SECURITIES & 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, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 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 (20 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, 1997
Common Stock, no par value 1,416,834<PAGE>
<PAGE>
INDEX
LYNCH CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations:
- Three and six months ended June 30, 1997 and 1996
Condensed Consolidated Balance Sheet:
- June 30, 1997
- December 31, 1996 (Audited)
Condensed Consolidated Statements of Cash Flows:
- Six months ended June 30, 1997 and 1996
Notes to Consolidated Financial Statements:
Item 2. Management'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>
LYNCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
(In thousands) June 30 December 31
1997 1996
(Unaudited) (A)
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and Cash Equivalents $ 24,553 $ 33,946
Marketable Securities and Short-Term Investments 1,682 2,156
Receivables, Less Allowances of $1650 and $1525 51,228 52,963
Inventories 38,426 36,859
Deferred Income Tax Benefits 5,571 5,571
Other Current Assets 11,042 8,598
Total Current Assets 132,502 140,093
PROPERTY, PLANT AND EQUIPMENT:
Land 1,472 1,367
Buildings and Improvements 23,484 21,334
Machinery and Equipment 184,407 157,025
209,363 179,726
Less Accumulated Depreciation 54,374 46,707
Net Property, Plant and Equipment 154,989 133,019
INVESTMENTS IN AND ADVANCES TO PCS ENTITIES 30,191 34,116
INVESTMENTS IN AND ADVANCES TO AFFILIATED COMPANIES 1,293 2,529
EXCESS OF COSTS OVER FAIR VALUE OF NET ASSETS ACQUIRED 75,573 69,206
OTHER ASSETS 22,160 13,657
Total Assets $416,708 $392,620
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes Payable to Banks $ 17,294 $ 17,419
Trade Accounts Payable 22,214 20,998
Accrued Liabilities 45,264 36,275
Current Maturities of Long-Term Debt 12,886 23,769
Total Current Liabilities 97,658 98,461
LONG-TERM DEBT 240,437 219,579
DEFERRED INCOME TAXES 24,945 22,389
MINORITY INTERESTS 13,420 13,268
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 8,648 8,417
RETAINED EARNINGS 27,210 26,472
TREASURY STOCK OF 54,357 AND 80,157 SHARES AT COST (749) (1,105)
Total Shareholders' Equity 40,248 38,923
Total Liabilities and Shareholders' Equity $416,708 $392,620
</TABLE>
(A)The Balance Sheet at December 31, 1996 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>
Part 1- FINANCIAL INFORMATION
Item 1- Financial Statements
LYNCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30 Ended June 30
SALES AND REVENUES 1997 1996 1997 1996
<S> <C> <C> <C> <C>
Multimedia $ 12,095 $ 6,641 $ 22,162 $ 13,356
Services 39,211 36,698 72,844 67,204
Manufacturing 70,120 70,154 135,199 142,408
121,426 113,493 230,205 222,968
Costs and expenses:
Multimedia 8,985 4,991 16,792 9,601
Services 35,884 33,944 66,853 62,505
Manufacturing 57,763 57,460 113,205 117,607
Selling and administrative 10,678 11,715 21,003 21,935
OPERATING PROFIT 8,116 5,383 12,352 11,320
Other income (expense):
Investment Income 424 715 857 1,148
Interest expense (5,808) (4,241) (11,277) (8,185)
Share of operations of
affiliated companies 57 47 71 66
Gain on Sale of Subsidiary Stock 260 4,134 260 4,178
(5,067) 655 (10,089) (2,793)
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES AND
MINORITY INTERESTS 3,049 6,038 2,263 8,527
Provision for income taxes (1,217) (2,449) (902) (3,426)
Minority interests (582) (374) (623) (662)
INCOME FROM CONTINUING OPERATIONS $ 1,250 $ 3,215 $ 738 $ 4,439
DISCONTINUED OPERATIONS:
LOSS FROM OPERATIONS OF DIS-
CONTINUED LYNCH TRI-CAN INTER-
NATIONAL (LESS APPLICABLE INCOME
TAXES OF $76 AND 90) 0 (125) 0 (148)
LOSS ON DISPOSAL OF LYNCH TRI-CAN
INTER-NATIONAL(LESS APPLICABLE
INCOME TAXES OF $305) 0 (595) 0 (595)
NET INCOME $ 1,250 $ 2,495 $ 738 $ 3,696
Weighted average shares
outstanding 1,417,000 1,408,000 1,413,000 1,402,000
INCOME PER COMMON SHARE:
INCOME FROM CONTINUING OPERATIONS 0.88 2.28 0.52 3.17
LOSS FROM DISCONTINUED OPERATIONS 0.00 (0.51) 0.00 (0.53)
0.88 1.77 0.52 2.64
</TABLE>
<PAGE>
LYNCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30
1997 1996
OPERATING ACTIVITIES
<S> <C> <C>
Net Income $ 738 $ 3,696
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 10,375 8,249
Net effect of purchases and
sales of trading securities 474 7,397
Deferred taxes 0 1,707
Share of operations of affiliated companies (71) (66)
Minority interests 623 662
Gain on sale of stock by subsidiaries 0 (4,178)
Changes in operating assets and liabilities:
Receivables 1,895 (605)
Inventories (1,567) (5,196)
Accounts payable and accrued liabilities 8,510 1,326
Other (1,426) (4,290)
NET CASH FROM OPERATING ACTIVITIES 19,551 8,702
INVESTING ACTIVITIES
Capital Expenditures (8,467) (9,786)
Acquisition of lines from U.S. West 0 (4,680)
Investment in Coronet Communications Company 2,995 0
Investment in Upper Peninsula Telephone Company (25,235) 0
Investment in Personal Communications
Services Partnerships 3,925 (3,326)
Other (102) (312)
NET CASH USED IN INVESTING ACTIVITIES (26,884) (18,104)
FINANCING ACTIVITIES
Repayments of debt, net (2,226) 13,087
Treasury stock transactions 657 723
Minority interest transactions (491) 697
NET CASH FROM (USED IN)FINANCING ACTIVITIES (2,060) 14,507
Net increase (decrease) in cash and cash equivalents (9,393) 5,105
Cash and cash equivalents at beginning of period 33,946 15,921
CASH AND CASH EQUIVALENTS AT END OF PERIOD 24,553 21,026
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A. Subsidiaries of the Registrant
<TABLE>
<CAPTION>
Owned by
Subsidiary Lynch
<S> <C>
Brighton Communications Corporation 100.0%
Lynch Telephone Corporation IV 100.0%
Bretton Woods Telephone Company, Inc. 100.0%
World Surfer, Inc. 100.0%
Lynch Kansas Telephone Corporation 100.0%
Lynch Telephone Corporation VI 98.0%
J.B.N. Telephone Company, Inc. 98.0%
J.B.N. Finance Corporation 98.0%
Giant Communications, Inc. 100.0%
Lynch Telephone Corporation VII 100.0%
USTC Kansas, Inc. 100.0%
Haviland Telephone Company, Inc. 100.0%
Haviland Finance Corporation 100.0%
DFT Communications Corporation 100.0%
Dunkirk & Fredonia Telephone Company 100.0%
Cassadaga Telephone Company 100.0%
Macom, Inc. 100.0%
Comantel, Inc. 100.0%
D&F Cellular Telephone, Inc. 100.0%
Erie Shore Communications, Inc. 100.0%
DFT Long Distance Corporation 100.0%
LMT Holding Corporation 100.0%
Lynch Michigan Telephone Holding Corporation 100.0%
Upper Peninsula Telephone Company 100.0%
Alpha Enterprises Limited 100.0%
Upper Peninsula Cellular North, Inc. 100.0%
Upper Peninsula Cellular South, Inc. 100.0%
Global Television, Inc. 100.0%
Inter-Community Acquisition Corporation 83.0%
Home Transport Services, Inc. 100.0%
Lynch Capital Corporation 100.0%
Lynch Entertainment Corporation 100.0%
Lynch Entertainment Corporation II 100.0%
Lynch International Exports, Inc. 100.0%
Lynch Manufacturing Corporation 100.0%
Lynch Display Technologies, Inc. 100.0%
Lynch Machinery, Inc. 90.0%
M-tron Industries, Inc. 94.0%
M-tron Industries, Ltd. 94.0%
Spinnaker Industries, Inc 73.4%
Entoleter, Inc. 73.4%
Brown-Bridge Industries, Inc. 73.4%
Central Products Company 73.4%
Lynch Multimedia Corporation 100.0%
CLR Video, L.L.C. 60.0%
The Morgan Group, Inc. 66.24%(V)/50.95%(O)
Morgan Drive Away, Inc. 66.24%(V)/50.95%(O)
Transport Services Unlimited, Inc. 66.24%(V)/50.95%(O)
Interstate Indemnity Company 66.24%(V)/50.95%(O)
Morgan Finance, Inc. 66.24%(V)/50.95%(O)
TDI, Inc. 66.24%(V)/50.95%(O)
Home Transport Corporation 66.24%(V)/50.95%(O)
MDA Corporation 66.24%(V)/50.95%(0)
Lynch PCS Communications Corporation 100.0%
Lynch PCS Corporation A 100.0%
Lynch PCS Corporation F 100.0%
Lynch PCS Corporation G 100.0%
Lynch Interactive Corporation 100.0%
Lynch Telecommunications Corporation 100.0%
Lynch Telephone Corporation 80.1%
Western New Mexico Telephone Co., Inc. 80.1%
WNM Communications Corporation 80.1%
Wescel Cellular, Inc. 80.1%
Wescel Cellular of New Mexico
Limited Partnership 40.9%
Wescel Cellular, Inc. II 80.1%
Northwest New Mexico Cellular, Inc. 40.1%
Northwest New Mexico Cellular of
New Mexico Limited Partnership 20.5%
Enchantment Cable Corporation 80.1%
Lynch Telephone Corporation II 83.0%
Inter-community Telephone Company 83.0%
Inter-community Telephone Company II 83.0%
Lynch Telephone Corporation III 81.0%
Cuba City Telephone Exchange Company 81.0%
Belmont Telephone Company 81.0%
</TABLE>
Notes:
(V)=Percentage voting control; (O)=Percentage of equity ownership
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 the management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the three and
six month periods ended June 30, 1997 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1997. 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, 1996.
C. Acquisitions
On March 18, 1997, Lynch Michigan Telephone Holding Company, a wholly-owned
subsidiary of the Registrant, acquired approximately 60% of the outstanding
shares of Upper Peninsula Telephone Company for $15.2 million. The Registrant
completed the acquisition of the remaining 40% on May 23, 1997. The total cost
of the acquisition was $26.1 million. As a result of this transaction, the
Registrant recorded approximately $8.1 million in goodwill which is being
amortized over 25 years.
On December 30, 1996, The Morgan Group, Inc., an approximately 51% owned
subsidiary of the Registrant, 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 25, 1996, DFT Communications Corporation, a wholly-owned subsidiary
of the Registrant, 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 Registrant recorded $13.8 million in goodwill which is
being amortized over 25 years.
All of these acquisitions were accounted for as purchases, and, accordingly,
the assets and liabilities were recorded at their estimated fair market value.
The operating results of the acquired companies are included in the
Consolidated Statement of Income from their respective acquisition dates. The
following unaudited proforma information shows the results of the Registrant's
operations as though the purchase of Upper Peninsula Telephone Company, Transit
Homes and Dunkirk & Fredonia were made at the beginning of 1996.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1997 1996 1997 1996
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Sales and Revenues $121,426 $126,847 $232,461 $247,217
Operating Profit 8,116 6,475 13,262 18,436
Income from Continuing Operations
Before Income Taxes and
Minority Interest 3,049 6,024 2,491 13,353
Net Income 1,250 2,389 834 6,727
Net Income Per Share $ 0.88 $ 1.70 $ 0.59 $4.80
</TABLE>
The proforma results for the six months ending June 30, 1996, reflect the sale
of Dunkirk & Fredonia's cellular telephone interests which resulted in a pre-
tax gain of $5.1 million, or $3.65 per share, included in operating profit.
The after-tax gain on the sale of the cellular interests was $3.4 million, or
$2.43 per share.
D. Discontinued Operations
During the second quarter of 1996, 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 for the six
months ended June 30, 1996. The assets sold primarily consisted of inventory,
fixed assets and intangibles. Accordingly, during the three and six months
ended June 30, 1996, results of Tri-Can are presented as "discontinued
operations."
E. Inventories
Inventories are stated at the lower of cost or market value. At June 30, 1997,
inventories were valued by three methods: last-in, first-out (LIFO) - 60%,
specific identification - 36%, and first-in, first-out (FIFO) - 4%. At
December 31, 1996, the respective percentages were 53%, 42%, and 5%.
<TABLE>
<CAPTION>
In Thousands
6-30-97 12-31-96
<S> <C> <C>
Raw material and supplies $10,758 $10,987
Work in process 5,482 3,950
Finished goods 22,186 21,922
Total Inventories $38,426 $36,859
</TABLE>
F. Indebtedness
On a consolidated basis, at June 30, 1997, the Registrant maintains short-term
and long-term lines of credit facilities totaling $91.4 million, of which $53.8
million was available. The Registrant (Parent Company) maintains an $18.0
million short-term line of credit facility, of which $6.0 million was available
at June 30, 1997. This facility decreases by $1.0 million per month starting
on November 30, 1997 and will expire on February 16, 1998. Spinnaker
Industries, Inc. maintains lines of credit at its subsidiaries which total
$40.0 million, of which $39.2 million was available at June 30, 1997. The
Morgan Group maintains lines of credit totaling $10.4 million, $3.2 million was
available at June 30, 1997. 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, 1997, $41.0 million of these total
facilities expire within one year.
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
million 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 $40.0 million asset-
backed senior-secured revolving credit facility.
<TABLE>
<CAPTION>
Long term debt consists of: 6-30-97 12-31-96
<S> <C> <C>
Spinnaker Industries, Inc. 10.75% Senior
Secured Note 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) 47,231 34,734
Bank credit facilities utilized by certain
telephone and telephone holding companies
through 2009, $37.0 million at a fixed
interest rate averaging 8.9% and $13.8 million
at variable interest rates averaging 8.7% 50,829 41,513
Unsecured notes issued in connection with
telephone company acquisitions at fixed
interest averaging 9% 28,045 28,044
Gabelli Funds, Inc. and affiliates loans
at fixed rates of 10% due on August 12, 1997 1,800 11,800
Other 10,418 12,257
253,323 243,348
Current Maturities (12,886) (23,769)
$240,437 $219,579
</TABLE>
H. Gain on Sale of Subsidiary Stock
As a result of the conversion of the $6.0 million Convertible Subordinated Alco
Note of Spinnaker into their 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.
I. 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 second quarter of 1997 increased by $7.9 million, or 7%, from
the second quarter of 1996. Within the operating segments, multimedia, whose
revenues increased by 82%, contributed $5.5 million to the increase and
services, whose revenues increased by 7%, contributed $2.5 million to the
overall increase. Revenues of the manufacturing segment were essentially the
same as the previous year. The acquisitions of Dunkirk & Fredonia Telephone
Company ($2.5 million contribution), which occurred on November 26, 1996, and
Upper Peninsula Telephone Company ($2.2 million contribution), which a majority
interest was obtained on March 18, 1997, were the primary contributors to the
increase in multimedia's operating revenues. Revenues of $4.3 million as a
result of the acquisition of Transit Homes of America, Inc., which occurred on
December 30, 1996, offset by lower "Truckaway" revenues, was the primary
contributor to the increased revenues at The Morgan Group, Inc. Within the
manufacturing group, revenues for Spinnaker were the same for the second
quarter of 1996. At Central Products Company, competitive pricing pressure
offset higher unit demand and capacity limitations and resulted in lower
revenues. Bolstered by additional orders for postage stamps, Brown-Bridge
revenues increased by $1.6 million. Lack of orders for extra-large glass
presses resulted in a $1.3 million period to period short-fall in revenues at
Lynch Machinery, Inc. and improved demand for electronic components,
predominantly by telecommunications capital equipment suppliers, resulted in
higher revenues of $1.2 million at M-tron.
For the six months ended June 30, 1997, revenues increased by $7.2 million, or
3% from the six months ended June 30, 1996. Multimedia revenues increased by
$8.8 million reflecting the acquisitions of Dunkirk & Fredonia and Upper
Peninsula of $5.0 million and $2.2 million, respectively. Morgan's revenues
increased by $5.6 million reflecting revenues of Transit Homes of America of
$9.7 million, offset by lower driver outsourcing Truckaway revenues.
Manufacturing revenues decreased by $7.2 million reflecting (1) pricing
pressure at Central Products, $3.3 million decrease, and (2) order short-fall
at Lynch Machinery, $3.1 lower.
Operating Profit
Operating profit for the second quarter of 1997 increased by $2.7 million from
the second quarter of 1996. Operating profit in the multimedia and services
segments increased by $1.4 million and $0.6 million, respectively, while
manufacturing operating profits grew by $0.3 million. Corporate expenses fell
by $0.4 million. In the multimedia segment, higher revenues resulted in
increased EBITDA (earnings before interest, taxes, depreciation and
amortization) of $2.5 million, offset by increased depreciation and
amortization expense of $1.1 million, both primarily associated with the
acquisitions of Dunkirk & Fredonia Telephone Company and Upper Peninsula
Telephone Company. Increased revenues and absence of the unprofitable
Truckaway operation, increased operating profit at Morgan by $0.6 million or
90%. The increase in the operating profit at the manufacturing group related
to improved product mix at Brown-Bridge, offset by lower operating profit at
Lynch Machinery of $0.4 million.
For the six months ended June 30, 1997, operating profit increased by $1.0
million, or 9%. Multimedia operating profit increased by $1.5 million
reflecting the acquisition of Dunkirk & Fredonia and Upper Peninsula of $0.5
million and $0.9 million, respectively. Morgan's operating profit increased by
$1.1 million reflecting higher revenues and improved product mix.
Manufacturing operating profit fell by $1.9 million. Spinnaker's operating
profit fell by $0.5 million as improved profit at Brown-Bridge did not offset
lower results at Central Products and higher corporate costs. Lynch
Machinery's operating profit fell by $1.0 million reflecting lack of orders.
Other Income (Expense), Net
Investment income in the second quarter of 1997 was $0.4 million which was a
reduction of $0.3 million from the second quarter of 1996. During 1996, the
Registrant recognized $0.3 million of income associated with the increase in
market value of its investment in Tremont Advisers, Inc. (NASDAQ:TMAVA). This
variance also applies to the six months shortfall of $0.3 million.
Interest expense increased by $1.6 million to $5.8 million in the second
quarter of 1997 from $4.2 in the first quarter of 1996. The increase was a
result of an increase in interest payments and amortization of deferred
financing costs of $1.0 million at Spinnaker Industries, Inc., as a result of
the issuance of $115 million of senior secured notes on October 23, 1996, and
interest expenses of $0.5 million each associated with the acquisition of
Dunkirk & Fredonia Telephone Company and Upper Peninsula Telephone Company.
These amounts were offset by $0.6 million of capitalized interest associated
with the development of the personal communications services ("PCS") licenses.
On a year to date basis, the acquisition of Dunkirk & Fredonia contributed $1.0
million of interest expense, Upper Peninsula contributed $.05 million of
additional interest expense and Spinnaker's high yield results in $2.0 million
of incremental interest expense. This amount was offset by $1.0 million of
capitalized interest for PCS licenses.
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. 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 the second quarter of 1996.
During the second quarter of 1997, the Registrant recognized a pre-tax
gain of $260 thousand on the sale of a subsidiary, Lafayette County Satellite
TV, which provided satellite television service to Lafayette County, Wisconsin.
Tax Provision
The income tax provision (benefit) includes federal, as well as state and local
taxes. The tax provision (benefit) for the three months ended June 30, 1997
and 1996, represent effective tax rates of 40.0% and 41.0%, respectively. The
rates differ from the federal statutory rate principally due to the effect of
state income taxes and amortization of non-deductible goodwill.
Minority Interest
Minority interest was $208 thousand higher in the second quarter of 1997 versus
the second quarter of 1996, predominantly due to increased net profits at The
Morgan Group, Inc., a 50% owned subsidiary.
Income From Continuing Operations
During the second quarter of 1997, the Registrant recorded income from
continuing operations of $1.3 million, or $0.88 per share, as compared to
income from continuing operations of $3.2 million, or $2.28 per share, in the
second quarter of 1996. The gain on the sale of Lafayette County Satellite TV
in 1997, had a net profit effect of $158 thousand, or $0.11 per share, and the
gain on the conversion of the Alco note in the second quarter of 1996, had a
net profit effect of $2.4 million, or $1.70 per share in 1996. Accordingly,
income generated from our continuing operations, absent the sale of subsidiary
interests, was $1.1 million, or $0.77 per share as compared to $0.8 million, or
$0.58 per share in the second quarter of 1996, a 34% increase.
Discontinued Operations
The Registrant had decided to discontinue the operations at Tri-Can
International, Ltd. in the second quarter of 1996 (see Note D). Accordingly,
its operating results in the three and six months ended June 30, 1996 are
treated as discontinued operations.
Net Income
Net income for the three months ended June 30, 1997 was $1.3 million, or $0.88
per share, as compared to a net income of $2.5 million, or $1.77 per share in
the previous year's quarter. Net income for the six months ended June 30, 1997
was $0.7 million, or $0.52 per share, as compared to $3.7 million, or $2.64 per
share, for the comparable period in 1996.
Backlog/New Orders
Total backlog of manufactured products at June 30, 1997 was $25.6 million,
which represents an increase of $4.7 million from the backlog of $20.9 million
at December 31, 1996. An $8.1 million extra-large glass press order at Lynch
Machinery helped increase their backlog by $4.0 million.
Liquidity/Capital Resources
At June 30, 1997, the Registrant has $26.2 million in cash and short-term
investments, $0.2 million of which was at the Parent Company, which was $9.9
million less than the amount reported at December 31, 1996. Working capital at
June 30, 1997, was $34.8 million compared to $41.6 million at December 31,
1996. The decrease in cash and working capital were primarily the result of
funding the acquisition of Upper Peninsula and investments in PCS partnerships
for interest and down payments for licenses awarded. Total debt was $270.6
million at June 30, 1997 compared to $260.8 million at December 31, 1996. The
increase was due primarily to debt incurred to fund the Registrant's
acquisition of Upper Peninsula Telephone Company. As reported in the
Registrant's Consolidated Statement of Cash Flow, during the six months ended
June 30, 1997, operating activities generated $19.6 million in cash, investing
activities used $26.9 million, and financing activities used $2.1 million.
Respective amounts for six months ended June 30, 1996, were $8.7 million, $18.1
million, and $14.5 million in cash generated from investing activities. Lower
net sales of trading securities, reduced inventory build up at Spinnaker, and
lower investment in other assets resulted in increased cash generated from
operating activities for the six months ended June 30, 1997 versus the six
months ending June 30, 1996. With regard to investment activities, the
acquisition of Upper Peninsula Telephone Company, offset by repayment of a note
by Coronet Communications Corporation, and return of bidding deposits from the
FCC with respect to activities by Aer Force Communications B, L.P., resulted in
an $8.8 million increase in cash used in investing activities as compared to
the prior year period. The $2.1 million used for financing activities resulted
when the Registrant repaid a $10 million affiliate loan with funds received
from the return of the F-Block bidding deposit, borrowed $10 million to finance
the acquisition of 60% of the shares of Upper Peninsula Telephone Company and
the payment of the first interest installment on the C-Block debt (see below).
The Registrant borrowed an additional $10 million in July to pay for the 40% of
Upper Peninsula. This compared to a net borrowings in the first half of 1996
due to capital expenditures and acquisition of telephone access lines by the
Registrant's telephone companies.
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, 1997, the
Registrant has $53.8 million of unused short-term and long-term lines of credit
facilities, $6.0 million of which applied to the Parent Company.
Subsidiaries of the Registrant hold limited partnership interests in and have
loan commitments to two partnerships which were the winning bidders in the
Federal Communications Commission's ("FCC") C-Block and F-Block Auctions for 30
megahertz and 10 megahertz, respectively, of broadband spectrum to be used for
PCS.
In the C-Block Auction, an entity, Fortunet Communications L.P. ("Fortunet"),
49% owned by the Registrant, acquired 31 licenses to provide PCS to geographic
areas of the United States with a 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 of 7% (The Registrant argues strenuously that the
interest rate should have been 6.51%, the applicable treasury rate at the time
the licenses were awarded), and with quarterly principal amortization in years
7, 8, 9, and 10. On March 31, 1997, the FCC has suspended until further notice
the quarterly payments, pending resolutions of certain matters. As of June 30,
1997, Registrant's subsidiary invested $598,000 in partnership equity and $24.4
million in loans to Fortunet and has funding commitments to provide an
additional $16.3 million in loans. Fortunet recently filed with the FCC a
letter asking for certain relief with regard to the interest and principal
payments and ownership restrictions associated with licenses won by Fortunet.
The FCC is considering whether to restructure the government installment debt
since many of the "C" Block licensees are experiencing difficulty in obtaining
financing needed via the public and private markets to fund the Government loan
as well as the capital build-out and operating loss and working capital
requirements. Bankruptcy of Pocket Communications, a "C" Block licensee,
further clouds the near term outlook for financing and development of the PCS
licenses. Lynch does not know what action, if any, the FCC will take but
expects the FCC to make a decision by year end. The future realizability of
Registrant's investment in these licenses will be based on the decisions of
the FCC, and as a result of those decisions, Fortunet's ability to obtain
vendor and other third party financing as well as entering into operating
agreements for our licenses.
In the F-Block Auction, Aer Force Communications B, L.P. ("Aer Force"), 49.9%
owned by Registrant, acquired five licenses to provide personal communications
services in geographic areas of the United States with a total population of 20
million. The cost of these licenses was $19.0 million. $15.2 million of the
cost of the licenses will be financed with a loan from the United States
Government. The interest rate on the loan will be the long-term Government
rate at the date of issuance and with quarterly principal amortization in year
3 to 10. On May 12, 1997, the Registrant loaned the entity $1.0 million to
make its final down payment on four of the five licenses (which were awarded)
and the interest rate on the United States Government loan of $8.1 million was
set at 6.25%. As of June 30, 1997, Registrant's subsidiary has invested $99
thousand in partnership equity and provided the entity with a loan of $2.5
million funded by a short-term secured borrowing by the Registrant and has a
funding commitment of $8.9 million to the entity. On July 14, 1997, the
Registrant loaned the entity $0.9 million to make the final down payment on the
fifth license which was awarded at that time. The Registrant has borrowed the
$3.5 million on a short-term basis to fund its F-Block loan commitment. In
addition, the Registrant has under consideration a proposed dividend to its
shareholders of its 49.9% ownership in Aer Force.
The Registrant's subsidiaries are currently seeking alternatives to minimize or
raise funds for their funding commitments to the entities. There are many
risks associated with PCS. In addition, funding aspects of acquisition of
licenses and the subsequent mandatory build out requirements plus the
amortization of the license, could significantly and materially impact the
Registrant's reported net income over the next several years. Of note, under
the current structure, the ramifications of this should not impact reported
revenues and EBITDA in the future. For further information on PCS, including
various risks, see Item 1 -I(c) of Form 10-K for the year ended December 31,
1996.
In December, 1996, the Registrants' Board of Directors announced that it is
examining the possibility of splitting, through a "Spin-off," of either its
communications operations or its manufacturing operations. A spin-off could
improve management focus, facilitate and enhance financings and set the stage
for future growth, including acquisitions. A split could also help surface the
underlying values of the company as the different business segments appeal to
differing "value" and "growth" cultures in the investment community. There are
a number of matters to be examined in connection with a possible spin-off,
including tax consequences, and there is no assurance that such a spin-off will
be effected.
In order to fund future growth of the Registrant's manufacturing subsidiaries,
each of these subsidiaries, Spinnaker Industries, Inc., Lynch Display
Technologies, Inc. and M-tron Industries, Inc. is in the process of
undertaking refinancing/strategic initiative program, that is, to either raise
financing for future acquisitions or form a joint venture strategic
partnership. There is no assurance that any or all of these companies can
accomplish these programs.
In February 1997, the Financial Accounting Standards Board issued, Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," which
changes the methodology of calculating earnings per share. SFAS No.128
requires a disclosure of diluted earnings per share regardless of its
difference from basic earnings per share. The Registrant plans to adopt SFAS
No. 128 in December 1997. Early adoption is not permitted. The Registrant
does not expect the adoption of SFAS No. 128 to have a material effect on the
financial statements.
Included in this Management Discussion and Analysis of Financial Condition and
Results of Operations are certain forward looking financial and other
information, including without limitation matters relating to PCS, a possible
spin-off and a refinancing/strategic initiative program. It should be
recognized that such information are projections, 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 what actions the FCC may take with respect to PCS.
As a result, such information is subject to uncertainties, risks and
inaccuracies.
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 May
8, 1997, the following persons were elected as Directors with the
following votes;
<TABLE>
<CAPTION>
Name Votes For Votes Withheld
<S> <C> <C>
Morris Berkowitz 1,281,178 1,485
E. Val Cerutti 1,281,178 1,485
Paul J. Evanston 1,281,178 1,485
John C. Ferrara 1,281,178 1,485
Mario J. Gabelli 1,281,178 1,485
Salvatore Muoio 1,281,178 1,485
Ralph R. Papitto 1,281,178 1,485
Paul P. Woolard 1,281,178 1,485
</TABLE>
(b) The following shares were voted as indicted on Item 2 of the
Registrant's Proxy Statement, dated April 16, 1997: The Principal
Executive Bonus Plan.
For: 872,462 Against: 19,649 Abstain: 39,863
Broker non-votes totaled 350,689.
Item 5. Other Information
Reference is made to Item 2. Management's Discussions and Analysis
of Financial Condition and Results of Operations -
Liquidity/Capital Resources for information on personal
communications services, particularly Fortunet Communications, L.P.
See also Item 1-I(c) Personal Communications Services ("PCS") in
Registrant's Form 10-K for the year ended December 31, 1996.
On May 23, 1997, Registrant acquired the remaining 40% of the stock
of Upper Peninsula Telephone Company for $10 million. Registrant
had acquired approximately 60% of the stock of Upper Peninsula
Telephone Company on March 18, 1996 for $15 million. The
acquisition costs set forth above do not include debt of Upper
Peninsula Telephone Company assumed and transaction costs. See
Item 6(b).
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
*10(o) - Directors Stock Plan as Amended
27 - Financial Data Schedule
(b) Reports on Form 8-K
On April 1, 1997, Registrant filed a report on Form 8-K
(dated March 18, 1997) re the acquisition of Upper Peninsula
Telephone Company, and on May 29, 1997, Registrant filed a
Form 8-K/A containing financial statements re the Upper
Peninsula Telephone Company acquisition.
SIGNATURES
Pursuant to the requirements 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
(Registrant)
By:s/Robert E. Dolan
Robert E. Dolan
Chief Financial Officer
August 14, 1997
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). 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 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.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Condensed
Consolidated Statements of Operations and Condensed Consolidated0Balance 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-31-1997
<PERIOD-END> JUN-30-1997
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<SECURITIES> 1,682
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<ALLOWANCES> 1,650
<INVENTORY> 38,426
<CURRENT-ASSETS> 132,502
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0
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<COMMON> 5,139
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<TOTAL-LIABILITY-AND-EQUITY> 416,708
<SALES> 230,205
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<CGS> 196,850
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<OTHER-EXPENSES> 0
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