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 September 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 November 1, 1996
Common Stock, no par value 1,390,679
<PAGE>
INDEX
LYNCH CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statement of Operations:
- Three months ended September 30, 1996 and 1995
- Nine months ended September 30, 1996 and 1995
Condensed Consolidated Balance Sheet:
- September 30, 1996
- December 31, 1995 (Audited)
Condensed Consolidated Statement of Cash Flows:
- Nine months ended September 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
- -----------------------------
Item 1- Financial Statements
- -----------------------------
<TABLE>
LYNCH CORPORATION AND SUBSIDIARIES
----------------------------------
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
----------------------------------------------
(UNAUDITED)
(In thousands, except share amounts)
<CAPTION>
Three Months Nine Months
Ended September 30 Ended September 30
---------- ---------- ---------- ----------
1996 1995 1996 1995
SALES AND REVENUES ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Multimedia $ 7,397 $ 5,902 $ 20,753 $ 17,503
Services 35,306 33,250 102,510 91,608
Manufacturing 74,618 41,449 217,026 115,558
---------- ---------- ---------- ----------
117,321 80,601 340,289 224,669
Costs and expenses: ---------- ---------- ---------- ----------
Multimedia 5,223 4,455 14,824 13,066
Services 32,417 29,977 94,922 82,598
Manufacturing 63,063 32,349 180,670 91,091
Selling and
administrative 9,904 8,879 31,839 24,663
---------- ---------- ---------- ----------
OPERATING PROFIT 6,714 4,941 18,034 13,251
Other income (expense):
Investment Income 519 577 1,667 2,196
Interest expense (4,254) (2,275) (12,439) (6,687)
Share of operations of
affiliated companies 8 (66) 74 (60)
Gain on sale of stock by
subsidiaries 0 0 4,178 59
---------- ---------- ---------- ----------
(3,727) (1,764) (6,520) (4,492)
---------- ---------- ---------- ----------
INCOME FROM CONTINUING
OPERATIONS BEFORE
INCOME TAXES AND
MINORITY INTERESTS 2,987 3,177 11,514 8,759
Provision for
income taxes (1,240) (1,201) (4,666) (3,466)
Minority interests (498) (568) (1,160) (1,588)
---------- ---------- ---------- ----------
INCOME FROM CONTINUING
OPERATIONS 1,249 1,408 5,688 3,705
---------- ---------- ---------- ----------
DISCONTINUED OPERATIONS:
LOSS FROM OPERATIONS OF DIS-
CONTINUED LYNCH TRI-CAN INTER-
NATIONAL (LESS APPLICABLE INCOME
TAXES OF $40,186,127) 0 (115) (259) (131)
LOSS ON DISPOSAL OF LYNCH TRI-CAN
INTERNATIONAL (LESS APPLICABLE
INCOME TAXES OF $249) 0 0 (484) 0
---------- ---------- ---------- ----------
NET INCOME $ 1,249 $ 1,293 $ 4,945 $ 3,574
========== ========== ========== ==========
Weighted average shares
outstanding 1,408,000 1,413,000 1,404,000 1,409,000
INCOME PER COMMON SHARE:
INCOME FROM CONTINUING
OPERATIONS $ 0.89 $ 1.00 $ 4.05 $ 2.63
LOSS FROM DISCONTINUED
OPERATIONS 0.00 (0.08) (0.53) (0.09)
---------- ---------- ---------- ----------
INCOME PER COMMON SHARE $ 0.89 $ 0.92 $ 3.52 $ 2.54
========== ========== ========== ==========
</TABLE>
<PAGE>
<TABLE>
LYNCH CORPORATION AND SUBSIDIARIES
-----------------------------------
CONDENSED CONSOLIDATED BALANCE SHEET
------------------------------------
<CAPTION>
(In thousands) September 30 December 31
1996 1995
(Unaudited) (A)
ASSETS ------------ ------------
CURRENT ASSETS:
<S> <C> <C>
Cash and Cash Equivalents $ 16,768 $ 15,921
Marketable Securities and
Short-Term Investments 1,971 11,432
Receivables, less Allowances
of $1431 and $1732 55,047 52,306
Inventories 39,188 33,235
Deferred Income Tax Benefits 3,944 3,944
Other Current Assets 9,096 6,810
--------- ---------
Total Current Assets 126,014 123,648
PROPERTY, PLANT AND EQUIPMENT:
Land 2,096 2,068
Buildings and Improvements 20,170 16,675
Machinery and Equipment 149,877 128,397
---------- ---------
172,143 147,140
Less Accumulated Depreciation 49,103 36,093
---------- ---------
Net Property, Plant and Equipment 123,040 111,047
INVESTMENT IN AND ADVANCES TO
AFFILIATED COMPANIES 23,810 8,982
ACQUISITION INTANGIBLES 52,344 53,060
OTHER ASSETS 6,280 5,702
---------- ---------
Total Assets $ 331,488 $ 302,439
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes Payable to Banks $ 12,157 $ 9,622
Trade Accounts Payable 20,977 20,147
Accrued Liabilities 28,983 28,545
Current Maturities of Long-Term Debt 51,943 39,708
---------- ---------
Total Current Liabilities 114,060 98,022
LONG-TERM DEBT 140,039 138,029
DEFERRED INCOME TAXES 19,619 17,912
MINORITY INTERESTS 16,620 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 8,400 7,873
RETAINED EARNINGS 28,721 23,776
TREASURY STOCK OF 80,512 AND 92,528
SHARES, AT COST (1,110) (1,276)
---------- ---------
Total Shareholders' Equity 41,150 35,512
---------- ---------
Total Liabilities and $331,488 $302,439
Shareholders' Equity ========== =========
</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 statements. <PAGE>
<PAGE>
<TABLE>
LYNCH CORPORATION AND SUBSIDIARIES
-----------------------------------
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
----------------------------------------------
(UNAUDITED)
(In thousands)
<CAPTION>
Nine Months Ended
September 30
---------- ----------
1996 1995
---------- ----------
OPERATING ACTIVITIES
<S> <C> <C>
Net Income $ 4,945 $ 3,574
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 12,514 7,753
Net effect of sales of trading securities 9,461 2,184
Deferred taxes 1,707 0
Share of operations of affiliated companies (74) 60
Minority interests 1,160 1,588
Gain on sale of stock by subsidiaries (4,178) 0
Changes in operating assets and liabilities:
Receivables (2,741) (9,128)
Inventories (5,953) (3,155)
Accounts payable and accrued liabilities 1,268 7,184
Other (3,255) (5,194)
-------- --------
NET CASH FROM OPERATING ACTIVITIES 14,854 4,866
-------- --------
INVESTING ACTIVITIES
Capital Expenditures (17,435) (12,584)
Acquisition of telephone lines (5,680) 0
Investment in Personal Communications
Services Partnerships (14,306) 0
Other (363) 0
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (37,784) (12,584)
-------- --------
FINANCING ACTIVITIES
Issuance of debt, net 22,410 6,181
Treasury stock transactions 730 0
Minority interest transactions 637 (454)
-------- --------
NET CASH FROM FINANCING ACTIVITIES 23,777 5,727
-------- --------
Net increase (decrease) in cash
and cash equivalents 847 (1,991)
Cash and cash equivalents
at beginning of period 15,921 18,010
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $16,768 $16,019
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.<PAGE>
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A. Subsidiaries of the Registrant
The present operating subsidiaries of the Registrant are as follows:
Lynch Interactive Corporation
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)
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.
Lynch PCS Communications Corporation
Lynch PCS Corporation (A)
Lynch PCS Corporation (B)
Lynch PCS Corporation (C)
Lynch PCS Corporation (D)
Lynch PCS Corporation (E)
Lynch PCS Corporation (F)
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 nine month period ended September 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. (a 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 Nine Months Ended
Sept. 30 Sept. 30
1996 1995 1996 1995
(In thousands, except
per share data)
<S> <C> <C> <C> <C>
Sales and Revenues $117,321 $111,140 $340,289 $315,938
Operating Profit 6,714 6,692 18,034 19,404
Income from Continuing
Operations 1,249 1,436 5,688 3,746
Net Income 1,249 1,321 4,945 3,615
Income from Continuing
Operations Per Share 0.89 1.02 4.05 2.66
Net Income Per Share 0.89 0.93 3.52 2.57
</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 $3.5 million,
respectively, for the nine months ended September 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 September 30,
1996, inventories were valued by three methods: last-in, first-out (LIFO) - 54%,
specific identification - 42%, and first-in, first-out (FIFO) - 4%. At December
31, 1995, the respective percentages were 58%, 38%, and 4%.
<TABLE>
<CAPTION>
In Thousands
Sept. 30, 1996 December 31, 1995
<S> <C> <C>
Raw materials and supplies $13,042 $10,676
Work in process 3,921 10,286
Finished goods 22,225 12,273
TOTAL INVENTORIES $39,188 $33,235
</TABLE>
F. Indebtedness
On a consolidated basis, at September 30, 1996, the Registrant maintains short-
term and long-term lines of credit facilities totaling $95.5 million, of which
$34.0 million was available. The Registrant maintains a $12.0 million short
term line of credit facility, of which $3.5 million was available at
September 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 $6.4 million was available at September 30, 1996.
The Spinnaker facilities were replaced on October 23, 1996 (see discussion
below). The Morgan Group maintains lines of credit totaling $18.9 million,
$11.8 million of which was available at September 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 September 30, 1996, $48.6 million of these total facilities expire within
one year.
Long-term debt consists of (all interest rates are weighted averages, where
applicable at September 30, 1996):
<TABLE>
<CAPTION>
In Thousands
9-30-96 12-31-95
<S> <C> <C>
Rural Electrification Administration and
Rural Telephone Bank notes payable
in equal quarterly installments through
2023 at fixed rates (4.0%) 31,894 27,543
Bank credit facilities utilized by
certain telephone and telephone
holding companies at both 9.5% fixed
and 9.0% variable rates 33,400 28,255
Unsecured notes issued in connection
with telephone company acquisitions
at 10% fixed rate 16,062 16,149
Debt associated with Central Products:
Revolving line of credit 9.25% variable rate 15,687 14,126
Term loans 9.5% variable rate 34,500 35,625
Notes to seller 7.0% fixed rate 19,250 30,000
Spinnaker bridge loan 10.7% variable rate 8,500
Bank debt associated with Brown-Bridge
at variable rates 9.5%:
Revolving line of credit 20,274 12,646
Term loan 5,120 6,691
Other 7,295 6,702
191,982 177,737
Current Maturities (51,94) (39,708)
$140,039 $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.
On October 23, 1996, Spinnaker Industries completed the issuance of $115,000,000
of 10-3/4% senior-secured debt due 2006. The debt proceeds were used to
extinguish substantially all existing bank debt, bridge loans and lines of
credit at Spinnaker and its two major operating subsidiaries, Central Products
and Brown-Bridge. In addition, Spinnaker established a $40 million asset-backed
senior-secured revolving credit facility. The extinguishment of debt will
result in an extraordinary charge to fourth quarter earnings of approximately
$1.1 million, or $0.83 per share after-tax and minority interest.
G. Gain on Sale of Stock by Spinnaker
As a result of the conversion of a $6.0 million Spinnaker Note into Spinnaker
Common Stock on May 5, 1996 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.
H. Income Taxes
The income tax provision includes federal, as well as state and local taxes.
The tax provisions for the nine months ending September 30, 1996 and 1995
represent effective tax rates of 40.5% and 39.6%, 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.
I. 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 September 30,
1996, the Registrant had purchased 230,861 shares of Common Stock to date at an
average price of $13.15.
J. 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.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Sales and Revenues
Revenues for the third quarter of 1996 increased by $36.7 million or 45.6% from
the third quarter of 1995. Contributions to the overall increase from the
multimedia, services and manufacturing segments were 4.1%, 5.6%, and 90.3%,
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 $31.7 million in the third quarter of 1996,
represented 95.6% of the increase in the manufacturing segment and 86% of the
overall increase in the Registrant's revenues. Revenues at Brown Bridge
Industries increased by $4.5 million as a result of recently obtained
contracts. Revenues at the Morgan Group, Inc. increased by $2.1 million
reflecting increased demand in its manufactured housing segment, offset by a
decline in recreational vehicle shipments. Offsetting these increases were
shortfalls at Lynch Machinery, Inc. ($2.2 million) due to lower production
activities associated with extra-large glass presses and M-tron Industries,
Inc. ($1.7 million due to softness in industry demand).
For the nine months ended September 30, 1996, revenues increased by $115.6
million, or 51.5%. The same factors that contributed to the third quarter
increase also contributed to the year-to-date increase. Specifically: (1) The
acquisition of Central Products added $95.1 million, or 94%; (2) increased
revenues at Morgan, partly due to the acquisition of Transfer Drivers, Inc. on
May 22, 1995 ($3.3 million), contributed $10.9 million, or 9% of the overall
increase; and (3) increased revenues at Brown Bridge of $11.1 million,
contributed 9.6% of the over-all increase. Revenues at Lynch Machinery
decreased by $4.9 million between the two periods as a result of reduced
production activity associated with shipment of extra-large glass presses in
1996 versus 1995.
Operating Profit
Operating profit for the third quarter of 1996, increased by $1.8 million, or
36.0%, from the third quarter of 1995. On a segment basis, multimedia and
manufacturing operations increased by $0.7 million and $1.1 million,
respectively, while the operating profit of the services segment declined by
$0.3 million. The inclusion of the Central Products operations in the third
quarter of 1996 increased operating profit by $1.3 million. Additional
volume due to additional major contracts plus productivity improvements
resulted in improved operating profit of Brown-Bridge of $1.1 million.
Within the multimedia segment, improved profits at Western New Mexico due in
part to a $0.5 million revenue true-up was the primary cause of increased
operating profits. In addition, the increased level of capital expenditures
by our telephone operations resulted in increased revenue recovery. The
decline in operating profit at The Morgan Group of $0.3 million, resulted
from reduced recreational vehicle margins due to reduced demand, and higher
claims and system development costs. Operating profit at Lynch Machinery
declined by $0.4 million due to the lower sales volume of extra-large glass
presses. M-tron's operating profits declined by $0.4 million
due to reduced volume.
For the nine months ended September 30, 1996, operating profit increased by $4.8
million. The same factors that affected operating profit in the third quarter
also affected the year-to-date amounts. Specifically: (1) The acquisitions of
Central Products contributed $5.4 million; (2) Brown-Bridge operating profit
increased by $1.2 million; (3) Morgan's results were lower by $1.7 million; and
(4) Western New Mexico operating profits increased by $0.8 million; and (5)
Lynch Machinery's operating profit were $0.9 million lower than last year.
At M-tron, a higher first half of 1996 offset a lower third quarter which
resulted in overall increased operating profit in the nine month period of $0.3
million.
Other Income (Expense), Net
Investment income earned during the third quarter of 1996 was $58 thousand lower
than the third quarter of the previous year due to lower investments in
investment generating current income. With regard to the nine month period,
investment income was $0.5 million lower in 1996 than 1995 also due primarily to
lower dollar investment in investments generating current income.
Interest expense in the third quarter of 1996 was $2.0 million higher than the
third quarter of the previous year due to interest expense associated with the
acquisition of Central Products of $1.7 million, funding of deposits for PCS
licenses of $0.2 million and multimedia acquisitions made in late 1995 and 1996
of $0.3 million. Nine month interest expense amounts for Central Products was
$5.2 million.
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. See Note G to the Consolidated
Financial Statements.
Tax Provision
The income tax provision includes federal, as well as state and local taxes. The
tax provisions for the three months ended September 30, 1996 and 1995, represent
effective tax rates of 40.5 and 39.6%, 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 $70 thousand lower in the third quarter of 1996 versus the
third quarter of 1995, predominantly due to the lower contribution of Morgan to
the 1996 results offset by increased earnings at the telephone companies and
Brown-Bridge.
Income From Continuing Operations
Income from continuing operations for the three months ended September 30, 1996
was $1.2 million, or $0.89 per share, as compared to $1.4 million, or $1.00 per
share, in the previous year. Income from continuing operations for the nine
months ended September 30, 1996 was $5.7 million, or $4.05 per share, as
compared to $3.7 million, or $2.63 per share in the previous year. The
above mentioned gain on the sale of the stock by a subsidiary, at $1.74 per
share after-tax, was the primary cause of the increases.
Extraordinary Item
As described in Note F, on October 23, 1996, Spinnaker Industries, Inc.
refinanced certain debt associated with the acquisition of Central Products and
Brown-Bridge. As a result of this refinancing, Spinnaker will write-off $2.7
million of costs associated with original financing of these acquisitions. The
net effect of their write-off on the consolidated financial statements of the
Registrant will be $1.1 million, or $0.82 per share after tax and minority
interests.
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 September 30, 1996 was $1.2 million, or
$0.89 per share, as compared to $1.3 million, or $0.92 per share in the previous
year. Net income for the nine months ended September 30, 1996 was $4.9 million,
or $3.52 per share as compared to $3.6 million, or $2.54 per share in the
previous year's period.
Backlog/New Orders
Total backlog of manufactured products at September 30, 1996 was $32.2 million,
which represents a decrease of $1.8 million from the backlog of $34.0 million at
December 31, 1995. The backlog at Central Products and Brown-Bridge increased
by $0.8 million and $3.3 million, respectively, but was offset by declines at M-
tron and Lynch Machinery of $2.4 million, and $4.0 million respectively.
Liquidity/Capital Resources
At September 30, 1996, the Registrant had $18.7 million in cash and short-term
investments, $0.5 million of which was at the Parent Company, which was $8.7
million less than the amount reported at December 31, 1995. Working capital at
September 30, 1996, was $12.0 million compared to $25.6 million at December 31,
1995. Additional loans of $14.3 million were made in 1996 to the PCS
partnerships to fund down payments required by the Federal Communications
Commission with regard to personal communications service licenses awarded to
these partnerships in the "C" Block Auction. Total debt was $204.1 million at
September 30, 1996 compared to $187.4 million at December 31, 1995. As reported
in the Registrant's Consolidated Statement of Cash Flow, during the nine months
ended September 30, 1996, operating activities generated $14.9 million in cash,
investing activities utilized $37.8 million, and financing activities generated
$23.8 million. The respective amounts for the nine months ended September 30,
1995 were $4.9 million, $12.6 million and $5.7 million, respectively. The sale
of trading securities was the primary contributor to the increase in net cash
from operating activities. Deposits with the FCC caused the increase in net
cash used in investing activities.
As described in Footnote F of Notes to Consolidated Financial Statement,
Spinnaker Industries completed the issuance of new debt to be used primarily to
extinguish previously existing credit facilities. In the fourth quarter,
Spinnaker will write-off associated deferred financing fees resulting from the
refinancing of these credit facilities. The net effect of this write-off will
be an extraordinary charge to the Registrant's fourth quarter earnings of
approximately $1.1 million, on an after-tax basis.
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 September 30, 1996, the Registrant
has $34.0 million of unused short-term and long-term lines of credit facilities,
$3.5 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
Forms 10-Q for the quarters ended June 30, 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, 10% (or $21.6 million) of the
purchase price of the licenses was paid as a down payment on September 24,
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, $21.6 million of which has been met as of September 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. Build out of these franchises
will also require significant financial resources.
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 PCS 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 Gabelli & Company, Inc., 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 the 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.
Item 5 below for additional information on personal communications services
investments.
Included in this Management Discussion and Analysis of Financial Consolidation
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 5. Other Information
See also Item 5 of Registrant's Form 10-Q for the first and second
quarters of 1996 for further information on Registrant's involvement
with personal communications services and uncertainties and risks
related thereto.
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
None
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
November 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>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 16,768
<SECURITIES> 1,971
<RECEIVABLES> 55,047
<ALLOWANCES> 1,431
<INVENTORY> 39,188
<CURRENT-ASSETS> 126,014
<PP&E> 172,143
<DEPRECIATION> 49,103
<TOTAL-ASSETS> 331,488
<CURRENT-LIABILITIES> 114,060
<BONDS> 140,039
0
0
<COMMON> 5,139
<OTHER-SE> 36,011
<TOTAL-LIABILITY-AND-EQUITY> 331,488
<SALES> 340,289
<TOTAL-REVENUES> 340,289
<CGS> 290,416
<TOTAL-COSTS> 322,255
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,439
<INCOME-PRETAX> 11,514
<INCOME-TAX> 4,666
<INCOME-CONTINUING> 5,688
<DISCONTINUED> 743
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,945
<EPS-PRIMARY> 3.52
<EPS-DILUTED> 3.52
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