SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A(1)
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of Earliest Event Reported) March 17, 1998
LYNCH CORPORATION
(Exact name of registrant as specified in its charter)
INDIANA 1-106 38-1799862
(State of jurisdiction (Commission (I.R.S. Employer
of Incorporation) File Number) Identifications No.)
401 Theodore Fremd Avenue, Rye, New York 10580
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: 914/921-7601 <PAGE>
<PAGE>
This Form 8-K/A amends the Registrant's Current Report on Form 8-K filed
on April 1, 1998 with respect to Registrant's majority-owned subsidiary,
Spinnaker Industries, Inc.'s acquisition of the pressure sensitive business of
S.D. Warren Company, to provide the financial statements and pro forma financial
information required by Item 7 of Form 8-K.
Item 7. Financial Statements and Exhibits
(a) Financial Statements of Businesses Acquired
Pressure Sensitive Business Unit of S.D. Warren Company
1. Independent Auditors' Report
2. Balance Sheets as of October 1, 1997 and October 2, 1996
3. Statements of Operations for the years ended October 1, 1997
and 1996 and for the period from December 21, 1994 through
September 27, 1995
4. Statements of Changes in Business Unit Equity for the years
ended October 1, 1997 and 1996 and for the period from
December 21, 1994 through September 27, 1995
5. Statements of Cash Flows for the years ended October 1, 1997
and 1996 and for the period from December 21, 1994 through
September 27, 1995
6. Notes to Financial Statements
7. Unaudited Condensed Balance Sheets at December 31, 1997 and
1996
8. Unaudited Condensed Statements of Operations for the three
months ended December 31, 1997 and 1996
9. Unaudited Condensed Statements of Cash Flows for the three
months ended December 31, 1997 and 1996
10. Notes to Unaudited Condensed Financial Statements
(b) Pro Forma Financial Information
1. Unaudited Pro Forma Combined Condensed Balance Sheet as of
December 31, 1997
2. Notes to Pro Forma Combined Condensed Balance Sheet
3. Unaudited Pro Forma Combined Condensed Statement of
Operations for the Year Ended December 31, 1997
4. Notes to Pro Forma Combined Condensed Statements of
Operations
<PAGE>
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 hereunto duly authorized.
LYNCH CORPORATION
/S/ROBERT E. DOLAN
ROBERT E. DOLAN
Chief Financial Officer
Date: May 29, 1998
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of S.D. Warren Company and subsidiaries:
We have audited the balance sheets of the Pressure Sensitive Business Unit
(the "Business Unit") of S.D. Warren Company (the "Company") as of October 1,
1997 and October 2, 1996, and the related statements of operations, changes in
business unit equity, and cash flows for the years then ended, and for the
period from December 21, 1994 through September 27, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Business Unit as of October 1, 1997 and
October 2, 1996 and the results of its operations and its cash flows for the
years then ended, and for the period from December 21, 1994 through September
27, 1995 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared, in part, from the
separate records maintained by the Westbrook Mill of the Company, which includes
the Business Unit and other Company operations, and may not necessarily be
indicative of the conditions that would have existed or the results of
operations if the Business Unit had been operated as an unaffiliated company.
Portions of certain income and expenses represent allocations made from
Westbrook Mill items applicable to the Westbrook Mill complex as a whole and
home-office items applicable to the Company as a whole.
DELOITTE & TOUCHE LLP
January 12, 1998
Boston, Massachusetts
<PAGE>
PRESSURE SENSITIVE BUSINESS UNIT,
S.D. WARREN COMPANY
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
OCTOBER 2, OCTOBER 1,
1996 1997
----------- -----------
CURRENT ASSETS:
<S> <C> <C>
Accounts receivable......................... $ 1,991,000 $ 1,262,000
Inventories................................. 6,273,000 9,709,000
Deferred income taxes....................... 280,000 339,000
Other current assets........................ 21,000 95,000
----------- -----------
Total current assets...................... 8,565,000 11,405,000
----------- -----------
PLANT ASSETS:
Land and buildings.......................... 122,000 122,000
Machinery and equipment..................... 2,287,000 2,384,000
----------- -----------
Total plant assets.......................... 2,409,000 2,506,000
Less accumulated depreciation................. (282,000) (461,000)
----------- -----------
Plant assets, net........................... 2,127,000 2,045,000
----------- -----------
GOODWILL, Net................................. 1,834,000 1,755,000
----------- -----------
PATENT, Net................................... 1,843,000 1,722,000
----------- -----------
TOTAL......................................... $14,369,000 $16,927,000
=========== ===========
LIABILITIES AND BUSINESS UNIT EQUITY
CURRENT LIABILITIES:
Accounts payable........................... $ 1,155,000 $ 1,555,000
Accrued salaries, wages and employee
benefits................................. 429,000 705,000
Accrued workers' compensation.............. 257,000 128,000
Other current liabilities.................. 967,000 1,091,000
----------- -----------
Total current liabilities................ 2,808,000 3,479,000
DEFERRED INCOME TAXES........................ 617,000 740,000
OTHER LIABILITIES............................ 2,822,000 2,553,000
COMMITMENTS AND CONTINGENCIES................ -- --
BUSINESS UNIT EQUITY......................... 8,122,000 10,155,000
----------- -----------
TOTAL........................................ $14,369,000 $16,927,000
=========== ===========
</TABLE>
See notes to financial statements.
<PAGE>
PRESSURE SENSITIVE BUSINESS UNIT,
S.D. WARREN COMPANY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD
DECEMBER 21,
1994 THROUGH YEAR ENDED YEAR ENDED
SEPTEMBER 27, OCTOBER 2, OCTOBER 1,
1995 1996 1997
<S> <C> <C> <C>
------------ ----------- -----------
SALES........................... $48,350,000 $68,655,000 $62,080,000
----------- ----------- -----------
COST OF GOODS SOLD:
Bodystock...................... 27,348,000 36,619,000 33,801,000
Allocation of Westbrook Mill costs. 3,413,000 4,356,000 4,187,000
Other costs.................... 13,792,000 20,769,000 15,234,000
----------- ----------- -----------
Total cost of goods sold..... 44,553,000 61,744,000 53,222,000
----------- ----------- -----------
GROSS PROFIT..................... 3,797,000 6,911,000 8,858,000
----------- ----------- -----------
SELLING, GENERAL AND ADMINISTRATIVE COSTS:
Allocated selling costs........ 1,439,000 1,647,000 1,488,000
Allocation of other corporate costs. 854,000 1,512,000 1,527,000
----------- ----------- -----------
Total selling, general and
administrative costs......... 2,293,000 3,159,000 3,015,000
----------- ----------- -----------
INCOME FROM OPERATIONS.............. 1,504,000 3,752,000 5,843,000
INCOME TAX EXPENSE................ 617,000 1,538,000 2,396,000
----------- ----------- -----------
NET INCOME..................... $ 887,000 $ 2,214,000 $ 3,447,000
=========== =========== ===========
</TABLE>
See notes to financial statements.
<PAGE>
PRESSURE SENSITIVE BUSINESS UNIT,
S.D. WARREN COMPANY
STATEMENTS OF CHANGES IN BUSINESS UNIT EQUITY
<TABLE>
<S> <C>
BALANCE AT ACQUISITION, DECEMBER 20, 1994...................... $10,429,000
Net income................................................... 887,000
Capital infusion--net........................................ 962,000
-----------
BALANCE AT SEPTEMBER 27, 1995.................................. 12,278,000
Net income................................................... 2,214,000
Capital withdrawal--net...................................... (6,370,000)
-----------
BALANCE AT OCTOBER 2, 1996..................................... 8,122,000
Net income................................................... 3,447,000
Capital withdrawal--net...................................... (1,414,000)
-----------
BALANCE AT OCTOBER 1, 1997..................................... $10,155,000
</TABLE>
===========
See notes to financial statements.
<PAGE>
PRESSURE SENSITIVE BUSINESS UNIT,
S.D. WARREN COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD
DECEMBER 21,
1994 THROUGH YEAR ENDED YEAR ENDED
SEPTEMBER 27, OCTOBER 2, OCTOBER 1,
1995 1996 1997
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income.................... $ 887,000 $ 2,214,000 $ 3,447,000
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities:
Depreciation................ 119,000 163,000 179,000
Amortization of intangibles. 159,000 200,000 200,000
Deferred income taxes....... 306,000 31,000 64,000
Changes in assets and liabilities:
Accounts receivable.......... (290,000) 3,663,000 729,000
Inventories................. (1,724,000) 1,120,000 (3,436,000)
Accounts payable, accrued and
other current liabilities.. (274,000) (204,000) 671,000
Other assets and liabilities. (28,000) (464,000) (343,000)
----------- ----------- -----------
Net cash provided by (used
in) operating activities. (845,000) 6,723,000 1,511,000
CASH FLOWS FROM INVESTING ACTIVITIES--
Investments in plant assets.... (117,000) (353,000) (97,000)
CASH FLOWS FROM FINANCING ACTIVITIES--
Parent company capital infusion
(withdrawals)--net............. 962,000 (6,370,000) (1,414,000)
----------- ----------- -----------
NET CASH.......................... $ -- $ -- $ --
=========== =========== ===========
</TABLE>
See notes to financial statements.
<PAGE>
PRESSURE SENSITIVE BUSINESS UNIT,
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS
The Pressure Sensitive Business Unit (the "Business Unit") of S.D. Warren
Company (the "Company") manufactures and sells pressure sensitive paper products
in roll form. These products are generally sold to label printers that produce
products used primarily for informational labels and product identification.
Pressure sensitive products are manufactured at the Company's Westbrook, Maine,
manufacturing facility (the "Westbrook Mill") with a four element construction
consisting of a paper face stock, adhesive coating, silicone coating and release
liner. The accompanying financial statements include income and expense accounts
and assets and liabilities associated with the manufacture and sale of pressure
sensitive products, including the Company's undivided interest in pressure
sensitive trade receivables which have been sold under a securitization
arrangement to S. D. Warren Finance Co. ("SDWF"), a wholly owned subsidiary of
the Company (see Note 6).
The Company is a wholly owned subsidiary of SDW Holdings Corporation
("Holdings"). Holdings is a wholly owned subsidiary of Sappi Limited ("Sappi").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION--The accompanying financial statements of the Business
Unit have been prepared on the accrual basis of accounting and reflect the
results of operations and financial position of the Business Unit, including
allocations of certain amounts from the Company as described below.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates used by management include the
allocations of certain assets, liabilities, revenues and expenses to the
Business Unit's financial statements. Significant estimates also include
realization of certain allocated assets such as trade and other accounts
receivable, inventory, goodwill and deferred tax assets, as well as estimates
of exposure and certain allocated liabilities of the Business Unit. Actual
results could differ from those estimates.
FISCAL YEAR--The Business Unit's fiscal year ends on the Wednesday closest
to the last day of September. The year ended October 2, 1996 ("fiscal year
1996") included 53 weeks. The period December 21, 1994 through September 27,
1995 (the "nine months ended September 27, 1995") included 40 weeks.
CASH MANAGEMENT--As an operating business unit of the Company, the Business
Unit participated in the Company's centralized cash management system.
Accordingly, cash received from the Business Unit's operations was administered
centrally while the Company financed operational and working capital
requirements as well as capital expenditures. The Business Unit has no external
sources of financing, such as available lines of credit, as may be necessary to
operate as a separate entity.
The statement of cash flows is prepared as though the cash received and
disbursed on behalf of the Company and by the Company, respectively, was
transacted through the Business Unit.
INVENTORIES--Inventories are valued at the lower of cost or market, using
the first-in, first-out ("FIFO") cost method. The primary source of bodystock,
the most significant raw material used in the manufacture of pressure sensitive
products, is the Westbrook Mill or other Company manufacturing facilities.
Bodystock is transferred to the Business Unit at the actual cost of production.
Inventories of maintenance parts and other supplies are recorded at purchase
cost.
PLANT ASSETS--Plant assets are recorded at cost. For financial accounting
purposes, depreciation is principally calculated on a straight-line basis over
the estimated useful lives of the assets, which range from twelve to forty- five
years. The buildings occupied by the Business Unit are a part of a complex
comprising the Westbrook Mill. The cost of buildings included in the
accompanying financial statements has been determined based upon an allocation
using the square footage occupied by the Business Unit.
Expenditures for renewals and improvements which increase the useful life
or capacity of plant assets are capitalized. Upon the retirement or sale of
assets which have not been fully depreciated, the cost of plant assets and the
related accumulated depreciation are removed from the asset account. The
Business Unit records gains and losses on the retirement or sale of plant assets
when realized.
GOODWILL--On December 20, 1994, SDW Acquisition Corporation ("SDW
Acquisition"), a direct wholly owned subsidiary of Holdings, acquired (the
"Acquisition") from Scott Paper Company ("Scott") all of the outstanding capital
stock of the Company, and certain related affiliates of Scott. Immediately
following the Acquisition, SDW Acquisition merged with and into Holdings, with
Holdings surviving. Goodwill on the accompanying balance sheets represents the
Business Unit's allocated share of goodwill resulting from the Acquisition, and
is being amortized for financial statement purposes on a straight-line basis
over 25 years. On an ongoing basis, the carrying value of goodwill is evaluated
on the basis of whether anticipated undiscounted operating cash flows generated
by the acquired business are adequate to recover the recorded asset balance over
its estimated useful life. The goodwill balance at October 2, 1996 and October
1, 1997 was $1,834,000 and $1,755,000, net of accumulated amortization of
approximately $142,000 and $221,000, respectively.
PATENT--The Business Unit has a patent directly associated with its pressure
sensitive business. The cost of this patent of $2,060,000 arose as part of the
Acquisition purchase price allocation. The patent is being amortized over its
estimated useful life of approximately seventeen years and is stated net of
accumulated amortization of approximately $217,000 and $338,000 in the
accompanying balance sheets at October 2, 1996 and October 1, 1997,
respectively.
INCOME TAXES--The Business Unit accounts for deferred income taxes in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes," which requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under this
approach, deferred income taxes are determined based on the difference between
the financial statements and income tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse. Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be realized. The Business Unit
is not a separate tax paying entity. Accordingly, its results of operations have
been included in tax returns filed by Holdings. The accompanying financial
statements include a charge in lieu of tax which approximates the tax provision
assuming the Business Unit filed separate returns. Amounts which would represent
current income taxes payable are included in Unit Equity as no amounts are
actually advanced from the Business Unit to the Company for the payment of its
current income tax expense.
WORKERS' COMPENSATION INSURANCE--The Company has a combination of
self-insured and insured workers' compensation programs. The self-insurance
claim liability of the Business Unit for workers' compensation is based on
claims reported and actuarial estimates of adverse developments and claims
incurred but not reported for employees of the Business Unit. The Company's
workers' compensation liability is discounted to reflect the passage of several
years before the claims related to a particular year are paid in full. The
liability has been determined based on an actuarial valuation as the timing of
payments associated therewith are reasonably estimable. The present value of
such claims was determined using a discount rate of 5.5% for the nine months
ended September 27, 1995, fiscal year 1996 and fiscal year 1997. The discounted
liability was $1,300,000 and $1,200,000 at October 2, 1996 and October 1, 1997,
respectively.
RESEARCH AND DEVELOPMENT EXPENDITURES--Expenditures for research and
development are charged to expense as incurred. Research and development costs
were approximately $541,000, $403,000, and $123,000 for the nine months ended
September 27, 1995, fiscal year 1996 and fiscal year 1997, respectively.
3. RELATED-PARTY TRANSACTIONS
As described elsewhere, the financial statements include allocations by the
Company for certain corporate administrative and benefit costs incurred for the
benefit of all operating divisions and certain operating costs related to the
Westbrook Mill. These costs are allocated to operating divisions on a variety
of methodologies as follows:
a) Specific identification--based on estimates of time and services
provided.
b) Relative identification--based on relevant criteria that establishes
the division's relationship to the entire pool of beneficiaries.
c) Formula driven--nonidentifiable to division but incurred for the
benefit of all.
Allocated costs included in selling, general and administrative costs were
$2,293,000, $3,159,000 and $3,015,000 for the nine months ended September 27,
1995, fiscal year 1996 and fiscal year 1997, respectively. Selling costs are
allocated based upon an individual's time dedicated to the sale of the Business
Unit's product. Other allocated corporate costs include executive, legal,
accounting, tax, auditing, cash management, purchasing, safety, human resources,
health and environmental, and employee benefits. Management believes these
allocations are reasonable under the circumstances. However, they may not
represent the cost of similar activities on a stand-alone basis.
In addition, certain costs of operating the Westbrook Mill such as
utilities, maintenance and supplies and other support services are common to the
entire Westbrook Mill complex and are allocated to cost of goods sold based upon
estimates of amounts relating to the Business Unit's operations, generally based
upon actual usage or tons of production. Utilities, maintenance and supplies
that were allocated based upon estimated usage aggregated $2,039,000, $2,412,000
and $2,315,000 for the nine months ended September 27, 1995, fiscal year 1996
and fiscal year 1997, respectively. Other support services were $1,374,000,
$1,944,000 and $1,872,000 for the nine months ended September 27, 1995, fiscal
year 1996 and fiscal year 1997, respectively. Management believes these
allocations are reasonable under the circumstances; however, they may not be
indicative of amounts that would be required to be incurred if the Business Unit
operated on a stand-alone basis.
No debt or related interest expense of the Company related to the
Acquisition or ongoing financing activities have been allocated to the Business
Unit's financial statements. Substantially all of the Business Units assets are
pledged as collateral to various debt agreements of the Company. Upon
consummation of the proposed transaction discussed in Note 4, such collateral
arrangements, as they relate to the Business Unit, will be released.
The Business Unit ships products to certain Sappi subsidiaries (Sappi
Europe, SA, Specialty Pulp Services and U.S. Paper). These subsidiaries then
sell the Business Unit's products to external customers at market prices and
remit the proceeds from such sales to the Business Unit, net of a sales
commission. Business Unit products shipped to Sappi subsidiaries and any
resulting accounts receivable were not material for the nine months ended
September 27, 1995, fiscal year 1996 and fiscal year 1997. The Company has
formalized certain of these agreements and is in the process of formalizing the
remainder.
4. PROPOSED SALE OF THE BUSINESS UNIT
On November 18, 1997, the Company entered into an Asset Purchase Agreement
(the "Agreement") to sell the Business Unit to Spinnaker Industries, Inc.
("Spinnaker"). The Agreement is anticipated to close in the first calendar
quarter of 1998, and is subject to the satisfaction of various conditions. In
connection with the Agreement, the Company and Spinnaker are required to execute
a Site Lease and a Site Separation and Service Agreement.
The Site Lease provides Spinnaker a portion of the Westbrook Mill for a term
of 99 years at a nominal rental amount of $1 per year. Under the Site Separation
and Service Agreement, the Company will provide Spinnaker, for a limited time
at predetermined costs, shipping, transportation and storage, maintenance and
support, information and administrative services. In addition, such agreement
will require the Company to supply certain raw materials, primarily bodystock,
for up to one year at predetermined amounts on a per-unit basis.
5. FORCE MAJEURE EVENT
Due to exceptionally heavy rains, the Presumpscot River flooded the
Westbrook Mill on October 21, 1996. The flooding resulted in the temporary
closure of the mill. There was no damage to Business Unit related equipment but
normal operating conditions of the Business Unit were impacted. During fiscal
year 1997 the Company received $11,800,000 related to business interruption
claims, of which $2,000,000 was allocated to the Business Unit based upon an
estimate of lost sales tons of the Business Unit. All claims were submitted and
finalized as of October 1, 1997.
6. ACCOUNTS RECEIVABLE AND MAJOR CUSTOMER INFORMATION
Accounts receivable consisted of the following:
<PAGE>
<TABLE>
<CAPTION>
OCTOBER 2, OCTOBER 1,
1996 1997
------------ ------------
<S> <C> <C>
Accounts receivable............................... $2,061,000 $1,327,000
Allowance for doubtful accounts................... (70,000) (65,000)
---------- ----------
$1,991,000 $1,262,000
========== ==========
</TABLE>
In April 1996, the Company, through a bankruptcy remote subsidiary, SDWF,
entered into a receivables sales agreement that provides the Company with a
five-year $110 million revolving accounts receivable securitization facility
(the "A/R Facility"). Under this facility and pursuant to a purchase and
contribution agreement between the Company and SDWF, the Company sells to SDWF,
on a non-recourse basis, all rights and interests in the majority of its
accounts receivable. Pursuant to the receivables purchase agreement, SDWF, in
turn, sells certain interests in the accounts receivable pool owned by SDWF
under similar terms to a third-party purchaser.
The Business Unit's accounts receivable, shown in the table above, represent
the undivided interest in the accounts receivable pool related to customers of
the Business Unit. Gross accounts receivable of the Business Unit's customers
are net of $5,383,000 and $4,705,000 at October 2, 1996 and October 1, 1997,
respectively, which represent accounts receivable of the Business Unit that were
securitized and sold under the A/R Facility.
Sales to unaffiliated customers which individually exceed 10% of total sales
amounted to approximately 50.3%, 30.0% and 34.1% for the nine months ended
September 27, 1995, fiscal year 1996 and fiscal year 1997, respectively. The
loss of any of these customers could have a material effect on the Business
Unit's business and results of operations. Approximate sales to each such
customer are indicated below:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 27, OCTOBER 2, OCTOBER 1,
CUSTOMER 1995 1996 1997
- --------------------------------- ------------- ------------- -------------
<C> <C> <C> <C>
1.............................. $10,400,000 $10,700,000 $10,500,000
2.............................. 8,700,000 10,000,000 10,700,000
3.............................. 5,200,000 -- --
</TABLE>
At October 2, 1996 and October 1, 1997, approximately 36.5% and 26.5%,
respectively, of the Business Unit's net receivables, including those
receivables which are securitized and sold, were concentrated in these
customers.
7. INVENTORIES
<TABLE>
<CAPTION>
Inventories consisted of the following: OCTOBER 2, OCTOBER 1,
1996 1997
<S> <C> <C>
------------ ------------
Raw materials..................................... $1,140,000 $ 968,000
Work in progress.................................. 2,048,000 3,272,000
Finished goods.................................... 3,085,000 5,469,000
---------- ----------
</TABLE>
$6,273,000 $9,709,000
========== ==========
8. OTHER LIABILITIES
Other current liabilities consisted of the following:
<TABLE>
<CAPTION>
OCTOBER 2, OCTOBER 1,
1996 1997
---------- ------------
<S> <C> <C>
Accrued freight................................... $201,000 $ 331,000
Accrued utilities ................................ 201,000 167,000
Accrued employee costs............................ 292,000 250,000
Other............................................. 273,000 343,000
-------- ---------
$967,000 $1,091,000
======== ==========
</TABLE>
Other liabilities consisted of the following:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Accrued workers' compensation................... $1,043,000 $1,071,000
Accrued pension and other postretirement benefits 1,529,000 1,482,000
Other accrued liabilities....................... 250,000 --
---------- ----------
$2,822,000 $2,553,000
========== ==========
</TABLE>
9. Income Taxes
The components of the tax provisions are as follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 27, OCTOBER 2, OCTOBER 1,
1995 1996 1997
------------- ------------ ------------
Current:
<S> <C> <C> <C>
Federal.......................... $243,000 $1,175,000 $1,819,000
State and local.................. 68,000 332,000 513,000
-------- ---------- ----------
Total current...................... 311,000 1,507,000 2,332,000
-------- ---------- ----------
Deferred:
Federal.......................... 237,000 24,000 50,000
State and local.................. 69,000 7,000 14,000
-------- ---------- ----------
Total deferred..................... 306,000 31,000 64,000
-------- ---------- ----------
$617,000 $1,538,000 $2,396,000
======== ========== ==========
</TABLE>
The components of the deferred tax assets and (liabilities) are as follows:
<TABLE>
<CAPTION>
OCTOBER 2, OCTOBER 1,
1996 1997
------------- -------------
<S> <C> <C>
Current:
Deferred tax assets:
Prepaids and other current assets......... $ 28,000 $ 26,000
Accrued and other liabilities............. 213,000 313,000
Inventory................................. 39,000 --
----------- -----------
<PAGE>
Total current deferred tax assets........... 280,000 339,000
----------- -----------
Noncurrent:
Deferred tax assets:
Pension benefits.......................... 311,000 218,000
Postretirement benefits................... 380,000 435,000
Workers' compensation..................... 257,000 279,000
Other..................................... 113,000 10,000
----------- -----------
Total noncurrent deferred tax assets........ 1,061,000 942,000
----------- -----------
Deferred tax liabilities:
Property, plant and equipment............. (211,000) (295,000)
Patents................................... (735,000) (687,000)
Goodwill.................................. (732,000) (700,000)
----------- -----------
Total noncurrent deferred tax liabilities... (1,678,000) (1,682,000)
----------- -----------
Net noncurrent deferred tax liabilities....... (617,000) (740,000)
----------- -----------
Net deferred tax liabilities.................. $ (337,000) $ (401,000)
========== ===========
</TABLE>
The differences between the U.S. statutory income tax rate and the Business
Unit's effective income tax rate are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 27, OCTOBER 2, OCTOBER 1,
1995 1996 1997
----------------- ------------- -------------
<S> <C> <C> <C>
U.S. statutory income tax rate... 34.0% 34.0% 34.0%
State income taxes,
net of federal benefit........ 5.9 5.9 5.9
Other........................... 1.1 1.1 1.1
---- ---- ----
Effective tax rate.............. 41.0% 41.0% 41.0%
===== ===== =====
</TABLE>
10. FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK
The Business Unit's financial instruments consist mainly of accounts
receivable and accounts payable. The carrying amounts of accounts receivable and
accounts payable approximate fair value due to the short-term nature of these
instruments.
At October 2, 1996 and October 1, 1997, the total carrying amounts of
accounts receivable reflect approximately $5,383,000 and $4,705,000,
respectively, of reductions related to the A/R Facility. There are no unrealized
losses on the A/R Facility at October 1, 1997.
A significant portion of the Business Unit's sales and accounts receivable
are from major customers (Note 5). None of the Business Unit's other financial
instruments represent a concentration of credit risk because the Company has
dealings with a variety of major banks and customers worldwide. None of the
Business Unit's off-balance sheet financial instruments would result in a
significant loss to the Business Unit if the other party failed to perform
according to the terms of its agreement, as any such loss would generally be
limited to the unrealized gain in any contract.
11. LEASES
The Business Unit leases certain office and warehouse space and
manufacturing equipment under operating leases. Rental expense for the nine
months ended September 27, 1995, fiscal year 1996 and fiscal year 1997 and any
future lease payments at October 1, 1997 were not material.
12. ENVIRONMENTAL, SAFETY AND OTHER MATTERS
The Business Unit is subject to a wide variety of environmental, safety and
other laws and regulations relating to matters including air emissions and
hazardous waste management. From time to time, the Business Unit may be involved
in various lawsuits and administrative proceedings relating to these matters.
The relief sought in such lawsuits and proceedings may include injunctions,
damages and penalties. At the present time, there are no such proceedings or
other legal matters which, after consulting with legal counsel, management
believes will have a material effect on the Business Unit's financial position,
results of operations or cash flows.
13. RETIREMENT BENEFITS
PENSION PLANS--The Company has four defined-benefit, trusteed pension plans
that provide retirement benefits for substantially all employees, including
employees of the Business Unit. Benefits provided are primarily based on
employees' years of service and compensation. The Company's funding policy
complies with the requirements of federal law and regulations. Plan assets
consist of equity securities, bonds and short-term investments. The current
portion of the net pension liability relating to employees of the Business Unit,
detailed below, is $61,000 and $324,000 at October 2, 1996 and October 1, 1997,
respectively.
The funded status of the pension plans relating to employees of the Business
Unit is as follows:
<TABLE>
<CAPTION>
OCTOBER 2, OCTOBER 1,
1996 1997
------------ ------------
<S> <C> <C>
Projected benefit obligation................. $4,103,000 $4,894,000
Plan assets at fair value.................... 3,723,000 4,476,000
---------- ----------
Projected benefit obligation in excess
of plan assets........................... 380,000 418,000
Unrecognized prior service costs............. -- (320,000)
Unrecognized loss............................ 259,000 616,000
---------- ----------
Net pension liability........................ $ 639,000 $ 714,000
========= ==========
</TABLE>
<PAGE>
The net pension cost attributable to the Business Unit includes the
following components:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 27, OCTOBER 2, OCTOBER 1,
1995 1996 1997
------------- ----------- -----------
<S> <C> <C> <C>
Service cost-benefits earned
during the period................ $ 119,000 $ 169,000 $ 153,000
Interest cost on projected
benefit obligation................ 194,000 283,000 318,000
Return on plan assets................ (194,000) (288,000) (335,000)
--------- --------- ---------
Net pension cost..................... $ 119,000 $ 164,000 $ 136,000
========= ========= =========
</TABLE>
The actuarial amounts incurred above relate solely to employees of the
Business Unit and do not include any amounts for employees that are part of
allocations to the Business Unit's financial statements for corporate selling,
general, and administrative costs or for allocations from the Westbrook Mill.
A separate pool of assets attributable to employees of the Business Unit
does not exist. The above funded status and return on plan assets was determined
by the Company's actuary as if the assets were split from the existing plans
based on the Business Unit's share of the total projected benefit obligation.
The projected benefit obligation at October 2, 1996 and October 1, 1997 was
determined using assumed discount rates of 8.25% and 7.75%, respectively, and
assumed long-term rates of compensation increases of 4.75% and 4.5%,
respectively. The assumed rate of return on plan assets (on an annualized basis)
was 9.0% for both fiscal years 1996 and 1997.
SAVINGS PLANS--The Company currently sponsors two 401(k) defined
contribution plans covering substantially all Business Unit employees pursuant
to which the Company is obligated to match employee contributions, up to
specified amounts. Contributions to these plans for Business Unit employees
totaled approximately $72,000, $98,000 and $108,000 for the nine months ended
September 27, 1995, fiscal year 1996 and fiscal year 1997, respectively.
14. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company sponsors a defined benefit postretirement plan that provides
health care and life insurance benefits to eligible retired employees. Employees
of the Business Unit participate in the Plan and are generally eligible for
benefits upon retirement and completion of a specified number of years of
service. The net postretirement liability detailed below is noncurrent.
<PAGE>
The funded status and obligations of the plan attributable to the Business
Unit are as follows:
<TABLE>
<CAPTION>
OCTOBER 2, OCTOBER 1,
1996 1997
---------- ------------
<S> <C> <C>
Accumulated postretirement benefit
obligation ("APBO")........................ $951,000 $1,064,000
Plan assets at fair value.................... -- --
-------- ----------
APBO in excess of plan assets................ 951,000 1,064,000
Unrecognized prior service cost.............. -- 27,000
-------- ----------
Net postretirement liability................. $951,000 $1,091,000
======== ==========
</TABLE>
Components of the net periodic postretirement benefit expense attributable
to the Business Unit are as follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 27, OCTOBER 2, OCTOBER 1,
1995 1996 1997
------------- ---------- ----------
<S> <C> <C> <C>
Service cost......................... $54,000 $ 73,000 $ 69,000
Interest cost on APBO................ 42,000 63,000 73,000
Unrecognized prior service cost...... -- (2,000)
------- -------- --------
Net postretirement benefit cost...... $96,000 $136,000 $140,000
======= ======== ========
</TABLE>
The actuarial amounts incurred above relate solely to employees of the
Business Unit and do not include any amounts for employees that are part of
allocations to the Business Unit's financial statements for corporate selling,
general, and administrative costs or for allocations from the Westbrook Mill.
The discount rates used to estimate the accumulated benefit obligations as
of October 2, 1996 and October 1, 1997 were 8.25% and 7.75%, respectively. The
initial health care cost trend rates used to value the APBO were 9.0% at both
September 27, 1995 and October 2, 1996 and 6.75% at October 1, 1997, decreasing
gradually to an ultimate rate of 5.0%, 5.25%, and 4.75%, respectively, in the
year 2007. A one-percentage point increase in the assumed health care trend rate
for each future year would increase the APBO by approximately 8.4% at October
1, 1997 and would increase the sum of the benefits earned and interest cost
components of net postretirement benefit cost for fiscal 1997 by approximately
10.8%.
<PAGE>
PRESSURE SENSITIVE BUSINESS UNIT,
S.D. WARREN COMPANY
CONDENSED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31, December 31,
1966 1997
(Unaudited)
CURRENT ASSETS:
<S> <C> <C>
Accounts receivable . . . . . . . . . . . $ 1,480,000 $ 1,184,000
Inventories . . . . . . . . . . . . . . . . 8,844,000 10,410,000
Deferred income taxes . . . . . . . . . . . 280,000 339,000
Other current assets . . . . . . . . . . . . 50,000 50,000
Total current assets . . . . . . . . . . 10,654,000 11,983,000
PLANT ASSETS, Net . . . . . . . . . . . . . . 2,107,000 2,025,000
GOODWILL, Net . . . . . . . . . . . . . . . . 1,814,000 1,735,000
PATENT, Net . . . . . . . . . . . . . . . . . . 1,813,000 1,692,000
TOTAL . . . . . . . . . . . . . . . . . . . . . $16,388,000 $17,435,000
LIABILITIES AND BUSINESS UNIT EQUITY
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . . $ 1,627,000 $ 1,666,000
Accrued salaries, wages and employee benefits. 1,389,000 603,000
Accrued workers' compensation. . . . . . . . . 250,000 150,000
Other current liabilities . . . . . . . . . . . 1,000,000 1,100,000
Total current liabilities . . . . . . . . . 4,266,000 3,519,000
DEFERRED INCOME TAXES . . . . . . . . . . . . . 617,000 740,000
OTHER LIABILITIES . . . . . . . . . . . . . . . 2,815,000 2,553,000
COMMITMENTS AND CONTINGENCIES . . . . . . . . . . ---- ----
BUSINESS UNIT EQUITY . . . . . . . . . . . . . . 8,690,000 10,623,000
TOTAL . . . . . . . . . . . . . . . . . . . . . . $16,388,000 $17,435,000
</TABLE>
See notes to condensed financial statements.
<PAGE>
PRESSURE SENSITIVE BUSINESS UNIT,
S.D. WARREN COMPANY
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
December 31, December 31,
1996 1997
(Unaudited)
<S> <C> <C>
SALES . . . . . . . . . . . . . . . . . $ 12,759,000 $ 14,559,000
COST OF GOODS SOLD:
Bodystock . . . . . . . . . . . . . . 6,947,000 7,961,000
Allocation of Westbrook Mill costs . . 979,000 1,047,000
Other costs. . . . . . . . . . . . . . 3,131,000 4,005,000
Total cost of goods sold . . . 11,057,000 13,013,000
GROSS PROFIT . . . . . . . . . . . . . . 1,702,000 1,546,000
SELLING, GENERAL AND ADMINISTRATIVE COSTS:
Allocated selling costs. . . . . . . . 360,000 372,000
Allocation of other corporate costs . . 380,000 381,000
Total selling, general and
administrative costs . . . . . . 740,000 753,000
INCOME FROM OPERATIONS . . . . . . . . 962,000 793,000
INCOME TAX EXPENSE. . . . . . . . . . . 394,000 325,000
NET INCOME. . . . . . . . . . . . . . $ 568,000 $ 468,000
</TABLE>
See notes to condensed financial statements
<PAGE>
PRESSURE SENSITIVE BUSINESS UNIT,
S.D. WARREN COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
December 31, December 31,
1996 1997
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income. . . . . . . . . . . . . $ 568,000 $ 468,000
Adjustments to reconcile net income
to net cash provided
By (used in) operating activities:
Depreciation . . . . . . . . . . . 45,000 45,000
Amortization of intangibles . . . 50,000 50,000
Changes in assets and liabilities:
Accounts receivable . . . . . . . 511,000 78,000
Inventories . . . . . . . . . . . (2,571,000) (701,000)
Accounts payable, accrued &
other liabilities 1,465,000 40,000
Other assets . . . . . . . . . . . (29,000) 45,000
Net cash provided by
operating activities . 25,000 25,000
CASH FLOWS FROM INVESTING ACTIVITIES
Investments in plant assets . . . . (25,000) (25,000)
CASH FLOWS FROM FINANCING ACTIVITIES ---- ----
NET CASH . . . . . . . . . . . . . . . $ ---- $ ----
</TABLE>
See notes to condensed financial statements
<PAGE>
PRESSURE SENSITIVE BUSINESS UNIT,
S.D. WARREN COMPANY
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. The Business Unit of the Company manufactures and sells pressure
sensitive paper products in roll form. These products are generally sold to
label printers that produce products used primarily for informational labels and
product identification. Pressure sensitive products are manufactured at the
Company's Westbrook Mill with a four element construction consisting of a
paper face stock, adhesive coating, silicone coating and release liner. The
accompanying condensed financial statements include income and expense
accounts and assets and liabilities associated with the manufacture and sale
of pressure sensitive products, including the Company's undivided interest
in pressure sensitive trade receivables which have been sold under a
securitization arrangement to SDWF, a wholly owned subsidiary of the Company.
The Company is a wholly owned subsidiary of Holdings. Holdings is a wholly
owned subsidiary of Sappi.
2. The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. 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 period ended December 31, 1997 are not necessarily indicative of the
results that may be expected for the year ended September 30, 1998.
3. The condensed financial statements include allocations by the Company for
certain corporate administrative and benefit costs incurred for the benefit
of all operating divisions and certain operating costs related to the
Westbrook Mill. These costs are allocated to operating divisions on a
variety of methodologies as follows:
a) Specific identification based on estimates of time and services
provided.
b) Relative identification based on relevant criteria that
establishes the division's relationship to the entire pool of
beneficiaries.
c) Formula driven nonidentifiable to division but incurred for the
benefit of all.
Allocated costs included in selling, general and administrative costs were
approximately $740,000 and $753,000 for the three months ended December 31,
1996 and 1997, respectively. Selling costs are allocated based upon an
individual's time dedicated to the sale of the Business Unit's product.
Other allocated corporate costs include executive, legal, accounting, tax,
auditing, cash management, purchasing, safety, human resources, health and
environmental, and employee benefits. Management believes these allocations
are reasonable under the circumstances. However, they may not represent the
cost of similar activities on a stand-alone basis.
In addition, certain costs of operating the Westbrook Mill such as utilities,
maintenance and supplies and other support services are common to the entire
Westbrook Mill complex and are allocated to cost of goods sold based upon
estimates of amounts relating to the Business Unit's operations, generally
based upon actual usage or tons of production. Utilities, maintenance and
supplies that were allocated based upon estimated usage aggregated
approximately $538,000 and $576,000 for the three months ended December 31,
1996 and 1997, respectively. Other support services were approximately
$441,000 and $471,000 for the three months ended December 31, 1996 and 1997,
respectively. Management believes these allocations are reasonable under the
circumstances; however, they may not be indicative of amounts that would be
required to be incurred if the Business Unit operated on a stand-alone basis.
No debt or related interest expense of the Company related to the Acquisition
or ongoing financing activities have been allocated to the Business Unit's
financial statements. Substantially all of the Business Units assets are
pledged as collateral to various debt agreements of the Company. Upon
consummation of the proposed transaction discussed in Note 4, such collateral
arrangements, as they relate to the Business Unit, will be released.
4. On November 18, 1997, the Company entered into an Agreement to sell the
Business Unit to Spinnaker. The Agreement is anticipated to close in the
first calendar quarter of 1998, and is subject to the satisfaction of various
conditions. In connection with the Agreement, the Company and Spinnaker are
required to execute a Site Lease and a Site Separation and Service Agreement.
The Site Lease provides Spinnaker a portion of the Westbrook Mill for a term
of 99 years at a nominal rental amount of $1 per year. Under the Site
Separation and Service Agreement, the Company will provide Spinnaker, for a
limited time at predetermined costs, shipping, transportation and storage,
maintenance and support, information and administrative services. In
addition, such agreement will require the Company to supply certain raw
materials primarily bodystock, for up to one year at predetermined amount on
a per-unit basis.
5. Due to exceptionally heavy rains, the Presumpscot River flooded the
Westbrook Mill on October 21, 1996. The flooding resulted in the temporary
closure of the mill. There was no damage to business Unit related equipment
but normal operating conditions of the Business Unit were impacted. During
fiscal year 1997 the Company received $11,800,000 related to business
interruption claims, of which $2,000,000 was allocated to the Business Unit
based upon an estimate of lost sales tons of the Business Unit. All claims were
submitted and finalized as of October 1, 1997.
<PAGE>
LYNCH CORPORATION
Unaudited Pro Forma Combined Condensed Balance Sheet and Statement of
Operations
On March 17, 1998, Registrant's majority-owned subsidiary Spinnaker
Industries, Inc. ("Spinnaker") acquired the assets of the pressure sensitive
adhesive-backed label stock business unit of S.D. Warren Company ("S.D. Warren")
for approximately $52.0 million (the "S.D. Warren Acquisition"). S.D. Warren
is a large pulp and paper producer owned by an indirect wholly-owned subsidiary
of SAPPI, Ltd., a public South African conglomerate.
The following unaudited pro forma combined condensed balance sheet and
statement of operations have been prepared from the historical results of
operations of both Lynch Corporation and S.D. Warren. The pro forma balance
sheet is presented as if the S.D. Warren Acquisition had occurred at December
31, 1997. The allocations of purchase price to assets acquired and liabilities
assumed, including related amortization, are based on preliminary estimates and
may be adjusted when the final fair value allocations are determined. The pro
forma statement of operations reflects the combined results of operations of
Lynch Corporation and S.D. Warren as if the acquisition had been consummated at
the beginning of the period presented.
These statements should be read in conjunction with the historical
financial statements of S.D. Warren included elsewhere in this Form 8-K/A(1) and
the historical financial statements of Lynch, included in Lynch's most recently
filed Forms 10-K and 10-Q including the notes thereto. The pro forma combined
results are not necessarily indicative of the combined results of future
operations.
<PAGE>
LYNCH CORPORATION
Notes to Pro Forma Combined Condensed Balance Sheet
(1) The Acquisition was accounted for as a purchase combination.
The purchase price, including acquisition costs, was approximately
$53.0 million and has been allocated as follows (in thousands):
<TABLE>
<S> <C>
Tangible assets purchased ........$35,498
Liabilities assumed ..............$ 2,995
Purchase price in excess
of net tangible assets.. ........$20,592
</TABLE>
(2) Represents off balance sheet Pressure Sensitive Business
receivables previously sold to an affiliate of the Seller under a
receivable sales agreement. In connection with the Acquisition, the
agreement was terminated.
(3) Inventory valuation adjustment to reflect finished goods at
estimated selling price, less costs of disposal and reasonable profit
allowance.
(4) Adjustment reflects assets and liabilities retained by the Seller.
(5) Adjustment to property, plant and equipment, and other assets
based on the registrant's preliminary estimate of fair market value.
(6) Represent borrowings under the Revolving Credit Facility in
connection with the Acquisition and deferred financing costs
associated with the amendment to the Revolving Credit Facility.
(7) Represents the issuance of a convertible subordinated note by the
Registrant to Seller in the amount of $7.0 million. The note bears
interest at the rate of 10% per annum.
(8) Elimination of Pressure Sensitive Business equity.
(9) Historical financial statements of S.D. Warren and for the fiscal
year ended October 1, 1997.
<PAGE>
LYNCH CORPORATION AND SUBSIDIARIES
PRO FORMA COMBINED CONDENSED BALANCE SHEET
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
S.D. Warren
Historical Acquisition(9) Adjustments Pro Forma
ASSETS
<S> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents $ 33,557 $ 33,557
Marketable securities 985 985
Receivables, net 54,480 1,262 4,705 (2) 60,447
Inventories 35,685 9,709 (273)(3) 45,121
Deferred income taxes 17,993 339 (339)(4) 17,993
Other current assets 10,059 95 10,154
Total Current Assets 152,759 11,405 4,093 168,257
Property, plant and
equipment - net 157,529 2,045 17,955 (5) 177,529
Excess of cost over fair value
of net assets acquired 73,257 1,755 18,704 (1) 93,716
Investments in & advances
to PCS entities 25,448 25,448
Other Assets 14,645 1,722 (1,224)(5) 15,143
Total Assets $423,638 $ 16,927 $ 39,528 $480,093
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable to banks $ 29,021 $ 45,268 (6) $ 74,289
Trade accounts payable 21,381 1,555 (645)(4) 22,291
Accrued interest payable 886 886
Accrued liabilities 33,969 1,924 (128)(4) 35,765
Customer advances 2,249 2,249
Current maturities of
long-term debt 9,302 9,302
Total current liabilities 96,808 3,479 44,495 144,782
Long-term debt 242,776 7,000 (7) 249,776
Deferred income taxes 33,764 740 (740)(4) 33,764
Other noncurrent liabilities 2,553 (1,072)(4) 1,481
Minority interests 13,839 13,839
Shareholders' Equity
Common stock 5,139 5,139
Additional paid-in capital 8,644 10,155 (10,155)(8) 8,644
Retained earnings(accumulated
deficit) 23,414 23,414
Treasury stock (746) (746)
Total shareholders' equity 36,451 10,155 (10,155) 36,451
Total liabilities and
shareholders' equity $423,638 $ 16,927 $ 39,528 $480,093
</TABLE>
<PAGE>
LYNCH CORPORATION
Notes to Pro Forma Combined Condensed Statement of Income
(1) Represents the elimination of maintenance, material handling, and
security costs previously allocated by the Seller, which the Pressure
Sensitive Business will not be subject to under the Site Separation and
Service Agreement, as only the direct charges for such services will be
charged under this agreement.
(2) Represents incremental depreciation expense related to acquire property,
plant and equipment.
(3) Represents the elimination of corporate overhead previously allocated by
the Seller. The services included executive, legal, accounting,
purchasing and other corporate overhead functions which will be provided
by the Company under its current corporate structure.
4) Represents amortization of goodwill from the Acquisition. Amortization
period of goodwill is thirty years.
(5) Interest expense on borrowings under Spinnaker's $60 million the
Revolving Credit Facility in connection with the Acquisition and
amortization of deferred financing costs associated with the amendment
to the Revolving Credit Facility. Interest is calculated based on an
assumed rate of 8.5%. A 1% change in the interest rate would change
interest expense on the Acquisition borrowings approximately $289 annually.
(6) Represents the income tax adjustment required to reflect the estimated
consolidated effective tax rate.
(7) Represents elimination of minority interest based upon Lynch's ownership
of Spinnaker.
(8) Historical financial statements of S.D. Warren are for the fiscal year
ended October, 1, 1997.
<PAGE>
LYNCH CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
S.D. Warren
Historical Acquisition(8) Adjustments Pro Forma
SALES AND REVENUES:
<S> <C> <C> <C> <C>
Multimedia $ 47,908 47,908
Services 146,154 146,154
Manufacturing 273,474 62,080 335,554
467,536 62,080 529,616
COSTS AND EXPENSES:
Multimedia 35,363 35,363
Services 135,431 135,431
Manufacturing 227,621 53,222 (1,012)(1) 281,190
1,359 (2)
Selling & administrative 44,334 3,015 (1,150)(3) 46,773
574 (4)
OPERATING PROFIT 24,787 5,843 229 30,859
Other income (expense):
Investment Income 2,048 2,048
Interest Expense (23,461) (3,399)(5) (26,860)
Share of operations of
affiliated companies 154 154
Reserve for impairment of
investment in PCS
license holders (7,024) (7,024)
Gain on sales of subsidiary
and affiliate stock 169 169
(28,114) (3,399) (31,513)
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES, MINORITY
INTERESTS (3,327) 5,843 (3,170) (654)
Benefit (provision) for
income taxes 713 (2,396) 1,766 (6) 83
Minority Interests (264) (756)(7) (1,020)
NET INCOME (LOSS) ($2,878) $3,447 ($2,160) ($1,591)
Weighted Average
Shares Outstanding 1,415,000 1,415,000
Basic earnings per share:
Net income (loss) ($2.03) ($1.12)
Diluted earnings per share:
Net income (loss) ($2.03) ($1.12)
</TABLE>
