITIONAL
INFORMATION
-33-
<PAGE> 34
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
LYNCH CORPORATION
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
Year Ended December 31
1997 1996
---- ----
(In Thousands of Dollars)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 290 $ 68
Marketable Securities and Short Term Investments 755 573
Deferred Income Tax Benefits 348 738
Other Current Assets 47 11
------ -------
Total Current Assets 1,440 1,390
OFFICE EQUIPMENT (Net of Depreciation) 22 26
OTHER ASSETS (Principally Investment in
and Advances to Subsidiaries) $69,255 $61,836
------- -------
Total Assets $70,717 $63,252
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES $28,602 $18,965
LONG TERM DEBT 2,190 2,090
DEFERRED INCOME TAX LIABILITIES 1,478 1,585
DEFERRED CHARGES 1,996 1,689
TOTAL SHAREHOLDERS' EQUITY $36,451 $38,923
------- -------
Total Liabilities and Shareholders' Equity $70,717 $63,252
======= =======
</TABLE>
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<PAGE> 35
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
LYNCH CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
1997 1996 1995
---- ---- ----
(In Thousands of Dollars)
<S> <C> <C> <C>
Cash Provided From (Used In) Operating Activities $ (25) $ 469 $(1,158)
-------- ------- -------
INVESTING ACTIVITIES:
Investment in Lynch Manufacturing 1,135 1,683 781
Investment and Advances to Brighton Communications (17) (2,053) -
Loan to Spinnaker Industries, Inc. - 1,330 --
Investment in Brown-Bridge Industries, Inc. - 407 -
Investment in and Advances to Lenco II - - 2,535
Investment in and Advances to The Morgan Group, Inc. 7 60 1,300
Investment in and Advances to Pcs Partnerships (8,628) (14,315) (7,010)
Other (101) 607 (13)
------- ------- -------
NET CASH PROVIDED FROM (USED IN) INVESTING ACTIVITIES (7,604) (12,281) (2,407)
------- ------- -------
FINANCING ACTIVITIES:
Net Borrowings
Lines of Credit 7,179 8,627 3,709
Issuance of Long Term Debt - 2,000 --
Sale of Treasury Stock 672 754 -
Other - 1 248
------ ------ ------
NET CASH PROVIDED FROM FINANCING ACTIVITIES 7,851 11,382 3,957
------ ------ -------
TOTAL INCREASE (DECREASE)IN CASH AND CASH EQUIVALENTS 222 (430) 392
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 68 498 106
------ ------ -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 290 $ 68 $ 498
====== ====== =======
</TABLE>
-35-
<PAGE> 36
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
LYNCH CORPORATION AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
ADDITIONS
BALANCE AT CHARGED TO CHARGED TO
BEGINNING COSTS AND OTHER ACCOUNTS DEDUCTIONS BALANCE AT
DESCRIPTION OF PERIOD EXPENSES -DESCRIBE -DESCRIBE PERIOD
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
ALLOWANCE FOR UNCOLLECTIBLE $1,525,000 $ 742,000 $ 0 $ 819,000(B) $1,448,000
YEAR ENDED DECEMBER 31, 1996
ALLOWANCE FOR UNCOLLECTIBLE $1,732,000 $1,900,000 $ 75,000(A) $2,182,000(B) $1.525.000
YEAR ENDED DECEMBER 31, 1995
ALLOWANCE FOR UNCOLLECTIBLE $ 737,000 $ 987,000 $1,160,000(A) $1,152,000(B) $1,732,000
</TABLE>
(A) ALLOCATION OF PURCHASE PRICE OF ACQUIRED COMPANY.
(B) UNCOLLECTIBLE ACCOUNTS WRITTEN OFF ARE NET OF RECOVERIES.
-36-
<PAGE> 37
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions, or are inapplicable, and therefore
have been omitted.
See Page 2 above re Forward Looking Information.
(3) Exhibits: See the Exhibit Index on pages 40 - 43 of
this Form 10-K Annual Report.
The following Exhibits listed in the Exhibit Index are filed with this
Form 10-K Annual Report:
10(o) - Directors Stock Plan
10(u)(i)(a) - Correction to Loan Agreement
10(y) - Letter Agreement dated as of January 20, 1998,
between Lynch PCS Corporation G and BCK/Rivgam, L.L.C.
10(z) - Employment Agreement dated February 2, 1998 between
Registrant and Mark Feldman
13 - Annual Report to Shareholders for the year ended
December 31, 1997 (only those portions of the Annual
Report expressly incorporated by reference herein
shall be deemed filed)
21 - Subsidiaries of the Registrant
23 - Consents of Independent Auditors
- Ernst & Young LLP
- Arthur Andersen LLP
- McGladrey & Pullen, LLP(2)
- Deloitte & Touche, LLP
- Johnson Mackowiak Moore & Myott, LLP
- Frederick & Warriner, L.L.C.
24 - Powers of Attorney
27 - Financial Data Schedules
99 Report of Independent Auditors.
- Report of Arthur Andersen LLP on the
Consolidated Financial Statements of the
Morgan Group, Inc. for the year ended
December 31, 1995.
- Report of McGladrey & Pullen, LLP on the
Financial Statements of Capital
Communications Corporation for the years ended
December 31, 1996 and 1995.
- Report of McGladrey & Pullen, LLP on the
Financial Statements of Coronet
Communications Corporation for the years ended
December 31, 1996 and 1995.
- Report of Deloitte & Touche LLP on the
Financial Statements of Central Products
Company for the year ended December 31, 1996
and the three months ended December 31, 1995.
- Report of Johnson Mackowiak Moore & Myott,
LLP on the Consolidated Financial Statements
of Dunkirk & Fredonia Telephone Company for
the period November 26, 1996 through
December 31, 1996.
- Report of Frederick & Warinner, L.L.C. on the
Financial Statements of CLR Video, Inc. for
the year ended December 31, 1996.
-37-
<PAGE> 38
(b) Reports on Form 8-K: Reports on Form 8-K were filed as of (i)
October 15, 1997, and December 8, 1997, to report under Item 5 on
letters to Hector Communications, Inc. with respect to shares of
stock of Hector .
(c) Exhibits:
Exhibits are listed in response to Item 14(a)(3)
(d) Financial Statement Schedules:
Financial Statement Schedules are listed in response to Item 14(a)(2)
-38-
<PAGE> 39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
LYNCH CORPORATION
By:s/ROBERT E. DOLAN
- --------------------------
ROBERT E. DOLAN
Chief Financial Officer (Principal
Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C> <C>
* MARIO J. GABELLI Chairman of the Board of
- ------------------- Directors and Chief
MARIO J. GABELLI Executive Officer March 30, 1998
(Principal Executive Officer)
* E. VAL CERUTTI Director March 30, 1998
- ------------------
E. VAL CERUTTI
* PAUL J. EVANSON Director March 30, 1998
- ------------------
PAUL J. EVANSON
* JOHN C. FERRARA Director March 30, 1998
- -----------------
JOHN C. FERRARA
* DAVID C. MITCHELL Director March 30, 1998
- -------------------
DAVID C. MITCHELL
* SALVATORE MUOIO Director March 30, 1998
- -----------------
SALVATORE MUOI0
* RALPH R. PAPITTO Director March 30, 1998
- ------------------
RALPH R. PAPITTO
s/ROBERT E. DOLAN Chief Financial Officer
- ------------------ (Principal Financial
ROBERT E. DOLAN and Accounting Officer) March 30, 1998
*s/ROBERT A. HURWICH
- --------------------
ROBERT A. HURWICH
Attorney-in-fact
</TABLE>
-39-
<PAGE> 40
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
3 (a) Restated Articles of Incorporation of Registrant (incorporated
by reference to Exhibit 3(a) of the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1987).
(b) By-Laws of the Registrant, (incorporated by reference to the
Exhibit 3(b) of the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1987).
4 (a) Loan Agreement and Revolving Loan Note of Lynch Telephone
Corporation, dated October 18, 1989, (incorporated by
reference to Exhibit 4(d) of the Registrant's Form 10-K for
the year ended December 31, 1989).
(b) Purchase Agreement, dated October 18, 1996 (the "Purchase
Agreement") among Spinnaker Industries, Inc., a Delaware
corporation ("Spinnaker"), Brown-Bridge Industries, Inc., a
Delaware corporation ("Brown-Bridge), Central Products
Company, a Delaware corporation ("Central Products"), and
Entoleter, Inc., ("Entoleter") and together with Brown-Bridge
and Central Products, the "Guarantors") and BT Securities
Corporation (the "Initial Purchaser") (incorporated by
reference to Exhibit 4.1 to Registrant's Form 8-K, dated
October 23, 1996).
(c) Indenture dated, October 23, 1996, among Spinnaker, the
Guarantors and the Chase Manhattan Bank, as Trustee
(incorporated by reference to Exhibit 4.3 to Registrant's Form
8-K, dated April 19, 1996).
(d) Credit Agreement among Central Products, Brown-Bridge and
Entoleter, as Borrowers, Spinnaker, as Guarantor, each of the
financial institutions listed on Schedule 1 thereto, BT
Commercial Corporation, as Agent, Transamerican Business
Credit Corporation, as Collateral Agent, and Bankers Trust
Company as Issuing Bank (incorporated by reference to Exhibit
99.1 to Registrant's Form 8-K dated October 23, 1996).
The Registrant, by signing this Form 10-K Annual Report, agrees to
furnish to the Securities and Exchange Commission a copy of any long-term debt
instrument where the amount of the securities authorized thereunder does not
exceed 10 percent of the total assets of the Registrant on a consolidated
basis.
10 (a) Partnership Agreement, dated March 11, 1987, between Lombardo
Communications, Inc. and Lynch Entertainment Corporation
(incorporated by reference to Exhibit 10(e) of the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1987).
*(b) Lynch Corporation 401(k) Savings Plan (incorporated by
reference to Exhibit 10(b) to Registrant's Report Form 10-K
for the year ended December 31, 1995).
(c) Stock Purchase Agreement, dated May 13, 1993, whereby
Registrant acquired J.B.N. Telephone Company, Inc.
(incorporated by reference to Exhibit 2(a) of the
Registrant's Form 8-K, dated December 13, 1993).+
(d) Stock Purchase Agreement, dated January 19, 1994, between
Registrant and Mario J. Gabelli (incorporated by reference to
Exhibit II of Amendment
-40-
<PAGE> 41
Number 36 to Schedule 13D filed by Mario J. Gabelli and
affiliated companies on January 19, 1994).
(e) Shareholders Agreement among Capital Communications Company,
Inc., Lombardo Communications, Inc. and Lynch Entertainment
Corporation II (incorporated by reference to Exhibit 10 of
Registrant's Form 8-K, dated March 14, 1994).
(f) Acquisition Agreement between Brown-Bridge Acquisition
Corporation and Kimberly-Clark Corporation, dated June 15,
1994 (exhibit omitted) (incorporated by reference to Exhibit
10(c) to Registrant's Form 10-Q for the quarter ended June
10, 1994).+
*(g) Management Agreement, dated as of June 10, 1994, by and among
Boyle, Fleming, George & Co., Inc. and Safety Railway Service
Corporation (incorporated by reference by Exhibit 7.1 to the
Registrant's Form 8-K, dated June 13, 1994).
(h) Warrant Purchase Agreement, dated as of June 10, 1994, by and
among Boyle, Fleming, George & Co., Inc. and Safety Railway
Service Corporation (incorporated by reference by Exhibit 7.1
to the Registrant's Form 8-K, dated June 13, 1994).
(i) A Warrant, dated as of June 10, 1994, executed by Safety
Railway Service Corporation (incorporated by reference to
Exhibit 7.1 to Registrant's Form 8-K, dated June 12, 1994).
(j)(i) Asset Purchase Agreement, dated as of June 15, 1994, between
Kimberly-Clark Corporation and Brown-Bridge Acquisition Corp.
(Exhibits omitted) (incorporated by reference to Exhibit 10(c)
to Registrant's Form 10-Q for the quarter ended June 30,
1994).+
(j)(ii) Amendments Nos. 1-3 to Asset Purchase Agreement by and between
Kimberly-Clark Corporation and Brown-Bridge Industries, Inc.
(formerly Brown-Bridge Acquisition Corp.) (incorporated by
reference to Registrant's Form 8-K, dated September 19, 1994).
(k) Stock Purchase Agreement, dated as of August 26, 1994, among
Brighton Communications Corporation, Lynch Telephone
Corporation VII, Universal Service Telephone Company and
InterDigital Communications Corporation (Exhibits omitted)
(incorporated by reference to Exhibit 7.1 to Registrant's
Form 8-K, dated September 26, 1994).+
*(l) Stock Purchase and Loan Program (incorporated by reference to
Exhibit 10(p) to Registrant's Form 10-K for the year ended
December 31, 1994).
(m) Shareholders' and Voting Agreement, dated September 16, 1994,
among Safety Railway Service Corporation, Brown-Bridge
Industries, Inc. and the other stockholders of Brown-Bridge
(incorporated by reference to Exhibit 10(q) to Registrant's
Form 10-K for the year ended December 31, 1994).
(n) Put Option Agreements, dated September 16, 1994, among Safety
Railway Service Corporation, Brown-Bridge Industries, Inc. and
certain stockholders of Brown Bridge (incorporated by
reference to Exhibit 10(q) to Registrant's Form 10-K for the
year ended December 31, 1994).
*(o) Directors Stock Plan
-41-
<PAGE> 42
*(p) Phantom Stock Plan (incorporated by reference to Exhibit 10(p)
to Registrant's Form 10-Q for the year ended March 31, 1997).
(q) Stock and Asset Purchase Agreement, dates as of September 27,
1995, by and among Central Products Acquisition Corp.,
Unisource Worldwide, Inc. and Alco Standard Corporation
(incorporated by reference to Exhibit 7.1 to Registrant's
Form 8-K dated October 18, 1995).+
(r) Stock Purchase Agreement, dated as of November 1, 1995, among
Brighton Communications Corporation, Lynch Telephone
Corporation VIII and certain other persons (excluding
exhibits) (incorporated by reference to Exhibit 10(v) to
Registrant's Form 10-K for the year ended December 31, 1995).+
(s)(i) Loan Agreement, dated as of November 6, 1995, between Lynch
PCS Corporation A and Aer Force Communications L.P. (now
Fortunet Wireless, L.P.) (four similar loan agreements with
Fortunet Wireless, L.P. increase the total potential
commitment to $41.8 million) (incorporated by reference to
Exhibit 10(w) to Registrant's Form 10-K for the year ended
December 31, 1995..
(s)(ii) Amendment No. 1 to the Loan Agreement, dated as of November 6,
1995, referred to in 10(s)(i) (incorporated by reference to
Exhibit 10(a) to Registrant's Form 10-Q for quarter ended
March 31, 1996).
(t) Agreement and Plan of Merger (Brown-Bridge Minority Interest),
by and among Spinnaker, BB Merger Corp., Brown-Bridge
Industries, Inc. and the stockholders of Brown-Bridge
Industries, Inc. on Exhibit A thereto (incorporated by
reference to Exhibit 99.2 to Registrant's Form 8-K, dated
April 19, 1996).+
(u)(i) Loan Agreement, dated as of August 12, 1996, between Gabelli
Funds, Inc. and Registrant (incorporated by reference to
Exhibit 10(u)(i) of Registrant's Form 10-K for the year ended
December 31, 1996.
(u)(a) Correction to Loan Agreement.
(u)(ii) Pledge and Security Interest Agreement, dated as of August 12,
1996, by and between Gabelli Funds, Inc. Registrant and
certain subsidiaries of Registrant (incorporated by reference
to Exhibit 10(u)(ii) to Registrant's Form 10-K for the year
ended December 31, 1996).
(v) Letter Agreement, dated as of August 12, 1996, between Rivgam
Communicators, L.L.P. and Lynch PCS Corporation G
(incorporated by reference to Exhibit 10(u)(ii) to
Registrant's Form 10-K for the year ended December 31, 1996).
(w) Loan Agreement, dated as of August 12, 1996 between Lynch PCS
Corporation F and Aer Force Communications B, L.P.
(incorporated by reference to Exhibit 10(u)(ii) to
Registrant's Form 10-K for the year ended December 31, 1996).
10(x) Letter Agreement between Lynch PCS Corporation G and
Bal/Rivgam, L.L.C. (incorporated by reference to Exhibit 10(x)
to Registrant's Form 10-Q for the Quarter ended September 30,
1997).
10(y) Letter Agreement, dated January 20, 1998, between Lynch PCS
Corporation G and BCK/Rivgam, L.L.C.
*10(z) Employment Agreement, dated February 2, 1998, between
Registrant and Mark Feldman.
13 Annual Report to Shareholders for the year ended December 31,
1997 (only
-42-
<PAGE> 43
those portions of the Annual Report expressly incorporated by
reference herein shall be deemed filed.)
16 Letter Re: Change in Certifying Accountant (incorporated by
reference to Exhibit 16 to Registrant's Form 8-K, dated March
19, 1996).
21 Subsidiaries of the Registrant.
23 Consents of Independent Auditors.
- Ernst & Young LLP
- Arthur Andersen LLP
- McGladrey & Pullen, LLP(2)
- Deloitte & Touche, LLP
- Johnson Mackowiak Moore & Myott, LLP
- Frederick & Warinner, L.L.C.
24 Powers of Attorney.
99 Report of Independent Auditors.
- Report of Arthur Andersen LLP on the
Consolidated Financial Statements of the
Morgan Group, Inc. for the year ended
December 31, 1995.
- Report of McGladrey & Pullen, LLP on the
Financial Statements of Capital
Communications Corporation for the years ended
December 31, 1996 and 1995.
- Report of McGladrey & Pullen, LLP on the
Financial Statements of Coronet
Communications Corporation for the years ended
December 31, 1996 and 1995.
- Report of Deloitte & Touche LLP on the
Financial Statements of Central Products
Company for the year ended December 31, 1996
and the three months ended December 31, 1995.
- Report of Johnson Mackowiak Moore & Myott,
LLP on the Consolidated Financial Statements
of Dunkirk & Fredonia Telephone Company for
the period November 26, 1996 through December
31, 1996.
- Report of Frederick & Warinner, L.L.C. on the
Financial Statements of CLR Video, Inc. for
the year ended December 31, 1996.
- ----------------------
* Management contract or compensatory or arrangement.
+ Registrant agrees to furnish a supplemental copy of any omitted schedule to
the Securities and Exchange Commission upon request.
The Exhibits listed above have been filed separately with the Securities and
Exchange Commission in conjunction with this Annual Report on Form 10-K or have
been incorporated by reference into this Annual Report on Form 10-K. Lynch
Corporation will furnish to each of its shareholders a copy of any such Exhibit
for a fee equal to Lynch Corporation's cost in furnishing such Exhibit.
Requests should be addressed to the Office of the Secretary, Lynch Corporation,
8 Sound Shore Drive, Greenwich, Connecticut 06830.
-43-
<PAGE> 1
EXHIBIT 10(0)
LYNCH CORPORATION
DIRECTORS STOCK PLAN (THE "PLAN")
1. Each person who is a director of Lynch Corporation (the "Corporation")
(but is not an employee of the Corporation) on the first business day
of each year (except that the date of grant for 1996 shall be February
1, 1996) shall be granted as of said business day a number of shares
of common stock of the Corporation ("Common Stock") equal to $15,000
divided by the average closing price of the Common Stock on the
American Stock Exchange for the 30 trading days preceding the date of
grant of the shares (January 2, 1996 in the case of the 1996 grant)
(whether or not the Common Stock traded on said day), but the number
of shares of Common Stock shall not be less than 200. Any person who
becomes such a director after the first business day of a year may, at
the option of the Board of Directors, be granted a number of shares of
Common Stock for that year up to the number of shares awarded to other
directors for that year. Unless otherwise determined by the Board of
Directors, if a director receiving a grant in a particular year is not
a director on March 31, June 30, September 30 and December 31 of said
year, the director shall
<PAGE> 2
promptly transfer to the Corporation 100%, 75%, 50%, or 25%,
respectively, of the shares received for that year. Certificates
issued by the Corporation may contain (i) an appropriate legend as to
the foregoing obligation and (ii) an appropriate securities laws
legend.
2. The Plan may be amended in any respect or discontinued at any time by
action of the Board of Directors of the Corporation; provided,
however, that any such action shall not affect any shares of Common
Stock previously granted and provided further that the Plan provisions
may not be amended more than once every six months, other than to
comply with changes in the Internal Revenue Code, the Employee
Retirement Income Security Act or the rules therewith. Adoption of
the Plan does not create any limitation on the power of the Board of
Directors to create other plans or programs for directors.
<PAGE> 1
EXHIBIT 10(u)(i)(a)
CORRECTION TO LOAN AGREEMENT ("LOAN AGREEMENT")
DATED AS OF AUGUST 12, 1996
BY AND BETWEEN
LYNCH CORPORATION, AS "BORROWER"
AND
GABELLI FUNDS, INC., AS "LENDER"
Whereas the Borrower and the Lender agree that the Section 2.01(d), as
originally executed, was incorrect and desire to correct said provision;
Now Therefore, the Borrower and Lender agree that Section 2.01(d)
shall be corrected in its entirety to read as follows:
"(d) Special Fee. If Borrower has not prepaid the Loan in
full within five Business Days after the end of the F-Block Auction, Borrower
shall pay Lender a special fee equal to 20.04008% of the Net Profits of PCSF's
49.9% partnership interest in Bidder (i.e., a 10% interest in Bidder), from
time to time as and when realized. Net Profits shall not include any amounts
received by PCSF pursuant to the Bidder Loan Agreement and shall be net of any
losses of PCSF under the Bidder Loan Agreement. For purposes of computing Net
Profits, capital contributions by PCSF to Bidder shall be deemed to be loans to
Bidder under the Bidder Loan Agreement and interest under the Bidder Loan
Agreement shall include deemed commitment fees and interest on such capital
contributions. Net Profits shall mean and shall be deemed to be realized at
the time of (i) any profits received by PCSF from the sale, directly or
indirectly, of all or a substantial portion of the assets of Bidder and the
distribution of the proceeds to the partners (after payments of the principal
and interest under the Bidder Loan Agreement), (ii) any payments or
distributions by Bidder to Borrower or its Affiliates, including loans (other
than principal, interest and other amounts as contemplated in the Bidder Loan
Agreement and the Expenses Agreement referred to therein) including loans,
(iii) the proceeds from any sale, directly or indirectly, including a merger or
similar transaction, by Borrower of any of its partnership interest in Bidder,
and/or (iv) the net proceeds from any sale of the stock of PCSF, whether by the
existing stockholder or an Affiliate, to a person or entity that is not its
Affiliate of PCSF. The term "Affiliate" shall have the meaning in Rule 12b-2
under the Securities Exchange Act of 1934, as amended. Any dispute under this
Section 2(d), including without limitation the amount of profit, the value of
any non-cash items or
<PAGE> 2
other matters, if the parties cannot otherwise agree, shall be submitted to
binding arbitration under the rules of the American Arbitration Association."
IN WITNESS WHEREOF, the Borrower and the Lender have executed this
Correction effective as of August 12, 1996.
LYNCH CORPORATION GABELLI FUNDS, INC.
By: By:
------------------- -----------------------
Robert E. Dolan
Chief Financial Officer
<PAGE> 1
EXHIBIT 10(y)
BCK/RIVGAM, L.L.C.
19 SPECTACLE LANE
WILTON, CT 06897
January 20, 1998
Lynch PCS Corporation G
8 Sound Shore Drive
Greenwich, CT 06830
Gentlemen:
This will confirm the agreement between BCK/Rivgam, L.L.C. ("BCK/R")
and Lynch PCS Corporation G ("LPCG") with respect to BCK/R's participation in
the Federal Communications Commission ("FCC")'s auctions for licenses for local
multipoint distribution service ("LMDS").
1. LPCG Services. LPCG will provide certain services as follows:
(i) LPCG will be responsible for submitting bids in the LMDS
auctions on behalf of BCK/R, subject to the control and as authorized by BCK/R;
(ii) LPCG will be responsible, in consultation with BCK/R, for
recommending certain strategies for any LMDS licenses won; and
(iii) LPCG will provide such other ancillary services as agreed to
between LPCG and BCK/R.
2. Compensation. In return for LPCG's providing such services, BCK/R
will
(a) reimburse LPCG for all out-of-pocket expenses incurred by LPCG
in connection with providing such services provided BCK/R is the winning bidder
on any LMDS Licenses; and
(b) pay LPCG 5% of the Net Profits of BCK/R from time to time as
and when realized.
With respect to any capital contributions by Marie Balitsos, Nara
<PAGE> 2
Cadorin, and Rivgam LMDS, L.L.C. ("Rivgam") or any Affiliate of such person, to
BCK/R up to an aggregate maximum of 25% of the cost (net of any bidding
credits) of LMDS Licenses won by BCK/R in the LMDS auctions (the "Equity
Investment"), there shall be deemed to be, for purposes of computing Net
Profits, an interest expense equal to 20% plus the higher of the prime rate (as
set forth in the Wall Street Journal) or 7% (reset annually on each January 1),
compounded annually. Interest, commitment fees and other payments on loans by
Rivgam (or its Affiliate) to BCK/R (the "Rivgam Loan") pursuant to the Loan
Agreement (the "Rivgam Loan Agreement") dated as of February 1, 1998, shall be
deemed to be costs at the rates stated therein in computing Net Profits, but
the special fee (the "Special Fee") provided for in Section 2.01(e) of the
Rivgam Loan Agreement shall not be deemed to be a cost for purposes of
computing Net Profits. Net Profits shall mean and shall be deemed to be
realized at the time of (i) any profits received by BCK/R from the sale,
directly or indirectly, of all or a substantial portion of the assets of BCK/R
(assuming the payment of the principal and deemed interest expense on the
Equity Investment), (ii) any payments or distributions by BCK/R, including
loans, to the members of BCK/R or their Affiliates (other than payments of
principal and deemed interest expense on the Equity Investment, payments (other
than the Special Payment) pursuant to the Rivgam Loan Agreement and payments
pursuant to the Expenses Agreement referred to in the Rivgam Loan Agreement),
(iii) the proceeds from any sale, directly or indirectly, including a merger or
similar transaction, by any Members of BCK/R of any of their interest in BCK/R
and/or (iv) the proceeds from any sale or transfer of any interest in any
member of BCK/R, whether by an existing shareholder or an Affiliate, to a
person that is not an Affiliate of BCK/R. The term "Affiliate" shall have the
meaning in Rule 12b-2 under the Securities Exchange Act of 1934, as amended.
Any recipient of any distributions or proceeds from sale shall be responsible,
in addition to BCK/R, for the payment of any amounts due under clause (b)
above.
3. Other.
(a) The agreement shall be binding on any successors to LPCG, BCK/R
and any Members of BCK/R.
(b) BCK/R shall not conduct any business other than LMDS.
-2-
<PAGE> 3
(c) This Agreement shall be construed in accordance with the internal
law of the State of Connecticut (without reference to choice of law
provisions).
(d) Any dispute hereunder shall be subject to arbitration in New York
City or Stamford, Connecticut, in accordance with the rules of the American
Arbitration Association.
IN WITNESS WHEREOF, the parties have duly executed and delivered this
Letter Agreement as of January 20, 1998.
LYNCH PCS CORPORATION G BCK/Rivgam, L.L.C.
By: By:
------------------- ----------------------------
Robert E. Dolan Marie Balitsos
President Managing Member of BCK/R
AGREED TO:
----------------------------
Marie Balitsos
A Member of BCK/R
----------------------------
Nara Cadorin
A Member of BCK/R
Rivgam LMDS, L.L.C.
A Member of BCK/R
By:
------------------------
-3-
<PAGE> 1
EXHIBIT 10(z)
February 2, 1998
Mr. Mark M. Feldman
27 Hampton Road
Scarsdale, NY 10583
Dear Mark:
This letter will memorialize the understanding between Lynch
Corporation and Mark M. Feldman (respectively, "Lynch" and Feldman";
collectively the "Parties") regarding the employment of Feldman by Lynch as
Executive Vice President - Corporate Development. This letter accurately sets
forth the understanding of the Parties; upon its execution it will be a binding
contract between them.
I Feldman will:
A. Report to the Chief Executive Officer of Lynch.
B. Be responsible for the implementation or effectuation of
transactions that were approved by Lynch that either may be
requested of him ("Delegated Transaction") or may be
identified, or otherwise originated, and introduced by him
("Introduced Transaction"). Without intending to limit the
scope of any such transactions:
1. Examples of Delegated Transactions are transactions
intended to rationalize the asset bases of Lynch and
its subsidiaries and affiliates (but excluding Mario
J. Gabelli and his affiliates), including, but not
limited to, effectuating sales, mergers equity
offering, or spin-offs of operations, acquisitions or
dispositions of individual assets, the raising of
capital for operating purposes, and any other
transaction that is not an Introduced Transaction;
and
<PAGE> 2
2. Examples of Introduced Transactions are acquisitions
and investments for Lynch and its subsidiaries and
affiliates (but excluding Mario J. Gabelli and his
affiliates) and raising pools of investment capital
(i.e., where Lynch raises and manages investment
funds for third parties), that may be so identified,
or otherwise originated, and introduced by him.
C. Provide such other services as may be reasonably requested by
the Chief Executive Officer of Lynch that are consistent with
Feldman's background and training.
II Lynch will:
A. Make Feldman a corporate officer with the title of Executive
Vice President - Corporate Development.
B. Pay Feldman an annual salary of $250,000, reimburse his
reasonable out-of-pocket expenses in accordance with company
policies, and provide him with such insurance, retirement, and
vacation benefits as are customarily provided by Lynch to its
senior officers.
C. Provide Feldman with twenty percent (20%) interests in the
future net gain or profits (after an allowance for Lynch's
customary return on capital for acquisitions and similar
investments) generated by all such Introduced Transactions
that are actually consummated. The form and terms of each
such interest to be determined on a case-by-case basis
depending on the structure and characteristics of the
particular underlying transaction. Feldman shall not transfer
any such interests received, without Lynch's consent in the
sole discretion. Any such interest shall not have any voting,
approval, election, inspection, fiduciary or other similar
ownership rights, except to the extent required by law, in
which case Feldman hereby grants to Lynch an irrevocable proxy
and power of attorney (which is coupled with an interest) to
exercise such rights as Lynch deems appropriate in its sole
discretion. If, in Lynch's sole discretion, a Feldman
interest would adversely affect a transaction which Lynch
desires to undertake, Feldman shall be required to agree to do
with his interest what Lynch in its sole discretion
<PAGE> 3
elects. Otherwise, Lynch shall have the right, upon notice to
Feldman, to acquire any such interest for cash at fair market
value. If the parties are unable to agree on fair market
value, the determination of fair value shall be submitted to a
binding arbitration in accordance with the rules of the
American Arbitration Association;
D. Pay Feldman, at the sole discretion of Lynch, an annual bonus,
part of Lynch's management bonus pool, based on Feldman's
successful implementation or consummation of Designated
Transactions or for any reason determined solely by Lynch;
E. Provide Feldman with an office with his own Internet access
and computer in the corporate headquarters of Lynch in
Greenwich, Connecticut, or in Rye, New York.
III The term of this agreement shall be from February 2, 1998, through
December 31, 1999. This agreement shall be terminable for cause at
any time and it shall be terminable without cause after October 31,
1998, on three months notice. Upon termination, Feldman shall have
the right to retain all equity interest earned herein as provided in
paragraph IIC, above, and Lynch shall have the right to retain all
pending Introduced Transactions, provided that (a) it shall elect such
right in writing within thirty (30) days of Feldman's termination; and
(b) it shall compensate Feldman in the manner described in paragraph
IIC for any Introduced Transactions on which he spent substantial time
prior to his termination and consummated within 6 months after
termination on terms comparable to those discussed prior to
termination of employment. Lynch shall have no other obligation to
Feldman in connection with any termination of employment.
IV As originally proposed by Lynch, Feldman shall be allowed to conduct
his financial advisory business as long as it does not conflict with
his obligations hereunder. As originally proposed by Feldman, he will
not undertake any significant new business without bringing it to the
attention of Lynch. Feldman presently is a director of Baron Asset
Fund and SNL Securities, Inc., and he represents that there is not
present conflict between either such directorship and the functions
herein contemplated. In the event that such a
<PAGE> 4
conflict develops, however, Feldman will immediately resign the
conflicting directorship.
Dated as of February 2, 1998.
Lynch Corporation Mark M. Feldman
By: L/S:
--------------------- ---------------------
<PAGE> 1
EXHIBIT 13
LYNCH CORPORATION
- ------------------------------------------------------------------------------
ANNUAL REPORT--1997
- ------------------------------------------------------------------------------
<PAGE> 2
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 Display
Technologies was formed to be the parent of Lynch Machinery and to focus
resources on growth opportunities in the electronic display industry. In
1998, Lynch Machinery's name was changed to Lynch Systems, 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 - 1996
- - 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 8% Convertible Subordinated
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., is 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
manufactured housing 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 acquisitions 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 Systems 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 the Boyle, Fleming & Company,
Inc., with the acquisition of Brown-Bridge Industries, a manufacturer of
adhesive coated stocks from Kimberly-Clark. In 1998, Brown-Bridge was
renamed Spinnaker Coating, Inc. 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.
- - 1995 unfolded with Lynch making dynamic progress. In multimedia, we
partnered with CLR Video, a cable operator in Kansas, bought 340 telephone
lines from Sprint and commercialized DirectTV. 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.
- - 1996 was another vigorous year for Lynch. On the telephony front, we
consummated the affiliation with the Maytum family and Dunkirk & Fredonia
and completed the purchase of 1,400 lines from U.S. West. Morgan closed on
Transit Homes of America, Inc., an innovative leader in manufactured
housing transport under the aegis of Larry Kling, further consolidating
its role as the leader in the still fragmented manufactured housing
outsourcing business. We streamlined the balkanized financial structure at
Spinnaker with the issuance of $115 million Senior Secured Notes Due 2006
through Bankers Trust. We also refinanced our investment in television
station WOI. Finally, partnerships including Lynch subsidiaries, organized
and bid on Personal Communications Services licenses in the so-called
"C-Block" and "F-Block" auctions.
LYNCH--1997
- - Completed the acquisition of Upper Peninsula Telephone Company.
- - Signed a contract at Spinnaker to acquire the pressure sensitive business
from. S.D. Warren. The transaction was closed on March 17, 1998 under a
newly formed subsidiary, Spinnaker Coating-Maine, Inc.
- - Spun-off interest in East/West Communications, Inc., a F-Block PCS
licensee with licenses covering a population of 20 million.
- - Lynch wrote-off approximately 30% of its subsidiary's investment in the
C-Block licenses. The net of tax write-off was $4.6 million, or $3.27 per
share.
<PAGE> 3
FINANCIAL HIGHLIGHTS
(IN THOUSANDS OF DOLLARS, EXCEPT FOR SHARE AMOUNTS)
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales and Revenues:
Multimedia $ 47,908 $ 28,608 $ 23,597 $ 20,144 $ 16,206
Services 146,154 132,208 122,303 101,880 82,829
Manufacturing 273,474 291,064 187,727 61,217 27,986
---------- ----------- ----------- ----------- -----------
Total $ 467,536 $ 451,880 $ 333,627 $ 183,241 $ 127,021
========== =========== =========== =========== ===========
- ---------------------------------------------------------------------------------------------------------------------
Earnings Before Interest, Taxes,
Depreciation and Amortization (EBITDA):
Multimedia $ 24,134 $ 15,331 $ 12,342 $ 10,858 $ 8,965
Services 2,090 (1,765) 4,635 4,349 3,013
Manufacturing 21,171 22,751 17,047 4,693 1,915
---------- ----------- ----------- ----------- -----------
EBITDA 47,395 $ 36,317 $ 34,024 $ 19,900 $ 13,893
Corporate Expenses-Net (1,563) (2,396) (2,928) (1,521) (1,366)
---------- ----------- ----------- ----------- -----------
Total $ 45,832 $ 33,921 $ 31,096 $ 18,379 $ 12,527
========== =========== =========== =========== ===========
- ---------------------------------------------------------------------------------------------------------------------
Depreciation/Amortization:
Multimedia $ 12,183 $ 8,660 $ 7,350 $ 5,651 $ 4,400
Services 1,075 1,498 1,264 915 803
Manufacturing 7,787 6,823 2,662 931 690
---------- ----------- ----------- ----------- -----------
Total $ 21,045 $ 16,981 $ 11,276 $ 7,497 $ 5,893
========== =========== =========== =========== ===========
- ---------------------------------------------------------------------------------------------------------------------
Capital Expenditures $ 21,828 $ 25,518 $ 19,569 $ 11,598 $ 4,356
- ---------------------------------------------------------------------------------------------------------------------
Net Income (Loss)- Total $ (2,878) $ 2,696 $ 5,145 $ 2,328 $ 2,953
- Per Share - Basic (2.03) 1.94 3.73 1.75 2.41
- Diluted (2.03) 1.92 3.66 1.72 2.29
- ---------------------------------------------------------------------------------------------------------------------
Working Capital $ 55,951 $ 41,632 $ 25,626 $ 22,713 $ 47,529
Current Ratio 1.6 to 1 1.4 to 1 1.3 to 1 1.3 to 1 3.3 to 1
Total Assets $ 423,638 $ 392,620 $ 302,439 $ 185,910 $ 129,972
Shareholders' Equity $ 36,451 $ 38,923 $ 35,512 $ 30,531 $ 24,316
Per Share $ 25.72 $ 27.98 $ 25.76 $ 22.15 $ 19.84
- ---------------------------------------------------------------------------------------------------------------------
Price Per Share: High $ 109 3/4 $ 92 1/2 $ 84 3/4 $ 32 7/8 $ 26 3/8
Low 69 1/2 56 30 22 20 3/4
At December 31 Stock Price 83 70 1/2 58 1/2 30 23
- ---------------------------------------------------------------------------------------------------------------------
Shares O/S 1,417,048 1,391,034 1,378,663 1,378,658 1,225,677
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
1
<PAGE> 4
CHAIRMAN'S LETTER
TO OUR SHAREHOLDERS:
Lynch's 1996 Annual Report started with the following statement, "By all
standards, Lynch ended 1996 on a solid note." I cannot say that for 1997. The
best analogy I may make is to say that 1997 was akin to walking through
knee-high mud. Our stock closed on December 31, 1997 at $83.00 per share, an
18% increase over the $70.50 per share price of the prior year. In addition,
each shareholder received one share of East/West Communications, Inc. for each
share of Lynch--on which the accountants placed a value of about $0.10 per
Lynch share.
Our telephone operations prospered. After a five-year "love-making fest," we
paired-up with the Upper Peninsula Telephone Company of Michigan. On the sour
side was the malaise associated with our PCS license involvement--the so-called
"C-Block"--I'll explain more later. Also, on the sour side, was the inability
to hit pay dirt at either Lynch Display Technologies or at M-tron. Spinnaker
and Morgan treaded water--so to speak. The net result was that we were unable
to add to the intrinsic value of our enterprise from internal initiatives. Any
progress on this all important bench mark is only traceable to the dynamics of
"the deal world" where merger fervor lifted and is lifting the multiples
accorded transactions, and, thereby, lifting our own "intrinsic valuation."
Let's step back and look at these comments in a more graphic format.
[LYNCH PUBLIC STOCK PRICE CHART] [LYNCH STOCK CHART]
[INTRINSIC VALUE GOAL CHART]
THE ECONOMY IN THE U.S.--HOW IT UNFOLDED
Again in our 1996 Annual Report, we stated "The outlook for the U.S. economy
continues to be of steady economic growth, low inflation and abundant financial
liquidity." Indeed, we ended 1997 on a vigorous economic note. For 1998, we
believe that the progress will continue with GDP rising 2 - 21/2%, inflationary
pressures, particularly on the labor front, contained by increased productivity
gains and lingering ripple effects of the Asian economic and currency turmoil.
Yet not all is bright. On our "bear watch," (we referred to these as
"potential gremlins at work" ) we include the following:
- - Will the Asian problems that we see at the time of this writing prove to
be the tip of a very deep iceberg that will march throughout the world,
including China/Hong Kong and, more importantly, impact major trade
partners of the United States such as Brazil and Mexico.
- - Will the U.S. leadership that provided the backdrop for sustained gains in
economic activity, employment and financial assets, be changed. Simply
stated, will Clinton become an early lame duck or resign, and will the
financial equivalent of Ruth and Gehrig (Rubin and Greenspan) be as
persistent and diligent in providing financial stewardship.
- - Will the Republicans maintain their control of the legislature to provide
the continued policy of checks and balances to liberal, left-winged social
initiatives that Clinton seems to be preparing.
- - Will upward pressure on wages not be checked by productivity gains and
eventually lead to an increase in the Federal Funds rate.
2
<PAGE> 5
- - Will a synchronized worldwide economic upswing lead to pressure on
interest rates. Equally, the emergence of trade barriers could cause a
political backlash.
- - Of course, there is always the potential for a disruption in the flow of
oil from the Mid-east.
- - Last, but certainly not least--the level of the market. Valuations are
high by most measures and the overall equity market does not appear to
have a margin of safety.
<TABLE>
<CAPTION>
- ----------------------------------------------------------
REPORT CARD FOR 1997
<S> <C>
Lynch Corporation
- ----------------------------------------------------------
Growth in EBITDA C
Acquisitions B
Financing D
Financial Incomplete
Creativity A
- ----------------------------------------------------------
</TABLE>
TO DO LIST IN 1998 AND BEYOND
<TABLE>
<CAPTION>
Your
Chairman Management Other
------- ---------- ----
<S> <C> <C> <C> <C>
- - Restart Growth in Intrinsic Value X X X
- - Raise Capital Efficiently X
- Monetize our holding in Spinnaker X
- Consolidate debt and restructure our
balkanized telco holdings X
- Split Lynch into two parts (Project Dolly) X X X
</TABLE>
- - Marry M-tron's customer base and manufacturing know how with technical
skill sets in high end frequency, initially, surface acoustic wave ("SAW")
technology.
- - Launch Lynch Display Technology by buttressing traditional "big screen" TV
capability (including HDTV) into all forms of equipment for PC (including
plastic and liquid display) and TV production.
- - Use Morgan as platform for growth either into collateral aspects of mobile
home business--including insurance, financing and lease/rental
business--or into new businesses.
For Lynch, our mantra remains the same: "Lets grow intrinsic value by 25%"
and lets do this by duplicating ourselves in the next ten years, our Project
Dolly.
LYNCH--LOOKING THROUGH THE REARVIEW MIRROR
As we go forward, we should examine each of the building blocks of our
intrinsic value. First, by looking at the interplay in 1997 and, then, looking
forward.
- - Telephony--take our systems and create C-LECs, ISP, LD resellers. In other
words, capitalize on the myriad opportunities opening up from new
technology and the deregulation of telecommunications. During 1997,
revenues in the multimedia group increased 67% to $47.9 million from $28.6
million in the previous year reflecting the inclusion of Dunkirk &
Fredonia Telephone Company and Upper Peninsula Telephone Company. EBITDA
at the telephone companies surged 57% to $24.1 million from $15.3 million
reported in 1996, also primarily due to these acquisitions.
3
<PAGE> 6
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Access Lines/Subscribers Population Telephony
- --------------------------------------------------------------------------------------------------------------------
Total
Telephony Alarm Minutes of
Operation Wireline Cable ISP Systems DirectTV Cellular PCS Use
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Western New Mexico 5,941 500 1,390 8,182
- --------------------------------------------------------------------------------------------------------------------
Inter-Community 2,634 110 7,334
- --------------------------------------------------------------------------------------------------------------------
Cuba City 1,698
- --------------------------------------------------------------------------------------------------------------------
Belmont 806
- --------------------------------------------------------------------------------------------------------------------
Bretton Woods 491 56
- --------------------------------------------------------------------------------------------------------------------
J.B.N. 2,698 80
- --------------------------------------------------------------------------------------------------------------------
Haviland 4,043 194 207
- --------------------------------------------------------------------------------------------------------------------
Dunkirk & Fredonia 11,634 2,553 569
- --------------------------------------------------------------------------------------------------------------------
Upper Peninsula 6,580
- --------------------------------------------------------------------------------------------------------------------
CLR Video 4,466
- --------------------------------------------------------------------------------------------------------------------
Fortunet* 7,297,743
- --------------------------------------------------------------------------------------------------------------------
1997 TOTAL 36,525 4,660 3,506 569 1,390 15,516 7,297,743 16,709M
- --------------------------------------------------------------------------------------------------------------------
1996 TOTAL 28,630 4,454 971 536 1,355
- --------------------------------------------------------------------------------------------------------------------
Growth 97/96 27.6% 4.6% 261% 6.2% 2.6%
</TABLE>
* A Lynch subsidiary is a 49.9% limited partner in Fortunet.
- - Services--Revenues at The Morgan Group rose nearly 11% to $146.2 million
from $132.2 million. The revenue growth reflects the acquisition of
Transit Homes of America on December 31, 1996, offset by a decrease in
revenues associated with Morgan's unprofitable Truck-away operation which
was disposed of during the second quarter of 1997. Stripping out the
effects of certain special charges associated with Truckaway and a change
in accounting for certain components of driver pay, EBITDA rose 56% to
$2.7 million from $1.7 million.
- - Manufacturing--Our manufacturing group's results were disappointing and
well below our expectations with revenues dropping 6% to $273.5 million
from the $291.1 million recorded in 1996. EBITDA dropped to $21.2 million
from $22.8 million.
a) Spinnaker Industries, Inc. revenues declined by 6% to $232.0 million
from $246.5 million as a decline in revenues per unit shipped offset
volume gains, notably at Central Products Company. Continuing efficiencies
resulted in a margin increase, allowing a 9% increase in EBITDA to $17.8
million from $16.3 million.
b) Timing delays in the manufacturing of extra-large glass presses under a
significant long-term contract hampered Lynch Machinery results. Revenues
and EBITDA fell by $7.4 million and $3.2 million, respectively, from the
previous year.
c) The bright spot was M-tron. Bolstered by significant sales to
telecommunications equipment manufacturers, M-tron's revenues and EBITDA
grew by 24% and almost 25%, respectively, for 1997. Continued growth in
the telecommunications marketplace should result in continued favorable
comparisons. More importantly, M-tron is accelerating plans to move into
surface acoustic wave (SAW) technology.
FINANCIAL HIGHLIGHTS--1997
- - EBITDA (earnings before interest, taxes, depreciation and amortization)
before corporate expenses increased 31% to a record of $47.4 million in
1997 from $36.3 million in 1996.
- - Revenues rose 3% to a record of $467.5 million from $451.9 million
reported in 1996.
- - Capital expenditures were $21.8 million in 1997--as we continued to build
our telecommunications and manufacturing infrastructure--compared to $25.5
million in 1996. Roughly $23 million is projected for 1998.
4
<PAGE> 7
- - Of note: at December 31, 1997, Lynch owned the following:
<TABLE>
<CAPTION>
Control % of Company Shares 12/31/96 Price 12/31/97 Price
- ----- ---------- -------- --------- ----------
<S> <C> <C> <C>
Spinnaker Industries, Inc. 63%
Common (SPNI) 2,237,203 30 Bid 201/8 Bid
Class A (SPNIA) 2,259,000 40 Bid 221/2 Bid
The Morgan Group, Inc. 51%
Class A Common (MG) 155,900 71/2 Close 91/4 Close
Class B Common 1,200,000 * *
Non-Control
- ---------
Hector Communications, Inc. 6%
Preferred** 124,000 ** **
Common 20,700 71/4 Close 91/4 Close
CommNet Cellular, Inc. .02%
Common 2,853 277/8 Close 359/16 Close
Pegasus Communications Inc. .2%
Class A Common 15,275 13.75 Close 20.75 Close
Tremont Advisers, Inc. 3%
Class B Common 116,189 2.50 Bid 4.75 Bid
East/West Communications, Inc.
-- 7,800 $1000 par value
per share***
</TABLE>
- ------------
* Class B does not trade, but is convertible into Common on a 1:1 basis.
** Preferred does not trade, but is convertible into Common on a 1:1 basis.
***Preferred does not trade.
NOW BACK TO THE FUTURE
OUR FUTURE--PROJECT "DOLLY"
[PRE-DOLLY CHART]
[POST-DOLLY CHART]
5
<PAGE> 8
FIRST TWELVE YEARS "SOWING"
To understand our guidelines for the future, let's look at 1997 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 1997, there were 1,417,048 shares outstanding and
shareholder equity was $36.5 million. More importantly, EBITDA was $45.8
million versus $0.1 million in 1985. Thus, during this timeframe, we have grown
revenues at 37% CAGR and EBITDA at 61% CAGR. We accomplished this with limited
financial resources and virtually no increase in shares outstanding. We also
have spun off two potentially lucrative companies to shareholders, Tremont and
East/West.
<TABLE>
<CAPTION>
1985 1997 CAGR
- --------------------------------------------------------------------------------------------------------------------
(000) (000)
<S> <C> <C> <C>
Revenues $10,699 $467,536 37%
EBITDA $ 147 $ 45,832 61%
Shareholder Equity $14,348 $ 36,451 8%
Number of Shares 1,364,110 1,417,048 .3%
Intrinsic Value (Pre-tax) $12 $200+/- 26%
Stock Price $11 $83 18%
</TABLE>
IT'S TIME TO HARVEST OR IS IT STILL TIME TO SOW
In examining our goals for the year in our 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 254,034 shares of the company,
approximately 18%. As the saying goes, "we eat our own cooking."
Our "prism" for the future is ever changing--should we bid/partner our
interest in 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.
6
<PAGE> 9
Before ending, and of special note, I would like to thank both Morris
Berkowitz and Paul Woolard, who will no longer be on the Lynch Board in an
official capacity effective December 31, 1997 (though I am not letting them get
off that easy, they will be serving as Directors Emeritus for some time to
come).
[PHOTO] [PHOTO]
MORRIS BERKOWITZ PAUL P. WOOLARD
Paul Woolard has served Lynch Corporation as a Director for 30 years. He
came to the Board in 1968 when Lynch was under the auspices of Curtiss Wright.
At that time, Lynch consisted solely of its glass machinery operation.
Accordingly, Paul has been party to the Lynch story from the beginning with the
acquisition of M-tron Industries in 1977 through the announcement of S.D.
Warren in 1997. After ably serving our country as a pilot in the U.S. Army Air
Force during World War II, Paul received a Bachelor of Arts degree from
Columbia College. His career began as a Field Sales Trainee for Prince
Matchabelli, Inc. and culminated 36 years later as President of Revlon, Inc.
worldwide cosmetics and fragrances operations. Over the years, Paul devoted
much time and effort to the March of Dimes, Boy Scouts, United Cerebral Palsy
and continues to be active as a founding trustee of the Inner City Scholarship
Fund. Paul served as Chairman of Lynch's Compensation Committee and provided
significant guidance to Lynch's Audit Committee.
Morris Berkowitz, who like Paul, during World War II served in the U.S. Army
Air Force, holds a B.B.A. from C.C.N.Y. and J.D. from N.Y.U. He is a C.P.A.
and is licensed to practice as an attorney. He spent his first 15 business
years in the accounting firm of Martin Podoll & Company, ten years as a
partner. He later became Vice President of Finance at Random House, Inc. and
Vice President of Finance of LIN Broadcasting Corporation, steering that
company through years of tremendous growth. Morris has been a Lynch Director
for over ten years and has been especially helpful in Lynch's broadcasting
ventures. Additionally, he is the proto-typical Chairman of an Audit Committee.
As always, we will be cognizant of the needs of our "stakeholders"--our
equity owners, our staff, our partner/employees, our debtholders, and our
communities in which we are job creators.
Mario J. Gabelli
Chairman of the Board and
Chief Executive Officer
March 30, 1998
7
<PAGE> 10
PROPORTIONAL OWNERSHIP
Another way to look at the company is to examine each of our businesses and
to look at what share of those businesses we own. This methodology is known as
"proportional ownership." Simply stated, what are the businesses Lynch owns,
what are the revenues, EBITDA, debt and values. Those of us who are
knowledgeable of cable TV are familiar with the concept.
<TABLE>
<CAPTION>
1997 DATA
Traditional Proportional
Accounting Ownership
(000) (000)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues--
Telecommunications $ 47,908 $ 43,080
Broadcasting -- 5,194
Services 146,154 74,465
Manufacturing 273,474 208,439
-------- --------
$467,536 $331,178
======== ========
EBITDA--Before Corporate Expenses
and Special Charges
Telecommunications $ 24,134 $ 21,700
Broadcasting -- 1,595
Services 2,090 1,116
Manufacturing 21,171 16,420
-------- --------
$ 47,395 $ 40,831
======== ========
Cash--
Telecommunications $ 26,554 $ 22,808
Broadcasting -- 542
Services 380 194
Manufacturing 6,497 4,856
-------- --------
$ 33,431 $ 28,400
======== ========
Debt--
Telecommunications $132,013 $121,384
Broadcasting -- 8,409
Services 4,460 2,272
Manufacturing 119,900 88,633
-------- --------
$256,373 $220,698
======== ========
</TABLE>
The proportional ownership amounts noted above, represents Lynch's
proportional share of the reported revenues, EBITDA ("earnings before interest,
taxes, depreciation and amortization"), cash (including marketable securities)
and debt of the subsidiaries included in Lynch Corporation's consolidated
financial statements and other significant minority-owned entities accounted
for in the consolidated financial statements under the equity method.
Accordingly, the above proportional ownership amounts represent Lynch's
percentage interest in the entities full reported amounts for the respective
period or date. That is, the proportional ownership of revenues and EBITDA
represents the entity's reported results for the year ended December 31, 1997,
multiplied by Lynch's ownership of that entity as of December 31, 1997.
Proportional ownership of cash and debt represents cash and debt of that entity
at December 31, 1997, multiplied by Lynch's ownership of that entity at
December 31, 1997. The cash and debt amounts above exclude cash and debt at the
Parent Company of $1.1 million and $24.9 million, respectively.
8
<PAGE> 11
REPORT BY THE CHIEF FINANCIAL OFFICER
OBJECTIVE
The stated and steadfast goal of Lynch Corporation is to grow the intrinsic
value of the company by 25% annually. Integral to this strategy, we provide our
shareholders with opportunities for direct participation in focused stand-alone
entities, armed with the financial platform for continued growth. While Safety
Railway and its success is the model, other examples of this strategy are the
rights offering for Tremont Advisors, Inc. in 1992, the initial public offering
of The Morgan Group, Inc. in 1993 and the dividend of East/West Communications,
Inc. in 1997.
The concept of intrinsic value is a long-term prescription for managing an
enterprise based on the cash flow generating ability of a business and the
collateral value of its assets. Lynch looks to achieve its growth goal via
acquisitions, both strategic and opportunistic, and development of internal
opportunities. We also look to optimize growth by structuring transactions in
the most tax efficient manner and utilizing financial engineering skills.
ACQUISITIONS STRATEGY
We look for value oriented investments and apply strict rate of return
criteria to all potential acquisitions. An appropriate level of financial
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;
- - basic business--no high technology, unless is related to what we know, 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.
On occasion, we will consider an acquisition which does not meet the
foregoing criteria.
OPERATING PHILOSOPHY
Once an acquisition is made, we cement a management/shareholder partnership
by providing local management teams with an opportunity to acquire an interest
in their respective business. It is our belief that managerial independence
promotes efficiency and longevity of financial success. Incentive compensation
plans coupled with stand-alone financing, reward management for operating the
company entrepreneurially. 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 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. Each business is empowered with the ability to leverage off its
current operations and accelerate growth. The people at corporate allocate
cash, provide long-term strategic vision to these businesses, support the
efforts of these business to grow via acquisitions and provide overall
financial guidance.
9
<PAGE> 12
OUR STRUCTURE TODAY
Lynch consists of an array of entrepreneurial operating entities, aligned as
follows:
<TABLE>
<CAPTION>
MULTIMEDIA SERVICES MANUFACTURING
- ---------- -------- -------------
<S> <C> <C>
Telecommunications The Morgan Group, Inc. Spinnaker Industries, Inc.
PCS Lynch Display Technologies, Inc.
Broadcasting M-tron Industries, Inc.
</TABLE>
TELECOMMUNICATIONS
Lynch Interactive has investments of 80% to 100% in eleven rural telephone
properties throughout the United States and a 60% investment in one cable
television operation. Lynch companies consist of 37,000 access lines, 4,700
cable television subscribers, 16,000 cellular POPs and 1,400 Direct Satellite
TV subscribers. Pro forma for the full year inclusion of Upper Peninsula
Telephone Company revenues and EBITDA for the telecommunications group were
$50.1 million and $25.4 million for the year end December 31, 1997. At December
31, 1997, the Group had cash of $26.6 million and debt of $132.0 million. Lynch
Interactive will look to continue to acquire and consolidate rural telephone
companies throughout the United States as well as leverage off its operational
and technical infrastructure and grow the company through the development of
complementary revenue streams.
PERSONAL COMMUNICATIONS SERVICES ("PCS")
C-BLOCK LICENSES
In late 1995, Lynch initiated the first leg of its personal communications
services or "PCS," strategy. Through five separate 49.9%-owned limited
partnerships, which were subsequently combined into one partnership, Fortunet,
Lynch subsidiaries participated in the FCC's "C-Block" Auction of 30 MHZ of PCS
spectrum (the so-called C-Block Auction). 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 $30.76 per POP. The prices of
the "C-Block" significantly exceeded expectations. As discussed below,
petitions were filed with the FCC by the largest C-Block holders, including
Fortunet, to restructure the terms of the license. As a result of petitions on
September 26, 1997, the FCC provided a four option plan to provide the current
C-Block holders with avenues to restructure their ownership interests. The FCC
had originally provided that the C-Block licensees were required to decide
which option they would choose by January 18, 1998. This date has been
extended. On March 24, 1998, the FCC somewhat modified the four options and
extended the deadline for bidders to choose an option until at least late May
1998. Our partners at Fortunet in consultation with Lynch's subsidiary are
currently still deciding which option it will choose.
F-BLOCK LICENSES
A Lynch subsidiary also participated in the subsequent F-Block Auction
through a different 49.9% limited partnership. This partnership was high bidder
in licenses that hold the right to provide PCS services of 10MHz of spectrum to
selective geographic areas in the United States, covering a population of 20
million, including Los Angeles and Santa Barbara, California, Reno, Nevada,
Washington, D.C., and Sarasota, Florida. The cost of these licenses was $18.9
million, or $0.95 per POP. A 39.9% interest in these properties were
subsequently spun off to our shareholders, via a newly created entity called
East/West Communications, Inc. The Lynch subsidiary provided $3.5 million of
cash in the form of a subordinated loan to the partnership to acquire these
licenses. A portion of this loan, including accrued interest and commitment
fees, was contributed to the partnership and the remainder converted to a
redeemable preferred stock with a par value of $7.8 million payable in 2009 at
face plus pay in kind accrued dividends at 5% per annum. While East/West has
certain financial and operating hurdles to overcome in the near term, we
believe it is well positioned to take advantage of significant opportunities
with its licenses.
10
<PAGE> 13
OTHER PCS AND WIRELESS
In the D & E Block auctions for PCS spectrum, a Lynch subsidiary provided
bidding services and certain other advisory services to Rivgam Communicators,
Inc. ("Rivgam"). In exchange for these services, the subsidiary will receive a
10% carried interest after a specific financial hurdle rate for the capital
provided to Rivgam, in the future profitability of these licenses. In these
auctions, Rivgam acquired 12 Licenses of 10 MHZ each covering a population of
33.1 million, for a total cost of $84.9 million, or $2.39 per POP including Los
Angeles, California, Philadelphia, Pennsylvania, Washington, D.C., San Diego,
California, Baltimore, Maryland (20 MHZ), and Buffalo, New York.
In a subsequent Wireless Communications ("WCS") Auction, the Lynch
subsidiary provided similar services to Bal/Rivgam for which it will receive a
5% carried interest after specific financial hurdle. This auction was for 10
MHZ of spectrum to be used for more advanced wireless voice and data
communications to pin point a subscriber to any given locale. Bal/Rivgam
acquired licenses covering a population of 42.1 million.
In the current LMDS Auction, the Lynch subsidiary is providing similar
services to BCK/Rivgam. The auction is for 1,300 GHz of spectrum and licenses
will afford licensees the opportunity to offer a variety of services such as
multichannel video programming, telephony, video communications and data
services. The auction closed on March 25, 1998 and BCK/Rivgam was high bidder
in licenses for Las Vegas, (1,300 GHz) and Reno (1,150 GHz), Nevada covering a
population of 1.3 million for a net purchase price of $6.1 million. Subject to
final grant Lynch will receive a 5% carried interest after specific financial
hurdle in these licenses.
While Lynch did not invest any funds to acquire these interests, we created
these "hidden values" within Lynch Corporation by capitalizing on our
experience gained in the C and F Block auctions.
BROADCASTING
Lynch owns 50% (fully diluted) and 20% net interest in Stations WOI-TV and
WHBF-TV, two network affiliated television stations, ABC and CBS, respectively.
In recent transactions, network affiliates have been sold at a multiple of 12
to 14 times broadcast cash flow.
In 1997, WOI's full year revenues and broadcasting cash flow were $8.2
million and $2.5 million, respectively. At December 31, 1997, it had a total
cash and accounts receivable of $2.3 million and outstanding debt of only $11
million. WHBF's full year revenues and broadcasting cash flow in 1997 were $7.3
million and $3.0 million, respectively. At December 31, 1997, it had total cash
and accounts receivable of $1.2 million and outstanding debt of only $15
million.
THE MORGAN GROUP, INC.
Morgan is an outsourcer of services to the manufactured housing and
recreational vehicle industries. Morgan Common Stock is listed on the American
Stock Exchange. There are 2.6 million common shares outstanding, of which,
Lynch Corporation owns 1.36 million, or 51%. Excluding all special charges,
revenues and EBITDA in 1997 were $146.2 million and $2.7 million, respectively.
At December 31, 1997, Morgan held cash and cash equivalents of $0.4 million
and had $4.5 million debt outstanding.
SPINNAKER INDUSTRIES, INC.
Spinnaker is a consolidator of manufacturing companies in the
adhesive-backed industry. Lynch owns 4.5 million of the 7.1 million common
shares outstanding. Pro forma 1997 revenues and EBITDA, including full year
results of S.D. Warren and other pro forma adjustments were $294 million and
$26.2 million, respectively, and pro forma at December 31, 1997, it had cash
and cash equivalents of $6.0 million and total debt outstanding of $168.1
million.
11
<PAGE> 14
LYNCH DISPLAY TECHNOLOGIES
Lynch Display Technologies, Inc., through Lynch Machinery, currently
produces glass presses and packaging machinery. For the three years ended
December 1997, average revenues and EBITDA were $25.7 million and $4.8 million,
respectively.
M-TRON INDUSTRIES, INC.
M-tron Industries, Inc. produces quartz crystals and oscillators. For the
three years ended December 31, 1997, average revenues and EBITDA were $20.5
million and $2.0 million, respectively.
PROJECT DOLLY
We are in the process of creating two entities at Lynch. Lynch Interactive
Corporation will consist of telecommunications, PCS, broadcasting and Morgan,
and Lynch Corporation will continue to hold the manufacturing operations,
though we will probably transfer 15% of the shares of Spinnaker Common Stock to
Interactive. Each Lynch shareholder would receive one share of the spin-off
company, Lynch Interactive Corporation, while maintaining each share of the
remaining company.
The spin-off would enable each group (Telecommunications and Manufacturing)
to focus on its unique markets and growth opportunities and more effectively
access capital. 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.
While growth opportunities in other aspects within Lynch have slowed the tax
rulings necessary to implement the spin-off, 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
will 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 our
PCS interests, will all be explored.
One such strategy is a high yield debt offering for our telecommunications
group. While such an offering would increase the cash cost of debt by 100 to
200 basis points, it would provide us with significantly more flexibility to
allocate financial resources within the telecommunication group to the areas
where they would most effectively grow the company. Additionally, it would
significantly ease our access to additional debt instruments and/or markets.
CLOSING
As we have traditionally done, our managing partners will share their
insight into what they are doing to enhance and grow their individual
operations and build toward the future. It's truly a pleasure to work with
these individuals as well as all the talented and dedicated associates within
the Corporation.
Robert E. Dolan
Chief Financial Officer
12
<PAGE> 15
LYNCH INTERACTIVE CORPORATION
Before I go on to the operations of Lynch Interactive, with great sadness, I
note the passing of a significant contributor to the Lynch family of companies.
During 1997, Jack C. Keen, our first partner in the telephone business, died.
After spending over 30 years at various telephone companies, including
Southwestern Bell and Contel, in 1973 J.C. branched out on his own and acquired
Mogollan Mountains Telephone Company, a decrepit rural telephone system that
served fewer than 600 subscribers through four exchanges strung out in the
mountains north of Silver City, New Mexico. J.C. took that system and,
virtually from scratch, built the state-of-the-art digital telecommunications
system serving almost 6,000 subscribers and covering over 15,000 square miles.
Through that time, he successfully piloted the company through many dramatic
and challenging changes in both the regulatory and technological environment.
[PHOTO]
JACK C. KEEN
J.C. was an extremely well respected industry player and was well known in
Washington, D.C., as an articulate and outspoken advocate for the nation's
small, independent telephone companies and their rural subscribers. In this
capacity, he chaired and served on numerous committees over the years.Today,
Western New Mexico Telephone Company is ably managed by Jackie Keen and Mary
Beth Baxter, (J.C.'s daughter) but we will sorely miss his counsel.
STATISTICS--VIDEO, VOICE & DATA--DECEMBER 31, 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Access Lines/Subscribers Population Telephony
- ---------------------------------------------------------------------------------------------------------------------
Total
Telephony Alarm Minutes of
Operation Wireline Cable ISP Systems DirectTV Cellular PCS Use
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Western New Mexico 5,941 500 1,390 8,182
- ---------------------------------------------------------------------------------------------------------------------
Inter-Community 2,634 110 7,334
- ---------------------------------------------------------------------------------------------------------------------
Cuba City 1,698
- ---------------------------------------------------------------------------------------------------------------------
Belmont 806
- ---------------------------------------------------------------------------------------------------------------------
Bretton Woods 491 56
- ---------------------------------------------------------------------------------------------------------------------
J.B.N. 2,698 80
- ---------------------------------------------------------------------------------------------------------------------
Haviland 4,043 194 207
- ---------------------------------------------------------------------------------------------------------------------
Dunkirk & Fredonia 11,634 2,553 569
- ---------------------------------------------------------------------------------------------------------------------
Upper Peninsula 6,580
- ---------------------------------------------------------------------------------------------------------------------
CLR Video 4,466
- ---------------------------------------------------------------------------------------------------------------------
Fortunet* 7,297,743
- ---------------------------------------------------------------------------------------------------------------------
1997 TOTAL 36,525 4,660 3,506 569 1,390 15,516 7,297,743 16,709M
- ---------------------------------------------------------------------------------------------------------------------
1996 TOTAL 28,630 4,454 971 536 1,355
- ---------------------------------------------------------------------------------------------------------------------
Growth 97/96 27.6% 4.6% 261% 6.2% 2.6%
</TABLE>
* A Lynch subsidiary is a 49.9% limited partner in Fortunet.
Lynch Interactive experienced growth in all its units in 1997. The
traditional wireline business, referred to as Incumbent Local Exchange Carriers
("ILECs"), enjoyed a 4.3% increase in customer lines which grew to 36,525 from
35,020, pro forma for the acquisition of Upper Peninsula Telephone Company.
Internet service is now available to 92% of our customers. The growth of
this service in the last 12 months has been significant. 2,856 new customers
have been added in 1997 for a growth rate of 439%.
All units of Lynch Interactive are exploring new opportunities for growth
especially in the area of Long Distance Reselling and Competitive Local
Exchange Companies (CLEC's). I am pleased with the managements' positive
attitude towards seeking out new ventures and fitting them into Lynch
Interactive's overall strategy.
On May 23, 1997, Lynch acquired all the remaining shares of Upper Peninsula
Telephone Company ("UPTC") for a total purchase price of $26.5 million. UPTC is
an ILEC which serves 6,580 access lines
13
<PAGE> 16
predominantly in the upper peninsula of Michigan. It's an outstanding company
that serves several towns in the Lower and Upper Peninsula of Michigan such as
Carney and Drummond Island. Full year 1996 revenues of UPTC were $8.5 million
and EBITDA was $5.0 million. In addition to its landline telecommunications
operation, UPTC owned two minority positions in cellular partnerships operating
in Michigan. As a result of this transaction, UPTC was required to sell these
properties to certain of its other partners for $6.3 million, net of income
taxes. Accordingly, adjusting for cash on hand at the acquisition date, debt
obligation assumed, and the net proceeds from the sale of the cellular
interests, Lynch acquired UPTC for 3.5 times 1996 revenues and 1.3 times
historical book value. But most importantly, we established ties with L.G.
Matthews and his family who have operated in the upper portion of Michigan for
over 35 years. The Matthews' helped pioneer the provision of telecommunication
services to the communities in the upper peninsula of Michigan through the
acquisition and development of telephone, cable, cellular and paging
operations. Lynch is proud to welcome all of the employees of UPTC to our
extended telephone family.
Upon the retirement of L.G. Matthews, Calvin, his son, was appointed
President of UPTC. Calvin has close to 30 years in the telephone business and
will continue the strong tradition of providing outstanding service to UPTC
customers.
As explained more fully below, we liquified our investment in our DirectTV
business in Wisconsin for cash and shares of Pegasus Communications, Inc.
Additionally, our two telephone companies JBN and Haviland were merged in
1997 to form the Lynch Kansas Telephone Company.
We believe the synergies between the two companies, operating in the same
state and will provide efficiencies and lead to increased profitability of each
company.
After the completion of the merger, Robert Ellis, General Manager of
Haviland retired at his request. Robert served the company with distinction and
its his experience and leadership that has prepared Haviland to enter the 21st
century as a leading edge communications provider.
Gene Morris, General Manager of JBN, assumed the responsibility for both
companies and was appointed President, Lynch Kansas Telephone Company.
1998 will be the year when special emphasis will be devoted to growing the
core business. CLEC's and Long Distance reselling should enhance the revenue
growth with a minimum capital investment. We are looking forward to placing
these two services in our overall product portfolio. "One-Stop-Shopping"
remains our primary goal.
<TABLE>
<CAPTION>
- ---------------------------------------------------------
ACCESS LINES
COMPANY 1996 1997
- ---------------------------------------------------------
<S> <C> <C>
Western New Mexico 5,596 5,941
Inter-Community 2,555 2,634
Cuba City/Belmont 2,442 2,504
Bretton Woods 360 491
Kansas Telephone
JBN 2,658 2,698
Haviland 3,890 4,043
Dunkirk & Fredonia 11,129 11,634
Upper Peninsula 6,390 6,580
--------- ---------
35,020 36,525
- ---------------------------------------------------------
</TABLE>
Eugene P. Connell
Chairman
14
<PAGE> 17
ACQUISITION OF UPPER PENINSULA TELEPHONE COMPANY
[UPPER PENINSULA MAP] [LOWER PENINSULA MAP]
On March 18, 1997, Lynch Corporation acquired Upper Peninsula Telephone
Company from the Matthews family, who have operated the company since the early
1950s. Upper Peninsula serves approximately 5,100 access lines in the Upper
Peninsula and 1,500 access lines in the Lower Peninsula of Michigan.
HISTORY OF UPPER PENINSULA TELEPHONE COMPANY
Upper Peninsula Telephone Company ("UPTC"), Carney, Michigan, was
incorporated on January 22, 1927 by various farming families in Menominee
County, Michigan as three separate entities known as Nadeau Township Telephone
Company, Faithorn Telephone Company, and Wallace Telephone Company.
In the early 1950s, the Matthews family purchased the Wallace Telephone
Company from local residents. Wallace Telephone Company at that time provided
service to approximately 50 customers in the village of Wallace, Michigan. The
company's second acquisition was in Marenisco, Michigan in the western portion
of the Upper Peninsula.
In the late 1950s, the Matthews family purchased the Nadeau Township and
Faithorn Telephone Companies, and the names were changed to Upper Peninsula
Telephone Company. After receiving funding from the Rural Electrification
Administration (REA) in 1963, the company was able to purchase the Felch and
Watson Exchanges. By the end of 1965, all six exchanges were provided with
underground cable plant and converted from magneto to dial equipment switching.
In 1967, the Matthews family formed the Drummond Island Telephone Company by
purchasing the Drummond Island Exchange from General Telephone Company. The
company grew to six exchanges by the end of 1972, serving two resort
communities, one exchange on Lake Huron, and three forestry and farming
communities. In September of 1983, the Drummond Island Telephone Company
properties were merged with UPTC's to form a company with 18 exchanges. The
company's latest acquisition consists of the previously unserved area known as
Manistee River, located 90 miles south of Mackinaw City, Michigan, with digital
service initiated in October 1992. These 56 residents went from using two-way
and CB radios to 100% digital service.
The company was basically formed by acquiring franchises for previously
unserved areas which the Michigan Bell Telephone Company and General Telephone
Company operating companies did not have an interest in due to a small customer
base or lack of business entities.
Today the company serves fifteen exchanges in the Upper Peninsula and four
in the Lower Peninsula of Michigan, ranging in size from our Scott Point
Exchange with 18 customers to the Chester Exchange with 1,056 customers, and
provides telephone service to approximately 6,580 customers. UPTC's service
areas cover 2,995 square miles, with 2,195 route miles of mainline facilities.
The company serves three exchanges on the Wisconsin-Michigan border and one
exchange which is on the Canadian border. The company was the first independent
in the State of Michigan to provide service via the placement of underground
facilities.
UPTC has continued to strive to improve its communications services. We are
proud to be serving all customers via American-made digital switching equipment
manufactured by Redcom Laboratories, Inc. of Victor, New York. These facilities
are providing 100% one-party service capabilities, Equal Access and E911
emergency services where availability of that service offering exists. Our
cable plant facilities are 100% underground, and we are deploying local
exchange fiber optic backbone and AFC subscriber facilities in four service
areas.
15
<PAGE> 18
UPTC is headquartered in the Village of Carney, Michigan, and provides all
of its corporate services from this location. UPTC has service personnel
stationed in five outlying areas to serve the customers' needs. We would like
to note that many of our employees serve in various capacities within the local
community on a voluntary basis, including the rescue squad, Boy Scouts of
America, township government and fire department. We welcome the following
associates to the Lynch family:
ASSOCIATES
Richard Bingham, Robert Cocco, Richard DeVriendt, Joe Dombrowski, Louis DuPont,
Vicki Fullerton, Blaine Gadda, Bart Hall, Linda Jeschke, Jeff Johnson, Rose Ann
Klatt, Gordon Leese, Dirk Macco, Dolores Marklein, Calvin Matthews, Mandy
Matthews, Caren Miller, Debbie Moreau, Mark Moreau, Dana Nakkula, Tammy
Parrett, Tena Parrett, Tiffany Poupore, Linda Rhode, Becky Schetter, John
Skufca, Val Sohr, Cathy Starzynski, Lori Thiry, Al Treiber, Mary Urbanc, Mike
Warrner, Ron Wells, Lori Wolsker, Scott Zimmerman and Judi Zini.
16
<PAGE> 19
WESTERN NEW MEXICO TELEPHONE COMPANY
Western New Mexico Telephone Company ("Western") had another year of
excellent access line growth and significant earnings. Western's regulated
customer base grew 5.3% in 1997 to end the year with 5,941 access lines.
Management anticipates that access line growth and earnings will continue to be
strong.
In 1997, Western began providing its customers the option of choosing their
long distance provider by converting to equal access for both interstate and
intrastate long distance services. Western continues to upgrade central office
and outside plant facilities in order to accommodate our customer's
telecommunications needs. Western strives to make certain our customers are not
excluded from the information superhighway. Management has worked closely with
the schools in our area to provide broadband capabilities. In addition, Western
helped develop an action plan for the schools to participate in the new federal
Universal Service Fund for schools and libraries. The new fund should help
assure that schools serving rural areas, such as Western's, can provide
students the same services as in the urban, metropolitan areas.
Western's non-regulated operation, WNM Communications Inc. ("WNMC"), is
rapidly expanding in the internet, paging and DBS satellite businesses. The DBS
satellite business ended the year with 1,390 customers. WNMC began actively
marketing internet access service in the latter part of 1997 and ended the year
with 500 customers. Internet access service shows good promise for growth and
expansion. WNMC began selling pagers and offering paging service late in 1997
and ended the year with approximately 40 paging customers. WNMC also expanded
its full service offering by locating GTE Mobilenet, Lynch's cellular partner,
inside WNMC's building.
Although WNMC is still in its infancy, it will provide Western a strong
presence in the Silver City market. This could be leveraged to provide
competitive local exchange services or other competitive telecommunication
offerings. Western's management is in the process of evaluating the business
opportunities in these exciting service arenas.
Western's management believes the future to be excellent in all phases of
the telecommunications business and is actively pursuing its long-term growth
objectives in both the regulated and non-regulated operations.
Jack K. Keen
Chairman
INTER-COMMUNITY TELEPHONE COMPANY
The Inter-Community Telephone Companies serve 2,634 subscribers in
southeastern North Dakota. We made several significant strides in 1997 toward
building Inter-Community into a leading telecommunications player in its
region.
Some of our accomplishments were as follows:
- - Our nine exchanges are now linked together with 165 miles of fiber-optic
cable using a Northern Telecom DMS-10 host-remote configuration.
- - All exchanges have SS7 and CLASS capability.
- - All exchanges have converted to Equal Access.
- - We established an Internet Service Provider not only to serve our current
customer base, but extending to Valley City, a town with a population of
three times our service area, whose telephone service is provided by US
West.
For 1998, we plan to construct another 30 miles of fiber-optic cable
through Valley City, providing broadband capabilities to Sanborn and Tower City
exchanges, as well as SONET capabilities to our customers, and interactive TV
for several area schools in the region and laying the ground work for a CLEC
operation in the near future.
Keith Andersen
General Manager
17
<PAGE> 20
BELMONT TELEPHONE COMPANY
CUBA CITY TELEPHONE EXCHANGE COMPANY
The year 1997 again proved to be a good one for both companies in several
categories. Subscriber access lines grew 3% reaching a combined total of 2,504
at year end.
During the fall of 1997, the two companies entered the final phase of their
four year system upgrade. The project will be completed in the spring of 1998.
The final phase of the Cuba City switch upgrade includes the addition of new
subscriber services for enhanced calling features, voice mail, caller
identification and added subscriber capacity. Concurrently, the Belmont central
office is being converted to a remote switch functioning off Cuba City as a
host.
In 1996 and 1997, the company worked closely with the Cuba City High School
in providing new technologies. The company donated a fiber optic communications
link between the high school and elementary school and the classroom facilities
for high school participation in "distance learning" which allows ten schools
to share curriculum.
In 1993, Lafayette County Satellite TV, Inc. was established as a sister
company to both Cuba City and Belmont Telephone Company. Lafayette County
acquired the right to provide DirectTV service to Lafayette County Wisconsin
with a population of approximately 16,062 for $45,000. After three years of
growing the business and attaining a level of 353 Subscribers, we made a
decision to sell the operation to Pegasus Communications, Inc. for a
combination of cash and stock with a total valuation of $373,000. Although we
are optimistic about the future of the DirectTV business, the economies of
running a small stand-alone operation plus the opportunity to generate
financial resources to reinvest in other opportunities that are more
complementary to our telephone operations led us to this decision to sell.
The two companies are looking forward to the spring of 1998 when we will
begin marketing new calling services.
Richard A. Kiesling
President
BRETTON WOODS TELEPHONE COMPANY
Bretton Woods Telephone Company serves the Bretton Woods Resort Area in New
Hampshire, location of the Mt. Washington Hotel, Bretton Woods Ski Areas, The
Mt. Washington Cog Railway and approximately 255 condominiums.
A Centrex system provides telephone service at the Ski Areas and the Mt.
Washington Hotel's facilities, in a fully integrated property-wide system,
thereby simplifying communication to all facilities.
Total access lines have increased approximately 36% in 1997 to 491 from 360,
due to the installation of these Centrex systems, as well as further
condominium development. 1997 has seen the greatest increase in access lines in
the history of Bretton Woods Telephone Company.
Currently, we are renegotiating our infrastructure-sharing agreements with
NYNEX/Bell Atlantic. These negotiations, and the total impact of the
Telecommunications Act of 1996, are issues that, hopefully, will be resolved in
1998.
The New Hampshire Public Utilities Commission has actively supported
competition but, thus far, interconnection is a reality in NYNEX/Bell Atlantic
serving areas only.
We look forward to 1998 and anticipate further "Resort" telecommunications
requirements for the Mt. Washington Hotel, should a proposed gambling bill
pass.
Bretton Woods Telephone Company's policy is to anticipate our customers'
requirements and meet their expectations with a network and staff that provides
state-of-the-art features and services.
Nancy Hubert
General Manager
18
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LYNCH KANSAS TELEPHONE COMPANY
[MAP OF KANSAS SERVICE AREAS]
JBN TELEPHONE COMPANY
During 1997, JBN Telephone Company increased its access lines by an
additional 1.5% to 2,698 from 2,658. That growth can be attributed to a casino
in our serving area that is in operation 24 hours a day.
JBN began providing local Internet access to its 15 exchanges in the fourth
quarter 1997. Due to an EAS route from one of our exchanges, we will also
provide local Internet to a neighboring town served by another local exchange
carrier. Due to fiber optic cable placement in a neighboring community outside
the JBN service area, we are able to provide local Internet to the city's
residents and school, in addition to industrial customers who have expressed
interest in changing from their current Internet provider.
Revenues in 1997 increased by $671,000, or 22% over the same period in 1996.
Additionally, JBN converted all its offices to Equal Access and SS7 in February
and March, and minutes billed to the interexchange carries have increased over
45% in 1997, further driving our increase in revenues. EBITDA increased by
$771,000, or 38% to $2.8 million from $2.0 million.
JBN is currently in discussions with Kinnet and three other independent
telephone companies adjacent to JBN in northeast Kansas to explore the
possibilities and advantages to fiber inter-connectivity between all companies.
JBN Telephone Company's goal in 1998 is to increase our marketing efforts in
order to better inform our customers of services currently available, as well
as increase our scope of service. We believe 1998 will be another exciting and
profitable year.
HAVILAND TELEPHONE COMPANY
During 1997, Haviland Telephone Company added 153 additional access lines,
an increase of approximately 4%. That growth can be attributed to the Eastern
exchanges, which are benefitting from industrial and population growth coming
out of Wichita. Additionally, the Company began offering local Internet
access, and presently there are 207 Internet subscribers, some of which have
requested second lines.
Revenues at December 31, 1997 have increased by $119,000, or 3.3% over the
same period in 1996. This increase is attributable to increased minutes of use
billed to Interexchange Carriers, and an increase in local rates as part of the
new Kansas Universal Service Fund.
Gene Morris
President
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DUNKIRK & FREDONIA TELEPHONE COMPANY
Dunkirk & Fredonia Telephone Company began 1997 with strong emphasis on
marketing ourselves as the total communications supplier. Working with The
Schutte Group, we have changed the name of our parent company to DFT
Communications Corporation (hereafter DFT), and have moved away from the name
that tied us to a particular geographic area. We have also changed our logo to
reflect a uniform advertising campaign that identifies all of our services with
DFT. The operation continues to include Dunkirk & Fredonia Telephone Company
and wholly-owned subsidiaries, Cassadaga Telephone Corporation and Comantel,
Inc., as well as the services they provide: Local Service, Long Distance,
Cellular, Telephone and Security Systems, Paging, Internet and 2-way Radio
Sales and Service.
New products and services were added during 1997. Those services included a
new dealer contract for Cellular service with Cellular One Sygnet and the
addition of DFT Long Distance in which two CIC codes were opened for all of the
Lynch companies to use. DFT Long Distance is expected to begin operation
within our franchised area in the summer of 1998. Nineteen ninety seven also
saw the expansion of our Comlink paging service into the Olean, NY market, as
well as the addition of several dealers for Comlink Paging.
DFT has experienced strong growth in several areas throughout the year.
Netsync, the Internet Service of DFT, which was started in April of 1996, has
seen an increase in subscribers of 1,582 during 1997. We enjoyed a positive
swing in EBITDA of $189,000 going from a loss of $148,000 in 1996 to a profit
of $41,000 in 1997. Access lines have also experienced growth at almost twice
the normal rate. Dunkirk & Fredonia telephone lines increased by 4.0% and
Cassadaga lines increased by 3.8% for a total combined growth of 505 access
lines.
In conjunction with the marketing program, a new product brochure was
developed to aid customers with the products and services offered by DFT. 1998
is also the 100th anniversary of Dunkirk & Fredonia Telephone Company. A full
color brochure was added to our 1997-98 Telephone Directory advertising our
services and proud history.
A newly remodeled building, at 38 Temple Street, was completed during 1997,
and is located next to our Central Office. The building currently houses our
Eagle Radio Technologies Group as well as some Sales offices.
1998 promises to be a busy year for DFT. Our 100th Anniversary celebration
kicks off in January with sales promotions and continues with scheduled events
throughout the year. One event planned for July will be an Open House for the
community and invited guests.
New service offerings will continue to be brought forward including DFT Long
Distance and the addition of CLASS services beginning in June of 1998.
DFT will also continue to work toward providing our customers a combined
bill, reinforcing our position as a one stop source for all communication needs
and making our billing more simplified for the customer. DFT is also in the
process of assisting one of our sister companies, Bretton Woods Telephone, with
developing and providing billing service which should begin in August of 1998.
The Internet continues to be an area of growth opportunity for Netsync as we
continue to exceed our projections. We will seek to expand subscribers through
acquisition and provisioning of service to other companies both within and
outside New York State.
Another highlight of 1998 will be for DFT to negotiate a contract extension
with the State University College at Fredonia. DFT currently provides
approximately 1,700 lines to the College. The College wishes to add additional
lines and Centrex service is currently provided via an Individual Case Basis
(ICB).
Industry perspectives are changing and DFT will have to position itself to
be ready to compete in the market as a Competitive Local Exchange Carrier
(CLEC) or embrace competition through interconnection agreements. Partnering
to provide service may become more of a necessity than an option as regulatory
issues, such as Access Reform, Universal Service, Lifeline and other FCC and
PSC changes, continue to erode revenues. Greater diversity and new revenue
opportunities through new services or enhancement of services will help shape
the customers' perception of keeping DFT a major player in the provisioning of
communications services.
Robert A. Maytum
President & CEO
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UPPER PENINSULA TELEPHONE COMPANY
Upper Peninsula Telephone Company is the newest member of the Lynch
telecommunications family, purchased on March 18, 1997. The company serves 19
exchanges covering 2,995 square miles between upper and lower Michigan. All of
the exchanges have digital switching provided by Redcom Laboratories, Inc. of
Victor, New York. As of December 31, 1997, the company serves 6,580 access
lines, and increased its customer base by 3.1% during the year. Exchanges
served are generally rural in nature with the exception of three exchanges
which serve resort areas with fishing and/or PGA type quality golf courses.
The economy in Michigan has seen a steady growth in recent years, and is
projected to continue through the next few years. As families migrate from
metropolitan areas to our rural location, our company should experience even
more growth in its customer base.
Our company continues to increase its investments, purchasing the latest
technology to provide its customer base with state-of-the-art communications
services. During 1997, plant investments consisted of 22 miles of fiber optic
cable and 40 miles of copper cable plant, upgrading our Fence River and Grace
Harbor Exchanges, along with the placement of AFC digital loop carrier systems.
At year end, the company's investments resulted in the elimination of all
multi-party services.
From an industry and regulatory standpoint, 1997 offered many challenges and
opportunities to increase the company's working experience. The Management of
the company makes every effort to stay abreast of regulatory and industry
changes which may affect the operation of the business. With many changes
looming in 1998, the company is confident that it has the expertise to navigate
these anticipated changes during 1998 and beyond.
The company's Management will see another busy year from the standpoint of
enhancing the services it offers its customers. We are looking forward to
formulating a partnership to provide Internet access, increasing our customers'
awareness of existing service offerings to generate revenue, and working with a
consortium of telephone companies within the Upper Peninsula area for offering
sky paging and toll related services. In addition, many companies operating
within the state of Michigan are also involved in providing a state-wide
network for various telecommunications services. As a member of this network,
we're analyzing the viability of this relationship as it would meet the needs
of our customers and continued profitability.
The Management and staff at Upper Peninsula Telephone Company are proud of
our many accomplishments during 1997, including our excellent customer service
and ability to provide our customers a safe haven in an ever changing
marketplace.
Calvin E. Matthews
Vice President
CLR VIDEO, L.L.C.
CLR Video, L.L.C. completed 1997 operations in a better position than had
been expected, both financially and in customer-base growth. We believe this
was accomplished by adhering to our business plan, which had been developed
around our belief in commitment, responsive customer and field service,
improved system maintenance and system improvements. These actions helped to
solidify our position with franchise authorities and customers.
A very successful marketing effort stopped the customer attrition and netted
a 5.1% gain in customer base, a major improvement over 1996, when we
experienced a 4.6% loss.
CLR's adherence to the business plan, coupled with a slight modification in
1997 capital expenditures, has facilitated continued improvements in
operations.
Revenues for 1997 have exceeded budget estimates. Expenses were slightly
lower than budgeted, producing an improved bottom line and annual contribution
to cash flow of $170 per customer, a 4.9% increase from the 1996 per customer
contribution of $162. Forecasted 1998 cash flow per customer is expected to
increase by 10%, to $187.
Robert C. Carson
President
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FORTUNET COMMUNICATIONS, L.C.
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.
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
must be constructed within five years of the award of the licenses; 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
auctions 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.
[GRAPHIC]
RESULTS OF AUCTION
Lynch subsidiaries, as a limited partner in five small business entities,
participated in the entrepreneurial C-Block auction. These partnerships were
eligible for 25% bidding credits and ten year government financing at long-term
Treasury rates. Lynch subsidiaries held a 49.9% equity interest in each of
these partnerships and funding commitments for which they are to receive
interest and commitment fees at stated rates.
In the auction, these 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 as well as selected areas of Georgia, Illinois,
Idaho, Kansas, Maryland, Minnesota, New Hampshire, New Mexico, New York and
Pennsylvania, Oregon, Texas, Virginia, and Wisconsin. These licenses were
subsequently rolled into one partnership, Fortunet Communications, L.P., of
which a Lynch subsidiary will has a 49.9% interest.
The total cost of these licenses was $216.2 million, or $30.76 per 30 MHZ
POP, after the 25% bidding credit. In addition, the FCC provided 10 year
financing (principal amortizing quarterly in years seven through ten) at an
interest rate of 7% (though the FCC staff has yet to figure out that the
appropriate interest rate should be 6.51% of $194.6 million, or 90%, of the
cost of the licenses acquired).
AFTERMATH OF THE AUCTION-REPRINTED VERBATIM FROM LYNCH'S THIRD QUARTER REPORT
TO SHAREHOLDERS
Before the conclusion of the C-Block auction, the FCC announced it would
auction off significant additional spectrum. These subsequent and unforeseen,
ill-conceived and ill-timed auctions have created the perception of a huge
inventory of spectrum available to the marketplace, far beyond current needs.
From Wall Street's point of view, the FCC's actions created the specter of
unlimited supply of spectrum. These considerations, as well as other externally
driven technological and market forces, have made financing of the build-out of
these licenses through the capital markets much more difficult than previously
anticipated. Indeed, the second largest acquirer of spectrum in the C-Block
auction, Pocket Communications, which acquired licenses covering a population
of 33.6 million at a cost of $1.4 billion, or $42.44 per POP, has filed for
bankruptcy. In addition, on October 20, 1997,
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General Wireless Inc., the third largest acquirer of spectrum in the C-Block
auction which acquired licenses covering a population of 17.9 million at a cost
of $1.1 billion, or $59.05 per POP, also filed for bankruptcy of its PCS
subsidiaries. Other license holders are also reported to be in financial
difficulty.
Fortunet, as well as many of the license holders from this auction, had
petitioned the FCC for relief in terms of (a) resetting the interest rate to
the appropriate rate at that time; (b) further reducing or delaying the
required debt payments in order to afford better access to capital markets;
and (c) relaxing the restrictions with regard to ownership structure and
alternative arrangements in order to afford these small businesses the
opportunity to more realistically restructure and build-out their systems. The
response from the FCC, which was announced on September 26, 1997, afforded
licenses holders a choice of four options, but, in our opinion, provided
little, if any, concrete relief to the license holders.
YOUR CHAIRMAN'S OBSERVATIONS
In the bidding evaluation process for spectrum, certain assumptions were
made regarding the future supply of spectrum that would be available for voice
and data. These were compiled with other financial, tax and operating
assumptions. Certain of the assumptions proved incorrect--particularly
regarding the tax deductions available to Lynch and, more importantly, the
actual supply of spectrum the FCC would permit in the marketplace. The FCC's
action on September 26, 1997, failed to address the linkage between the capital
market and the fundamental supply/demand issue.
We believe the prudent action for our shareholders is to stop any further
cash drain. The philosophical jousting among the regulators and the liquidity
confusion in the marketplace is unlikely to be resolved by January 15, 1998,
the current deadline for C-Block holders to select an option offered under the
current FCC plan. In addition, we believe the "reauction" of the C-Block PCS
licenses, currently scheduled for Spring 1998, will create lingering
uncertainty.
REMAINING INVESTMENT IN FORTUNET
Lynch's subsidiary has a net book value associated with its remaining
investment in, loans to, and deferred costs associated with Fortunet of $20.3
million. Under the FCC's response on September 26, 1997, four courses of action
were provided to the C-Block license holders, one of them being resumption of
principal and interest payments. The ramifications of choosing the other three
courses of action could result in Fortunet ultimately forfeiting either 30%,
50%, or 100% of its current investment in these licenses. While Fortunet is
still examining what action, if any, it will take with respect to these options
and will continue to look for ways to finance and build out this spectrum, the
management of Lynch felt it prudent to provide for a 30% reserve of its
investment at this time, as this represents management's estimate of the
impairment of this investment given the available alternatives. At the same
time, we must point out that the "New FCC" (four of the five current FCC
Commissioners have been appointed since the September 26th action) may
determine it appropriate to take a fresh look at this issue.
UPDATE
On March 24, 1998, the FCC modified the four options that had been
previously provided. As part of this modification, the FCC provided the C-Block
licensee somewhat more flexibility in choosing the application of these options
to the licenses awarded. The deadline for the C-Block licensees to submit
their choices, though not yet established, will most likely be in late May
1998. The modification to these options does not impact our previously provided
for reserve for impairment and, Fortunet, in concert with the Lynch subsidiary,
is still evaluating what options it will choose.
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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 72rd 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.
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 share, 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.
Reflecting lower prime time ratings by ABC versus the other networks, WOI
reported lower revenues and EBITDA versus the previous year. Revenues during
1997 were $8.2 million and broadcast cash flow was $2.5 million. The 1996
amounts were $8.9 million and $2.9 million, respectively.
As evidenced in television history, the networks success in prime time has
always cycled up and down and we firmly believe, under the guidance of the Walt
Disney Company, ABC will begin an up trend in the near future. In addition, WOI
has recently enacted several management changes, which is expected to support
the anticipated network upswing with improved local results. From a broader
perspective, we continue to believe this station is well positioned both
geographically and operationally.
STATION WHBF-TV
In 1986, 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 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 1997 were $7.3 million and broadcast cash flow was $3.0
million, in line with the 1996 amounts of $7.1 million and $3.0 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.
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THE MORGAN GROUP, INC.
The Morgan Group, Inc. ("Morgan") and its wholly owned subsidiaries, Morgan
Drive Away, Inc., Interstate Indemnity Company and Morgan Finance Company
realized a profit rebound in 1997. Aided by the December 1996 acquisition of
Transit Homes of America, a major manufactured housing transporter, and the
disposition of its money-losing, capital intensive Truckaway division, Morgan's
EBITDA rose 56% to $2.7 million in 1997, up from $1.7 million in 1996, prior to
special charges in both years. (After special charges, 1997 EBITDA rose to $2.1
million, up from a loss of $1.8 million in 1996).
Despite this significant improvement in earnings, we are far from satisfied
with Morgan's level of profitability. We have worked to build a company that is
a leader in its chosen market niches--we arrange for almost 30% of the nation's
manufactured housing deliveries from manufacturer to dealer--and have moved
aggressively into outsourcing transportation services for recreational and
commercial vehicles manufacturers, modular office producers, semi-trailer
manufacturers and lessors, retailers, and other private fleet operators. As a
market leader, serving the growing dominant producers and providing those
customers with the best service, highest insurance protection and a national
network of offices, we expect to continue to build our business--and expand our
margins.
Since 1992 we have grown our top line from $67 million to $146 million--a
respectable 17% per year. Our margins have not kept a steady pace, however, and
bettering our profitability will be a continuing focus in the years immediately
ahead. We plan to accomplish this by continuing to implement our three platform
strategy:
(1) Consolidation: Morgan is the long-time industry leader in its 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
will continue to leverage that by acquisitions and by growing with our current
customers who dominate their markets--companies such as Oakwood Homes,
Fleetwood Enterprises, Winnebago, Champion Enterprises, Redman Homes, Palm
Harbor, and Cavalier Homes. We also are building toward a number one market
share in semi-trailer delivery and selected driver outsourcing markets.
(2) Restructuring: As we sharpen our focus in manufactured housing and
outsourcing, and having completed the closing/selling of Truckaway, we not only
cut out a drag on operating income but also generated positive cash flow from
the sale of assets. Now, we have set upon a path to cut our centralized
overhead, including our selling, general, and administrative costs, and are
determined to pare duplicative field expenses as well. While Year 2000 issues
present a challenge, our information systems can be made more efficient and
less costly.
(3) Outsourcing: We intend to capitalize on the growing trend toward
manufacturers' outsourcing the arrangement of transporting their vehicles. This
is an estimated $500.0 million market, involving the annual shipment of some
750,000 new commercial and recreational vehicles - buses, vans, garbage trucks,
motor homes, 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 worksite. This, like manufactured housing shipment, is a
highly fragmented industry, marketed by dozens of small companies and only a
few national competitors capable of providing full service to the largest
manufacturers. Our experience and network of terminals around the country
provide an outstanding opportunity for developing this market.
INDUSTRY OVERVIEW AND OUTLOOK
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. 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.Having cut away unprofitable operations and focusing on our areas of
leading market position and growth, we believe 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 commitment
to maximizing shareholder value should result in above-average operating gains
in 1998 and beyond.
Charles C. Baum
Chairman
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SPINNAKER INDUSTRIES, INC.
Spinnaker is a leading manufacturer and marketer of adhesive carton sealing
tape and adhesive-backed label stock, primarily for the carton sealing tape and
pressure sensitive label stock markets. Our strategy is to focus on the growing
pressure sensitive markets for industrial tape and label stock applications,
while pursuing acquisitions within the adhesive-backed materials industry that
complement its existing businesses. Three businesses are grouped into two
principal categories that accounted for the following percentages of net sales
for the year ended December 31, 1997: industrial tape 53% and adhesive-backed
label stock 47%.
Spinnaker's industrial tape business is conducted through its Central
Products subsidiary, which was founded in 1917. Central Products, is a leading
manufacturer of carton sealing tape and offers the broadest line. It estimates
that it has a greater than 50% share of the water sensitive carton sealing tape
market, where its revenues are more than twice those of its next largest
competitor. In the pressure sensitive carton sealing tape market, it is one of
the three largest manufacturers for carton sealing tape applications, and
believes that it is the only manufacturer of all pressure sensitive technologies
(acrylic, hot melt and natural rubber), which provides Central with a
competitive advantage by allowing it to meet the broadest range of application
requirements of its customers. Its branded and private label products are used
primarily for commercial packaging applications and are sold through its
national sales force to over 1,500 paper and office products distributors
nationwide, including the largest national distributors of paper products, for
resale to over 20,000 end users. Spinnaker maintains particularly strong
relationships with Unisource Worldwide, Inc. ("Unisource") and xpedx (a division
of International Paper Co.), formerly known as ResourceNet International, which
are among the largest distributors of paper and office products in the United
States. Central supplies each of Unisource and xpedx with a full line of their
own private label carton sealing tape products. Spinnaker believes that its
arrangements with key customers are evidence of its leading position in the
carton sealing tape market, which is due in part to Spinnaker being the only
one-stop manufacturer of private label products in the carton sealing tape
market.
Spinnaker's adhesive-backed label stock business is conducted through
Spinnaker Coating, Inc. (formerly known as Brown-Bridge Industries, Inc.) which
was founded in 1928. With the recent acquisition of the Pressure Sensitive
Business from S.D. Warren Company, Spinnaker Coating is the fifth largest
manufacturer of adhesive-backed label stock in the United States. It is the
only manufacturer of all adhesive-backed paper technologies (pressure, water
and heat sensitive), which enables Spinnaker Coating to provide a broad
range of standard and custom coating solutions that meet the design
specifications of its customers. Spinnaker Coating primarily manufactures
custom, low-volume, pressure sensitive products used for speciality
applications, whereas the Pressure Sensitive Business manufactures standard,
high volume, pressure sensitive products, which complements its product line.
Spinnaker Coating, on a pro forma basis, offers a full line of more than 2,000
variations of adhesive-backed label stock and sells its products in roll and
sheet form to over 1,000 printers, paper merchants, industrial users and major
forms manufacturers and distributors. These major forms manufacturers and
distributors purchase high volumes of standard pressure sensitive products
manufactured by the Pressure Sensitive Business. Customers convert its label
stock into labels used for a broad range of end use applications, including
bar-coding, mailing and shipping, packaging for pharmaceutical, food and other
consumer products, office identification and business forms, postage stamps
stock, decorative labels and other specialty industrial uses. Spinnaker
Coating is the largest supplier of pressure sensitive postage stamp stock for
use by the United States Postal Service.
Spinnaker expects to benefit from strong growth in the adhesive-backed
materials industry, particularly in pressure sensitive applications in its
principal markets for carton sealing tape and adhesive-backed label stock.
Despite lower than expected industry growth during 1997, according to
independent studies, demand for pressure sensitive tape for packaging and
sealing applications is projected to grow at an average rate of approximately
6.3% per year, and demand for pressure sensitive label stock is projected to
increase at an average rate of approximately 8.3% per year.
Spinnaker also manufactures and markets industrial process equipment and air
pollution control scrubbers through its Entoleter, Inc. ("Entoleter")
subsidiary. Spinnaker is exploring strategic alternatives with respect to
Entoleter to improve shareholder value, including the possible sale or spin-off
of Entoleter.
Richard J. Boyle
Chairman
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LYNCH DISPLAY TECHNOLOGIES, INC
Lynch Corporation formed Lynch Display Technologies in 1997 to focus
resources on growth opportunities in the electronic display industry.
Electronic displays involve rapidly-changing technologies in the fields of flat
panel and cathode ray tubes for televisions, computer screens, electronic
signs, automobile panels and numerous other applications. Lynch Display
Technologies concentrates in the capital equipment and components sector of
this global market.
The long-term strategy of Lynch Display Technologies is to acquire and
develop a group of growth companies in the electronic display industry. The
company is continually evaluating investment and strategic opportunities from a
broad and growing field of technology firms. To ensure that the company is
focused on emerging technologies with the highest growth potential, Lynch
Display Technologies has created a Scientific Advisory Board chaired by Dr.
Samuel Musa, PhD., executive director of the University of Michigan's Center
for Display Technology. The other member at this time is Dr. Christopher
Summers, PhD, director of the Center for Phosphor Excellence at Georgia Tech in
Atlanta.
Lynch Display Technologies currently has one operating company, Lynch
Machinery in Bainbridge, Georgia. To reflect the broader range of services and
products offered by the company, Lynch Machinery has been renamed Lynch
Systems, Inc. Lynch Systems designs, manufactures and markets a sophisticated
array of glass-forming equipment and industrial controls systems for cathode
ray tube and non-display glass manufacturers. The company exports in excess of
95% of its products outside the United States, with the vast majority produced
for customers in China, Korea, Indonesia and India. Although Lynch Systems
requires that all transactions be conducted in U.S. dollars, the company has
been affected by the significant economic upheaval and downturn in key Asian
markets, most importantly Korea and Indonesia. Financial and currency issues
have caused customers in these markets to postpone capital expenditure programs
involving the purchase of glass-pressing and industrial control systems from
Lynch Systems. As a result, company revenues and operating income declined from
1996. Revenues declined from $26. 1 million in 1996 to $18.7 million in 1997.
EBITDA dropped from $4.9 million in 1996 to $1.9 million in 1997. After-tax
earnings declined from $1.9 million in 1996 to $.9 million in 1997.
Lynch Systems has launched several strategic initiatives to increase
revenues and profitability in 1998 and beyond. The company is focusing on
developing long-term supply and service relationships with every major producer
of cathode ray tube glass in the world. These services include design,
engineering, manufacturing, installation management and maintenance of capital
equipment and controls.
Lynch Systems has also launched key product development initiatives to
regain technological dominance in its historic markets of non-display glass
forming equipment for consumer and commercial glass. Lynch Systems currently
has less than a two percent share of this global market and expects to increase
its share significantly with new product and marketing initiatives.
In December, the company accepted the resignation of Bob Pando as President
and Chief Executive Officer of Lynch Systems. Lynch thanks Bob for his ten
years of service in Bainbridge. Mark L. Cushing, President and CEO of Lynch
Display Technologies and assistant to the Chairman of Lynch Corporation, was
named acting President/CEO of Lynch Systems. A search is underway for a
permanent President.
Mark L. Cushing
Assistant to the Chairman
27
<PAGE> 30
M-TRON INDUSTRIES
HIGHLIGHTS
- M-tron continued to pursue and grow its share in the telecommunications
and wireless communications marketplace with it applications specific products.
- The implementation of the Team Concept has developed to the point that the
next phase is being organized and will be put into effect in the immediate
future. This procedure has significantly increased M-tron's ability to meet
market demands for competitive, on time delivery.
- Several new products were introduced and an advanced research and
development project was initiated primarily applicable to the
telecommunications market sector.
THE ORGANIZATION
The sales organization was restructured into three managerial directives:
OEM (Original Equipment Manufacturers) and Contract Manufacturing. With
contract manufacturing of ever increasing importance and design-ins at the OEM
level critical.
Telecommunications. Fast becoming the major sales area, M-tron's top
customers are telecommunications companies. Much of the product development
that is currently taking place, and will continue to be so, is for this market
segment. This area requires a special technical knowledge of the marketplace,
its product requirements and the customers' technical direction.
Distribution. M-tron has contracts with several of the top distributors in
the country along with some second tier area distributors. Unlike OEM/Contract
Manufacturing, or Telecommunications, distribution requires a different set of
disciplines to sell in this market segment. Once purchasing in high volume and
selling in low volume, distributors now operate almost the same as
manufacturer's representatives.
In confirmation of this sales approach, OEM new orders grew 20%,
distribution grew 23%, telecommunications grew 28%, and contract manufacturing
grew 39% in 1997 over 1996 new orders in like category.
In addition, the M-tron Hong Kong office, in its third year, has shown
significant gains selling primarily to contract manufacturers in the Pacific
Rim countries who assemble products primarily of United States OEM's origin.
This office also does its own quality control and is successfully incorporating
off shore purchasing for the Hong Kong office and for M-tron USA. These
activities include purchasing of standard product to M-tron's specifications
and the research and purchase of new product offerings developed in the Far
East as well as to coordinate and find new quality sources in the Far East,
including China.
PRODUCT DEVELOPMENT
The principle product area that resulted in significantly increased sales
was that of manufactured oscillators. This manufactured product is expected to
grow approximately 40% in 1998 primarily driven by new products introduced in
1997 principally directed at the telecommunications market sector. In addition,
M-tron initiated the development of a technologically advanced product that is
being coordinated by M-tron's Chief Scientist and a globally recognized expert
in telecommunication frequencies for application in PCS and cellular base
stations, multiple channel multipoint distribution systems, wireless LAN
systems and wireless meter reading for such applications as gas, water, and
electrical wireless systems. These new product characteristics and
specifications exceed that of known SAW (Surface Acoustical Wave) device
applications for such markets.
1997 OPERATIONS PERFORMANCE
Continuing efforts in 1997 as expressed in the 1996 Annual Report, M-tron
realized an increase in new orders from $16.2 million to $23.0 million or 42%,
while sales increased from $18.4 million in 1996 to $22.8 million in 1997, or
24%. Net income increased from $677,000 in 1996 to $1,006,000 in 1997, or 49%,
while EBITDA increased from $ 1.7 million in 1996 to $2.2 million in 1997, or
25%.
M-tron will continue its team development, introduce new products, both
sourced in the Far East and designed at its Yankton facility, and emphasize its
efforts in the Telecommunications and Wireless Communications markets. By doing
so, and capturing an increased share of its major customers business, M-tron
expects that it will continue its growth path in 1998 and beyond. In so doing,
M-tron expects to incorporate a major amount of automation into its processes
in the coming year.
M-tron would like to take this opportunity to thank its employees, its
suppliers, the Yankton Community and, of course, its most valued customers, for
the understanding and support that resulted in M-tron's 1997 performance which
has laid the groundwork for profitable growth in the years to come.
Martin J. Kiousis
President
28
<PAGE> 31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
YEAR 1997 COMPARED TO 1996
Revenues increased to $467.5 million in 1997 from $451.9 million in 1996, a
4% increase. Acquisitions made during late 1996 and early 1997 in the
multimedia and service segments were the most significant contributors to this
increase. In the multimedia segment, revenues increased by $19.3 million to
$47.9 million from $28.6 million in the previous year. Dunkirk and Fredonia
Telephone Company, which was acquired on November 26, 1996, contributed $10.3
million compared to $0.9 million in 1996. Upper Peninsula Telephone Company,
control of which was acquired on March 18, 1997, contributed $7.2 million to
this segment's revenue increase. In the services segment, revenues of $21.2
million resulting from the acquisition of Transit Homes of America, Inc. on
December 31, 1996, offset by lower "Truckaway" revenues, was the primary
contributor to the revenue increase at The Morgan Group, Inc. In the
manufacturing segment, revenues decreased by $17.6 million reflecting order
short-fall at Lynch Systems, Inc. (formerly known as Lynch Machinery, Inc.), of
$7.4 million; revenue short-fall at all three units of Spinnaker of $14.5
million; and partially offset by improved revenues at M-tron of $4.4 million.
Earnings before interest, taxes, depreciation and amortization (EBITDA)
increased to $45.8 million in 1997 from $33.9 million in 1996, a $11.9 million,
or a 35% increase. Operating segment EBITDA (prior to corporate management fees
and expenses) grew to $47.4 million from $36.3 million, a 31% increase. The
manufacturing segment represented 46% of EBITDA, or $21.2 million, a decrease
of $1.6 million versus 1996. While all of the other components of the
manufacturing segment had increases, they were more than offset by lower EBITDA
at Lynch Systems of $3.2 million when compared to 1996 results due to lower
sales volume of the extra-large glass presses. The services segment had EBITDA
of $2.1 million versus negative EBITDA of $1.8 million in 1996 predominately
due to special charges recorded at Morgan of $3.5 million in 1996 and $.6
million in 1997. The multimedia segment contributed $24.1 million or 52.7% of
total EBITDA versus $15.3 million in 1996 due to the effects of the acquisition
of Dunkirk & Fredonia Telephone Company and Upper Peninsula Telephone Company.
Operating profits for 1997 were $24.8 million, an increase of $7.8 million,
or 46.3%, versus 1996. Operating profits in the services segment increased by
$4.3 million due to the same factors impacting EBITDA. There were also
increases in the multimedia and corporate segments operating profits of $5.2
million and $.9 million offset by a decline in the manufacturing segment of
$2.5 million.
Investment income decreased by $.2 million to $2.0 million in 1997 versus
1996. The decrease was related to lower dollar investments generating current
income.
Interest expense increased by $6.5 million in 1997 when compared to 1996.
The increase is due primarily to the full year effect of financing the
acquisitions of Dunkirk and Fredonia Telephone Company, the acquisition of
Upper Peninsula Telephone Company and the Subordinated Notes issued by
Spinnaker in October 1996.
In 1997, Lynch provided a reserve of 30% of the investment in, loans to, and
deferred costs associated with its subsidiary's 49.9% equity ownership in
Fortunet Communications, L.P. ("Fortunet"), a partnership formed to acquire,
construct and operate licenses for the provision of personal communications
services ("PCS") in the so-called C-Block Auction. Such write-off amounted to
$7.0 million, or $4.6 million after tax benefit.
In May 1996, the FCC concluded the C Block Auction for 30-megahertz of
broadband spectrum across the United States to be used for PCS. PCS is the
second generation of low-cost digital wireless service utilized for voice,
video and data devices. In the C-Block Auction, certain qualified small
businesses were afforded bidding credits as well as access to long-term
government financing for a substantial portion of the cost of the licenses
acquired.
As a result of this auction, Fortunet acquired 31 licenses in 17 states
covering a population ("POP") of 7.0 million. The total cost of these licenses
was $216 million, or $30.76 per POP, after the 25% bidding credit. The U.S.
Government lent licensees 90% of the net cost of the licenses. Events during
and subsequent to the auction, as well as other externally driven technologies
and market forces, have made financing of the Government installment debt and
the development of these licenses through the capital markets much more
difficult than previously anticipated.
29
<PAGE> 32
Fortunet, as well as many of the license holders from this auction, has
petitioned the FCC for relief in terms of (1) resetting the interest rate to
the appropriate rate at the time; (2) further reducing or delaying the required
debt payments in order to afford better access to capital markets; and (3)
relaxing the restrictions with regard to ownership structure and alternative
arrangements in order to afford these small businesses the opportunity to more
realistically restructure and build-out their systems. The response from the
FCC which was announced on September 26, 1997, and modified on March 26, 1998,
afforded license holders a choice of four options, one of which was the
resumption of current debt payments which had been suspended earlier this year.
The ramifications of choosing the other three courses of action could result in
Fortunet ultimately forfeiting either 30%, 50%, or 100% of its current
investment in these licenses. While Fortunet is still examining what action, if
any, it will take with respect to these options and will continue to look for
ways to finance and develop this spectrum, the management of the Company
provided for a 30% reserve of its investment at this time, as this represents
management's estimate of the impairment of this investment given the current
available alternatives.
The 1997 tax benefit of $.7 million, includes federal, state and local taxes
and represents an effective rate of 21.4% versus 40.8% effective tax provision
rate in 1996. The difference in the effective rates is primarily due to the
effects of state income taxes and the amortization of goodwill.
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 Systems, 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 $36.3 million from $34.0 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 Systems 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 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 CPC in late 1995.
Gain on sales of subsidiary and affiliate stock increased by $5.1 million in
1996. This increase is the result of the conversion of a $6.0 million Spinnaker
Note into Spinnaker Common Stock in 1996 and other transactions.
30
<PAGE> 33
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 of 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.
FINANCIAL CONDITION
As of December 31, 1997, the Company had current assets of $152.8 million
and current liabilities of $96.8 million. Working capital was therefore $56.0
million as compared to $41.6 million at December 31, 1996 and increased
primarily due to the acquisition of Dunkirk & Fredonia Telephone Company and
Upper Peninsula Telephone Company.
Capital expenditures were $21.8 million in 1997 and $25.5 million in 1996 as
1996 included the installation of a silicone paper coating machine at Spinnaker
Coating. Overall 1998 capital expenditures are expected to be approximately
$2.0 million to $3.0 million above the 1997 level.
At December 31, 1997, total debt was $281.1 million, which was $20.3 million
more than the $260.8 million at the end of 1996, primarily due to the
acquisition of Upper Peninsula during 1997. Debt at year end 1997 included
$231.2 million of fixed interest rate debt, at an average cash interest rate of
8.9% and $49.9 million of variable interest rate debt at an average interest
rate of 8.7%. Additionally, at December 31, 1997 the Company had $48.1 million
in unused short-term lines of credit of which $34.5 million was attributed to
Spinnaker, and $3.3 million of which was attributable to Morgan. Subsequent to
year end, Spinnaker increased its working capital facility from $40.0 to $60.0
million and $45.0 million of the facility was drawn down to fund the
acquisition of S.D. Warren's pressure sensitive business. Certain restrictive
covenants within the debt facilities at both Spinnaker and Morgan limit their
ability to provide the parent company with significant funding. As of December
31, 1997, the Parent Company had borrowed $22.7 million under two short-term
lines of credit facilities. The lines currently total $24.5 million. These
funds were primarily used to fund the bids by partnerships in the PCS Auctions
and fund a portion of the purchase price of Upper Peninsula Telephone Company.
These short-term lines of credit expire May 15, 1998 ($14.5 million) and
December 29, 1998 ($10.0 million). Management anticipates that these lines will
be renewed for one year but there is no assurance that they will be.
Backlog in the manufactured products segment at December 31, 1997 was $30.9
million versus $20.9 million at the end of 1996. Backlog at Lynch Systems was
$18.6 million at December 31, 1997, and $6.6 million at December 31, 1996.
Included in the current backlog is a $16 million glass press order from a
international customer. The customer has currently alerted the Company not to
proceed with construction on these presses until notified and Lynch Systems
does not expect significant production during 1998.
Since 1987, the Board of Directors of Lynch has authorized the repurchase of
300,000 common shares. At December 31, 1997, Lynch's remaining authorization is
to repurchase an additional 69,000 shares of common stock.
The Board of Directors has adopted a policy not to pay cash 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 1998.
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.
31
<PAGE> 34
On March 17, 1998, Spinnaker Coating-Maine, Inc. acquired the pressure
sensitive adhesive-backed label stock business of S.D. Warren ("Pressure
Sensitive Business" or "the Acquisition"). The Pressure Sensitive Business
manufactures and markets label stock primarily for the EDP segment of the label
stock market and generated $62.1 million of net sales and operating profit of
$5.8 million on a historical basis for the fiscal year ended October 1, 1997.
The purchase price was approximately $52 million, plus the assumption of
certain liabilities and was funded by issuing the seller a subordinated note of
$7.0 million and from Spinnaker's amended $60 million revolving credit
facility. The subordinated note bears interest at 10% per annum and 30% is due
on March 31, 1999 with the remainder due March 31, 2000, subject to certain
postponement and acceleration provisions. The note is convertible into
Spinnaker common stock at a price of $25.00 per share, subject to certain
adjustments.
A subsidiary of the Company has a minority position in an entity, Fortunet
Communications, Inc. ("Fortunet") to which it has funding commitments. Fortunet
participated in the auction conducted by the Federal Communications Commission
for 30 megahertz and broadband spectrum to be used for personal communications
services, the so-called "C-Block" Auction. In this auction, Fortunet acquired
30 licenses to provide personal communications services to geographic areas of
the United States with a total population of 7.0 million. The cost of these
licenses was $216.2 million, $194.6 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 through 10. As of December 31, 1997, the subsidiary had invested $598,000 in
partnership equity and $24.0 million in loans; as well as possible funding
commitments to provide an additional $17.6 million in loans. The subsidiary is
currently evaluating its funding alternatives and options in light of the
current FCC proposals (see below) and has not yet determined how it will go
forward with regard to the funding commitments. There are many risks associated
with personal communications services. In addition, funding aspects of
acquisition and development of licenses plus the amortization of the license,
could significantly and materially impact the Company's reported net income
over the next several years.
Fortunet, as well as many of the license holders from this auction, has
petitioned the FCC for relief in terms of (1) resetting the interest rate to
the appropriate rate at the time; (2) further reducing or delaying the required
debt payments in order to afford better access to capital markets; and (3)
relaxing the restrictions with regard to ownership structure and alternative
arrangements in order to afford these small businesses the opportunity to more
realistically restructure and build-out their systems. The response from the
FCC, which was announced on September 26, 1997, afforded the license holders a
choice of four options, one of which was the resumption of current debt
payments which had been suspended earlier this year. The ramifications of
choosing the other three courses of action could result in the Company's
subsidiary ultimately forfeiting either 30%, 50%, or 100% of its current
investment in these licenses. On March 24, 1998, the FCC modified the four
options, with a date not earlier than late May 1998, for the "C-Block" license
holders to notify the FCC of its choice of options. While Fortunet is still
examining what action, if any, it will take with respect to these options, and
will continue to look for ways to finance and develop this spectrum, the Company
provided for a 30% reserve of its investment at this time, as this represents
management's estimate of the impairment of this investment given the current
available alternatives.
The Company has initiated a comprehensive review of its computer systems to
identify the systems that could be affected by the "Year 2000" issue and is
developing an implementation plan to resolve the issue. The Year 2000 problem
is the result of computer programs being written using two digits (rather than
four) to define the applicable year. Any of the Company's programs or programs
utilized by vendors to the Company that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a major system failure or miscalculations. Of the Company's
subsidiaries, the most potential exposure exists at the telephone companies,
both with the switching equipment and third party billing vendors, and at
Morgan. The Company presently believes that, with modifications to existing
software and converting to new software, the Year 2000 problem will not pose
significant operational problems for the Company's computer systems as so
modified and converted. However, if such modifications and conversions are not
completed timely, the Year 2000 problem may have a material impact on the
operations of the Company. The Company cannot yet estimate the cost of such
modifications or conversions.
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<PAGE> 35
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 spin-off 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 parent company, meet its current funding commitments 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 investments in operating entities either directly or through an
exchange debt instrument. Additional debt and/or equity financing vehicles at
the parent company and/or subsidiaries 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.
33
<PAGE> 36
LYNCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 31
1997 1996
------- -------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 33,557 $ 33,946
Marketable securities and short-term investments . . . . . . . . . . . . . . . . . . 985 2,156
Trade accounts receivable, less allowances of $1,448 and $1,525 in 1997
and 1996, respectively includes $1,776 and $9,624 of costs in excess of
billings at 1997 and 1996, respectively . . . . . . . . . . . . . . . . . . . . . . 54,480 52,963
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,685 36,859
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,993 5,571
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,059 8,598
-------- --------
TOTAL CURRENT ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152,759 140,093
PROPERTY, PLANT AND EQUIPMENT:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,742 1,367
Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,272 21,334
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190,579 157,025
-------- --------
217,593 179,726
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (60,064) (46,707)
-------- --------
157,529 133,019
EXCESS OF COSTS OVER FAIR VALUE OF NET ASSETS ACQUIRED . . . . . . . . . . . . . . . . . 73,257 69,206
INVESTMENTS IN AND ADVANCES TO PCS ENTITIES . . . . . . . . . . . . . . . . . . . . . . . 25,448 34,116
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,645 16,186
-------- --------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $423,638 $392,620
======== ========
</TABLE>
See accompanying notes.
34
<PAGE> 37
LYNCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 31
1997 1996
---------- ----------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 29,021 $ 19,158
Trade accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,381 20,998
Accrued interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 886 1,230
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,969 28,663
Customer advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,249 6,382
Current maturities of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . 9,302 22,030
-------- --------
TOTAL CURRENT LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96,808 98,461
LONG-TERM DEBT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242,776 219,579
DEFERRED INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,764 22,389
MINORITY INTERESTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,839 13,268
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,644 8,417
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,414 26,472
Treasury stock of 54,143 and 80,157 shares, at cost . . . . . . . . . . . . . . . . . (746) (1,105)
-------- --------
TOTAL SHAREHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,451 38,923
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . . . . . . $423,638 $392,620
======== ========
</TABLE>
See accompanying notes.
35
<PAGE> 38
LYNCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year ended December 31
1997 1996 1995
----------- ------------ -----------
<S> <C> <C> <C>
SALES AND REVENUES:
Multimedia . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 47,908 $ 28,608 $ 23,597
Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146,154 132,208 122,303
Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . 273,474 291,064 187,727
----------- ------------ -----------
467,536 451,880 333,627
----------- ------------ -----------
COSTS AND EXPENSES:
Multimedia . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,363 21,435 17,889
Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135,431 127,236 111,672
Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . 227,621 241,683 147,497
Selling and administrative . . . . . . . . . . . . . . . . . . . 44,334 44,586 36,722
----------- ------------ -----------
OPERATING PROFIT . . . . . . . . . . . . . . . . . . . . . . . . . . 24,787 16,940 19,847
----------- ------------ -----------
Other income (expense):
Investment income . . . . . . . . . . . . . . . . . . . . . . . . 2,048 2,203 3,070
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . (23,461) (17,011) (10,844)
Share of operations of affiliated companies . . . . . . . . . . . 154 119 398
Reserve for impairment of investment in PCS license holders . . . (7,024) -- --
Gain on sales of subsidiary and affiliate stock . . . . . . . . . 169 5,146 59
----------- ------------ -----------
(28,114) (9,543) (7,317)
----------- ------------ -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES, MINORITY INTERESTS AND
EXTRAORDINARY ITEM . . . . . . . . . . . . . . . . . . . . . . . (3,327) 7,397 12,530
Benefit (provision) for income taxes . . . . . . . . . . . . . . . . 713 (3,021) (4,906)
Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . (264) 418 (2,155)
----------- ------------ -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
EXTRAORDINARY ITEM . . . . . . . . . . . . . . . . . . . . . . . (2,878) 4,794 5,469
Discontinued operations:
Loss from operations of discontinued Lynch Tri-Can International
(less applicable income taxes of $149 and $220 and minority
interest effects of $29 and $36 in 1996 and 1995, respectively) -- (263) (324)
Loss on disposal of Lynch Tri-Can International (less applicable
income taxes of $167 and minority interest effect of $54) . . . -- (487) --
----------- ------------ -----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM . . . . . . . . . . . . . . . (2,878) 4,044 5,145
Loss on early extinguishment of debt, net of income tax
benefit of $953 and minority interest effect of $495 . . . . . . . -- (1,348) --
----------- ------------ -----------
NET INCOME (LOSS) . . . . . . . . . . . . . . . . . . . . . . . . . . $ (2,878) $ 2,696 $ 5,145
----------- ------------ -----------
Weighted average shares outstanding . . . . . . . . . . . . . . . . . 1,415,000 1,388,000 1,379,000
=========== ============ ===========
Basic earnings per share:
Income (loss) from continuing operations before
extraordinary item . . . . . . . . . . . . . . . . . . . . . . $ (2.03) $ 3.45 $ 3.96
Loss from discontinued operations . . . . . . . . . . . . . . . . . . -- (.54) (.23)
Extraordinary item . . . . . . . . . . . . . . . . . . . . . . . . . -- (.97) --
----------- ------------ -----------
NET INCOME (LOSS) . . . . . . . . . . . . . . . . . . . . . . . . . . $ (2.03) $ 1.94 $ 3.73
=========== ============ ===========
Diluted earnings per share:
Income (loss) from continuing operations before
extraordinary item . . . . . . . . . . . . . . . . . . . . . . $ (2.03) $ 3.41 $ 3.89
Loss from discontinued operations . . . . . . . . . . . . . . . . -- (.53) (.23)
Extraordinary item . . . . . . . . . . . . . . . . . . . . . . . -- (.96) --
----------- ------------ -----------
NET INCOME (LOSS) . . . . . . . . . . . . . . . . . . . . . . . . . . $ (2.03) $ 1.92 $ 3.66
=========== ============ ===========
</TABLE>
See accompanying notes.
36
<PAGE> 39
LYNCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year ended December 31
1997 1996 1995
--------- ------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . $ (2,878) $ 2,696 $ 5,145
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . 21,045 16,981 11,276
Amortization of deferred financing charges . . . . . . . . . . 632 -- --
Extraordinary charge on early extinguishment of debt . . . . . -- 1,348 --
Net effect of purchases and sales of trading securities . . . . 1,171 9,276 2,079
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . (3,751) 2,082 201
Share of operations of affiliated companies . . . . . . . . . . (154) (119) (398)
Minority interests . . . . . . . . . . . . . . . . . . . . . . 264 (500) 2,119
Morgan special charge . . . . . . . . . . . . . . . . . . . . . -- 3,500 --
Gain on sale of stock by subsidiaries . . . . . . . . . . . . . (169) (5,146) (59)
Reserve for impairment in investment in PCS license holders . . 7,024 -- --
Changes in operating assets and liabilities,
net of effects of acquisitions:
Receivables . . . . . . . . . . . . . . . . . . . . . . (1,357) 407 (3,704)
Inventories . . . . . . . . . . . . . . . . . . . . . . 1,174 (3,374) 1,539
Accounts payable and accrued liabilities . . . . . . . . (1,342) 3,743 10,417
Other . . . . . . . . . . . . . . . . . . . . . . . . . 2,426 (1,810) (1,437)
--------- ------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES . . . . . . . . . . . . . . 24,085 29,084 27,178
--------- ------- ---------
INVESTING ACTIVITIES
Acquisitions (total cost less debt assumed and cash
equivalents acquired):
Personal Communications Services Partnerships . . . . . . 1,644 (27,106) (7,010)
Dunkirk and Fredonia . . . . . . . . . . . . . . . . . . . -- (17,788) --
Central Products Company . . . . . . . . . . . . . . . . . -- -- (85,072)
Upper Peninsula Telephone Company . . . . . . . . . . . . (24,968) -- --
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (7,813) (8,048)
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . (21,828) (25,518) (19,569)
Investment in Coronet Communications Company . . . . . . . . . . 2,995 -- --
Investment in Capital Communications, Inc. . . . . . . . . . . . -- -- 3,000
Sale of investments in Cellular partnerships . . . . . . . . . . 8,576 -- --
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . (31) (1,597) (1,349)
--------- ------- ---------
NET CASH USED IN INVESTING ACTIVITIES . . . . . . . . . . . . . . . . (33,612) (79,822) (118,048)
--------- ------- ---------
</TABLE>
See accompanying notes.
37
<PAGE> 40
LYNCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year ended December 31
1997 1996 1995
------- ------ ------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Issuance of long-term debt . . . . . . . . . . . . . . . . . . . 25,027 166,358 90,167
Payments to reduce long-term debt . . . . . . . . . . . . . . . . (26,634) (101,708) (4,720)
Net borrowings, lines of credit . . . . . . . . . . . . . . . . 9,863 7,797 3,718
Deferred financing costs . . . . . . . . . . . . . . . . . . . . -- (7,139) --
Sale of treasury stock . . . . . . . . . . . . . . . . . . . . . 672 755 --
Sale of minority interests . . . . . . . . . . . . . . . . . . . -- 3,642 (220)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210 (942) (164)
------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES . . . . . . . . . . . . . . 9,138 68,763 88,781
------- -------- --------
Net increase (decrease) in cash and cash equivalents . . . . . . . . (389) 18,025 (2,089)
Cash and cash equivalents at beginning of year . . . . . . . . . . . 33,946 15,921 18,010
------- -------- --------
Cash and cash equivalents at end of year . . . . . . . . . . . . . . $33,557 $ 33,946 $ 15,921
======= ======== ========
</TABLE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
Common Additional
Stock Common Paid-in Retained
Outstanding Stock Capital Earnings
------------- --------- ----------- -----------
<S> <C> <C> <C> <C>
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
Capital transactions of the Morgan Group, Inc. . . . . -- -- (86) --
Issuance of treasury stock . . . . . . . . . . . . . . 26,014 -- 313 --
Dividend of East/West Communications, Inc. . . . . . . -- -- -- (180)
Net loss for the year . . . . . . . . . . . . . . . . . -- -- -- (2,878)
----------- -------- ---------- -----------
Balance at December 31, 1997 . . . . . . . . . . . . . . . 1,417,048 $5,139 $8,644 $23,414
=========== ======== ========== ===========
</TABLE>
See accompanying notes.
38
<PAGE> 41
LYNCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
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, meet its current funding commitments (see Note 5) and fund
future growth. The Company is currently considering various alternative long
and short-term financing arrangements. One such alternative would be to sell a
portion or all of certain investments in operating entities either directly or
through an exchangeable debt instrument. 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, 1997 and 1996, assets of $19.9 million and $14.4 million, which
are classified as cash and cash equivalents, are invested in United States
Treasury money market funds for which affiliates of the Company serve as
investment managers to the respective Funds.
Marketable Securities and Short-term Investments Marketable securities and
short-term investments consist principally of U.S. Treasury obligations, and
preferred and common stocks and bonds. At December 31, 1997 and 1996, all
marketable securities and United States Treasury money market funds classified
as cash equivalents were classified as trading, with the exception of certain
equity securities in 1997 and 1996 with carrying values of $1.0 million and $.9
million, respectively, which were 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 of $169,000, $628,000 and $408,000 on
trading securities has been included in earnings for the years ended December
31, 1997, 1996, and 1995, respectively. There was no adjustment to
shareholders' equity for the available-for-sale securities at December 31,
1997, 1996 and 1995, respectively.
The cost of marketable securities sold is determined on the specific
identification method. Realized gains of $229,000, $102,000 and $529,000, and
realized losses of $9,000, $112,000 and $108,000 are included in investment
income for the years ended December 31, 1997, 1996, and 1995, 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 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.
39
<PAGE> 42
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 were $1,022,000 in 1997, $1,627,000 in 1996
and $1,673,000 in 1995.
Earnings Per Share In 1997, the Financial Accounting Standards Board issued
Statement ("SFAS") No. 128, Earnings per Share. SFAS No. 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants, and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts for
all periods have been presented in accordance with, and where appropriate,
restated to conform to the SFAS No. 128 requirements.
Accounting for Long-Term Contracts Lynch Systems, 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 Systems accounts for these
contracts using the percentage-of-completion accounting method as costs are
incurred.
Impairments Effective January 1, 1996, the Company adopted SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for 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, if the exercise price of the Company's employee stock options
was 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 other long-term
obligations approximates cost based on borrowing rates for similar instruments,
excluding the Spinnaker senior-secured debt with a carrying value of $115
million and a fair value of approximately $119 million at December 31, 1997,
based on quoted market prices for similar securities.
Reclassifications Certain amounts in the 1996 and 1995 financial statements
have been reclassified to conform to the 1997 presentation.
Recent Accounting Pronouncements In June 1997, the FASB issued SFAS No. 130,
Reporting Comprehensive Income, which is effective beginning in 1998. SFAS No.
130 establishes standards for reporting and display for comprehensive income
and its components. Comparative periods are required to be reclassified to
reflect the provisions of the Statement. The adoption of this Statement will
not affect earnings as previously reported.
In June 1997, the FASB also issued SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information. This new Statement requires disclosure
of selected financial and descriptive information for each operating segment
based on management's internal organizational decision-making structure.
Additional information is required on a company-wide basis for revenues by
product or service, revenues and identifiable assets by geographic location and
informa-
40
<PAGE> 43
tion about significant customers. The Company will begin presenting any
additional information as required by SFAS No. 131 in its financial statements
for the year ending December 31, 1998.
2. ACQUISITIONS
On March 18, 1997, Lynch Michigan Telephone Holding Company, a wholly-owned
subsidiary of Lynch acquired approximately 60% of the outstanding shares of
Upper Peninsula Telephone Company for $15.2 million. The Company completed the
acquisition of the remaining 40% on May 23, 1997. The total cost of the
acquisition was $26.5 million. As a result of this transaction, the Company
recorded $7.4 million in goodwill which is being amortized over 25 years.
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, DFT Communications, Inc. (Formerly known as Lynch
Telephone Corporation VIII), a wholly-owned subsidiary of Lynch, acquired all
of the outstanding shares of Dunkirk & Fredonia Telephone Company, a local
exchange company serving portions of western New York. The total cost of this
transaction was $27.7 million. As a result of this transaction, the Company
recorded $13.8 million in goodwill which is being amortized over 25 years.
On June 3, 1996, Inter-Community Telephone, a Lynch Telephone Corporation II
subsidiary acquired four telephone exchanges in North Dakota containing
approximately 1,400 access lines from U.S. West Communications, Inc. for
approximately $4.7 million.
On October 4, 1995, Central Products Acquisition Corp., a wholly-owned
subsidiary of Spinnaker Industries, Inc. ( a 63% 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.
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 Operations 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 Upper Peninsula
Telephone Company was made at the beginning of 1996 and the purchase of Transit
Homes and Dunkirk and Fredonia were made at the beginning of 1995.
<TABLE>
<CAPTION>
For the year ended
December 31
1997 1996 1995
---------- ---------- ----------
(In thousands except
per share data)
<S> <C> <C> <C>
Sales . . . . . . . . . . . $469,912 $500,915 $467,720
Income (loss) from
continuing operations . . . . (2,711) 8,056 4,843
Loss from discontinued
operations . . . . . . . . . -- (750) (324)
Extraordinary item . . . . . . . -- (1,348) --
---------- ---------- ----------
Net income (loss) . . . . . . . . $ (2,711) $ 5,958 $ 4,519
========== ========== ==========
Basic earnings per share:
Income (loss) from
continuing operations . . . $ (1.92) $ 5.80 $ 3.51
Loss from discontinued
operations . . . . . . . . -- (.54) (.23)
Extraordinary item . . . . . -- (.97) --
---------- ---------- ----------
Net income (loss) per share . . . $ (1.92) $ 4.29 $ 3.28
========== ========== ==========
Diluted earnings per share:
Income (loss) from
continuing operations . . . $ (1.92) $ 5.73 $ 3.44
Loss from discontinued
operations . . . . . . . . -- (.53) (.23)
Extraordinary item . . . . . -- (.96) --
---------- ---------- ----------
Net income (loss) per share . . . $ (1.92) $ 4.24 $ 3.21
========== ========== ==========
</TABLE>
3. SPECIAL CHARGES/DISCONTINUED OPERATIONS
Morgan Drive Away, a 51% 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. Morgan recorded a special charge for 1997 of $624,000 before
taxes comprised of gains in excess of the net realizable value associated with
exiting the truckaway operation of $361,000, offset by charges related to
driver pay of $985,000. These charges have been included in the Company's
results of continuing operations.
The Board of Directors of Lynch Systems, 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 and
1995. Tri-Can which was previously reported in the manufacturing segment due to
the insignificance to the Company's financial statements, is treated as a
discontinued operation as its products and customers are different than those
of Lynch Systems.
41
<PAGE> 44
As a result of this disposal, Lynch recorded a provision for loss of $487,000
after-taxes, to reflect the writedown of certain assets and costs estimated to
be incurred prior to disposal and a provision of $263,000 after-tax for
operating losses prior to the sale. The operating results of Tri-Can are
summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
For the Year ended
December 31
1996 1995
----- -----
<S> <C> <C>
Sales . . . . . . . . . . . . . . . . . . $2,797 $4,539
====== ======
Loss before tax benefit . . . . . . . . . $ (441) $ (580)
Income tax benefit . . . . . . . . . . . 149 220
Minority interest . . . . . . . . . . . . 29 36
------ ------
Loss from operations . . . . . . . . . . (263) (324)
------ ------
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)
====== ======
</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 48% and 50%
of consolidated inventories at December 31, 1997 and 1996. Inventories at
Spinnaker Coating, 43% and 42% of inventories at December 31, 1997 and 1996,
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
1997 1996
----- -----
(In Thousands)
<S> <C> <C>
Raw materials and supplies . . . . . . . . $10,493 $10,987
Work in process . . . . . . . . . . . . . . 3,544 3,950
Finished goods . . . . . . . . . . . . . . 21,648 21,922
------- -------
TOTAL . . . . . . . . . . . . . . . . . . . $35,685 $36,859
======= =======
</TABLE>
Current cost exceeded the LIFO value of inventories by $925,000 and $973,000 at
December 31, 1997 and 1996, 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 held a 49.9% limited
partnership interest in each of these partnerships and had committed to funding
the government interest and certain other expenses up to a specified amount as
discussed below.
In the C-Block auction, which ended in May 1996, Lynch's subsidiary was a
limited partner in Fortunet Communications, L.P. ("Fortunet"), which 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's subsidiary had agreements to
provide a total of $41.8 million of funding to such partnership, of which $24.0
million was funded through December 31, 1997. 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. Events during and subsequent to the auction, as well
as other externally driven technological and market forces, have made financing
the development of these licenses through the capital markets much more
difficult than previously anticipated.
Fortunet, as well as many of the license holders from this auction, has
petitioned the FCC for relief in terms of (1) resetting the interest rate to
the appropriate rate at the time; (2) further reducing or delaying the required
debt payments in order to afford better access to capital markets; and (3)
relaxing the restrictions with regard to ownership structure and alternative
arrangements in order to afford these small businesses the opportunity to more
realistically restructure and build-out their systems. The response from the
FCC, which was announced on September 26, 1997, afforded license holders a
choice of four options, one of which was the resumption of current debt payment
which had been suspended earlier this year. The ramifications of choosing the
other three courses of action could result in Lynch's subsidiary ultimately
forfeiting either 30%, 50%, or 100% of its current investment in these
licenses. On March 24, 1998, the
42
<PAGE> 45
FCC modified the four options. While Fortunet is still examining what action,
if any, it will take with these options, it is expected that a decision will be
required to be made during the second quarter of 1998. Lynch has provided for a
30% reserve of its investment at this time, as this represents management's
estimate of the impairment of this investment given the current available
alternatives.
The balance sheets of Fortunet at December 31, 1997 and 1996 are as follows (in
thousands):
<TABLE>
<CAPTION>
December 31
1997 1996
------ ------
<S> <C> <C>
ASSETS
Cost of license acquired . . . . . . . . . . $243,693 $223,076
-------- --------
Total assets . . . . . . . . . . . . . . . . $243,693 $223,076
======== ========
LIABILITIES AND DEFICIT
Due to the Department of Treasury . . . . . . $208,188 $198,486
Due to Lynch Subsidiary . . . . . . . . . . . 49,513 31,574
Partnership Deficit . . . . . . . . . . . . . (14,008) (6,984)
-------- --------
Total liabilities and deficit . . . . . . . . $243,693 $223,076
======== ========
</TABLE>
Included in "Due to Lynch Subsidiary" and "Cost of license acquired" are
interest and other financing fees aggregating $25.5 million and $10.9 million
at December 31, 1997 and 1996, respectively.
In the F-Block Auction, East/West Communications, Inc. ("East/West"),
incorporated in August 1997 as a successor to Aer Force Communications B, L.P.
minority owned by a subsidiary of Lynch, acquired five licenses to provide
personal communications services in geographic areas of the United States with
a total population of 20 million. 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. $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 a description of the terms of this loan). In January
1997, $10.0 million of this loan was repaid with monies returned from the FCC
upon completion of the auction. On May 12, 1997, four of the five licenses were
awarded and on July 14, 1997, the fifth license was awarded. $15.2 million of
the cost of the licenses is financed with a loan from the United States
Government. The interest rate on the loan is 6.25% with quarterly principal
amortization in years 3 to 10. As of November 30, 1997, Lynch's subsidiary had
invested $225,000 in partnership equity and provided the partnership with a
loan of $3.5 million funded by a short-term secured borrowing and had a funding
commitment of $8.3 million to East/West. On December 4, 1997, East/West
succeeded to the assets and liabilities of Aer Force with Lynch's subsidiary
receiving 49.9% of the common stock. Immediately thereafter, Lynch spun off
39.9% of the common stock of East/West to Lynch's shareholders and transferred
10% of East/West stock to GFI in satisfaction of an obligation to pay it 10% of
the net profits (after a capital charge) of Aer Force. Prior to the succession,
Lynch's subsidiary contributed a portion of the debt (including interest and
commitment fees) owed to it as a contribution to Aer Force B's capital and
immediately after the succession the remaining debt owed to it ($4.5 million
book value) was deemed paid by the issuance by East/West of 7,800 shares
($7,800,000 liquidation preference) of Redeemable Preferred Stock and
termination of Lynch's subsidiary's obligation to make further loans. The
Redeemable Preferred Stock has a 5% payment-in-kind dividend and is redeemable
in 2009 subject to earlier payment in certain circumstances.
A 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. During 1997, the FCC held an auction for 2.3
GHZ of spectrum to be used for Wireless Communications Services. A wholly-owned
Lynch subsidiary will receive a 5% net profit interest (after a capital charge)
in certain WCS licenses won by Bal/Rivgam Communications in that auction for
certain services performed during the auction. GFI has a minority interest in
Bal/Rivgam.
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 Ames/Des Moines, Iowa.
At December 31, 1997 and 1996, LENCO's net investment in Coronet is a negative
($1,612,000) and $1,214,000, respectively. In 1997, Coronet repaid a $2.9
million loan to LENCO plus accrued interest. Long-term debt of Coronet, at
December 31, 1997, is comprised of $14.8 million due to a third party lender
which is due quarterly through December 31, 2003. The Company recorded interest
income on the LENCO debt of $30,000, $287,000 and $276,000 for the years ended
December 31, 1997, 1996, and 1995, respectively. LENCO guaranteed $3.8 million
of $14.8 million of Coronet's third party debt.
43
<PAGE> 46
At December 31, 1997 and 1996, LENCO II's investment in Capital is carried at
zero as its share of net losses recognized to date has exceeded its 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 $73.3 million and $69.2 million, net of accumulated amortization
of $11.2 million and $7.9 million, at December 31, 1997 and 1996, respectively.
8. NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt consists of (all interest rates are at December 31, 1997):
<TABLE>
<CAPTION>
December 31
1997 1996
------ ------
(In Thousands)
<S> <C> <C>
Spinnaker Industries, Inc. 10.75%
Senior Secured Notes due 2006 . . . . . . . $115,000 $115,000
Rural Electrification Administration and
Rural Telephone Bank notes payable
in equal quarterly installments through
2027 at fixed interest rates ranging
from 2% to 7.5% (4.7% weighted
average), secured by assets of the
telephone companies of $102.6 million . . . 47,109 34,734
Bank credit facilities utilized by certain
telephone and telephone holding
companies through 2009, $35.1 million
at a fixed interest rate averaging 9.1%
and $19.5 million at variable interest
rates averaging 8.5% . . . . . . . . . . . 54,633 41,513
Unsecured notes issued in connection
with telephone company acquisitions;
$28.0 million at fixed interest rates
averaging 9% . . . . . . . . . . . . . . . 28,049 29,783
Gabelli Funds, Inc. loan issued in
connection with FCC F-Block Auction
at fixed rate of 10% due in 1997 . . . . . -- 11,800
Other . . . . . . . . . . . . . . . . . . . . . 7,287 8,779
-------- --------
252,078 241,609
Current maturities . . . . . . . . . . . . . . . . (9,302) (22,030)
-------- --------
$242,776 $219,579
======== ========
</TABLE>
On October 23, 1996, Spinnaker Industries, Inc. completed the issuance of
$115.0 million 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 Spinnaker Coating. 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 $5.7 million and $6.2
million at December 31, 1997 and 1996, respectively, are included in other
assets.
The notes are redeemable, in whole or in part, at the option of Spinnaker on or
after October 15, 2001, at the redemption prices beginning at 105.375% of the
principal amount declining to 100% of the principal amount on October 15, 2005,
plus accrued and unpaid interest. In addition, at any time or from time to time
on or prior to October 15, 1999, Spinnaker, at its option, may redeem up to
33-1/3% of the aggregate principal amount of the Notes with net cash proceeds
from public equity offerings at a redemption price equal to 110.75% of the
principal amount plus accrued and unpaid interest. The Notes are unconditionally
guaranteed, jointly and severally, by Spinnaker Coating, Inc. (formerly known as
Brown-Bridge Industries, Inc.) and CPC.
REA 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.
On a consolidated basis, at December 31, 1997, Lynch maintains short-term and
long-term lines of credit facilities totaling $88.9 million, of which $48.1
million was available. Lynch (Parent Company) maintains a $26.0 million
short-term line of credit facility, of which $3.3 million was available at
December 31, 1997. One facility decreased from $16.0 million to $14.0 in
February 1998. The line of credit agreement expires in May 1998 and is subject
to renewal. Spinnaker Industries, Inc. maintains lines of credit at its
subsidiaries which total $40.0 million, of which $34.5 million was available at
December 31, 1997 (see Note 17). The Morgan Group maintains lines of credit
totaling $10.0 million, $3.3 million was available at December 31, 1997. In
March 1998, the Morgan Group replaced this facility with a $15.0 million
revolving line of credit that matures in April 2001. Additionally, a letter of
credit facility was obtained which expires in April 1999. These facilities, as
well as facilities at other subsidiaries of Lynch, generally limit the credit
available under the lines of credit to certain variables, such as inventories
and receivables, and are secured by the operating assets of the subsidiary, and
include various restrictive financial covenants. Due to certain of these
restrictive covenants and working capital requirements of the subsidiaries,
cash distributions from the subsidiaries are limited. At December 31, 1997,
$48.9 million of these total facilities expire within one year.
44
<PAGE> 47
In general, the long-term debt credit facilities are secured by property, plant
and equipment, inventory, receivables and common stock of certain subsidiaries
and contain certain covenants restricting distributions to Lynch. At December
31, 1997 substantially all net assets of operating subsidiaries are restricted.
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 was due and payable in one year. The
interest rate on this loan was fixed at 10% and in addition a commitment fee of
1% per annum was being charged on the principal amount of GFI's commitment
($11.8 million) including funds actually borrowed. GFI also received 20% 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. The remaining note was paid in August 1997.
Cash payments for interest were $23.1 million, $16.7 million and $10.6 million
for the years ended December 31, 1997, 1996 and 1995, respectively.
Aggregate principal maturities of long-term debt for each of the next five
years are as follows: 1998--$9.3 million; 1999--$8.0 million; 2000--$15.8
million; 2001--$12.0 million and 2002--$11.8 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 that
time) at any time on or before June 30, 1999, subject to certain restrictions.
As of December 31, 1997 there were 228,499 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). All the remaining warrants
were exercised in January 1998.
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
Spinnaker Coating. 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 Spinnaker Coating, 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 Spinnaker Coating entity owned by such stockholder at the time of the
merger multiplied by 75% of the fair value of the capital stock of Spinnaker
Coating, 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 Spinnaker Coating minority interest, all
the Spinnaker Coating options were accelerated and in turn certain key
executives of Spinnaker Coating management exercised those options to purchase
71,065 shares of Spinnaker Coating 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.
On March 12, 1996, Lynch sold 10,373, 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 this date was $60.25.
In March, 1997, GFI and an affiliate made a secured loan to the Company of $10
million, which was used by the Company to close the acquisition of 60% of the
stock of Upper Peninsula Telephone Company. The loan bore interest at the prime
rate with a commitment fee of 1% of the principal amount. The loan was repaid
in June 1997.
45
<PAGE> 48
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
non-employee directors. 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. Stock options vest over a four year period
pursuant to the terms of the plan, except for stock options granted to a
non-employee director, which are immediately vested.
Morgan employees have been granted non-qualified stock options to purchase
118,000 shares of Class A Common stock, net of cancellations and exercises, at
prices ranging from $7.38 to $9.38 per share. Non-employee directors have been
granted non-qualified stock options to purchase 49,000 shares of Class A Common
stock, net of cancellations and exercises, at prices ranging from $6.20 to
$9.00 per share. As of December 31, 1997, there were 110,625 options to
purchase shares granted to Morgan's employees and non-employee directors which
were exercisable based upon the vesting terms, of which all shares had option
prices less than the December 31, 1997 closing price of $9.25.
In accordance with Spinnaker's directors stock option plan, Spinnaker may grant
stock options to directors who are not employees of Spinnaker. In February
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. In January of 1997, under the same terms,
Spinnaker issued 10,000 stock options for the purchase of one share of Common
Stock at an exercise price of $27 per share. As permitted by SFAS No. 123,
Spinnaker elected to account for these options under APB No. 25 and as such no
compensation expense was recorded because the option exercise price was not
less than the market price at the date of grant.
Pro forma information regarding net income and earnings per share is required
by SFAS No. 123, and has been determined as if Spinnaker had accounted for its
director stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions: risk-free interest rates of 6.09%-5.58%; dividend yields of 0%,
volatility factors of the expected market price of the Spinnaker's common stock
of .50; and a weighted-average expected life of the options of 3 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 $14.62 and $10.40 for
the 1997 and 1996 options, respectively. The pro forma effect on Lynch's 1997
and 1996 operations is as follows (In Thousands, except for per share amounts):
<TABLE>
<CAPTION>
1997 1996
---------- -------
<S> <C> <C>
As reported:
Net Income (loss) . . . . . . $(2,878) $2,696
Per share:
Basic . . . . . . . . . . . (2.03) $1.94
Diluted . . . . . . . . . . (2.03) $1.92
Pro forma:
Net Income (loss) . . . . . . $(2,950) $2,607
Per share:
Basic . . . . . . . . . . . (2.08) $1.88
Diluted . . . . . . . . . . (2.08) $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, 1997, 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 and shares were issued from Treasury.
46
<PAGE> 49
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.
Through March 1998, 4,126 shares have been awarded under this program.
On February 29, 1996, the Company adopted a Phantom Stock Option Plan for
certain employees. To date, 43,000 of Phantom Stock Options ("PSO") have been
granted at prices ranging from $63 to $85 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. The resulting expenses were $439,000 and $46,000
in 1997 and 1996, respectively.
12. INCOME TAXES
Deferred income taxes for 1997 and 1996 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, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
Deferred Tax Deferred Tax
Asset Liability Asset Liability
------ ------ ----- ------
(In Thousands)
<S> <C> <C> <C> <C>
Inventory reserve . . . . . . $ 474 -- $ 435 --
Fixed assets written up
under purchase
accounting and tax
over book depreciation . -- $18,514 -- $14,818
Discount on long-term debt . -- 1,184 -- 1,286
Basis difference in
subsidiary and affiliate
stock . . . . . . . . . -- 3,378 -- 3,486
Partnership tax losses in
excess of book losses,
including PCS
impairment reserve . . . 6,109 8,040 -- 1,669
Other reserves and accruals . 5,459 -- 2,536 --
Net operating loss
carryforwards of
subsidiary companies . . 4,056 -- 2,568 --
Other . . . . . . . . . . . . 1,895 2,648 194 1,130
------- ------- ------ -------
17,993 33,764 5,733 22,389
Valuation allowance . . . . . -- -- (162) --
------- ------- ------ -------
Total deferred
income taxes . . . . . . $17,993 $33,764 $5,571 $22,389
======= ======= ====== =======
</TABLE>
The provision (benefit) for income taxes is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(In Thousands)
<S> <C> <C> <C>
Current payable taxes:
Federal . . . . . . . . $2,359 $ 695 $4,420
State and local . . . . 679 193 992
------ ------ ------
3,038 888 5,412
------ ------ ------
Deferred taxes:
Federal . . . . . . . . (3,722) 1,495 (446)
State and local . . . . (29) 638 (60)
------ ------ ------
(3,751) 2,133 (506)
------ ------ ------
$ (713) $3,021 $4,906
====== ====== ======
</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 and extraordinary item, follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ----- ----
(In Thousands)
<S> <C> <C> <C>
Tax at statutory rate . . . . . $(1,131) $2,515 $4,260
Increases (decreases):
State and local taxes,
net of federal benefit . 429 543 615
Amortization of excess of
acquired net assets over
cost, net . . . . . . . . 443 132 64
Unremitted earnings of
domestic subsidiary . . . . (108) (65) 91
Reduction attributable to
special election by
captive insurance
company . . . . . . . . . . (155) (216) (223)
Other . . . . . . . . . . . . . (191) 112 99
------- ------ ------
$ (713) $3,021 $4,906
======= ====== ======
</TABLE>
Net cash payments for income taxes were $.7 million, $3.5 million and $4.2
million for the years ended December 31, 1997, 1996 and 1995, 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.
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 $39 million in 1997, $25 million in 1996 and $41
million in 1995. 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
47
<PAGE> 50
television stations. The services segment includes transportation and related
services. $13.5 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. 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, $932,000 and $965,000 during the years
ended December 31 1997, 1996 and 1995, 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
1997 1996 1995
-------- -------- ------
(In Thousands)
<S> <C> <C> <C>
REVENUES
Multimedia . . . . . . . . . . $ 47,908 $ 28,608 $ 23,597
Services . . . . . . . . . . . 146,154 132,208 122,303
Manufacturing . . . . . . . . 273,474 291,064 187,727
-------- -------- --------
$467,536 $451,880 $333,627
======== ======== ========
OPERATING PROFIT
Multimedia . . . . . . . . . . $ 11,845 $ 6,611 $ 4,938
Services . . . . . . . . . . . 1,015 (3,263) 3,371
Manufacturing . . . . . . . . 13,384 15,928 14,412
Unallocated corporate
expense . . . . . . . . . . (1,457) (2,336) (2,874)
-------- -------- --------
$ 24,787 $ 16,940 $ 19,847
======== ======== ========
CAPITAL EXPENDITURES
Multimedia . . . . . . . . . . $ 10,914 $ 11,056 $ 14,051
Services . . . . . . . . . . . 919 1,007 2,135
Manufacturing . . . . . . . . 9,991 13,438 3,373
General corporate . . . . . . 4 17 10
-------- -------- --------
$ 21,828 $ 25,518 $ 19,569
======== ======== ========
DEPRECIATION AND
AMORTIZATION
Multimedia . . . . . . . . . . $ 12,183 $ 8,660 $ 7,350
Services . . . . . . . . . . . 1,075 1,498 1,264
Manufacturing . . . . . . . . 7,787 6,823 2,662
-------- -------- --------
$ 21,045 $ 16,981 $ 11,276
======== ======== ========
ASSETS
Multimedia . . . . . . . . . . $197,881 $168,354 $102,998
Services . . . . . . . . . . . 32,746 33,066 30,796
Manufacturing . . . . . . . . 180,292 186,299 162,819
General corporate . . . . . . 12,719 4,901 5,826
-------- -------- --------
$423,638 $392,620 $302,439
======== ======== ========
</TABLE>
15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the years
ended December 31, 1997 and 1996 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1997--Three Months Ended
---------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Sales and revenues . . . . . . . . . . . $108,779 $121,426 $118,717 $118,614
Operating profit . . . . . . . . . . . . 4,236 8,116 6,287 6,148
Income (loss) from
continuing operations . . . . . . . (512) 1,250 (4,274)(a) 658
Net income (loss) . . . . . . . . . (512) 1,250 (4,274)(a) 658
Basic earnings per share:
Net income (loss) . . . . . . . . . (.36) .88 (3.02) .46
Diluted earnings per share:
Net income (loss) . . . . . . . . . (.36) .88 (3.02) .46
</TABLE>
<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 (loss) 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 (loss) . . . . . . . . . 1,201 2,495 1,249 (2,249)
Basic earnings per share:
Net income (loss) . . . . . . . . . .87 1.79 .90 (1.62)
Diluted earnings per share:
Net income (loss) . . . . . . . . . .86 1.77 .89 (1.62)
</TABLE>
Note: a) Includes $7.0 million before tax for reserve for impairment of
investment in PCS license holders.
48
<PAGE> 51
16. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share from continuing operations:
<TABLE>
<CAPTION>
Year ended December 31
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Numerator:
Income (loss)
from continuing
operations before
extraordinary item . . . . $(2,878,000) $4,794,000 $5,469,000
Numerator for diluted
earnings per share . . . . (2,878,000) 4,794,000 5,469,000
Denominator:
Denominator for basic
earnings per share--
weighted-average shares . . 1,415,000 1,388,000 1,379,000
Effect of dilutive securities:
Stock options . . . . . . . . . -- 17,000 30,000
----------- ---------- ----------
Dilutive potential common
shares . . . . . . . . . . -- 17,000 30,000
Denominator for diluted
earnings per share -
adjusted weighted-
average shares . . . . . . 1,415,000 1,405,000 1,409,000
=========== ========== ==========
Basic earnings (loss)
per share . . . . . . . . . . . $(2.03) $3.45 $3.96
=========== ========== ==========
Diluted earnings (loss)
per share . . . . . . . . . . . $(2.03) $3.41 $3.89
=========== ========== ==========
</TABLE>
17. SUBSEQUENT EVENTS
Effective March 17, 1998, Spinnaker Coating-Maine, Inc. closed the acquisition
of the pressure sensitive adhesive-backed label stock business of S.D. Warren
("Pressure Sensitive Business" or "the Acquisition"). S.D. Warren is a large
pulp and paper producer owned by an indirect wholly owned subsidiary of SAPPI,
Ltd., a public South African conglomerate. Spinnaker Coating-Maine is a wholly
owned subsidiary of Spinnaker Coating, Inc. and was formed to acquire the
Pressure Sensitive Business which manufactures and markets label stock
primarily for the EDP segment of the label stock market. The Pressure Sensitive
Business' EDP products are used in various labeling end uses, including form
printing and product marking and identification. The purchase price under the
agreement was approximately $52 million, plus the assumption of certain
liabilities and was funded by issuing the seller a subordinated note of $7.0
million and the remainder from Spinnaker's revolving credit facility which was
expanded subsequent to December 31, 1997 from $40.0 million to $60.0 million.
The subordinated note bears interest at 10% per annum and 30% is due on March
31, 1999 with the remainder due March 31, 2000, subject to certain postponement
and acceleration provisions. The note is convertible into Spinnaker common
stock at a price of $25.00 per share, subject to certain adjustments.
The Pressure Sensitive Business generated $62.1 million of net sales and, on a
historical basis, and $5.8 million of operating income for the fiscal year
ended October 1, 1997. The Pressure Sensitive Business was renamed Spinnaker
Coating-Maine, Inc. effective with the acquisition.
- -------------------------------------------------------------------------------
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, personal communications service matters,
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.
49
<PAGE> 52
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, 1997 and
1996, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 1997. 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 1996 and 1995 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 as of
December 31,1996, 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, the 1996 financial statements of Dunkirk and Fredonia
Telephone Company, a wholly-owned subsidiary of DFT Communications, Inc.
(formerly 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,
the 1996 financial statements of 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
of $1,399,000 for the year ended December 31, 1996, the 1995 financial
statements of The Morgan Group, Inc. and subsidiaries, a subsidiary in which
the Company has a 64% voting interest, which statements reflect total revenues
of $122,303,000 for the year ended December 31, 1995, and the 1996 and 1995
financial statements of Coronet Communications Company and of 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 in 1996 and 1995, Dunkirk and
Fredonia in 1996, CLR Video, L.L.C. in 1996, The Morgan Group, Inc. and
subsidiaries in 1995, Coronet Communications Company and Capital Communications
Company, Inc. in 1996 and 1995, 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, 1997 and 1996, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Stamford, Connecticut
March 24, 1998
50
<PAGE> 53
LYNCH CORPORATION
FIVE YEAR SUMMARY
SELECTED FINANCIAL DATA
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year Ended December 31 (a)
------------------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenues (a) . . . . . . . . . . . . . . . . . . . $467,536 $451,880 $333,627 $183,241 $127,021
--------- --------- --------- --------- ---------
Operating Profit (b) . . . . . . . . . . . . . . . 24,787 16,940 19,847 10,942 6,634
Net Financing Activities . . . . . . . . . . . . . (21,259) (14,689) (7,376) (4,333) (3,643)
Reserve for Impairment, of Investment in PCS
License Holders . . . . . . . . . . . . . . . . (7,024) -- -- -- --
Gain on Sales of Subsidiary and Affiliate Stock . . 169 5,146 59 190 4,326
--------- --------- --------- --------- ---------
Income (Loss) from Continuing
Operations Before Income Taxes
and Minority Interests . . . . . . . . . . . . (3,327) 7,397 12,530 6,799 7,317
Provision for Income Tax . . . . . . . . . . . . . 713 (3,021) (4,906) (2,726) (2,454)
Minority Interests . . . . . . . . . . . . . . . . (264) 418 (2,155) (1,372) (737)
--------- --------- --------- --------- ---------
Income (Loss) from Continuing Operations
Before Extraordinary Items and Cumulative
Effect of Accounting Change . . . . . . . . . . (2,878) 4,794 5,469 2,701 4,126
Discontinued Operations (c) . . . . . . . . . . . . -- (750) (324) (109) (10)
Extraordinary Item (d) . . . . . . . . . . . . . . -- (1,348) -- (264) (206)
Cumulative Effect to January 1, 1993 of
Change in Accounting for Income Taxes(e) . . . -- -- -- -- (957)
--------- --------- --------- --------- ---------
Net Income (Loss) . . . . . . . . . . . . . . . . . $ (2,878) $ 2,696 $ 5,145 $ 2,328 $ 2,953
========= ========= ========= ========= =========
Per Common Share (f)
Income (Loss) from Continuing Operations:
Basic . . . . . . . . . . . . . . . . . . . $ (2.03) $ 3.45 $ 3.96 $ 2.03 $ 3.37
Diluted . . . . . . . . . . . . . . . . . . (2.03) 3.41 3.89 1.95 2.98
Net Income (Loss):
Basic . . . . . . . . . . . . . . . . . . . $ (2.03) $ 1.94 $3.73 $ 1.75 $ 2.41
Diluted . . . . . . . . . . . . . . . . . . (2.03) 1.92 3.66 1.72 2.29
Cash, Securities and Short-Term Investments . . . . $ 34,542 $ 36,102 $ 27,353 $ 31,521 $ 45,509
Total Assets (a) . . . . . . . . . . . . . . . . . 423,638 392,620 302,439 185,910 129,523
Long-term Debt . . . . . . . . . . . . . . . . . . 242,776 219,579 138,029 62,745 65,768
Shareholders' Equity (g) . . . . . . . . . . . . . $ 36,451 $ 38,923 $ 35,512 $ 30,531 $ 24,316
</TABLE>
NOTES:
(a) Includes results of J.B.N. Telephone Company from November 30, 1993,
Station WOI-TV from March 1, 1994, the Brown Bridge Division from
September 19, 1994, Haviland Telephone Company from September 26, 1994,
Central Products Company from October 4, 1995, Dunkirk and Fredonia
Telephone Company from November 26,1996, Transit Homes of America from
December 30. 1996, and Upper Peninsula Telephone Company from March 18,
1997.
(b) 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.
(c) Discontinued operations of Lynch Tri-Can International.
(d) Gain (Loss) on repurchase or redemption of Company's 8% convertible
subordinated debentures for years 1994 and 1993 and early extinguishment
of debt at Spinnaker in 1996.
(e) On January 1, 1993, Lynch adopted the provisions of Statement of
Financial Accounting Standard No., 109, "Accounting for Income Taxes."
(See Note 12 to the Consolidated Financial Statements.) As a result of
this adoption, for the years ended December 31, 1994 and 1993, Operating
Profit was lower by $766,000 due to the higher depreciation and
amortization as a result of increased write-ups in assets acquired in
prior business combinations. The adoption of this statement had no effect
on net income, other than the above noted "Cumulative Effect of
Accounting Change Adjustment" for that period.
(f) Based on weighted average number of common shares outstanding--restated
to conform to SFAS #128.
(g) No cash dividends have been declared over the period. In 1997, for each
share of Lynch Common Stock, our shareholders received one share of
East/West Communications, Inc., an F-Block PCS licensee with licenses
covering a population of 20 million. These shares had a net book value
to Lynch of $0.12 per share prior to the dividend.
51
<PAGE> 54
MARKET PRICE INFORMATION AND
COMMON STOCK OWNERSHIP
The Common Stock of Lynch Corporation is traded on the American Stock
Exchange under the symbol "LGL." The market price high and lows in
consolidating trading of the Common Stock during the past two years is as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------
1997 MARCH 31 JUNE 30 SEPT 30 DEC 31
--- --------- ------- ------- ------
<S> <C> <C> <C> <C>
High 109 3/4 98 100 95
Low 69 1/2 83 1/2 87 1/2 77
1996
---
High 72 1/2 92 1/2 90 1/2 77
Low 56 62 67 1/2 63 1/2
</TABLE>
At March 16, 1998, the Company had 998 shareholders of record.
52
<PAGE> 55
<TABLE>
<CAPTION>
BOARD OF DIRECTORS
----------------------------------------------------------------------------------------------------------
<S> <C>
E. VAL CERUTTI DAVID C. MITCHELL
Business Consultant Business Consultant
PAUL J. EVANSON SALVATORE MUOIO
President of Florida Power & Light Company Managing Member of S. Muoio & Co. LLC
JOHN C. FERRARA RALPH R. PAPITTO
Business Consultant Chairman of AFC Cable Systems
MARIO J. GABELLI
Chairman of the Board and Chief Executive Officer of DIRECTOR SEMERITUS
Lynch Corporation and Chairman and Chief Executive MORRIS BERKOWITZ
Officer of The Gabelli Funds Inc. Business Consultant
PAUL P. WOOLARD
Business Consultant
</TABLE>
<TABLE>
<CAPTION>
OFFICERS
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MARIO J. GABELLI ROBERT E. DOLAN CORPORATE STAFF
Chairman of the Board and Chief Financial Officer ---------------
Chief Executive Officer ROBERT A. HURWICH MARY J. CARROLL
MARK L. CUSHING Vice President of Administration, CARMINE P. CERAOLO
Assistant to the Chairman Secretary & General Counsel CAROLE L. RAU
MARK M. FELDMAN LYNCH INTERACTIVE CORPORATION
Executive Vice President of Eugene P Connell
Corporate Development Chairman
JOSEPH H. EPEL
Treasurer
</TABLE>
<TABLE>
<CAPTION>
SUBSIDIARY INFORMATION
------------------------------------------------------------------------------------------------------
<S> <C>
WESTERN NEW MEXICO TELEPHONE COMPANY SPINNAKER COATINGS, INC.
314 Yankee Street 518 E. Water Street
Silver City, New Mexico 88062 Troy, Ohio 45373
INTER-COMMUNITY TELEPHONE COMPANY SPINNAKER COATING-MAINE, INC.
P.O. Box A 225 Warren Avenue
Nome, North Dakota 58062 Westbrook, Maine 04092
CUBA CITY TELEPHONE EXCHANGE COMPANY CENTRAL PRODUCTS COMPANY
BELMONT TELEPHONE COMPANY 748 Fourth Street
2801 International Lane Menasha, WI 54952
Madison, Wisconsin 53704 ENTOLETER, INC.
BRETTON WOODS TELEPHONE COMPANY 251 Welton Street
Mount Washington Place Hamden, Connecticut 06517
Bretton Woods, New Hampshire 03575 LYNCH SYSTEMS, INC.
J.B.N. TELEPHONE COMPANY 601 Independent Street
Second & Kansas Bainbridge, Georgia 31717
Wetmore, Kansas 66550 M-TRON INDUSTRIES, INC.
CLR VIDEO, L.L.C. 100 Douglas Avenue
328 Second Street Yankton, South Dakota 57078
Westmore, Kansas 66650
HAVILAND TELEPHONE COMPANY INVESTOR RELATIONS CONTACT
106 N. Main Street Robert E. Dolan
Haviland, Kansas 67059 (203) 629-3333
DUNKIRK & FREDONIA TELEPHONE COMPANY
40 Temple Street TRANSFER AGENT & REGISTRAR
Fredonia, New York 14063 FOR COMMON STOCK
UPPER PENINSULA TELEPHONE COMPANY Chemical Mellon Shareholder Services
397 US 41 New York, New York
Carney, Michigan 49812 TRADING INFORMATION
THE MORGAN GROUP, INC. American Stock Exchange
MORGAN DRIVE AWAY INC.
28651 US 20, West Securities Symbol
Elkhart, Indiana 46515 Common Stock LGL
SPINNAKER INDUSTRIES, INC.
600 N. Pearl Street
Dallas, Texas 75201
</TABLE>
FORM 10-K
COPIES OF THE CORPORATION'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997 MAY
BE OBTAINED, WITHOUT CHARGE, BY WRITING TO LYNCH CORPORATION, 8 SOUND SHORE
DRIVE, GREENWICH, CT 06830, ATTENTION: ROBERT E. DOLAN.
<PAGE> 56
<TABLE>
<S> <C>
LYNCH CORPORATION, 8 SOUND SHORE DRIVE, SUITE 290, GREENWICH, CONNECTICUT 06830 TELEPHONE (203) 629-3333
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 1
LYNCH CORPORATION - LIST OF SUBSIDIARIES Exhibit 21
LYNCH CORPORATION (38-1799862)
<TABLE>
<CAPTION>
STATE OF PARENT OWNED BY
SUBSIDIARY INCORPORATION COMPANY LYNCH
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BRIGHTON COMMUNICATIONS CORPORATION DELAWARE 100.0% 100.0%
LYNCH TELEPHONE CORPORATION IV DELAWARE 100.0% 100.0%
BRETTON WOODS TELEPHONE COMPANY, INC. NEW HAMPSHIRE 100.0% 100.0%
WORLD SURFER, INC. NEW HAMPSHIRE 100.0% 100.0%
LYNCH-KANSAS TELEPHONE CORPORATION DELAWARE 100.0% 100.0%
LYNCH TELEPHONE CORPORATION VI DELAWARE 90.0% 98.0%
J.B.N. TELEPHONE COMPANY, INC. KANSAS 100.0% 98.0%
J.B.N. FINANCE CORPORATION DELAWARE 100.0% 98.0%
GIANT COMMUNICATIONS, INC. KANSAS 100.0% 98.0%
LYNCH TELEPHONE CORPORATION VII DELAWARE 100.0% 100.0%
USTC KANSAS, INC. KANSAS 100.0% 100.0%
HAVILAND TELEPHONE COMPANY, INC. KANSAS 100.0% 100.0%
HAVILAND FINANCE CORPORATION DELAWARE 100.0% 100.0%
DFT COMMUNICATIONS CORPORATION DELAWARE 100.0% 100.0%
DUNKIRK & FREDONIA TELEPHONE COMPANY NEW YORK 100.0% 100.0%
CASSADAGA TELEPHONE COMPANY NEW YORK 100.0% 100.0%
MACOM, INC. NEW YORK 100.0% 100.0%
COMANTEL, INC. NEW YORK 100.0% 100.0%
D&F CELLULAR TELEPHONE, INC. NEW YORK 100.0% 100.0%
ERIE SHORE COMMUNICATIONS, INC. NEW YORK 100.0% 100.0%
DFT LONG DISTANCE CORPORATION DELAWARE 100.0% 100.0%
LMT HOLDING CORPORATION MICHIGAN 100.0% 100.0%
LYNCH MICHIGAN TELEPHONE HOLDING CORP. MICHIGAN 100.0% 100.0%
UPPER PENINSULA TELEPHONE CORP. MICHIGAN 100.0% 100.0%
ALPHA ENTERPRISES LIMITED MICHIGAN 100.0% 100.0%
UPPER PENINSULA CELL. NORTH, INC. MICHIGAN 100.0% 100.0%
UPPER PENINSULA CELL. SOUTH, INC. MICHIGAN 100.0% 100.0%
GLOBAL TELEVISION, INC. DELAWARE 100.0% 100.0%
HOME TRANSPORT SERVICES, INC. DELAWARE 100.0% 100.0%
LYNCH CAPITAL CORPORATION DELAWARE 100.0% 100.0%
LYNCH ENTERTAINMENT CORPORATION DELAWARE 100.0% 100.0%
LYNCH ENTERTAINMENT CORPORATION II DELAWARE 100.0% 100.0%
LYNCH INTERNATIONAL EXPORTS, INC. (B) U.S. VIRGIN ISL. 100.0% 100.0%
LYNCH MANUFACTURING CORPORATION DELAWARE 100.0% 100.0%
LYNCH DISPLAY TECHNOLOGIES, INC. DELAWARE 100.0% 100.0%
LYNCH MACHINERY, INC. (C) DELAWARE 90.0% 90.0%
M-TRON INDUSTRIES, INC. SOUTH DAKOTA 94.0% 94.0%
M-TRON INDUSTRIES, LTD HONG KONG 100.0% 94.0%
SPINNAKER INDUSTRIES, INC. (D) DELAWARE 63.0% 63.0%
ENTOLETER, INC. DELAWARE 100.0% 63.0%
SPINNAKER COATING, INC. DELAWARE 100.0% 63.0%
SPINNAKER COATING-MAINE, INC. DELAWARE 100.0% 63.0%
CENTRAL PRODUCTS COMPANY DELAWARE 100.0% 63.0%
MAC SAW, INC. DELAWARE 100.0% 100.0%
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
STATE OF PARENT OWNED BY
SUBSIDIARY INCORPORATION COMPANY LYNCH
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LYNCH MULTIMEDIA CORPORATION DELAWARE 100.0% 100.0%
CLR VIDEO, L.L.C. KANSAS 60.0% 60.0%
THE MORGAN GROUP, INC. DELAWARE 66.24%(V)/50.95%(O) 66.24%(V)/50.95%(O)
MORGAN DRIVE AWAY, INC. INDIANA 100.0% 66.24%(V)/50.95%(O)
TRANSPORT SERVICES UNLIMITED, INC. INDIANA 100.0% 66.24%(V)/50.95%(O)
INTERSTATE INDEMNITY COMPANY VERMONT 100.0% 66.24%(V)/50.95%(O)
MORGAN FINANCE, INC. INDIANA 100.0% 66.24%(V)/50.95%(O)
TDI, INC. INDIANA 100.0% 66.24%(V)/50.95%(O)
HOME TRANSPORT CORPORATION INDIANA 100.0% 66.24%(V)/50.95%(O)
MDA CORPORATION
LYNCH PCS COMMUNICATIONS CORPORATION DELAWARE 100.0% 100.0%
LYNCH PCS CORPORATION A DELAWARE 100.0% 100.0%
LYNCH PCS CORPORATION F DELAWARE 100.0% 100.0%
LYNCH PCS CORPORATION G DELAWARE 100.0% 100.0%
LYNCH INTERACTIVE CORPORATION DELAWARE 100.0% 100.0%
LYNCH TELECOMMUNICATIONS CORPORATION DELAWARE 100.0% 100.0%
LYNCH TELEPHONE CORPORATION DELAWARE 83.1% 83.1%
WESTERN NEW MEXICO TELEPHONE CO., INC. NEW MEXICO 100.0% 83.1%
WNM COMMUNICATIONS CORPORATION DELAWARE 100.0% 83.1%
WESCELL CELLULAR, INC. NEW MEXICO 100.0% 83.1%
WESCEL CELLULAR OF NEW MEXICO
LIMITED PARTNERSHIP COLORADO 51.0% 42.4%
WESCEL CELLULAR, INC. II NEW MEXICO 100.0% 83.1%
NORTHWEST NEW MEXICO CELLULAR, INC. NEW MEXICO 50.0% 40.6%
NORTHWEST NEW MEXICO CELLULAR OF
NEW MEXICO LIMITED PARTNERSHIP COLORADO 51.0% 20.7%
ENCHANTMENT CABLE CORPORATION DELAWARE 100.0% 80.1%
LYNCH TELEPHONE CORPORATION II DELAWARE 83.0% 83.0%
INTER-COMMUNITY TELEPHONE COMPANY NORTH DAKOTA 100.0% 83.0%
INTER-COMMUNITY TELEPHONE COMPANY II NORTH DAKOTA 100.0% 83.0%
INTER-COMMUNITY ACQUISITION CORPORATION DELAWARE 100.0% 83.0%
LYNCH TELEPHONE CORPORATION III DELAWARE 81.0% 81.0%
CUBA CITY TELEPHONE EXCHANGE COMPANY WISCONSIN 100.0% 81.0%
BELMONT TELEPHONE COMPANY WISCONSIN 100.0% 81.0%
</TABLE>
<PAGE> 1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Lynch Corporation of our report dated March 24, 1998 included in the 1997
Annual Report to Shareholders of Lynch Corporation.
Our audits also included the financial statement schedules of Lynch Corporation
listed in Item 14(a). These schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, based on our audits and the reports of other auditors, the
financial statement schedules referred to above, when considered in relation
to the basic financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-46953) pertaining to the Lynch Corporation 401 (k) Savings Plan
of our report dated March 24, 1998, with respect to the consolidated financial
statements incorporated by reference, and our report included in the preceding
paragraph with respect to the financial statement schedules included in this
Annual Report (Form 10-K) of Lynch Corporation.
/s/ Ernst & Young, LLP
Stamford, CT
March 25, 1998
<PAGE> 2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTS
As independent public accountants, we hereby consent to the use of our report
dated February 5, 1996 on The Morgan Group, Inc., which is included in The
Morgan Group, Inc.'s Form 10-K for the year ended December 31, 1997, and
incorporated by reference into The Morgan Group, Inc.'s previously filed
Registration Statements on Form S-8 (Registration Nos. 33-72996, 33-72998), as
an exhibit in Lynch Corporation's Form 10-K for the year ended December 31,
1997, and into Lynch Corporation's previously filed Registration Statements on
Form S-8 (Registration No. 33-46953). It should be noted that we have not
audited any financial statements of The Morgan Group, Inc. subsequent to
December 31, 1995 or performed any audit procedures subsequent to the date of
our report.
ARTHUR ANDERSEN LLP
Chicago, Illinois
March 25, 1998
<PAGE> 3
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Partners
Coronet Communications Company
Bronxville, New York
We hereby consent to the incorporation by reference in the previously filed
Registration Statement on Form S-8 (Registration No. 33-46953) of our report,
dated January 24, 1997, except for Note 4, which is as of January 31, 1997,
on the financial statements of Coronet Communications Company which appears in
this annual report on Form 10-K of Lynch Corporation and subsidiaries, for the
year ended December 31, 1997.
McGLADREY & PULLEN, LLP
New York, New York
March 27, 1998
<PAGE> 4
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Partners
Capital Communications Company, Inc.
Bronxville, New York
We hereby consent to the incorporation by reference in the previously filed
Registration Statement on Form S-8 (Registration No. 33-46953) of our report,
dated January 29, 1997 on the financial statements of Capital Communications
Company, Inc. which appears in this annual report on Form 10-K of Lynch
Corporation and subsidiaries, for the year ended December 31, 1997.
McGLADREY & PULLEN, LLP
New York, New York
March 27, 1998
<PAGE> 5
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-46953 of Lynch Corporation on Form S-8 of our report dated February 21, 1997
relating to the financial statements of Central Products Company (not presented
separately herein), appearing in this Annual Report on Form 10-K of Lynch
Corporation for the year ended December 31, 1997.
DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
March 26, 1998
<PAGE> 6
CONSENT OF INDEPENDENT ACCOUNTANTS
March 26, 1998
To the Board of Directors
Dunkirk & Fredonia Telephone Company
Fredonia, New York 14063
We hereby consent to the incorporation by reference in the previously filed
Registration Statement on Form S-8 (Registration No. 33-46953) of our report,
dated January 31, 1997 on the financial statements of Dunkirk & Fredonia
Telephone Company which appears in this annual report on Form 10-K of Lynch
Corporation and subsidiaries, for the year ended December 31, 1997.
JOHNSON, MACKOWIAK, MOORE & MYOTT, LLP
<PAGE> 7
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Managers
CLR Video, L.L.C.
Wetmore, Kansas
We hereby consent to the incorporation by reference in the previously
filed Registration Statement on Form S-8 (Registration No. 33-46953) or our
report, dated January 29, 1997, on the financial statements of CLR Video,
L.L.C. which appears in this annual report on Form 10-K of Lynch Corporation
and subsidiaries, for the year ended December 31, 1997.
Frederick & Warinner, L.L.C.
Lenexa, Kansas
March 30, 1998
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director of LYNCH
CORPORATION, an Indiana corporation, hereby appoints ROBERT E. DOLAN and ROBERT
A. HURWICH true and lawful attorneys-in-fact and agents, and each of them (with
full power to act without the other) his true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign, execute, deliver and
file with the Securities and Exchange Commission the Annual Report on Form 10-K
of Lynch Corporation for the fiscal year ended December 31, 1997, including any
and all amendments thereto, granting unto said attorneys and agents, and each
of them, full power to do and perform every act and thing requisite, necessary
or desirable to be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or any of them, or their or his
substitutes or substitute, may lawfully do or cause to be done by virtue
hereof, and hereby revoking all prior appointments by him, if any, of
attorneys-in-fact and agents to sign and file the above-described document,
including any and all amendments thereto.
IN WITNESS WHEREOF. the undersigned has hereunto set his hand and seal on the
date set forth below.
DATE: March 17, 1998 s/ David C. Mitchell (L.S.)
-------------------------
David C. Mitchell
s/ Carole L. Rau
- -----------------------------
Notary Public
<PAGE> 2
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director of LYNCH
CORPORATION, an Indiana corporation, hereby appoints ROBERT E. DOLAN and ROBERT
A. HURWICH true and lawful attorneys-in-fact and agents, and each of them (with
full power to act without the other) his true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign, execute, deliver and
file with the Securities and Exchange Commission the Annual Report on Form 10-K
of Lynch Corporation for the fiscal year ended December 31, 1997, including any
and all amendments thereto, granting unto said attorneys and agents, and each
of them, full power to do and perform every act and thing requisite, necessary
or desirable to be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or any of them, or their or his
substitutes or substitute, may lawfully do or cause to be done by virtue
hereof, and hereby revoking all prior appointments by him, if any, of
attorneys-in-fact and agents to sign and file the above-described document,
including any and all amendments thereto.
IN WITNESS WHEREOF. the undersigned has hereunto set his hand and seal on the
date set forth below.
DATE: March 17, 1998 s/ E. Val Cerutti (L.S.)
-------------------------
E. Val Cerutti
s/ Carole L. Rau
- ---------------------------
Notary Public
<PAGE> 3
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director of LYNCH
CORPORATION, an Indiana corporation, hereby appoints ROBERT E. DOLAN and ROBERT
A. HURWICH true and lawful attorneys-in-fact and agents, and each of them (with
full power to act without the other) his true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign, execute, deliver and
file with the Securities and Exchange Commission the Annual Report on Form 10-K
of Lynch Corporation for the fiscal year ended December 31, 1997, including any
and all amendments thereto, granting unto said attorneys and agents, and each
of them, full power to do and perform every act and thing requisite, necessary
or desirable to be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or any of them, or their or his
substitutes or substitute, may lawfully do or cause to be done by virtue
hereof, and hereby revoking all prior appointments by him, if any, of
attorneys-in-fact and agents to sign and file the above-described document,
including any and all amendments thereto.
IN WITNESS WHEREOF. the undersigned has hereunto set his hand and seal on the
date set forth below.
DATE: March 17, 1998 s/ Paul J. Evanson (L.S.)
-------------------------
Paul J. Evanson
s/ Elsa M. Akin
- ---------------------------
Notary Public
<PAGE> 4
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director of LYNCH
CORPORATION, an Indiana corporation, hereby appoints ROBERT E. DOLAN and ROBERT
A. HURWICH true and lawful attorneys-in-fact and agents, and each of them (with
full power to act without the other) his true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign, execute, deliver and
file with the Securities and Exchange Commission the Annual Report on Form 10-K
of Lynch Corporation for the fiscal year ended December 31, 1997, including any
and all amendments thereto, granting unto said attorneys and agents, and each
of them, full power to do and perform every act and thing requisite, necessary
or desirable to be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or any of them, or their or his
substitutes or substitute, may lawfully do or cause to be done by virtue
hereof, and hereby revoking all prior appointments by him, if any, of
attorneys-in-fact and agents to sign and file the above-described document,
including any and all amendments thereto.
IN WITNESS WHEREOF. the undersigned has hereunto set his hand and seal on the
date set forth below.
DATE: March 17, 1998 s/ Salvatore Muoio (L.S.)
-------------------------
Salvatore Muoio
s/ Carole L. Rau
- --------------------------
Notary Public
<PAGE> 5
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director of LYNCH
CORPORATION, an Indiana corporation, hereby appoints ROBERT E. DOLAN and ROBERT
A. HURWICH true and lawful attorneys-in-fact and agents, and each of them (with
full power to act without the other) his true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign, execute, deliver and
file with the Securities and Exchange Commission the Annual Report on Form 10-K
of Lynch Corporation for the fiscal year ended December 31, 1997, including any
and all amendments thereto, granting unto said attorneys and agents, and each
of them, full power to do and perform every act and thing requisite, necessary
or desirable to be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or any of them, or their or his
substitutes or substitute, may lawfully do or cause to be done by virtue
hereof, and hereby revoking all prior appointments by him, if any, of
attorneys-in-fact and agents to sign and file the above-described document,
including any and all amendments thereto.
IN WITNESS WHEREOF. the undersigned has hereunto set his hand and seal on the
date set forth below.
DATE: March 17, 1998 s/ Ralph R. Papitto (L.S.)
--------------------------
Ralph R. Papitto
s/ Carole L. Rau
- ----------------------------
Notary Public
<PAGE> 6
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director of LYNCH
CORPORATION, an Indiana corporation, hereby appoints ROBERT E. DOLAN and ROBERT
A. HURWICH true and lawful attorneys-in-fact and agents, and each of them (with
full power to act without the other) his true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign, execute, deliver and
file with the Securities and Exchange Commission the Annual Report on Form 10-K
of Lynch Corporation for the fiscal year ended December 31, 1997, including any
and all amendments thereto, granting unto said attorneys and agents, and each
of them, full power to do and perform every act and thing requisite, necessary
or desirable to be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or any of them, or their or his
substitutes or substitute, may lawfully do or cause to be done by virtue
hereof, and hereby revoking all prior appointments by him, if any, of
attorneys-in-fact and agents to sign and file the above-described document,
including any and all amendments thereto.
IN WITNESS WHEREOF. the undersigned has hereunto set his hand and seal on the
date set forth below.
DATE: March 17, 1998 s/ John C. Ferrara (L.S.)
-------------------------
John C. Ferrara
s/ Carole L. Rau
- --------------------------
Notary Public
<PAGE> 7
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, Director, Chairman of the
Board and Chief Executive Officer (Principal Executive Officer), of LYNCH
CORPORATION, an Indiana corporation, hereby appoints ROBERT E. DOLAN and ROBERT
A. HURWICH true and lawful attorneys-in-fact and agents, and each of them (with
full power to act without the other) his true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities (including Director, Chairman
of the Board and Chief Executive Officer (Principal Executive Officer)), to
sign, execute, deliver and file with the Securities and Exchange Commission the
Annual Report on Form 10-K of Lynch Corporation for the fiscal year ended
December 31, 1997, including any and all amendments thereto, granting unto said
attorneys and agents, and each of them, full power to do and perform every act
and thing requisite, necessary or desirable to be done in connection therewith,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, or their or his substitutes or substitute, may lawfully do or cause to be
done by virtue hereof, and hereby revoking all prior appointments by him, if
any, of attorneys-in-fact and agents to sign and file the above-described
document, including any and all amendments thereto.
IN WITNESS WHEREOF. the undersigned has hereunto set his hand and seal on the
date set forth below.
DATE: March 17, 1998 s/ Mario J. Gabelli (L.S.)
----------------------------
Mario J. Gabelli
s/ Carole L. Rau
- -------------------------
Notary Public
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 33,557
<SECURITIES> 985
<RECEIVABLES> 54,480
<ALLOWANCES> 1,448
<INVENTORY> 35,685
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0
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<EPS-PRIMARY> (2.03)
<EPS-DILUTED> (2.03)
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<TABLE> <S> <C>
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<LEGEND>
This schedule contains summary financial information extracted from Condensed
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</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
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<PERIOD-END> JUN-30-1997
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0
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<TABLE> <S> <C>
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This schedule contains summary financial information extracted from Condensed
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</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
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<PERIOD-END> SEP-30-1997
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<RECEIVABLES> 57,572
<ALLOWANCES> 1,624
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0
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<TABLE> <S> <C>
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<LEGEND>
This schedule contains summary financial information extracted from Condensed
Consolidated Statements of Operations and Condensed Consolidated Balance Sheets
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</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 23,204
<SECURITIES> 6,409
<RECEIVABLES> 52,959
<ALLOWANCES> 1,286
<INVENTORY> 33,911
<CURRENT-ASSETS> 127,443
<PP&E> 152,395
<DEPRECIATION> 40,053
<TOTAL-ASSETS> 308,433
<CURRENT-LIABILITIES> 100,074
<BONDS> 139,485
0
0
<COMMON> 5,139
<OTHER-SE> 32,291
<TOTAL-LIABILITY-AND-EQUITY> 308,433
<SALES> 110,930
<TOTAL-REVENUES> 110,930
<CGS> 94,405
<TOTAL-COSTS> 105,020
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,954
<INCOME-PRETAX> 2,452
<INCOME-TAX> 963
<INCOME-CONTINUING> 1,201
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,201
<EPS-PRIMARY> .87
<EPS-DILUTED> .86
</TABLE>
<TABLE> <S> <C>
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This schedule contains summary financial information extracted from Condensed
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</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 21,026
<SECURITIES> 4,035
<RECEIVABLES> 52,911
<ALLOWANCES> 1,314
<INVENTORY> 38,431
<CURRENT-ASSETS> 129,107
<PP&E> 163,481
<DEPRECIATION> 45,660
<TOTAL-ASSETS> 320,463
<CURRENT-LIABILITIES> 106,324
<BONDS> 138,444
0
0
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<TOTAL-REVENUES> 222,968
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<TOTAL-COSTS> 211,648
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<INCOME-TAX> 3,426
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<TABLE> <S> <C>
<ARTICLE> 5
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This schedule contains summary financial information extracted from Condensed
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<RESTATED>
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<PERIOD-TYPE> 9-MOS
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<PERIOD-END> SEP-30-1996
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<ALLOWANCES> 1,431
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0
0
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<PERIOD-END> DEC-31-1996
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<ALLOWANCES> 1,525
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0
0
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<TOTAL-REVENUES> 451,880
<CGS> 390,354
<TOTAL-COSTS> 434,940
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,011
<INCOME-PRETAX> 7,397
<INCOME-TAX> 3,021
<INCOME-CONTINUING> 4,794
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<CHANGES> 0
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<EPS-PRIMARY> 1.94
<EPS-DILUTED> 1.92
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<TABLE> <S> <C>
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<PERIOD-TYPE> 12-MOS
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<PERIOD-END> DEC-31-1995
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<SECURITIES> 11,432
<RECEIVABLES> 52,306
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<INVENTORY> 33,235
<CURRENT-ASSETS> 123,648
<PP&E> 147,140
<DEPRECIATION> 36,093
<TOTAL-ASSETS> 302,439
<CURRENT-LIABILITIES> 98,022
<BONDS> 138,029
0
0
<COMMON> 5,139
<OTHER-SE> 30,373
<TOTAL-LIABILITY-AND-EQUITY> 302,439
<SALES> 333,627
<TOTAL-REVENUES> 333,627
<CGS> 278,703
<TOTAL-COSTS> 313,782
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,844
<INCOME-PRETAX> 12,530
<INCOME-TAX> 4,906
<INCOME-CONTINUING> 5,469
<DISCONTINUED> 360
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,145
<EPS-PRIMARY> 3.73
<EPS-DILUTED> 3.66
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Condensed
Consolidated Statements of Operations and Condensed Consolidated Balance Sheets
and is qualified in its entirety by reference to such Form 10-Q.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 27,685
<SECURITIES> 1,666
<RECEIVABLES> 53,466
<ALLOWANCES> 1,501
<INVENTORY> 35,937
<CURRENT-ASSETS> 132,316
<PP&E> 205,011
<DEPRECIATION> 50,396
<TOTAL-ASSETS> 412,326
<CURRENT-LIABILITIES> 97,027
<BONDS> 0
0
0
<COMMON> 5,139
<OTHER-SE> 33,929
<TOTAL-LIABILITY-AND-EQUITY> 412,326
<SALES> 108,779
<TOTAL-REVENUES> 108,779
<CGS> 94,218
<TOTAL-COSTS> 104,543
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,469
<INCOME-PRETAX> (786)
<INCOME-TAX> 315
<INCOME-CONTINUING> (512)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (512)
<EPS-PRIMARY> 0.36
<EPS-DILUTED> 0.36
</TABLE>
<PAGE> 1
Exhibit 99
Report of Independent Public Accountants
To the Shareholders and Board of Directors
of The Morgan Group, Inc.:
We have audited the accompanying consolidated statements of operations,
changes in redeemable preferred stock, common stock and other shareholders'
equity and cash flows of The Morgan Group, Inc. (a Delaware Corporation) and
Subsidiaries for the year ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit 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 audit provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of The Morgan
Group, Inc. and Subsidiaries for the year ended December 31, 1995, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 5, 1996
<PAGE> 2
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Capital Communications Company, Inc.
Bronxville, New York
We have audited the accompanying balance sheet of Capital Communications
Company, Inc. as of December 31, 1996, and the related statements of
operations, stockholders' equity (deficit), and cash flows for each of the
two years 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 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 provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Capital Communications
Company, Inc. as of December 31, 1996, and the results of its operations and
its cash flows for each of the two years in the period ended December 31, 1996,
in conformity with generally accepted accounting principles.
McGLADREY & PULLEN, LLP
New York, New York
January 29, 1997
<PAGE> 3
INDEPENDENT AUDITOR'S REPORT
To the Partners
Coronet Communications Company
Bronxville, New York
We have audited the accompanying balance sheets of Coronet Communications
Company as of December 31, 1996, and the related statements of operations,
partners' capital (deficit), and cash flows for each of the two years in the
period ended December 31, 1996. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
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 provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Coronet Communications Company
as of December 31, 1996, and the results of its operations and its cash flows
for each of the two years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
McGLADREY & PULLEN, LLP
New York, New York
January 24, 1997
(Except for Note 4, which is
as of January 31, 1997)
<PAGE> 4
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Spinnaker Industries, Inc.:
We have audited the balance sheet of Central Products Company (a wholly-owned
subsidiary of Spinnaker Industries, Inc.) as of December 31, 1996 and the
related statements of operations and retained earnings (accumulated deficit)
and cash flows for the year ended December 31, 1996 and the three months ended
December 31, 1995. These financial statements (not presented separately
herein) are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
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 provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Central Products Company as of December 31,
1996 and the results of its operations and its cash flows for the year ended
December 31, 1996 and three months ended December 31, 1995 in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Milwaukee, Wisconsin
February 21, 1997
<PAGE> 5
INDEPENDENT AUDITOR'S REPORT
January 31, 1997
To the Board of Directors
Dunkirk and Fredonia Telephone Company
40 Temple Street
Box 209
Fredonia, New York 14063
We have audited the accompanying consolidated balance sheet of Dunkirk and
Fredonia Telephone Company (a wholly owned subsidiary of Lynch Telephone
Corporation, VIII) and subsidiaries as of December 31, 1996 and the related
consolidated statements of income, retained earnings and cash flows for the
period November 26, 1996 through December 31, 1996. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards
and the Government Auditing Standards, issued by the Comptroller General of the
United States. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated 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 provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Dunkirk and
Fredonia Telephone Company and subsidiaries as of December 31, 1996 and the
results of their operations and their cash flows for the period then ended in
conformity with generally accepted accounting principles.
The accompanying statements present only the operation of Dunkirk and Fredonia
Telephone Company and its subsidiaries since the date of sale of 100% of its
stock to Lynch Telephone Corporation VIII.
JOHNSON, MACKOWIAK, MOORE & MYOTT, LLP
<PAGE> 6
INDEPENDENT AUDITOR'S REPORT
To the Board of Managers
CLR Video, L.L.C.
Wetmore, Kansas
We have audited the accompanying balance sheet of CLR Video, L.L.C. (a limited
liability company) as of December 31, 1996, and the related statements of
operations, members' equity and cash flows for the year then ended. These
financial statements are the responsibility of CLR Video, L.L.C.'s management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CLR Video, L.L.C. as of
December 31, 1996, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
The financial statements for the period from inception (November 30, 1995) to
December 31, 1995 were reviewed by us, and our report thereon, dated March 14,
1996, stated we were not aware of any material modifications that should be
made to those statements for them to be in conformity with generally accepted
accounting principles. However, a review is substantially less in scope than
an audit and does not provide a basis for the expression of an opinion on the
financial statements taken as a whole.
FREDERICK & WARINNER, L.L.C.
Lenexa, Kansas
January 29, 1997
<PAGE> 7
March 30, 1998
To the Board of Directors
Dunkirk & Fredonia Telephone Company
Fredonia, New York 14063
We hereby consent to the incorporation by reference in the previously filed
Registration Statement on Form S-8 (Registration No. 33-46953) of our report,
dated January 31, 1997 on the financial statements of Dunkirk & Fredonia
Telephone Company which appears in this annual report on Form 10-K of Lynch
Corporation and subsidiaries, for the year ended December 31, 1997.
JOHNSON, MACKOWIAK, MOORE & MYOTT, LLP
