SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) of the
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 1-106
LYNCH CORPORATION
(Exact name of Registrant as specified in its charter)
Indiana 38-1799862
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8 Sound Shore Drive, Suite 290, Greenwich, Connecticut 06830
(Address of principal executive offices) (Zip code)
(203) 629-3333
Registrant's telephone number, including area code
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 Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the Registrant's classes of
Common Stock, as of the latest practical date.
Class Outstanding at August 1, 1996
Common Stock, no par value 1,390,579
<PAGE>
INDEX
LYNCH CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statement of Operations:
- Three months ended June 30, 1996 and 1995
- Six months ended June 30, 1996 and 1995
Condensed Consolidated Balance Sheet:
- June 30, 1996
- December 31, 1995 (Audited)
Condensed Consolidated Statement of Cash Flows:
- Six months ended June 30, 1996 and 1995
Notes to Condensed Consolidated Financial Statements
Item 2. Managements's Discussion and Analysis of Financial Condition and
Results of Operations
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
<PAGE>
Part 1- FINANCIAL INFORMATION
Financial Statements
LYNCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
----------------------------------------------
<TABLE>
(UNAUDITED)
(In thousands, except share amounts)
<CAPTION>
Three Months Six Months
Ended June 30 Ended June 30
--------------------------------------------
1996 1995 1996 1995
SALES AND REVENUES --------------------------------------------
<S> <C> <C> <C> <C>
Multimedia $ 6,641 $ 5,916 $ 13,356 $ 11,601
Services 36,698 31,555 67,204 58,358
Manufacturing 70,154 37,912 142,408 74,109
--------------------------------------------
113,493 75,383 222,968 144,068
--------------------------------------------
Costs and expenses:
Multimedia 4,991 4,386 9,601 8,611
Services 33,944 28,388 62,505 52,621
Manufacturing 57,855 29,576 117,607 58,742
Selling and administrative 11,320 8,724 21,935 15,784
------------------------------------------
OPERATING PROFIT 5,383 4,309 11,320 8,310
Other income (expense):
Investment income 715 735 1,148 1,619
Interest expense (4,241) (2,221) (8,185) (4,412)
Share of operations of
affiliated companies 47 76 66 6
Gain on sale of stock
by subsidiaries 4,134 59 4,178 59
--------------------------------------------
655 (1,351) (2,793) (2,728)
--------------------------------------------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES AND
MINORITY INTERESTS 6,038 2,958 8,527 5,582
Provision for income taxes (2,449) (1,177) (3,426) (2,265)
Minority interests (374) (597) (662) (1,020)
--------------------------------------------
INCOME FROM CONTINUING OPERATIONS 3,215 1,184 4,439 2,297
--------------------------------------------
DISCONTINUED OPERATIONS:
LOSS FROM OPERATIONS OF DIS-
CONTINUED LYNCH TRI-CAN
INTERNATIONAL(LESS APPLICABLE
INCOME TAXES OF $76,17,90,and 9) (125) (28) (148) (16)
LOSS ON DISPOSAL OF LYNCH TRI-CAN
INTERNATIONAL INCLUDING PROVISION
OF $150 FOR OPERATING LOSSES
DURING PHASE-OUT PERIOD (LESS
APPLICABLE INCOME TAXES OF $305) (595) 0 (595) 0
--------------------------------------------
NET INCOME $ 2,495 $ 1,156 $ 3,696 $ 2,281
Weighted average ============================================
shares outstanding 1,408,000 1,407,000 1,402,000 1,404,000
INCOME PER COMMON SHARE:
- --------------------------
INCOME FROM CONTINUING OPERATIONS $2.28 $0.84 $3.17 $1.63
INCOME (LOSS) FROM
DISCONTINUED OPERATIONS (0.51) (0.02) (0.53 (0.01)
--------------------------------------------
INCOME PER COMMON SHARE $1.77 $0.82 $2.64 $1.62
============================================
</TABLE>
<TABLE>
LYNCH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
------------------------------------
<CAPTION>
June 30 December 31
1996 1995
(Unaudited) (A)
-----------------------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and Cash Equivalents $ 21,026 $ 15,921
Marketable Securities and
Short-Term Investments 4,035 11,432
Receivables, Less Allowances
of 1,314 and $1,732 52,911 52,306
Inventories 38,431 33,235
Deferred Income Tax Benefits 3,944 3,944
Other Current Assets 8,760 6,810
-----------------------
Total Current Assets 129,107 123,648
PROPERTY, PLANT AND EQUIPMENT:
Land 2,086 2,068
Buildings and Improvements 19,609 16,675
Machinery and Equipment 141,786 128,397
-----------------------
163,481 147,140
Less Accumulated Depreciation 45,660 36,093
-----------------------
Net PROPERTY, PLANT and EQUIPMENT 117,821 111,047
INVESTMENT IN AND ADVANCES TO
AFFILIATE COMPANIES 12,742 8,982
ACQUISITION INTANGIBLES 52,489 53,060
OTHER ASSETS 8,304 5,702
-----------------------
Total Assets $320,463 $302,439
=======================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes Payable to Banks $10,765 $9,622
Trade Accounts Payable 22,771 20,147
Accrued Liabilities 27,247 28,545
Current Maturities of Long-Term Debt 45,541 39,708
-----------------------
Total Current Liabilities 106,324 98,022
LONG-TERM DEBT 138,444 138,029
DEFERRED INCOME TAXES 19,619 17,912
MINORITY INTERESTS 16,172 12,964
SHAREHOLDERS' EQUITY
COMMON STOCK, NO PAR VALUE-10,000,000 SHARES
AUTHORIZED: 1,471,191 shares issued
(at stated value) 5,139 5,139
ADDITIONAL PAID - IN CAPITAL 8,404 7,873
RETAINED EARNINGS 27,472 23,776
TREASURY STOCK OF 80,612 AND
92,528 SHARES, AT COST (1,111) (1,276)
-----------------------
Total Shareholders' Equity 39,904 35,512
-----------------------
Total Liabilities and Shareholders' Equity $320,463 $302,439
=======================
</TABLE>
(A) The Balance Sheet At December 31, 1995, has been derived from the Audited
Financial Statements at that date, but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial information.
<PAGE>
LYNCH CORPORATION AND SUBSIDIARIES
----------------------------------------
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
-------------------------------------------
<TABLE>
(UNAUDITED)
(In thousands)
<CAPTION>
Six Months Ended
June 30
---------- ----------
1996 1995
---------- ----------
OPERATING ACTIVITIES
<S> <C> <C>
Net Income 3,696 2,281
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 8,249 5,144
Net effect of sales of trading securities 7,397 1,375
Deferred taxes 1,707 0
Share of operations of affiliated companies (66) (6)
Minority interests 662 1,020
Gain on sale of stock by subsidiaries (4,178) 0
Changes in operating assets and liabilities:
Receivables (605) (6,317)
Inventories (5,196) (5,376)
Accounts payable and accrued liabilities 1,326 4,836
Other (4,290) (1,912)
---------- ----------
NET CASH FROM OPERATING ACTIVITIES 8,702 1,045
---------- ----------
INVESTING ACTIVITIES
Capital Expenditures (9,786) (7,314)
Acquisition of lines from U.S. West (4,680) 0
Investment in Personal Communications
Services Partnerships (3,326) 0
Other (312) 0
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (18,104) (7,314)
---------- ----------
FINANCING ACTIVITIES
Borrowings of debt, net 13,087 4,122
Treasury stock transactions 723 0
Minority interest transactions 697 (307)
---------- ----------
NET CASH FROM FINANCING ACTIVITIES 14,507 3,815
---------- ----------
Net increase (decrease)in cash
and cash equivalents 5,105 (2,454)
Cash and cash equivalents at
beginning of period 15,921 18,010
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD 21,026 15,556
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A. Subsidiaries of the Registrant
The present operating subsidiaries of the Registrant are as follows:
Lynch Multimedia Corporation
CLR Video LLC (60% owned)
Lynch Telecommunications Corporation
Lynch Telephone Corporation (80.1% owned)
Western New Mexico Telephone Company, Inc.
WNM Communications Corporation
Lynch Telephone Corporation II (83.0% owned)
Inter-Community Telephone Company
Inter-Community Telephone Company II
Lynch Telephone Corporation III (81% owned)
Cuba City Telephone Exchange Company
Belmont Telephone Company
Lafayette County Satellite TV, Inc.
Brighton Communications Corporation
Lynch Telephone Corporation IV
Bretton Woods Telephone Company
Lynch Telephone Corporation VI (98% owned)
J.B.N. Telephone Company, Inc.
J.B.N. Finance Corporation
Lynch Telephone Corporation VII
USTC Kansas Inc.
Haviland Telephone Company
Haviland Finance Corporation
Global Television Inc.
Lynch Entertainment Corporation
Coronet Communications Company (20% owned)
Lynch Entertainment Corporation II
Capital Communications Corporation (49% owned)
The Morgan Group, Inc. (equity ownership 49%
- voting ownership 64%)
Morgan Drive Away, Inc.
Transport Services Unlimited, Inc.
Interstate Indemnity Inc.
Morgan Finance, Inc.
Lynch Capital Corporation
Lynch Manufacturing Corporation
Lynch Machinery, Inc. (90% owned)
Tri-Can International, Ltd.
M-tron Industries, Inc. (94% owned)
M-tron Industries, Ltd.
Spinnaker Industries, Inc. (previously named Safety Railway
Service Corporation) (73.5% owned)
Central Products Acquisition Corp.
Brown-Bridge Industries, Inc. (80.1% owned)
Entoleter, Inc.
Lynch International Exports, Inc.
B. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six month period ended June 30, 1996
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1996. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1995.
C. Acquisitions
On October 4, 1995, Central Products Acquisition Corp., a wholly-owned
subsidiary of Spinnaker Industries, Inc. (an 73.5% owned subsidiary of Lynch)
acquired from Alco Standard Corporation ("Alco"), the assets and stock of
Central Products Company. Central Products manufactures a wide variety of
carton sealing tapes and related equipment. The cost of the acquisition was
$80.0 million. As a result of this transaction, the Company recorded $27.2
million in goodwill which is being amortized over 25 years. This transaction
was accounted for as a purchase, and accordingly, the assets acquired and
liabilities assumed were recorded at their estimated fair market value.
The operating results of the acquired company are included in the consolidated
statements of operations from their respective acquisition dates. The following
combined proforma information shows the results of the Registrant's operations
presented as though the purchase of Central Products had been made at the
beginning of 1995.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1996 1995 1996 1995
(In thousands, except
per share data)
<S> <C> <C> <C> <C>
Sales and Revenues $113,493 $105,103 $222,968 $204,798
Operating Profit 5,343 6,281 11,320 12,712
Income from Continuing
Operations 3,215 952 4,439 2,310
Net Income 2,495 924 3,696 2,294
Income from Continuing
Operations Per Share 2.28 0.68 3.17 1.65
Net Income Per Share 1.77 0.66 2.64 1.63
</TABLE>
The above proforma data has been revised by Registrant for certain refinements
in the proforma adjustments determined in June, 1996. The above data has been
adjusted to reflect these changes.
D. Discontinued Operations
During the second quarter, the Registrant decided to discontinue the operations
of Tri-Can International, Ltd. ("Tri-Can") and sell the assets of that
operation. The sale was completed in August 1996. Tri-Can, a manufacturer of
packaging machinery, recorded sales of $1.3 million and $2.6 million,
respectively, for the six months ended June 30, 1996 and 1995, and $4.5 million
and $5.4 million for the years ended December 31, 1995 and 1994, respectively.
The assets to be sold primarily consist of inventory fixed assets, inventory
and intangibles. As a result of this decision, the Registrant, during the three
months ended June 30, 1996, recorded a provision for loss of $750,000, $495,000,
or $0.35 per share after-taxes, to reflect the write-down of certain assets
and costs estimated to be incurred prior to the disposal and a provision for
operating losses of $150,000 for the period, $100,000, or $0.07 per share
after-tax, between June 30, 1996 and the date of the sale.
E. Inventories
Inventories are stated at the lower of cost or market value. At June 30, 1996,
inventories were valued by three methods: last-in, first-out (LIFO) - 56%,
specific identification - 39%, and first-in, first-out (FIFO) - 5%. At December
31, 1995, the respective percentages were 58%, 38%, and 4%.
<TABLE>
<CAPTION>
In Thousands
June 30, 96 December 31, 95
<S> <C> <C>
Raw materials and supplies $11,712 $10,676
Work in process 12,388 10,286
Finished goods 14,331 12,273
TOTAL INVENTORIES $38,431 $33,235
</TABLE>
F. Indebtedness
On a consolidated basis, at June 30, 1996, the Registrant maintains short-term
and long-term lines of credit facilities totaling $82.1 million, of which $26.3
million is available. The Registrant maintains a $12.0 million short term line
of credit facility, of which $4.7 million was available at June 30, 1996. This
facility expires on April 15, 1997. Spinnaker Industries, Inc. maintains lines
of credit at its subsidiaries which total $45.5 million, of which $8.8 million
was available at June 30, 1996 and The Morgan Group maintains lines of credit
totaling $18.5 million, $11.6 million of which was available at June 30, 1996.
These facilities, as well as facilities at other subsidiaries of the Registrant,
generally limit the credit available under the lines of credit to certain
variables; such as inventories and receivables, which are secured by the
operating assets of the subsidiary, and include various financial covenants.
At June 30, 1996, $35.1 million of these total facilities expire within one
year.
Long-term debt consists of (all interest rates are weighted averages, where
applicable at June 30, 1996):
<TABLE>
<CAPTION>
In Thousands
6-30-96 12-31-95
<S> <C> <C>
Rural Electrification Administration and
Rural Telephone Bank notes payable
in equal quarterly installments through
2023 at fixed rates (3.6%) 29,762 27,543
Bank credit facilities utilized by
certain telephone and telephone
holding companies at both 9.5% fixed
and 9.0% variable rates 32,810 28,255
Unsecured notes issued in connection
with telephone company acquisitions
at 10% fixed rate 16,091 16,149
Debt associated with Central Products:
Revolving line of credit 9.25% variable rate 14,413 14,126
Term loans 9.5% variable rate 34,875 35,625
Notes to seller 7.0% fixed rate 19,250 30,000
Bridge loan 10.4% variable rate 8,500
Bank debt associated with Brown-Bridge
at variable rates 9.5%:
Revolving line of credit 15,103 12,646
Term loan 5,441 6,691
Other 7,740 6,702
183,985 177,737
Current Maturities (45,541) (39,708)
$138,444 $138,029
</TABLE>
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 the Registrant.
G. Central Products Refinance
As part of Spinnaker's acquisition of Central Products Company from Alco
Standard on October 4, 1995 (see note C), Alco provided two loans totaling
$25 million and received the right to sell these notes to Spinnaker and
demand payment (the "Put Agreement"). Lynch agreed to guarantee the notes
and provide funds for the Put Agreements. As of January 2, 1996, Alco
exercised the rights under the Put Agreement to sell the notes back to
Spinnaker and in connection therewith, as described below, Spinnaker entered
into a new financing agreement with the seller and a third party to make a
partial principal payment on the note and replace the balance with a new
financing arrangement.
On April 5, 1996, Spinnaker entered into an agreement with a third party for an
$8.5 million bridge loan. The bridge loan is due on December 30, 1996, and if
not paid will convert into a 5 year term loan. The third party will be entitled
to receive a warrant to purchase 2.5% of the common equity of Spinnaker for each
quarter the term loan is outstanding up to 20% on a fully diluted basis, of the
common equity of Spinnaker. The bridge loan bears interest at the greater of
the LIBOR reference rate or the Treasury rate plus 5% for the first 90 days,
then incrementally increasing by .25% for every subsequent 90 day period.
Spinnaker may also fix the rate at 18% if the floating rate increases to or
above that rate. The bridge loan and term loan include a payment in kind
("PIK") feature that allows Spinnaker to pay an interest in excess of 16%
(the maximum cash interest) by issuing additional bridge notes.
On April 5, 1996, an entity affiliated with Richard J. Boyle and Ned N. Fleming
III ("BF"), the Company's Chairman and Chief executive Officer and President,
respectively, exercised warrants to purchase 187,476 shares of Spinnaker's
common stock resulting in proceeds of $500,000 which will be used by the Company
to make scheduled interest payments on the bridge loans. The agreement requires
BF to continue to exercise its warrants to provide funds to satisfy the
outstanding interest that will be due on the bridge loan and term loans. The
Company has pledged its shares of Spinnaker stock to secure such loans.
Concurrently with the closing of the bridge loan, Spinnaker paid Alco $7.5
million of which $5.5 million was a principal payment on the $25 million note,
approximately $1.0 million related to accrued interest and $1.0 million was
applied toward a $1.75 million purchase price for a warehouse facility in
Denver, Colorado. The unpaid balance of the $25 million note, together with the
balance due on the warehouse facility was restructured into a series of new
convertible subordinated notes consisting of the following:
(a) A 7%, $6 million convertible subordinated note that automatically
converts including accrued interest, into Spinnaker common stock. On
May 5, 1996, the Note converted into 171,429 shares of Spinnaker Stock;
(b) A 7%, $7 million convertible subordinated note due April 1997. The
note contains a PIK feature that allows Spinnaker, at its option, to
satisfy the interest by increasing the principal amount of the note.
However, if Spinnaker selects the PIK option, the interest rate on the
note is 9%. All or any part of this note can be converted at Alco's
option into shares of Spinnaker's common stock after April 1, 1997 at
the then market price; and
(c) A 7%, $7.25 million convertible subordinated note due April 1998. The
note contains a PIK feature that allows Spinnaker, at its option, to
satisfy interest by increasing the principal amount of the note.
However, if Spinnaker selects the PIK option, the interest rate on the
note is 9%. All or any part of this note can be converted at Alco's
option into shares of Spinnaker common stock after April 1, 1998 at the
then current market price.
Spinnaker is pursuing various alternatives to refinance the indebtedness of
Spinnaker and its subsidiaries, including refinancing the bridge loan before it
matures. There can be no assurance that Spinnaker can successfully complete any
such refinancing.
H. Gain of Sale of Stock by Spinnaker
As a result of the conversion of the $6.0 million Alco Note into Spinnaker
Common Stock on May 5, 1996 (see Note G) and other transactions, the Registrant,
in accordance with its accounting policy, recognized a gain of $4.1 million,
$2.4 million or $1.70 per share after taxes, in the second quarter of 1996.
I. Income Taxes
The income tax provision includes federal, as well as state and local taxes.
The tax provisions for the six months ending June 30, 1996 and 1995 represent
effective tax rates of 40.2% and 40.6%, respectively. The rates differ from the
federal statutory rate principally due to the effect of state income taxes,
amortization of non-deductible goodwill, and, in 1995 a valuation reserve
provided on the benefit associated with the Registrant's equity in losses of
Capital Communications Corporation.
J. Capital Stock
In 1987 and 1992, the Board of Directors authorized the purchase of up to a
total of 300,000 shares of Common Stock of the Registrant. These shares will be
retained as treasury stock for future use as required. Through June 30, 1996,
the Registrant had purchased 230,861 shares of Common Stock to date at an
average price of $13.15.
K. Earnings Per Share
Earnings per common and common equivalent share amounts are based on the average
number of common shares outstanding during each period, assuming the exercise of
all stock options having an exercise price less than the average market price of
the common stock using the treasury stock method. Fully diluted earnings per
share reflect the effect, where dilutive, of the exercise of all stock options
having an exercise price less than the greater of the average or closing market
price at the end of the period of the Common Stock of the Registrant using the
treasury stock method.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Sales and Revenues
Revenues for the second quarter of 1996 increased by $38.1 million or 50.6% from
the second quarter of 1995. Contributions to the overall increase from the
multimedia, services and manufacturing segments were 1.9%, 13.5%, and 84.6%,
respectively. The acquisition of Central Products Company by Spinnaker
Industries, on October 4, 1995, was the predominant cause of the increase.
Central Products, with revenues of $31.4 million in the second quarter of 1996,
represented 97.5% of the increase in the manufacturing segment and 82.4% of the
overall increase in the Registrant's revenues. Revenues at Brown Bridge
Industries increased by $2.4 million as a result of recently obtained
contracts. Revenues at the Morgan Group, Inc. increased by $5.1 million
reflecting increased demand in its manufactured housing and driver outsourcing
segment, partly the result of the acquisition of Transfer Drivers, Inc. ("TDI")
on May 22, 1995 ($1.4 million), offset by a decline in recreational vehicle
shipments.
For the six months ended June 30, 1996, revenues increased by $78.9 million, or
54.8%. The same factors that contributed to the second quarter increase also
contributed to the year-to-date increase. Specifically: (1) The acquisition of
Central Products added $63.4 million, or 80.3%; (2) increased revenues at
Morgan, partly due to the acquisition of TDI ($3.3 million), contributed $8.8
million, or 11.2% of the overall increase; and (3) increased revenues at Brown
Bridge of $6.7 million, contributed 8.5% of the over-all increase. Revenues at
Lynch Machinery decreased by $2.7 million between the two periods as a result of
reduced production activity associated with shipment of extra-large glass
presses in 1996 versus 1995.
On a prospective basis, the inclusion of the Central Products operation for a
full year is expected to result in increased reported revenues by the
Registrant in the third quarter of 1996 versus the respective prior year
periods.
Operating Profit
Operating profit for the second quarter of 1996, increased by $1.1 million, or
24.9%, from the second quarter of 1995. On a segment basis, multimedia and
manufacturing operations increased by $0.2 million and $2.0 million,
respectively, while the operating profit of the services segment declined by
$0.6 million. The inclusion of the Central Products operations in the second
quarter of 1996 increased operating profit by $2.0 million. Improved results at
M-tron, contributed $0.3 million to the operating profit improvement. Within
the multimedia segment, the inclusion of CLR Video, which acquired a 4,500
subscriber cable operation on December 1, 1995, contributed $0.1 million in
operating profits for the quarter. In addition, the increased level of capital
expenditures by our telephone operations resulted in increased revenue recovery
and operating profit in 1996. The decline in operating profit at The Morgan
Group of $0.6 million, resulted from reduced recreational vehicle margins due to
reduced demand plus higher claims costs. Operating profit at Lynch Machinery
declined by $0.2 million due to the lower sales volume. Net corporate expenses
were higher by $0.5 million reflecting increased level of corporate bonus
accrual associated with the higher level of net earnings.
For the six months ended June 30, 1996, operating profit increased by $3.0
million. The same factors that affected operating profit in the second quarter
also affected the year-to-date amounts. Specifically: (1) The acquisitions of
Central Products and CLR Video cable operation contributed $4.1 million and $0.2
million, respectively; (2) M-tron's operating profits were $0.7 million greater
than last year; (3) Morgan's results were lower by $1.3 million; and (4) Lynch
Machinery's operating profit were $0.4 million lower than last year.
On a prospective basis and assuming no material adverse change in operations,
the inclusion of Central Products is expected to result in increased reported
operating profit by the Registrant in the third quarter of 1996 versus the
respective prior year period.
Other Income (Expense), Net
Investment income in the second quarter of 1996 was essentially the same as the
second quarter of the previous year as increased net marketable securities gains
offset lower investments in securities generating current investment income.
With regard to the six month period, the first quarter of 1996 contained less
marketable securities gain than the first quarter of 1995.
Interest expense in the second quarter of 1996 was $2.0 million higher than the
second quarter of the previous year due to interest expense associated with the
acquisitions of Central Products and CLR Video of $1.7 million and $0.1 million,
respectively. Six month interest expense amounts for Central Products and CLR
Video were $3.1 million and $0.1 million, respectively.
As described in Note F to the Condensed Consolidated Financial Statements, as
part of Spinnaker's acquisition of Central Products, Spinnaker issued to Alco a
$6 million Convertible Subordinated Note that converted into Spinnaker Common
Stock on May 5, 1996 at a conversion price per share of approximately $35. As
it is the accounting policy of the Registrant to recognize gains and losses on
the sale of stock by a subsidiary, the conversion of this Note resulted in a
pre-tax gain of $4.1 million to the Registrant.
In addition, during 1996, Spinnaker is pursuing various alternatives to
refinance its indebtedness in order to pay off the $8,500,000 loan before it
converts into a term loan, to simplify its capital structure, to remove
restrictions imposed by various lenders and to reduce the administrative burdens
resulting from having multiple lenders. Such refinancing could result in a
charge to earnings related to the early extinguishment of the existing debt.
Tax Provision
The income tax provision includes federal, as well as state and local taxes.
The tax provisions for the three months ended June 30, 1996 and 1995, represent
effective tax rates of 40.2% and 40.6%, respectively. The rates differ from the
federal statutory rate principally due to the effect of state income taxes,
amortization of non-deductible goodwill, and, in 1995, a valuation reserve
provided on the benefit associated on the Registrant's equity in losses in
Capital Communications Corporation.
Minority Interest
Minority interest was $0.2 million lower in the second quarter of 1996 versus
the second quarter of 1995, predominantly due to the lower contribution of
Morgan to the 1996 results.
Income From Continuing Operations
Income from continuing operations for the three months ended June 30, 1996 was
$3.2 million, or $2.28 per share, as compared to $1.2 million, or $0.84 per
share, in the previous year. Income from continuing operations for the six
months ended June 30, 1996 was $4.4 million, or $3.17 per share, as compared to
$2.3 million, or $1.63 per share in the previous year. The above mentioned
gain on the sale of the stock by a subsidiary was the primary cause of the
increases.
Discontinued Operations
As described in Note D of the interim financial statement, the Registrant has
decided to discontinue the operation of Tri-Can International, Ltd.
Accordingly, its operating results and a loss reserve provided in the second
quarter of 1996 are treated as discontinued operations.
Net Income
Net income for the three months ended June 30, 1996 was $2.5 million, or $1.77
per share, as compared to $1.2 million, or $0.82 per share in the previous
year. Net income for the six months ended June 30, 1996 was $3.7 million, or
$2.64 per share as compared to $2.3 million, or $1.62 per share in the
previous quarter.
Backlog/New Orders
Total backlog of manufactured products at June 30, 1996 was $32.6 million, which
represents a decrease of $1.5 million from the backlog of $34.0 million at
December 31, 1995. The backlog at Central Products and Entoleter increased by
$1.1 million and $0.8 million, respectively, but was offset by declines at
M-tron, Brown-Bridge and Lynch Machinery of $2.2 million, $1.0 million, and
$0.3 million respectively.
Liquidity/Capital Resources
At June 30, 1996, the Registrant had $25.1 million in cash and short-term
investments, $1.0 million of which was at the Parent Company, which was $2.3
million less than the amount reported at December 31, 1995. Working capital at
June 30, 1996, was $22.8 million compared to $25.6 million at December 31,
1995. Total debt was $194.8 million at June 30, 1996 compared to $187.4
million at December 31, 1995. As reported in the Registrant's Consolidated
Statement of Cash Flow, during the six months ended June 30, 1996, operating
activities generated $8.7 million in cash, investing activities utilized $18.1
million, and financing activities generated $14.5 million. The respective
amounts for the six months ended June 30, 1995 were $1.0 million, $7.3
million and $3.8 million, respectively. Increased sales of marketable
securities and a seasonable build up of inventories at Spinnaker in the first
half of 1996 weres primarily responsible for the significant fluctuation in
cash generated from operating activities between the two periods.
Registrant 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 the Parent Company from its subsidiaries. At June 30, 1996, the
Registrant has $26.3 million of unused short-term and long-term lines of credit
facilities, $4.7 million of which applied to the Parent Company.
Subsidiaries of the Registrant hold limited partnership interests in and have
loan commitments to five partnerships which were the winning bidders on an
aggregate of 31 licenses in the Federal Communications Commission's ("FCC")
recently concluded C-Block auction for 30 megahertz of broadband spectrum to be
used for personal communications services (PCS). See Item 5 of Registrant's
Form 10-Q for the quarter ended March 31, 1995. The licenses have an aggregate
purchase price of $215 million, after a 25% bidding credit that the FCC provides
to "small businesses." Under FCC regulations, 5% (or $10.8 million) of the
purchase price of the licenses was paid on May 15, 1996 and 5% (or $10.8
million) is due at the time the licenses are awarded, which is expected to
occur in the third quarter of 1996. The remaining 90% will be funded by a
loan from the U.S. Government with a ten-year life with principal payments
beginning in year seven. Registrant's subsidiaries have an aggregate commitment
to loan the partnerships $41.8 million, $10.8 million of which has been met as
of June 30, 1996, to be utilized principally by the partnerships to fund down
payments on the licenses and interest payments on the Government loans. The
Registrant is pursuing various alternatives to obtain the financing necessary to
meet this current funding commitment, but there can be no assurance that the
Registrant can successfully complete any such financing.
The funding aspects of the acquisition and potential acquisition of licenses and
the subsequent mandatory build out requirements plus the amortization of the
license, could significantly and materially impact Registrant's reported net
income over the next several years. Under the current structure and
consolidations rules, the ramifications of this would not impact reported
revenues and operating profit in the future.
A subsidiary of Registrant is a 49.9% limited partner in a partnership which has
filed an application with the FCC to bid in the FCC's F-Block Auction licenses
for 10 megahertz of spectrum to be used for personal communications services and
has loaned the partnership $12 million for five years for bidding purposes.
Registrant has borrowed $12 million for one year from a subsidiary of GSI, an
affiliate of the Chairman of the Registrant, to fund the subsidiary's loan
obligation, secured by the vote from the partnership, the subsidiary's 49.9%
interest in the Partnership and the stock of certain of Registrant's
subsidiaries. The F-Block Auction is restricted to certain "entrepreneurs," and
winning bidders will receive government financing for 80% of price of licenses
won (after any bidding credits).
On November 4, 1995, a contract was signed to acquire for $22 million, subject
to certain conditions, Dunkirk & Fredonia Telephone Company, a local exchange
company in New York, with approximately 11,000 access lines. On July 26, 1996,
the New York State Public Service Commission authorized this transaction subject
to certain conditions. The Registrant is in the process of negotiating the
placement of the financing for this transaction though there is no assurance
that such financing can be obtained.
See Footnote G, supra, as to Spinnaker financing and Item 5 below for additional
information on personal communications services investments.
On June 27, 1996, the shareholders of the Registrant approved a proposal
described in Registrant's Proxy Statement dated June 7, 1996, whereby the
Registrant may request Gabelli & Company, Inc. ("GSI") to assist the Registrant
in obtaining up to $25 million in funds to be used for general operating
purposes including investments in the PCS partnerships, although GSI has no
obligation to do so. To the extent the Registrant obtains funds, such
borrowings would be evidenced by an interest bearing promissory note due not
earlier than 120 days from issuance. If the Registrant should default in the
payment of the notes, the holder would have the right to exchange the
promissory notes for notes convertible into common stock of the Registrant at a
conversion price that may be substantially below the market price of the stock.
Registrant's shareholders would have the opportunity under certain
circumstances to acquire convertible notes if convertible notes are issued
to GSI or certain of its Principal Accounts.
Included in this Management Discussion and Analysis of Financial Condition
and Results of Operations are certain forward looking financial and other
information. It should be recognized that such information are estimates or
forecasts based on various assumptions, including without limitation meeting its
assumptions regarding expected operating performance and other matters
specifically set forth, as well as the expected performance of the economy as it
impacts the Registrant's businesses, and which accordingly are subject to
uncertainties and risks.
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) At the Annual Meeting of Stockholders of the Registrant held on
June 27, 1996, the following persons were elected as directors
with the following votes:
<TABLE>
<CAPTION>
Name Votes For Votes Withheld
<S> <C> <C>
Morris Berkowitz 1,290,479 5,723
E. Val Cerutti 1,290,479 5,723
Paul J. Evanson 1,292,679 3,523
Mario J. Gabelli 1,292,632 3,580
Salvatore Muoio 1,290,579 5,623
Ralph R. Papitto 1,290,579 5,623
Paul P. Woolard 1,292,579 3,623
</TABLE>
(b) The following shares were voted as indicated on Item 2 of the
Registrant's Proxy Statement, dated June 7, 1996: Right to
exchange promissory notes in a principal amount of up to $25
million that may be issued by the Registrant into convertible
notes under certain circumstances.
For: 959,462 Against: 16,432 Abstain: 10,550
Broker non-votes totaled 303,750. See the last paragraph of Item
2 Supra.
Item 5. Other Information
A subsidiary of Registrant is a 49.9% limited partner in a partnership
which has filed an application with the FCC to bid in the F-Block
Auction licenses for 10 megahertz of spectrum to be used for personal
communications services and has loaned the partnership $11.8 million
for five years for bidding purposes. Registrant has borrowed $11.8
million for one year from Gabelli Funds, Inc. ("GFI") to fund the
subsidiary's loan obligation, secured by the note from the partnership,
the subsidiary's 49.9% interest in the partnership and the stock of
certain of Registrant's subsidiaries. The $11.8 million loan from GSI
includes a special fee payable to the GSI equal to 10% of the profits
on the subsidiary's investment in the partnership. The F-Block Auction
is restricted to certain "entrepreneurs," and winning bidders will
receive government financing for 80% of price of licenses won (after
any bidding credits). Another subsidiary of Registrant has an
agreement with Rivgam Communicators L.L.C., an applicant in the FCC's
D and E Block Auctions and a subsidiary of GSI, to provide certain
services to it and will receive a fee equal to 10% of the profits of
Rivgam. The D-E-F Block Auctions are scheduled to commence on August
26, 1996. PCS is subject to numerous uncertainties and risks. There
can be no assurance that either applicant will win any licenses or if
they win any licenses, that such licenses can be successfully
developed.
See also Item 5 of Registrant's Form 10-Q for the first quarter of 1996
for further information on Registrant's involvement with personal
communications services and uncertainties and risks related thereto.
Registrant's majority-owned subsidiary, Spinnaker Industries, Inc.
("Spinnaker") has given notice to terminate its management agreement
with Boyle, Fleming, George & Co., Inc. on August 31, 1996, with the
intent of having Messrs. Boyle and Fleming, Chairman and Chief
Executive Officer and President, respectively, enter into employment
arrangements with Spinnaker. Negotiations between Spinnaker and
Messrs. Boyle and Fleming are continuing. Spinnaker is also
negotiating to acquire the approximately 19.9% minority interest in its
Brown-Bridge Industries subsidiary. The terms of any such acquisition,
which may involve cash payments, issuance of Spinnaker stock and/or
other arrangements, have not been agreed to and there can be no
assurance this transaction will ultimately be consummated.
Registrant may from time to time provide certain forward looking
financial and/or other information in press releases, filings with the
Securities and Exchange Commission or otherwise. It should be
recognized that such information are estimates or forecasts based on
various assumptions, including without limitation meeting its
assumptions regarding expected operating performance and other matters
specifically set forth, as well as the expected performance of the
economy as it impacts the Registrant's businesses, and which
accordingly are subject to uncertainties and risks.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27-Financial Data Schedule
(b) Reports on Form 8-K
On April 19, 1996, May 14, 1996, and June 4, 1996, Registrant
filed Amendments (6)-(8), respectively, to its Form 8-K, dated
October 4, 1995, with respect to the Central Products acquisition
and financing and on April 4, 1996, Registrant filed Amendment
No. 1 to its Form 8-K dated March 19, 1996, with respect to a
change of auditors at The Morgan Group, Inc.
SIGNATURE
Pursuant to the requirements of the Securities 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
(Registrant)
BY:s/Robert E. Dolan
Robert E. Dolan
Chief Financial Officer
August 14, 1996
<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>
<CIK> 0000061004
<NAME> LYNCH CORPORATION
<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
<COMMON> 5,139
<OTHER-SE> 34,765
<TOTAL-LIABILITY-AND-EQUITY> 320,463
<SALES> 222,968
<TOTAL-REVENUES> 222,968
<CGS> 189,713
<TOTAL-COSTS> 211,648
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,185
<INCOME-PRETAX> 8,527
<INCOME-TAX> 3,426
<INCOME-CONTINUING> 4,439
<DISCONTINUED> 743
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,696
<EPS-PRIMARY> 2.64
<EPS-DILUTED> 2.64
</TABLE>
