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, 1998
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.)
401 Theodore Fremd Avenue, Rye, New York 10580
- ---------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(914) 921-7601
--------------
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 July 31, 1998
----- ----------------------------
Common Stock, no par value 1,418,248
<PAGE>
INDEX
LYNCH CORPORATION AND SUBSIDIARIES
----------------------------------
PART I. FINANCIAL INFORMATION
- ------- ---------------------
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet:
- June 30, 1998
- December 31, 1997 (Audited)
Condensed Consolidated Statements of Operations:
- Three and six months ended June 30, 1998 and 1997
Condensed Consolidated Statements of Cash Flows:
- Six months ended June 30, 1998 and 1997
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>
Part 1- FINANCIAL INFORMATION
Item 1- Financial Statements
LYNCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(In Thousands)
<TABLE>
<CAPTION>
June 30 December 31
1998 1997
(Unaudited) (A)
----------------------------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and Cash Equivalents ............................. $ 21,549 $ 33,557
Marketable Securities and short-term Investments ...... 1,135 985
Receivables, Less Allowances of $1496 and $1448 ....... 59,512 54,480
Inventories ........................................... 48,334 35,685
Deferred Income Tax Benefits .......................... 17,993 17,993
Other Current Assets .................................. 11,278 10,059
--------- ---------
Total Current Assets ................................. 159,801 152,759
PROPERTY, PLANT AND EQUIPMENT:
Land .................................................. 2,742 1,742
Buildings and Improvements ............................ 27,490 25,272
Machinery and Equipment ............................... 216,371 190,579
--------- ---------
246,603 217,593
Accumulated Depreciation .............................. (69,240) (60,064)
--------- ---------
Net Property, Plant and Equipment ..................... 177,363 157,529
INVESTMENTS IN AND ADVANCES TO PCS ENTITIES .............. 26,594 25,448
EXCESS OF COSTS OVER FAIR VALUE OF NET ASSETS ACQUIRED ... 91,860 73,257
OTHER ASSETS ............................................. 17,320 14,645
--------- ---------
Total Assets ......................................... $ 472,938 $ 423,638
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes Payable to Banks ................................ $ 62,052 $ 29,021
Trade Accounts Payable ................................ 32,654 21,381
Accrued Liabilities ................................... 33,872 37,104
Current Maturities of Long - Term Debt ................ 10,867 9,302
--------- ---------
Total Current Liabilities ............................ 139,445 96,808
LONG-TERM DEBT ........................................... 244,272 242,776
DEFERRED INCOME TAXES .................................... 34,070 33,764
PENSION LIABILITIES AND OTHER POST-RETIREMENT BENEFITS ... 3,007 0
MINORITY INTERESTS ....................................... 14,300 13,839
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 .......................... 8,710 8,644
RETAINED EARNINGS ..................................... 24,302 23,414
ACCUMULATED OTHER COMPREHENSIVE INCOME ................ 423 0
TREASURY STOCK OF 52,943 AND 54,143 SHARES, AT COST ... (730) (746)
--------- ---------
Total Shareholders' Equity ........................... 37,844 36,451
--------- ---------
Total Liabilities and Shareholders' Equity ........... $ 472,938 $ 423,638
========= =========
<FN>
(A) The Balance Sheet at December 31,1997 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.
</FN>
</TABLE>
<PAGE>
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
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
SALES AND REVENUES
<S> <C> <C> <C> <C>
Multimedia ................................ $ 13,392 $ 12,095 $ 26,324 $ 22,162
Services .................................. 41,523 39,211 75,494 72,844
Manufacturing ............................. 78,101 70,120 146,415 135,199
-------- -------- -------- --------
133,016 121,426 248,233 230,205
-------- -------- -------- --------
Costs and Expenses:
Multimedia ................................ 9,231 8,985 18,452 16,792
Services .................................. 37,411 35,884 69,361 66,853
Manufacturing ............................. 67,928 57,763 126,619 113,205
Selling and Administrative ................ 10,246 10,678 21,214 21,003
-------- -------- -------- --------
OPERATING PROFIT .............................. 8,200 8,116 12,587 12,352
Other income (Expense):
Investment Income ......................... 1,098 424 1,767 857
Interest Expense .......................... (7,186) (5,808) (13,534) (11,277)
Share of Operations of Affiliated Companies 52 57 125 71
Gain (Loss) on Sale of Subsidiary Stock ... 13 260 (45) 260
-------- -------- -------- --------
(6,023) (5,067) (11,687) (10,089)
-------- -------- -------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES AND MINORITY INTERESTS .......... 2,177 3,049 900 2,263
Provision for Income Taxes .................... (914) (1,217) (378) (902)
Minority Interests ............................ 61 (582) 366 (623)
-------- -------- -------- --------
NET INCOME .................................... $ 1,324 $ 1,250 $ 888 $ 738
======== ======== ======== ========
Weighted Average Shares Outstanding ........ 1,418,000 1,417,000 1,418,000 1,413,000
BASIC EARNINGS PER SHARE:
NET INCOME .................................. $ 0.93 $ 0.88 $ 0.63 $ 0.52
======== ======== ======== ========
DILUTED EARNINGS PER SHARE:
NET INCOME .................................. $ 0.93 $ 0.88 $ 0.63 $ 0.52
======== ======== ======== ========
</TABLE>
<PAGE>
LYNCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30
-------
1998 1997
---- ----
OPERATING ACTIVITIES
<S> <C> <C>
Net Income ................................................ $ 888 $ 738
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization .......................... 12,377 10,375
Net effect of purchases and sales of trading securities (150) 474
Share of operations of affiliated companies ............ (125) (71)
Minority interests ..................................... (366) 623
Loss on sale of stock by subsidiaries .................. 45 0
Changes in operating assets and liabilities:
Receivables .......................................... (433) 1,895
Inventories .......................................... (3,379) (1,567)
Accounts payable and accrued liabilities ............. 9,471 8,510
Other ................................................ (4,566) (1,426)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES ................. 13,762 19,551
-------- --------
INVESTING ACTIVITIES
Capital Expenditures ...................................... (9,965) (8,467)
Investment in Coronet Communications Company .............. 0 2,995
Investment in Upper Peninsula Telephone Company ........... 0 (25,235)
Investment in Spinnaker Coating - Maine ................... (44,770) 0
Investment in Personal Communications Services Partnerships 0 3,925
Other ..................................................... (22) (102)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES ..................... (54,757) (26,884)
-------- --------
FINANCING ACTIVITIES
Issuance (Repayments) of debt, net ........................ 29,092 (2,226)
Treasury stock transactions ............................... 90 657
Minority interest transactions ............................ (195) (491)
-------- --------
NET CASH FROM (USED IN) FINANCING ACTIVITIES .............. 28,987 (2,060)
-------- --------
Net decrease in cash and cash equivalents ................ (12,008) (9,393)
Cash and cash equivalents at beginning of period .......... 33,557 33,946
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................ $ 21,549 $ 24,553
======== ========
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
<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 ............................. 100.0%
World Surfer, Inc. .......................................... 100.0%
Lynch Kansas Telephone Corporation ............................ 100.0%
Lynch Telephone Corporation VI ................................ 98.0%
JBN Telephone Company, Inc. ................................. 100.0%
JBN 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%
Comtel, Inc. .............................................. 100.0%
D&F Cellular Telephone, Inc. ............................ 100.0%
DFT Long Distance Corporation ........................... 100.0%
DFT Local Service Corporation ........................... 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 ......................... 100.0%
Home Transport Service, 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%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Owned By
Subsidiary Lynch
- ---------- -----
<S> <C>
Lynch Manufacturing Corporation ............................... 100.0%
Lynch Display Technologies, Inc. .............................. 100.0%
Lynch Systems, Inc. ....................................... 100.0%
M-tron Industries, Inc. ...................................... 91.0%
M-tron Industries, Ltd. .................................... 91.0%
Spinnaker Industries, Inc. ................................... 63.0%
Entoleter, Inc. ........................................... 63.0%
Spinnaker Coating, Inc. ................................... 63.0%
Spinnaker Coating-Maine, Inc. ........................... 63.0%
Central Products Company .................................. 63.0%
Lynch Multimedia Corporation .................................. 100.0%
CLR Video, L.L.C ............................................ 60.0%
The Morgan Group, Inc. ........................................ 66.24%(V)/51.47%(O)
Morgan Drive Away, Inc. ..................................... 66.24%(V)/51.47%(O)
Transport Services Unlimited, Inc. ........................ 66.24%(V)/51.47%(O)
Interstate Indemnity Company ................................ 66.24%(V)/51.47%(O)
Morgan Finance, Inc. ........................................ 66.24%(V)/51.47%(O)
TDI, Inc. ................................................... 66.24%(V)/51.47%(O)
Home Transport Corporation ................................ 66.24%(V)/51.47%(O)
MDA Corporation ........................................... 66.24%(V)/51.47%(O)
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 ................................. 83.1%
Western New Mexico Telephone Company, Inc.................. 83.1%
WNM Communications Corporation ............................ 83.1%
Wescel Cellular, Inc. ..................................... 83.1%
Wescel Cellular of New Mexico, L.P....................... 42.4%
Wescel Cellular, Inc. II .................................. 83.1%
Northwest New Mexico Cellular, Inc....................... 40.6%
Northwest New Mexico Cellular of New Mexico, L.P........ 20.7%
Enchantment Cable Corporation.......................... 83.1%
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%
Notes: (V)=Percentage voting control; (O)=Percentage of equity ownership
</TABLE>
<PAGE>
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, 1998 are not necessarily indicative of the results that
may be expected for the year ended December 31, 1998. 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,
1997.
C. Acquisitions
- -- ------------
On March 17, 1998, Spinnaker Coating-Maine, Inc. acquired the pressure sensitive
adhesive-backed label stock business of S.D. Warren. The purchase price was
approximately $52.0 million, plus the assumption of certain liabilities and was
funded by issuing the seller a convertible subordinated note of $7.0 million
with the remainder funded by Spinnaker's revolving credit facility. As a result
of this transaction, the Registrant recorded approximately $19.6 million in
goodwill which is being amortized over 30 years.
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 $26.5 million. As a result of this transaction, the
Registrant recorded approximately $7.4 million in goodwill, which is being
amortized over 25 years.
All of the above acquisitions were accounted for as purchases, and accordingly,
the assets acquired and liabilities assumed were recorded at their estimated
fair market values.
The operating results of the acquired companies are included in the Consolidated
Statement of Operations from their respective acquisition dates. The following
unaudited proforma information shows the results of the Registrant's operations
as though the acquisition of S.D. Warren's adhesive-backed label stock business
and the acquisition of Upper Peninsula Telephone Company were made at the
beginning of 1997.
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1998 1997 1998 1997
---- ---- ---- ----
(Thousands, except per share data)
<S> <C> <C> <C> <C>
Sales and Revenues ............ $133,016 $138,004 $260,347 $265,381
Operating Profit .............. 8,200 9,879 13,230 16,728
Income from Continuing
Operations Before Income Taxes
and Minority Interest ........ 2,177 3,805 584 4,273
Net Income ................... 1,324 1,801 667 2,090
Net Income Per Share .......... $ 0.93 $ 1.27 $ 0.71 $ 1.48
</TABLE>
D. Inventories
- -- -----------
Inventories are stated at the lower of cost or market value. At June 30, 1998,
inventories were valued by three methods: last-in, first-out (LIFO) - 45%,
specific identification - 52%, and first-in, first-out (FIFO) - 3%. At December
31, 1997, the respective percentages were 48%, 43%, and 9%.
<TABLE>
<CAPTION>
June 30 Dec. 31
1998 1997
---- ----
<S> <C> <C>
Raw Material and Supplies..... $12,012 $10,493
Work in Progress ............. 5,267 3,544
Finished Goods ............... 31,055 21,648
------- -------
Total Inventories ........ $48,334 $35,685
======= =======
</TABLE>
E. Indebtedness
- -- ------------
On a consolidated basis, at June 30, 1998, the Registrant maintains short-term
and long-term lines of credit facilities totaling $117.0 million, of which $34.7
million was available. The Registrant (Parent Company) maintains two short-term
lines of credit facilities totaling $22.0 million, of which $7.0 million was
available at June 30, 1998. Both facilities will expire on December 29, 1998 and
December 31, 1998, respectively. Spinnaker Industries, Inc. maintains lines of
credit at its subsidiaries which total $60.0 million, of which $8.5 million was
available at June 30, 1998. The Morgan Group maintains lines of credit totaling
$23.0 million, of which $12.1 million was available at June 30, 1998. 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, and are secured by the operating
assets of the subsidiary, and include various financial covenants. Due to
certain of these restrictive covenants and working capital requirements of the
subsidiaries, cash distributions from the subsidiaries are limited. At June 30,
1998, $56.9 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.
<PAGE>
<TABLE>
<CAPTION>
Long term debt consists of: 6-30-98 12-31-97
<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% ................. 46,190 47,109
Bank credit facilities utilized by certain
telephone and telephone holding companies
through 2009, $33.8 million at a fixed interest
rate averaging 9.1% and $18.4 million at
variable interest rates averaging 8.8% ........ 52,208 54,633
Unsecured notes issued in connection with
acquisitions at fixed interest rates
averaging 9.2% with maturities through 2006
35,054 28,049
Other ......................................... 6,687 7,287
--------- ---------
255,139 252,078
Current maturities ............................ (10,867) (9,302)
--------- ---------
Total ..................................... $ 244,272 $ 242,776
========= =========
</TABLE>
F. Earnings per share
- -- ------------------
In December 1997, the Registrant adopted Statement of Financial Accounting
Standards ("SFAS") No. 128, Earnings Per Share which changed the methodology of
calculating earnings per share. Basic earnings per common share amounts are
based on the average number of common shares outstanding during each period,
excluding the dilutive effects of options, warrants, and convertible securities.
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. All earnings per share amounts
have been presented in accordance with, and where appropriate, restated to
conform to the SFAS No. 128 requirements.
G. Comprehensive Income
- -- --------------------
Effective January 1, 1998, the Registrant adopted SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components; however, the adoption of
SFAS No. 130 had no impact on the Company's net income. SFAS No. 130 requires
unrealized gains or losses on the Registrant's available-for-sale securities,
which prior to adoption were reported separately in shareholders equity to be
included in other comprehensive income.
The components of comprehensive income, net of tax, for the six months ended
June 30, 1998 and 1997 are as follows:
<PAGE>
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net Income ......................... $ 888 $ 738
Unrealized gain on securities....... 423 --
------ ------
Comprehensive income ............... $1,311 $ 738
====== ======
</TABLE>
The components of accumulated other comprehensive income, net of related tax, at
June 30, 1998 and December 31, 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Unrealized gains on securities ........ $423 $--
---- ----
Accumulated comprehensive income....... $423 $--
==== ====
</TABLE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Sales and Revenues
- ------------------
Revenues for the second quarter of 1998 increased by $11.6 million, or 10%, from
the comparable period in the prior year. The percentage contribution to the
overall increase by the operating segment is as follows: multimedia - 11% ($1.3
million), The Morgan Group, Inc. - 20% ($2.3 million), and manufacturing - 69%
($8.0 million). Multimedia's revenues increased due to growth in access lines
and additional revenue streams, such as Internet services. The Morgan Group,
Inc. recorded increases in the Driver Outsourcing and Specialized Transport
businesses. Within the manufacturing group, Spinnaker Industries, Inc. revenues
increased $11.6 million. In March 1998, Spinnaker Industries, Inc. acquired the
adhesive-back division of S.D. Warren Company. The operation contributed
approximately $15 million to Spinnaker's revenue increase. Spinnaker's other
operations recorded slight revenue decreases due to uneven postage stamp
business and pricing pressure in the industrial tape product line. Revenues at
Lynch Systems, Inc. decreased by $2.6 million between the two quarters due to
lack of orders for extra large glass press machines. M-tron Industries, Inc.
revenues were below prior year by $1.0 million reflecting an overall decline in
industry shipments.
For the six months ended June 30, 1998, revenues increased from the prior year
period by $18.0 million, or 7.8%. The percentage contribution to the increase by
each business segment is as follow: multimedia - 23% ($4.2 million), The Morgan
Group, Inc. - 15% ($2.7 million) and manufacturing - 62% ($11.2 million). Aside
from the factors noted above, the acquisition of Upper Peninsula Telephone
Company in March 1997, accounted for $2.3 million of the revenue increase in
multimedia on a year-to-date basis. Spinnaker's acquisition of the
adhesive-backed business of S.D. Warren contributed $17.2 million to the
manufacturing revenue increases.
Operating Profit
- ----------------
Operating profit for the second quarter of 1998 increased by $0.1 million.
Operating profit in the multimedia segment increased by $1.1 million. Primary
factors contributing to the growth were: increase in access lines, increased
revenues associated with non-traditional telephone services, improved recovery
of costs under the regulatory model, and lower costs at certain operations.
Despite higher revenues, Morgan's operating profit was essentially flat between
the two quarters as a result of increased expenditures for data processing and
to support growth in Specialized Transport. Operating profit in the
manufacturing group decreased by $1.6 million and includes declines at Spinnaker
(attributable to
<PAGE>
increased depreciation and amortization relating to the S.D. Warren
acquisition), Lynch Systems and M-tron. Spinnaker's results were also impacted
by lower operating profit due to the uneven level of postage stamp business
versus the prior year and price pressure in the industrial tape market.
Corporate expenses during the second quarter of 1998 decreased by $0.6 million
from the prior year, primarily attributable to the reverse of non-cash charge
relating to stock appreciation rights ("SARs"). In the second quarter of 1998
the Registrant reversed a previously recorded SAR accrual of $0.7 million. A
$0.1 million charge was recorded in the second quarter of 1997.
Operating profit for the first six months ended June 30, 1998 increased by $0.2
million from the six months ended June 30, 1997. Operating profit of multimedia
segment increased by $2.5 million reflecting the growth in continuing operations
plus the acquisition of Upper Peninsula Telephone Company in March 1997.
Operating profit at The Morgan Group, Inc. fell by $0.8 million between the two
periods due to the factors noted above. In the manufacturing segment operating
profit fell $1.6 million. Within corporate operations, the SAR accrued for the
six months ended June 30, 1998 of $0.4 million, equaled the 1997 charge for the
1997 period.
Other Income (Expense), Net
- ---------------------------
Investment income in the second quarter of 1998 increased by $0.7 million from
the second quarter of 1997. Unrealized gains from an increase in the market
price of the Registrant's investment in Tremont Advisors, Inc. Class B Stock and
accreted interest from the Registrant's investment in East/West Communications,
Inc. Redeemable Preferred Stock were the primary causes of the increase. These
factors also caused year-to-date investment income to be greater than the
previous year by $0.9 million.
Interest expense increased by $1.4 million. The increase was primarily due to
the increased debt level resulting from the acquisition of S.D. Warren's
pressure sensitive adhesive-backed label stock business on March 17, 1998. On a
year-to-date basis, interest expense increased by $2.2 million, $1.3 million was
associated with Spinnaker's acquisition of S.D. Warren's adhesive-backed
business. Additionally, in March 1997 the Registrant acquired Upper Peninsula
Telephone Company; incrementally this acquisition added $0.3 million of interest
expense to the current year-to-date versus the prior year-to-date.
On July 31, 1998, Spinnaker Industries, Inc. completed the acquisition of the
electrical tape division of tesa tape, inc. Part of the purchase price was the
issuance of 200,000 shares, subject to certain adjustments of Spinnaker's Class
A Common Stock. As a result of this issuance, the Registrant is expect to record
a gain on sale of subsidiary stock of $2.1 million in the third quarter of 1998,
or $1.2 million ($0.87 per share) after tax.
Tax Provision
- -------------
The income tax provision includes federal, as well as state and local taxes. The
tax provision for the three and six months ended June 30, 1998 and 1997,
represents effective tax rates of (42%) and (40%), respectively. The differences
from the federal statutory rate are principally due to the effect of state
income taxes and amortization of non-deductible goodwill.
<PAGE>
Minority Interest
- -----------------
Profit (loss) associated with minority interests increased net income by $0.6
million in the second quarter of 1998 in comparison to the second quarter of
1997 and $1.0 million for the comparable six month period. These were due to
reduced profits at the Spinnaker Industries, Inc., a 63% owned subsidiary, and
The Morgan Group, Inc., a 51% owned subsidiary.
Net Income
- ----------
Net income for the three months ended June 30, 1998 was $1.3 million, or $0.93
per share, as compared to $1.2 million, or $0.88 per share in the previous
year's quarter. Net income for the six months ended June 30, 1998 was $0.9
million, or $0.63 per share, as compared to $0.7 million, or $0.52 per share.
Backlog/New Orders
- ------------------
Total backlog of manufactured products at June 30, 1998 was $15.6 million,
backlog was $30.9 million at December 31, 1997. Included in the backlog at
December 31, 1997 was a $16 million glass press order at Lynch Systems from an
international customer. The customer subsequently canceled this. The purchase
order associated with this order contains a cancellation provision pursuant to
which the customer would pay Lynch Systems $2.4 million in event the customer
cancels the order. Lynch Systems is currently negotiating with the customer for
a settlement of this cancellation provision. Aside from the cancellation at
Lynch Systems referred to above, backlog increased by $0.7 million as an
increase in backlog at Spinnaker offset lower backlogs at Lynch Systems and
M-tron.
Liquidity/Capital Resources
- ---------------------------
As of June 30, 1998, the Company had current assets of $159.8 million and
current liabilities of $139.4 million. Working capital was therefore $20.4
million as compared to $56.0 million at December 31, 1997. The decrease is
primarily due to the acquisition of S.D. Warren's pressure sensitive adhesive
backed label stock business, a majority of which was financed by the draw down
on a working capital revolver, which is classified as a current liability. Six
months capital expenditures were $10.0 million in 1998 and $8.5 million in 1997.
At June 30, 1998, total debt was $317.1 million, which was $36.0 million more
than the $281.1 million at the end of 1997, primarily due to the acquisition of
S.D. Warren. Debt at June 30, 1998 included $235.6 million of fixed interest
rate debt, at an average cash interest rate of 9.0% and $81.6 million of
variable interest rate debt at an average interest rate of 9.3%. Additionally,
at June 30, 1998 the Company had $34.7 million in unused lines of credit of
which (i) $12.1 million of which was attributable to Morgan and (ii) $4.8
million was attributable to Lynch Systems. Spinnaker has $8.5 million available
under a line of credit. Certain restrictive covenants within the debt facilities
at both Spinnaker and Morgan limit their ability to provide the parent company
with significant funding. As of June 30, 1998, the Parent Company had borrowed
$15.0 million under short-term lines of credit facilities. The lines currently
total $22.0 million. These funds were primarily used to fund the bids by
partnerships in the PCS Auctions and fund a
<PAGE>
portion of the purchase price of Upper Peninsula Telephone Company. These
short-term lines of credit expire by the end of December 1998. Management
anticipates that these lines will be renewed for one year but there is no
assurance that they will be.
Lynch Corporation maintains an active acquisition program and generally finances
each acquisition with a significant component of debt. This acquisition debt
contains restrictions on the amount of readily available funds that can be
transferred to Lynch Corporation from its subsidiaries.
In December 1996, the Company's Board of Directors announced that it is
examining the possibility of splitting, through a "spin-off," either its
communications operations or its manufacturing operations. A spin-off could
improve management focus, facilitate and enhance financings and set the stage
for future growth, including acquisitions. A spin-off could also help surface
the underlying values of the company as the different business segments appeal
to differing "value" and "growth" cultures in the investment community. There
are a number of matters to be examined in connection with a possible spin-off,
including tax consequences, and there is no assurance that such a spin-off will
be effected.
The Company has a significant need for resources to fund the operation of the
parent company, meet its current funding commitments and fund future growth.
Lynch is currently considering various alternative long and short-term financing
arrangements. One such alternative would be to sell a portion or all of certain
investments in operating entities either directly or through an exchange debt
instrument. Additional debt and/or equity financing vehicles at the parent
company and/or subsidiaries are also being considered. While management expects
to obtain adequate financing resources to enable the company to meet its
obligations, there is no assurance that such can be readily obtained or at
reasonable costs.
A subsidiary of the Company has a minority position in an entity, Fortunet
Communications, L.P. ("Fortunet"). Fortunet participated in the auction
conducted by the Federal Communications Commission for 30 megahertz of broadband
spectrum to be used for personal communications services, the so-called
"C-Block" Auction. In this auction, Fortunet acquired 31 licenses to provide
personal communications services to geographic areas of the United States with a
total population of 7.0 million. The cost of these licenses was $216.2 million,
$194.6 million of the cost of these licenses was funded via a loan from the
United States Government.
As a result of petitions filed with the FCC by certain licensees, including
Fortunet, to restructure the United States Government debt associated with the
licenses, the FCC afforded the license holders a choice of four options, one of
which was the resumption of current debt payments which had been suspended in
1997. The licensees had until June 8, 1998 to select an option. The
ramifications of choosing the other three courses of action could result in the
Company's subsidiary ultimately forfeiting either 30%, 50%, or 100% of its
current investment in these licenses. In the third quarter of 1997, a 30%
reserve of its investment was created as this represents management's estimate
at that time of the impairment of this investment given the current available
alternatives. On June 8, 1998, Fortunet elected to retain 15 megahertz of
spectrum in three licenses, Panama City, Tallahassee (state capital) and Ocala,
Florida. As a result of this decision, Fortunet forfeited 28% of its original
down payment of $21.6 million, or $6.0 million, along with all of the other
licenses and applied the remaining down payment to repayment of all remaining
Government debt which was used to acquire the retained licenses.
<PAGE>
Accordingly, Fortunet now owns three licenses in Florida comprising a total
population of 0.8 million with an acquisition cost of $15.8 million, or $20.09
per POP. There are no further accounting implications at this time.
The Company has initiated a comprehensive review of its computer systems to
identify the systems that could be affected by the "Year 2000" issue and is
developing an implementation plan to resolve the issue. The Year 2000 problem is
the result of computer programs being written using two digits (rather than
four) to define the applicable year. Any of the Company's programs or programs
utilized by vendors to the Company that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a major system failure or miscalculation. The Company presently
believes that, with modifications to existing software and converting to new
software, the Year 2000 problem will not pose significant operational problems
for the Company's computer systems as so modified and converted. However, if
such modifications and conversions are not completed timely, the Year 2000
problem may have a material impact on the operations of the Company. The Company
cannot yet estimate the cost of such modifications or conversions.
Due to the integral nature of switching equipment and billing software to their
operations, the telecommunications businesses are most effected by the Year 2000
issue. The majority of the telephone companies' switching and billing software
is expected to be Year 2000 compliant by the end of 1998, with the remaining
compliant by the end of first half 1999.
The Morgan Group, Inc. and the manufacturing businesses are in the process of
addressing the Year 2000 issue through modifications to existing software and/or
conversions to new software.
Included in this Management Discussion and Analysis of Financial Condition and
Results of Operations and Item 5 below are certain forward looking financial and
other information, including without limitation matters relating to PCS, a
possible spin-off, a refinancing/strategic initiative program and the
anticipation that short-term lines of credit would be renewed, the possible gain
resulting from the issuance of Spinnaker Common Stock in connection with the
tesa tape acquisition, and "Year 2000" matters. 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 and financial markets as they impact
the Registrant's businesses and financing needs, competition, tax consequences,
what may happen with respect to PCS, and ability of Registrant and, in certain
cases, third parties to achieve their Year 2000 compliance. As a result, such
information is subject to uncertainties, risks and inaccuracies.
Two subsidiaries of the Registrant, The Morgan Group, Inc. and Spinnaker
Industries, Inc., file reports with the Securities and Exchange Commission
pursuant to the Securities Exchange Act of 1934, as amended.
<PAGE>
PART II OTHER INFORMATION
- -------------------------
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
At the Annual Meeting of Stockholders of the Registrant held on
May 7, 1998, the following persons were elected as Directors with the
following votes:
<TABLE>
<CAPTION>
Name Votes For Votes Withheld
<S> <C> <C>
E. Val Cerutti ............ 1,296,975 3,028
Paul J. Evanson ........... 1,296,975 3,028
John C. Ferrara ........... 1,296,975 4,028
Mario J. Gabelli .......... 1,296,970 3,033
David C. Mitchell ......... 1,295,975 4,028
Salvatore Muoio ........... 1,295,975 4,028
Ralph R. Papitto .......... 1,295,975 4,028
</TABLE>
Item 5. Other Information
- ------- -----------------
Reference is made to Item 1.I.C. Personal Communication Services ("PCS") in
Registrant's Form 10-K for the year ended December 31, 1997 and Footnote 5 to
Registrant's financial statements for 1997.
As a result of the financial problems of a number of C-Block PCS licensees, the
Federal Communications Commission ("FCC") offered the holders of C-Block PCS
licenses four options with respect to their licenses. On June 8, 1998, Fortunet
Communications, L.P., in which a subsidiary of Registrant has a 49.9% limited
partnership interest, elected to surrender to the FCC all of its C-Block PCS
licenses except for 15 megahertz licenses in Tallahassee, Panama City and Ocala,
Florida (the "Retained Licenses"). In return, the FCC authorized 70% of the down
payment on the surrendered licenses ($14.0 million) plus a portion of its
installment payments ($0.2 million) to be used to pay off all of the FCC
installment debt on the Retained Licenses. The remainder of the installment
payments ($3.8 million) was returned to Fortunet in August 1998 and used to
repay a portion of Fortunet's debt obligation to Registrant's subsidiary.
Registrant had, in the third quarter of 1997, written off approximately 30% of
its subsidiary's investment in Fortunet.
On July 31, 1998, Registrant's subsidiary, Spinnaker Industries, Inc. acquired
tesa tape, inc.'s pressure sensitive electrical tape product line and its
Carbondale, IL manufacturing plant. The purchase price totaled $10.7 million,
comprising 200,000 shares of Spinnaker common stock, cash and a seller note. The
newly acquired plant produces electrical tape for insulating motors, coils and
transformers for customers in Europe, Canada and the U.S. Sales in 1997 totaled
approximately $20 million.
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) Exhibits
27 - Financial Data Schedule
(b) Reports on Form 8-K
<PAGE>
On April 1, 1998, Registrant filed a report on Form 8-K/A(1) (dated March 17,
1998) relating to the acquisition by a subsidiary of the pressure sensitive tape
business of S.D. Warren and on May 29, 1998, Registrant filed a Form 8-K/A(1)
containing financial statements relating to such 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, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Financial Statements as of June 30, 1998 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000061004
<NAME> Lynch Corporation
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 21,549
<SECURITIES> 1,135
<RECEIVABLES> 59,512
<ALLOWANCES> 1,496
<INVENTORY> 48,334
<CURRENT-ASSETS> 159,801
<PP&E> 246,603
<DEPRECIATION> 69,240
<TOTAL-ASSETS> 472,938
<CURRENT-LIABILITIES> 139,445
<BONDS> 244,272
0
0
<COMMON> 5,139
<OTHER-SE> 32,705
<TOTAL-LIABILITY-AND-EQUITY> 472,938
<SALES> 248,233
<TOTAL-REVENUES> 248,233
<CGS> 214,432
<TOTAL-COSTS> 235,646
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,534
<INCOME-PRETAX> 900
<INCOME-TAX> 378
<INCOME-CONTINUING> 888
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 888
<EPS-PRIMARY> .63
<EPS-DILUTED> .63
</TABLE>
