FORM 10-K/A
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1999 Commission file number 1-106
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
LYNCH CORPORATION
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(Exact name of Registrant as specified in its charter)
Indiana 38-1799862
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State of other jurisdiction (I.R.S. Employer
Incorporation or organization Identification No.)
401 Theodore Fremd Avenue, Rye, NY 10580
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Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (914) 921-7601
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange
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Common Stock, No Par Value American Stock Exchange
Securities registered pursuant to section 12(g) of the Act: None
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 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 by mark if disclosure of delinquent filers pursuant to Item 405 of
Regulations S - K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K, or any
amendment to this Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of the
Registrant (based upon the closing price of the Registrant's Common Stock on the
American Stock Exchange on March 15, 2000 of $30 per share) was $32,048,000. (In
determining this figure, the Registrant has assumed that all of the Registrant's
directors and officers are affiliates. This assumption shall not be deemed
conclusive for any other purpose.)
The number of outstanding shares of the Registrant's Common Stock was 1,510,183
as of March 29, 2000.
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Item 5 is amended in its entirety as follows:
The Common Stock of Lynch Corporation is traded on the American Stock Exchange
under the symbol "LGL." The market price highs and lows in consolidated trading
of the Common Stock during the two years ended December 31, 1999 and 1998, are
as follows:
<TABLE>
<CAPTION>
Three Months Ended
1999 March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- --------
7/1-9/1- 9/2-9/30
<S> <C> <C> <C> <C> <C>
High ............. 85 1/2 84 87 34 3/4 26 1/2
Low .............. 70 1/2 69 78 26 1/2 18 7/8
</TABLE>
<TABLE>
<CAPTION>
1998 March 31 June 30 Sept. 30 Dec. 31
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<S> <C> <C> <C> <C>
High ............. 109 113 100 1/2 82
Low .............. 77 1/4 88 76 69 1/2
</TABLE>
At March 15, 2000, the Company had 901 shareholders of record.
On September 1, 1999, the Company spun off the shares of Lynch Interactive
Corporation to its shareholders. As a result, stock prices before and after that
date are not comparable. The high and low sales prices of Lynch Interactive from
September 1, 1999 to December 31, 1999, were $120 and $42, respectively, and
the closing price at December 31, 1999, was $99 7/8.
The Board of Directors has adopted a policy of not paying cash dividends, a
policy which is reviewed annually. This policy takes into account the long term
growth objectives of the Company, especially its acquisition program,
shareholders' desire for capital appreciation of their holdings and the current
<PAGE>
tax law disincentives for corporate dividend distributions. Accordingly, no cash
dividends have been paid since January 30, 1989 and none are expected to be paid
in 2000.
ITEM 6. SELECTED FINANCIAL DATA
Item 6 is amended in its entirety as follows:
<TABLE>
LYNCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED SELECTED FINANCIAL DATA
(Adjusted to Reflect Discontinued Operations and
Spin Off of Lynch Interactive Corporation)
(in thousands except per share amounts)
<CAPTION>
Year Ended December 31 ( a )
1999 1998 1997 1996 1995
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<S> <C> <C> <C> <C> <C>
Revenues.......................................... $ 194,222 $ 187,644 $ 153,735 $ 166,976 $ 157,146
Operating Profit (b).............................. 85 4,074 6,730 8,473 11,945
Net Financing Activities.......................... (9,528) (8,392) (4,884) (5,166) (3,463)
Gain in Sale of Subsidiary Stock and Other
Operating Assets................................ -- 2,090 (91) 5,072 --
Income (Loss) from Continuing Operatins before
Income Taxes, Minority Interests, Discontinued
Operation and Extraordinary Items............... (9,443) (2,228) 1,755 8,379 8,482
(Provision) Benefits For Income Taxes............. 2,544 1,408 (301) (3,571) (3,267)
Minority Interest................................. 2,647 1,107 (121) (119) (634)
------ ------ ------ ------ ------
Income (Loss) From Continuing Operations Before
Discontinued Operations and Extraordinary Item.. (4,252) 287 1,333 4,689 4,581
Operations of Lynch Interactive Corporation (f) (7,493) 4,929 (3,349) (818) 467
Discontinued Operations (c)...................... (572) (1,859) (862) 173 97
Minority Interests
Gain (Loss) on Sale of Spinnaker's Industrial
Tape Segment................................... 10,431 -- -- -- --
Extraordinary Items (d) 303 -- -- (1,348) --
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Net Income (Loss)............................... $ (1,583) $3,357 $( 2,878) $ 2,696) $ 5,145
======== ======== ========= ======== ========
Per Common Share (e)
Income (Loss) from Continuing Operation
Befopre Discontinued Operations and
Extraordinary Items...........................
Basic...................................... $ (3.00) $ .20 $ .94 $ 3.38 $ 3.32
Diluted.................................... $ (3.00) .20 .94 3.34 3.25
Net Income (Loss)
Basic...................................... (1.12) 2.37 (2.03) 1.94 3.73
Diluted.................................... (1.12) 2.37 (2.03) 1.92 3.66
Cash, Securities and Short-Term Investments..... $ 13,106 $ 1,132 $ 6,499 $ 10,561 $ 5,405
Restricted Cash (h) 56,026 -- -- -- --
Total Assets (Net of assets distributed
to shareholders(f)........................... 211,192 251,658 183,720 144,417 144,984
Long-Term Debt (g) ............................. 116,765 126,976 115,159 96,577 62,557
Shareholders Equity (Deficit)(f)................ 15,991 11,441 14,464 (6,083) 6,085
<FN>
Notes:
(a) The data presented herein reflect the spin off of Lynch Interactive
Corporation (Interactive) from the Company and the sale by Spinnaker
Industries, Inc. (Spinnaker), a 47.6% owned consolidated subsidiary of the
Company, of its industrial tape units, all of which transactions occurred
in the third quarter of 1999. Accordingly, the operating results of both
Interactive and the industrial tape segment have been segregated from
continuing operations of the Company and are reported as separate line
items. The data presented also includes results of the business acquired
from S. D. Warren (name changed to Spinnaker Coating-Maine, Inc.) from
March 17, 1998.
(b) Operating profit is sales and revenues less operating expenses, which
excludes investment income, interest expense, share of operations of
affiliated companies, minority interests and taxes.
(c) Discontinued operations of the industrial tape segment of Spinnaker
Industries(See Note 3 to Financial Statements)and Lynch Tri-Can
International in 1995 and 1996.
(d) Gain (loss) on early extinguishment of debt at Spinnaker in 1996 and 1999
(e) Based on weighted average number of common shares outstanding - restated to
conform to SFAS #128 in 1996 and prior years.
(f) No cash dividends have been declared over the period. In 1999, for each
share of Lynch Common Stock, shareholders received one share of Lynch
Interative Corporation in a Spin Off of the multimedia and transportation
business. (See Note 4 to Financial Statements). In 1997, for each share of
Lynch Common Stock, shareholders received one share of East/West
Communications, Inc., an F- block PCS licensee with licenses covering a
population of 20 million. For years prior to 1999, shareholders equity has
been restated to reflect the net assets of Lynch Interactive distributed to
shareholders.
(g) Includes $115.6 million of long-term debt at December 31, 1999 of 47.6%
owned Spinnaker Industries.
(h) See dicussion of Restricted Cash in Note 6-Notes Payable and Long-Term
Debt.
</FN>
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Item 7 is amended in its entirety as follows:
RESULTS OF OPERATIONS
YEAR 1999 COMPARED TO 1998
The accompanying audited consolidated financial statements reflect the Spin Off
of Lynch Interactive Corporation (Interactive) from Lynch Corporation (Lynch)
that occurred in the third quarter of 1999 and also the sale by Spinnaker
Industries, Inc. (Spinnaker), a consolidated subsidiary of the Company, of its
two industrial tape units, Central Products Company and Spinnaker Electrical,
that also occurred in the third quarter of 1999. Accordingly, the operating
results of both Interactive and the industrial tape segment have been segregated
from continuing operations of the Company and are reported as separate line
items on the financial statements as discontinued operations. The comparative
amounts for 1998 have also been restated to reflect the above transactions. The
ensuing narrative considers these changes and only includes discussions of the
Company as it is currently composed. EBITDA is presented because it is a widely
accepted financial indicator of value and ability to incur and service debt.
EBITDA is not a substitute for operating income or cash flows from operating
activities in accordance with generally accepted accounting principles.
Revenues for the year ended December 31, 1999 were $194.2 million, an increase
of $6.6 million from the comparable 1998 period. Spinnaker's 1999 net sales were
$162.1 million, compared to $159.1 million in 1998. The growth in net sales for
1999 is attributed to approximately $7.6 million in net sales from the
acquisition of Coating-Maine and higher unit sales of certain label stocks from
1998, which were offset by increased domestic capacity and the disruption of
business at Entoleter from a mid-summer labor dispute. Revenues at M-tron
increased by $3.7 million due to increased demand from the telecommunications
industry and increased sales of new products. Lynch Systems' revenues were
essentially flat.
Operating profit for 1999 declined by $4.0 million from the operating profit in
the prior year. Spinnaker's operating profit declined by $3.7 million
principally due to lower gross margins as a result of the lower pricing and the
impact of the Entoleter labor dispute, partially offset by gains on sale of
fixed assets and lower selling, general and administrative expenses. M-tron's
operating profit increased by $.4 million due to increased volume.
Subsequent to the spin off of Interactive, the Company, with the concurrence of
the holders of all outstanding SAR units, terminated its SAR program for
corporate management, including all outstanding units, thus eliminating possible
future profit and loss and cash flow distortions associated with the program. As
a result of the termination, the Company recorded approximately $700,000 of
related corporate expense.
In order to improve operational efficiencies, Spinnaker Coating restructured
operations at its Maine unit in early 2000. Also, in view of the narrowed scope
of the Spinnaker business as a result of the sale of the industrial tape
business, steps are being taken to reduce Spinnaker corporate overhead by
transferring functions from the Dallas headquarters to the main Spinnaker
Coatings office in Ohio. As a result, Spinnaker has announced it expects to
record a charge of approximately $500,000 in the first quarter of 2000.
Investment income increased due to the investment in short term securities of
approximately $75 million in proceeds remaining, after payment of certain debt
obligations, from the sale by Spinnaker of its Central Products and Electrical
Tape businesses.
Interest expense was $11.9 million and increased from the prior year due to the
allocation of a portion of the interest associated with the Spinnaker 10.75%
Senior Secured Notes Due 2006 (the Senior Notes) to the discontinued industrial
tape segment that ceased at the time of their sale in the third quarter of 1999.
Interest expense also increased due to higher debt levels resulting from
Spinnaker's acquisition of the Warren assets.
Interest expense from continuing operations is subject to certain matters
associated with the use of the net proceeds from the sales of the industrial
tape units of Spinnaker, including retirement of senior debt or "permitted
investments" as defined under the Indenture.
The income tax benefit includes federal, as well as state and local taxes. The
tax benefit for the year ended December 31, 1999, and 1998, represents effective
tax rates of 27% for 1999 and 63% for 1998. The differences from the federal
statutory rate are principally due to the effect of state income taxes,
operating losses of subsidiaries and amortization of non-deductible goodwill.
Minority interests contribution to the net income (loss) increased by $1.5
million for the year from the prior year due to the increased losses from
continuing operations at Spinnaker and the January 1, 1999, repurchase of M-tron
minority interest.
On August 12, 1999, the Board of Directors approved a plan to distribute the
stock of Lynch Interactive Corporation on a one for one basis to the
shareholders of Lynch Corporation ( the spin off). Lynch completed the spin off
of Lynch Interactive Corporation on September 1, 1999, to stockholders of record
on August 23, 1999. Pursuant to the spin off, each Lynch shareholder received
one share of Interactive stock for each share of Lynch owned. Lynch had received
a private letter ruling from the Internal Revenue Service that the spin off
would be tax free to Lynch shareholders. Interactive has listed its stock on the
American Stock Exchange. (LIC)
Interactive owns all of what was Lynch's multimedia and service businesses while
Lynch retains the manufacturing businesses. Interactive owns the telephone
companies, television interests and PCS interests, as well as the 55% equity
interest of the Morgan Group, Inc. In addition, Interactive owns a 13.6% equity
interest in Spinnaker Industries, Inc. Lynch owns a 48% equity interest in
Spinnaker after the spin off, as well as M-tron Industries, Inc. and Lynch
Systems, Inc.
As a result of the spin off, the Company's multimedia and services segments are
being reported as operations distributed to shareholders in the accompanying
consolidated financial statements. Accordingly, operating results of Lynch
Interactive Corporation have been segregated from continuing operations and
reported as a separate line item on the statement of operations. Lynch has
restated its prior year financial statements to present the operating results of
Lynch Interactive on a comparable basis. Interactive's net sales were $204.6
million for the year ended December 31, 1999, and $205.1 million and $194.1
million for the fiscal years ended December 31, 1998 and 1997, respectively.
Prior to the spin off, Lynch Interactive recorded a $15.4 million valuation
reserve due to the decline in market value of its investment in personal
communications licenses. As a result, Lynch Interactive reported an operating
loss for the first eight months of 1999.
In the third quarter of 1999, Spinnaker sold its two industrial tape units,
Central Products Company and Spinnaker Electrical, which comprise its industrial
tape segment. Accordingly, operating results of the industrial tape segment have
been segregated from continuing operations and reported separately in the
statement of operations. Lynch has restated its prior years financial statements
to present the operating results of the industrial tape segment as a
discontinued operation. The industrial tape segment's net sales, up to the point
of its sale, were $69.5 million for the year ended December 31, 1999, and $121.8
million and $119.7 million for the fiscal years ended December 31, 1998 and
1997, respectively.
Net loss for the year ended December 31, 1999, was $1.6 million, or ($1.12) per
share, which compares to the net income of $3.4 million, or $2.37 per share, for
the same period of 1998 due primarily to the operating losses mentioned above
and the loss incurred by Interactive, offset by Spinnaker's gain on sale of its
industrial tape units ($10.4 million after income taxes and minority interest).
Total backlog of manufactured products at December 31, 1999 was $35.3 million,
which represents an increase of $25.5 million from the backlog of $9.8 million
at December 31, 1998. All operating units contributed significantly to the
increase in backlog at December 31, 1999. Included in this backlog for both
periods is a $2.4 million payment from a customer for an earlier glass press
order at Lynch Systems which was subsequently cancelled. The customer can use
this amount for future orders and, if not utilized, will be forfeited to Lynch
Systems. Included in the backlog at December 31, 1999, is a $14 million order
for large glass press machines at Lynch Systems. In connection with this order,
Lynch Systems has obtained a substantial credit facility to protect advances by
the customer and for working capital.
YEAR 1998 COMPARED TO 1997
Revenues increased to $187.6 million in 1998 from $153.7 million in 1997, a 22%
increase. The acquisition made during 1998 by Spinnaker Industries, Inc. was the
most significant contributor to this increase. On March 17, 1998, Spinnaker
acquired from S. D. Warren its assets in Westbrook, Maine utilized to
manufacture pressure sensitive label stock. This operation contributed $47.0
million to Spinnaker's revenue increase. Spinnaker Coating, Inc. (Ohio) reported
small revenue decreases during 1998 as a result of higher unit volume, but at
overall lower prices, while Spinnaker's Entoleter subsidiary had a 39% increase.
Lynch Systems' revenues decreased by $13 million from 1997 to 1998 due to lack
of order activity for CRT glass press machines. During 1998 and early 1999,
Lynch Systems added several new consumer glass press machines to its product
offerings in an effort to be less dependent on orders for CRT glass press
machines in the future.
Operating profits for 1998 were $4.1 million, down from $6.7 million in 1997.
Operating profits fell by $2.6 million due to the EBITDA increase offset by
increased depreciation and amortization of $1.7 million associated with the S.
D. Warren acquisition.
Effective September 30, 1998, the Company amended its SAR (stock appreciation
rights) Program so that the SARs become exercisable only in the event the price
for the Company's shares double from the SAR grant price within five years from
the original issuance. The grant prices of the 42,700 SARs outstanding at
December 31, 1998 range from $63.03 to $84.63. On December 31, 1998, the closing
price of the Company's common shares in trading on the American Stock Exchange
was $70.50. This amendment eliminated the recording of the profit and loss
effect from changes in the market price in the Company's common stock until it
is probable that the SARs will become exercisable. During 1997, the Company
recorded $0.4 million SAR expense and in 1998, prior to the amendment of the
program, $0.2 million in SAR income.
Investment income was approximately $.2 million in 1998 and $.3 million in 1997.
Interest expense increased by $3.4 million in 1998 compared to 1997. The
increase is due primarily to the effect of financing the Spinnaker acquisition
of the Warren assets.
On July 31, 1998, Spinnaker Industries, Inc. completed the acquisition of the
electrical tape division of tesa tape, inc. A portion of the purchase price was
satisfied by the issuance of 200,000 shares, subject to certain adjustments, of
Spinnaker's Class A common stock. As a result of this issuance, the Company
recorded a gain on sale of subsidiary stock of $2.1 million, or $1.2 million
($0.87 per share) after income taxes.
The 1998 tax benefit of $1.4 million, includes federal, state and local taxes
and represents an effective rate of 63% versus 17.2% effective tax rate in 1997.
The difference in the effective rates is primarily due to the effects of the
amortization of goodwill, the state and local income taxes and losses of
subsidiaries.
During 1998, minority interest was income of $1.1 million versus $.1 million
expense in 1997. The variance was primarily associated with additional losses
recorded by Spinnaker (61% owned subsidiary by the Company at December 31, 1998)
during 1998.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company had current assets of $79.7 million and
current liabilities of $56.5 million. Working capital was therefore $23.2
million as compared to $18.8 million at December 31, 1998. The increase was
primarily due to the increase in cash and reduction of short term working
capital debt at Spinnaker resulting from the sale of its industrial tape
segment.
Capital expenditures were $3.8 million in 1999 and $3.3 million in 1998. Overall
2000 capital expenditures are expected to be approximately 25% higher than the
1999 level.
At December 31, 1999, total debt was $141.6 million, which was $47.1 million
less than the $188.7 million at the end of 1998. Debt at year end 1999 included
$118.4 million of fixed interest rate debt, at an average interest rate of
10.7%, and $23.2 million of variable interest rate debt at an average interest
rate of 8.1%. Additionally, the Company had $12.3 million in unused lines
of credit at December 31, 1999, of which $11.5 million was attributed to
Spinnaker.
Since 1987, the Board of Directors of Lynch has authorized the repurchase of
400,000 common shares. At December 31, 1999, Lynch's remaining authorization is
to repurchase an additional 161,000 shares of common stock. In 1999, 8,130
shares were purchased for treasury at a cost of $523,000.
The Board of Directors has adopted a policy of not paying cash dividends, a
policy which is reviewed annually. This policy takes into account the long term
growth objectives of the Company, especially its acquisition program,
shareholders' desire for capital appreciation of their holdings and the current
tax law disincentives for corporate dividend distributions. Accordingly, no cash
dividends have been paid since January 30, 1989 and none are expected to be paid
in 2000.
In March, 2000 Lynch Systems completed a project specific line of credit
totaling $7.1 million related to a contract to deliver equipment in 2000.
Substantially all assets of Lynch Systems are pledged in support of the credit
facility. In addition, the Company has guaranteed the full amount of the credit
facility and has pledged $4 million of its Spinnaker Class A Common Stock as
additional collateral.
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 the parent company from its subsidiaries. As the result of
acquisitions, Lynch consolidated, Spinnaker and certain acquisition subsidiaries
have relatively high debt to equity ratios.
The Company has a significant need for resources to fund the operations of the
holding company and future growth. There currently is no credit facility in
place at the Lynch corporate level, and the Company is currently considering
various long and short term financing arrangements. One alternative could be to
sell a portion or all of certain investments in operating entities either
directly or through an exchangeable debt instrument. Additional debt and/or
equity financing vehicles at corporate 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.
The Company is exploring all options with respect to Spinnaker, including
liquifying and monetizing its investment, and searching for ways to provide the
Company with a more financially visible investment with respect to M-tron. There
is no assurance that any transaction will be implemented.
In March, 2000, the Company completed the previously announced sale of 100,000
shares of its common stock to its Chairman at $30 per share, or $3 million. This
transaction is subject to shareholder ratification at the Company's 2000 annual
meeting. These funds will be available for general corporate purposes.
YEAR 2000
The Company had initiated a comprehensive review of its computer systems to
identify the systems that could be affected by the "Year 2000" issue and
developed an implementation plan to resolve the issue. The Year 2000 issue was
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 have resulted in a major system failure or miscalculation. The Company's
Year 2000 review was performed primarily by internal staff, and in certain
operations supplemented by outside consultants. The principal Information
Technology (IT) systems for the Company are sales order entry, shop floor
control, inventory control and accounting. The Year 2000 may have also impacted
various non-IT systems, including among other things security systems, HVAC,
elevator systems, and communications systems. In addition, each of the Company's
businesses may have been impacted by the Year 2000 readiness of third party
vendors/suppliers.
The assessment phase for the Company's manufacturing businesses was completed by
the 4th quarter of 1999. Based upon its identification and assessment efforts,
the Company determined that certain of its computer and software used in
manufacturing and accounting systems required replacement or modification. Such
replacements and modifications were completed in the 4th quarter of 1999. The
total cost of Year 2000 remediation was $0.2 million. A comprehensive
contingency plan had been completed in the 4th quarter of 1999.
The assessment, implementation and contingency plans for the Company's Year 2000
program were based on management's estimates and were developed using numerous
assumptions of future events, some of which were beyond the Company's control.
The Company believed that with modifications to existing software and the
conversion to new software, the Year 2000 issue would not pose significant
operational problems for the Company as a whole.
The Company experienced no significant occurrences related to the Year 2000
issue.
MARKET RISK
The Company is exposed to market risk relating to changes in the general level
of U.S. interest rates. Changes in interest rates affect the amounts of interest
earned on the Company's cash equivalents and short-term investments and
restricted cash. The Company generally finances the debt portion of the
acquisition of long-term assets with fixed rate, long-term debt. The Company
generally maintains the majority of its debt as fixed rate in nature either by
borrowing on a fixed long-term basis or, on a limited basis, entering into
interest rate swap agreements. The Company does not use derivative financial
instruments for trading or speculative purposes. Management does not foresee any
significant changes in the strategies used to manage interest rate risk in the
near future, although the strategies may be reevaluated as market conditions
dictate.
At December 31, 1999, approximately $23.2 million, or 16% of the Company's
long-term debt and notes payable bears interest at variable rates. Accordingly,
the Company's earnings and cash flows are affected by changes in interest rates.
Assuming the current level of borrowings for variable rate debt and assuming a
one percentage point change in the 1999 average interest rate under these
borrowings, it is estimated that the Company's 1999 and 1998 interest expense
would have changed by $.2 million and $.5 million, respectively. In the event of
an adverse change in interest rates, management would likely take actions to
further mitigate its exposure. However, due to the uncertainty of the actions
that would be taken and their possible effects, the analysis assumes no such
actions. Further, the analysis does not consider the effects of the change in
the level of overall economic activity that could exist in such an environment.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8 is amended in its entirety as follows:
See Item 14(a).
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this amendment to
Form 10-K Annual Report:
(1) Financial Statements:
The Report of Independent Auditors and the following
Consolidated Financial Statements of the Registrant are
amended in their entirety as follows:
Consolidated Balance Sheets at December 31, 1999 and 1998
Consolidated Statements of Operations - Years ended December
31, 1999, 1998, and 1997
Consolidated Statements of Shareholders' Equity - Years ended
December 31, 1999, 1998, and 1997
Consolidated Statements of Cash Flows - Years ended December
31, 1999, 1998, and 1997
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules as of December 31, 1999
and 1998 and for the three years ended December 31, 1999:
Schedule I - Condensed Financial Information of Registrant
Schedule II - Valuation and Qualifying Accounts
All other schedules for which provision is made in the
applicable accounting regulation of the Securities and Exchange Commission are
not required under the related instructions, or are inapplicable, and therefore
have been omitted.
See Page 2 above re Forward Looking Information.
-----------------------------------------------
(c) The following Exhibits listed in the Exhibit Index are filed with
this amendment to Form 10-K Annual Report:
23.1 - Consent of Ernst & Young LLP
27.A - Amended Financial Data Schedule
(d) Financial Statement Schedules:
Financial Statement Schedules are listed in response to
Item 14(a)(2)
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Lynch Corporation
We have audited the accompanying consolidated balance sheets of Lynch
Corporation and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1999. Our audits also
included the financial statement schedules listed in the index at Item 14(a).
These financial statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Lynch
Corporation and subsidiaries at December 31, 1999 and 1998 and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all material respects
the information set forth therein.
/s/ ERNST & YOUNG LLP
Stamford, Connecticut
March 28, 2000
<PAGE>
<TABLE>
LYNCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<CAPTION>
ASSETS December 31 December 31
1999 1998
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents .................................... $ 13,106 $ 1,132
Trade accounts receivables, less allowances of $361 and $395 . 24,642 25,320
Inventories .................................................. 31,680 28,396
Deferred income taxes ........................................ 8,943 11,714
Other current assets ......................................... 1,303 1,787
Net current assets of subsidiaries distributed to shareholders -- 58,047
Net current assets of discontinued operations ................ -- 36,226
--------- ---------
TOTAL CURRENT ASSETS .............................................. 79,674 162,622
Restricted Cash ................................................... 56,026 --
PROPERTY, PLANT AND EQUIPMENT:
Land ......................................................... 672 672
Buildings and Improvements ................................... 11,015 12,585
Machinery and Equipment ...................................... 54,529 51,306
--------- ---------
66,216 64,563
Accumulated Depreciation ...................................... (22,137) (17,534)
--------- ---------
44,079 47,029
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS
ACQUIRED, NET .................................................. 22,020 21,075
OTHER ASSETS ...................................................... 9,393 7,328
NET NON - CURRENT ASSETS OF SUBSIDIARIES DISTRIBUTED
TO SHAREHOLDERS ................................................. -- 170,295
NET NON - CURRENT ASSETS OF DISCONTINUED OPERATIONS ............... -- 71,651
--------- ---------
TOTAL ASSETS ...................................................... $ 211,192 $ 480,000
========= =========
</TABLE>
See accompanying notes
<PAGE>
<TABLE>
LYNCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Thousands)
<CAPTION>
December 31 December 31
1999 1998
CURRENT LIABILITIES
<S> <C> <C>
Notes payable to banks ............................... $ 23,178 $ 59,686
Trade accounts ....................................... 14,404 18,178
Accrued interest payable ............................. 2,426 2,575
Accrued liaiblites ................................... 13,956 3,580
Customer advances .................................... 860 2,406
Current maturities of long-term debt ................. 1,636 2,027
Net current liabilities of subsidiaries
distributed to shareholders......................... -- 37,240
Net current liabilities of discontinued operations ... -- 18,162
--------- ---------
TOTAL CURRENT LIABILITIES ............................... 56,460 143,854
LONG-TERM DEBT .......................................... 116,765 126,976
DEFERRED INCOME TAXES ................................... 6,225 11,715
OTHER LONG-TERM LIABILITIES ............................. 4,866 2,182
MINORITY INTERESTS ...................................... 10,885 3,999
NET NON-CURRENT LIABILITIES OF SUBSIDIARIES
DISTRIBUTED TO SHAREHOLDERS ........................... -- 147,600
NET NON-CURRENT LIABILITIES OF DISCONTINUED
OPERATIONS ........................................... -- 3,881
COMMITMENT AND CONTINGINCIES
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 ............................ 8,302 8,554
RETAINED EARNING ...................................... 3,843 26,771
ACCUMULATED OTHER COMPREHENSIVE INCOME(LOSS) .......... (40) 59
TREASURY STOCK OF 61,008 AND 52,943 SHARES AT COST .... (1,253) (730)
--------- ---------
15,991 39,793
--------- ---------
$ 211,192 $ 480,000
========= =========
</TABLE>
See accompanying notes
<PAGE>
<TABLE>
LYNCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share amounts)
<CAPTION>
Years Ended December 31
1999 1998 1997
<S> <C> <C> <C>
SALES AND REVENUES ..................................... $ 194,222 $ 187,644 $ 153,735
Costs and expenses:
Manufacturing ....................................... 172,567 162,735 126,570
Selling and Administrative .......................... 21,570 20,835 20,435
----------- ----------- -----------
OPERATING PROFIT ..................................... 85 4,074 6,730
Other Income (expense):
Investment Income .................................... 2,354 199 305
Interest Expense ..................................... (11,882) (8,591) (5,189)
Gain on Sale of Stock by Subsidiary .................. -- 2,090 (91)
----------- ----------- -----------
(9,528) (6,302) (4,975)
----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES, MINORITY INTERESTS, DISCONTINUED
OPERATIONS AND EXTRAORDINARY ITEM .................... (9,443) (2,228) 1,755
Benefit (provision) for income taxes ................... 2,544 1,408 (301)
Minority interests ..................................... 2,647 1,107 (121)
----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
DISCONTINUED OPERATIONS AND EXTRAORDINARY ITEM ......... (4,252) 287 1,333
DISCONTINUED OPERATIONS:
Income (loss) from operations of Lynch Interactive
Corporation distributed to shareholders (less income
Tax (provision) benefit of $3,068, ($5,012), and $736
and minority interests of $578, $1,226, and $714)...... (7,493) 4,929 (3,349)
(Loss) from discontinued operations of Industrial
tape segment (less income tax benefit of $308,
$2,192, and $226 and minority interests of $558,
$1,429, and $239) .................................... (572) (1,859) (862)
Gain on sale of Industrial tape segment
(less income tax provision of $6,495 and
minority interest of $7,013) ......................... 10,431 -- --
EXTRAORDINARY ITEM:
Gain on early extinguishment of debt (less
income tax provision of $355 and minority
interest of $300) .................................... 303 -- --
----------- ----------- -----------
NET INCOME (LOSS) ...................................... $ (1,583) $ 3,357 $ (2,878)
=========== =========== ===========
Weighted average shares outstanding .................... 1,415,000 1,418,000 1,415,000
Basic and diluted earnings (loss) per share:
Income (loss) from continuing operations
before discontinued operations ........................ $ (3.00) $ .20 $ 0.94
Income (loss) from operations of
Lynch Interactive Corporation ....................... (5.30) 3.48 (2.36)
Income (loss) from gain on sale and operations
of industrial tape segement .......................... 6.97 (1.31) (0.61)
Extraordinary item ..................................... .21 -- --
----------- ----------- -----------
NET INCOME (LOSS) ...................................... $ (1.12) $ 2.37 $ (2.03)
=========== =========== ===========
</TABLE>
Accmpanying notes
<PAGE>
<TABLE>
Lynch Corporation and Subsidiaries
Consolidated Statements of Shareholders' Equity
For the Three Years Ended December 31, 1999
(In Thousands except for shares of common stock)
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
SHARES OF COMMON COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY
STOCK OUTSTANDING STOCK CAPITAL EARNINGS INCOME STOCK TOTAL
------------ ---------- ----------- ------------ ------------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DEC 31, 1996 ..... 1,391,034 $ 5,139 $ 8,417 $ 26,472 -- $ (1,105) $ 38,923
Issuance of Treasury Stock .. 26,014 -- 313 -- -- 359 672
Capital transactions of The
Morgan Group, Inc. -- -- (86) -- -- -- (86)
Dividend of East/West
Communications, Inc. -- -- -- (180) -- -- (180)
Net income (loss) for year .. -- -- -- (2,878) -- -- (2,878)
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT DEC 31, 1997 ..... 1,417,048 5,139 8,644 23,414 -- (746) 36,451
Issuance of Treasury Stock .. 1,200 -- 74 -- -- 16 90
Capital transactions of The
Morgan Group, Inc. -- -- (164) -- -- -- (164)
Net income (loss) for year .. -- -- -- 3,357 -- -- 3,357
Other comprehensive income -- -- -- -- 59 -- 59
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT DEC 31, 1998 ..... 1,418,248 5,139 8,554 26,771 59 (730) 39,793
Purchase of Treasury Stock (8,065) -- -- -- -- (523) (523)
Capital transactions of The
Morgan Group, Inc. -- -- (252) -- -- -- (252)
Dividend of Lynch
Interactive Corporation -- -- -- (21,345) (59) -- (21,404)
Net income (loss) for year -- -- -- (1,583) -- -- (1,583)
Other comprehensive income -- -- -- -- (40) -- (40)
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT DEC 31, 1999 ..... 1,410,183 $ 5,139 $ 8,302 $ 3,843 $ (40) $ (1,253) $ 15,991
---------- ---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
<PAGE>
<TABLE>
LYNCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
(In Thousands) Years Ended December 31
-----------------------------------------
1999 1998 1997
-----------------------------------------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income (loss) ($1,583) $3,357 ($2,878)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities of continuing operations:
Adjustment from discontinued operations:
(Income) loss from operations of Lynch Interactive Corporation 7,493 (4,929) 3,349
Loss from operations of industrial tape segment 572 1,859 862
Gain on sale of industrial tape segment (10,431) - -
Extraordinary item (303) - -
Depreciation and amortization 6,234 5,165 3,216
Amortization of deferred financing charges 786 771 632
Gain on sale of stock by subsidiary corporation -- (4,778) (169)
Deferred taxes (2,719) (1,488) (1,279)
Minority interests (2,636) (2,536) (367)
Gain on sale of fixed assets (854) - -
Changes in operating assets and liabilities:
Receivables 678 2,560 1,959
Inventories (3,284) 2,270 22
Accounts payable and accrued liabilities (3,949) 8,317 (3,450)
Other 864 (728) (479)
------------- ---------- ------------
Cash provided by operating activities of continuing operations (9,132) 9,840 1,418
------------- ---------- ------------
INVESTING ACTIVITIES
Capital Expenditures (3,795) (3,297) (3,231)
Investment in Spinnaker Coating - Maine - (47,933) -
Proceeds from sale of industrial tape segment 104,450 - -
Proceeds from sale of fixed assets 2,403 2,696 -
Other 509 (128) (1,339)
------------- ---------- ------------
Cash provided by (used in) investing activities of
continuing operations 103,567 (48,662) (4,570)
------------- ---------- ------------
FINANCING ACTIVITIES
Net borrowings (repayments) of notes payable (36,127) 42,268 1,121
Issuance of long-term debt - 6,025 1,262
Repayment of long-term debt (10,937) (1,954) (1,991)
Deferred financing costs (580) (726) -
(Purchase) sale of treasury stock (523) 90 672
Other - (841) 755
------------- ---------- ------------
Cash provided by (used in) financiging activities of
continuing operations (48,167) 44,862 1,819
------------- ---------- ------------
Net increase (decrease) in cash and cash equivalents 46,268 6,040 (1,333)
Cash provided by (used by) Lynch Interactive Corporation 15,987 (1,880) (557)
Cash provided by (used by) industrial tape segment 5,745 (7,025) 864
------------- ----------- ------------
Increase (decrease) in cash and cash equivalents 68,000 (2,865) (1,026)
Cash and cash equivalents at beginning of period 1,132 3,997 5,023
------------- ---------- ------------
Cash and cash equivalents at end of period, including
$56,026 of Restricted Cash at December 31, 1999 $69,132 $1,132 $3,997
============= ========== ============
</TABLE>
Lynch Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999
1. Accounting and Reporting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Lynch Corporation
(the "Company" or "Lynch") and entities in which it has majority voting control.
All material intercompany transactions and accounts have been eliminated in
consolidation. See Note 4 for details of the spin off of Lynch Interactive
Corporation which occurred on September 1, 1999.
Uses of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
Cash Equivalents
Cash equivalents consist of highly liquid investments with a maturity of less
than three months when purchased.
At December 31, 1999 and 1998, assets of $1.1 million and $1.3 million, which
are classified as cash and cash equivalents, are invested in United States
Treasury money market funds for which affiliates of the Company serve as
investment managers to the respective funds.
Restricted Cash
At December 31, 1999 the Company had $56 million of Restricted Cash. See
discussion of Restricted Cash in Note 6 - Notes Payable and Long-Term Debt.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost and include expenditures for
additions and major improvements. Maintenance and repairs are charged to
operations as incurred. Depreciation is computed for financial reporting
purposes using the straight-line method over the estimated useful lives of the
assets, which range from 3 years to 35 years. For income tax purposes,
accelerated depreciation methods are used.
Excess of Cost over Fair Value of Net Assets of Companies Acquired
Excess of cost over fair value of net assets of companies acquired (goodwill) is
being amortized on a straight-line basis over periods ranging from twenty to
forty years. The Company periodically reviews goodwill to assess recoverability,
and impairments would be recognized in operating results if a permanent
diminution in value were to occur. The Company measures the potential impairment
of recorded goodwill by the undiscounted value of expected future cash flows in
relation to its net capital investment in the subsidiary. Based on its review,
the Company does not believe that an impairment of its goodwill has occurred.
Excess of cost over fair value of net assets acquired include acquisition
intangibles of $23.4 million and $21.6 million, net of accumulated amortization
of $1,391,000 and $574,000 at December 31, 1999 and 1998, respectively.
Revenue Recognition
Revenues, with the exception of certain long-term contracts discussed below, are
recognized on shipment.
Research and Development Costs
Research and development costs are charged to operations as incurred. Such costs
were $571,000, $1,030,000, and $1,022,000 in 1999, 1998, and 1997, respectively.
Earnings Per Share
In 1997, the Company adopted Financial Accounting Standards Board Statement
("SFAS") No. 128, "Earnings Per Share". SFAS No. 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants, and convertible securities. Diluted
earnings per share are very similar to the previously reported fully diluted
earnings per share. The Company's basic and diluted earnings per share are
equivalent as the Company has no dilutive securities.
Segment Information
Effective December 1998, the Company adopted SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information". SFAS No. 131 superseded SFAS
No. 14, "Financial Reporting for Segments of a Business Enterprise". SFAS No.
131 establishes new standards for reporting information about operating
segments. SFAS No. 131 requires disclosure of selected financial and descriptive
information for each operating segment based on management's internal
organizational decision-making structure. Additional information is required on
a company-wide basis for revenues by product or service, revenues and
identifiable assets by geographic location and information about significant
customers. The adoption of SFAS No. 131 did not affect results of operations or
financial position, but did affect the disclosure of segment information. Prior
year amounts have been reclassified to conform to the requirements of SFAS No.
131. See Note 14.
Pension and Other Post-Retirement Benefits
In February 1998, the FASB issued SFAS No. 132, "Employers Disclosures About
Pensions and Other Post-Retirement Benefits", which is an amendment to SFAS
No.'s 87, 88, and 106. This SFAS revises employers' disclosures about pension
and other post-retirement benefits plans. It does not change the measurement or
recognition of those plans. The adoption of SFAS No. 132 in 1998 did not have a
significant impact on the Company's consolidated financial statements as the
Company's benefit plans are not material.
Accounting for Long-Term Contracts
Lynch Systems, Inc., a 91% owned subsidiary of the Company is engaged in the
manufacture and marketing of glass-forming machines and specialized
manufacturing machines. Certain sales contracts require an advance payment
(usually 15% of the contract price) which is accounted for as a customer
advance. The contractual sales prices are paid either (i) as the manufacturing
process reaches specified levels of completion or (ii) based on the shipment
date. Guarantees by letter of credit from a qualifying financial institution are
required for most sales contracts. Because of the specialized nature of these
machines and the period of time needed to complete production and shipping,
Lynch Systems accounts for these contracts using the percentage-of-completion
accounting method as costs are incurred. At December 31, 1999 and 1998, costs in
excess of billings were $95,000 and $0, respectively.
Impairments
The Company accounts for impairments of long-lived assets in accordance with the
provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of". The Company periodically assesses
the net realizable value of its long-lived assets and evaluates such assets for
impairment whenever events or changes in circumstances indicate the carrying
amount of an asset may not be recoverable. For assets to be held and used,
impairment is determined to exist if estimated undiscounted future cash flows
are less than the carrying amount. For assets to be disposed of, impairment is
determined to exist if the estimated net realizable value is less than the
carrying amount.
Stock Based Compensation
The Company accounts for stock based compensation in accordance with the
provisions of SFAS No. 123, "Accounting for Stock Based Compensation". SFAS No.
123 establishes a fair value method of accounting and reporting standards for
stock based compensation plans. However as permitted by SFAS No. 123, the
Company has elected to continue to apply the provisions of Accounting Principles
Board Opinion ("APB") No. 25, if the exercise price of the Company's employee
stock options was not less than the market price of the underlying stock on the
date of grant, no compensation expense is recognized. The Company is required to
disclose the pro forma net income (loss) and net income (loss) per share as if
the fair value method defined in SFAS No. 123 had been applied to all grants
made on or after January 1, 1995. See Note 8 for pro forma disclosures.
Fair Value of Financial Instruments
Cash and cash equivalents, trade accounts receivable, short-term borrowings,
trade accounts payable and accrued liabilities are carried at cost which
approximates fair value due to the short-term maturity of these instruments. The
carrying account of the Company's borrowings under its revolving lines of credit
approximates fair value, as the obligations bear interest at a floating rate.
The fair value of other long-term obligations approximates cost based on
borrowing rates for similar instruments, excluding the Spinnaker Industries,
Inc. ("Spinnaker") senior-secured debt with a carrying value of $109 million at
December 31, 1999 and $115 million at December 31, 1998 and a fair value of
between $87.8 million and $92.3 million, and $100.1 million, respectively, at
December 31, 1999 and 1998, based on quoted market prices.
Issuance of Stock by Subsidiaries and Investees
Changes in the Company's equity in a subsidiary or an investee caused by
issuance of the subsidiary's or investees' stock are accounted for as gains or
losses where such issuance is not part of a broader reorganization (see Note 9).
Reclassifications
The consolidated financial statements reflect the spin off of Lynch Interactive
Corporation (Interactive) from Lynch Corporation that occurred in the third
quarter of 1999 and also the sale by Spinnaker Industries, Inc. (Spinnaker), of
its two industrial tape units, Central Products Company and Spinnaker Electrical
that also occurred in the third quarter of 1999. Accordingly, the operating
results of both Interactive and the industrial tape segment have been segregated
from continuing operations of the Company and are reported as separate line
items on the financial statements as discontinued operations. The comparative
amounts for 1998 and 1997 have also been restated to reflect the above
transactions.
Certain other amounts in the 1998 and 1997 financial statements have been
reclassified to conform to the 1999 presentation. These other reclassifications
are immaterial to the consolidated financial statements taken as a whole.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which is
required to be adopted in years beginning after June 15, 2000. SFAS No. 133
requires the Company to recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value through
income. If the derivative is a hedge, depending on the nature of the hedge,
changes in fair value are either offset against the changes in fair value of
assets and liabilities through earnings or recognized in other comprehensive
income until the hedged item is recognized in earnings. Because of the Company's
minimal use of derivatives, management does not anticipate that the adoption of
SFAS No. 133 will have a significant effect on its earnings or financial
position.
2. Acquisitions
On July 31, 1998, the Company's subsidiary, Spinnaker, acquired tesa tape,
Inc.'s pressure-sensitive electrical tape product line and its Carbondale, IL
manufacturing plant (the "Spinnaker Electrical Acquisition"). The purchase price
totaled $10.7 million, comprised of 200,000 shares of Spinnaker common stock
(subject to adjustment) valued at $3.7 million, $4.5 million in term debt, $2.0
million in cash, and a $0.5 million subordinated note. The acquired business
produces electrical tape for insulating motors, coils and transformers for
customers in Europe, Canada and the U.S. This company was subsequently sold
within the industrial tape segment. See Note 3 - Discontinued Operations.
On March 17, 1998, Spinnaker Coating-Maine, Inc., a wholly owned subsidiary of
Spinnaker, acquired the assets of the pressure-sensitive adhesive-backed label
stock business of S. D. Warren (the "S.D. Warren Acquisition"). The purchase
price was approximately $51.8 million, plus the assumption of certain
liabilities and transaction costs, 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
Company recorded approximately $23.1 million in goodwill which is being
amortized over 30 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 on their respective dates of acquisition. The operating
results of the acquired companies are included in the Consolidated Statements of
Operations from their respective acquisition dates except for the tesa tape
acquisition, which is included in discontinued operations.
The following unaudited pro forma information shows the results of the Company's
operations presented as if the S. D. Warren Acquisition was made at the
beginning of 1997. The unaudited pro forma information is not necessarily
indicative of the results of operations that would have occurred had the
transactions been made at that date nor is it necessarily indicative of future
results of operations.
<TABLE>
<CAPTION>
For the years ended December 31
(In thousands, except per share amounts)
1998 1997
<S> <C> <C>
Sales .................................. $ 199,758 $ 217,614
========= =========
Income (loss) from continuing operations $ (3,053) $ 2,274
========= =========
Net income (loss) ...................... $ 3,197 $ (1,937)
========= =========
Basic and diluted earnings per share:
Income (loss) from continuing operations $ (2.15) $ 1.61
========= =========
Net income (loss)....................... $ 2.25 $ (1.37)
========= =========
</TABLE>
3. Discontinued Operations
On April 9, 1999, Spinnaker entered into a definitive agreement to sell its
industrial tape segment to Intertape for approximately $105 million and
five-year warrants to purchase 300,000 shares of Intertape common stock (New
York Stock Exchange Symbol "ITP") at an exercise price of $29.50 per share. The
warrants were valued at approximately $3.0 million using the Black-Scholes
option pricing model and are reflected in other assets. Accordingly, operating
results of the industrial tape segment have been segregated from continuing
operations and reported as a separate line item on the statement of operations.
The sale of the two industrial tape businesses closed on August 10, 1999 and
July 30, 1999, respectively. The Company recorded gains totaling $17.4 million,
net of applicable income taxes of approximately $6.5 million. Spinnaker offset
the cash tax liability by utilizing net operating loss carry forwards.
The Company has restated its prior financial statements to present the operating
results of the industrial tape segment as a discontinued operation. The
industrial tape segment net sales were $69.5 million, $121.8 million and $119.7
million for the periods ended December 31, 1999 (through the date of sale), 1998
and 1997, respectively.
General corporate office expenses related to finance and administrative
functions including public company compliance reporting, bank and investor
relations, taxes other than income taxes and holding company payroll,
historically allocated and charged to the industrial tape segment were reversed
and allocated back to continuing operations. These expenses were not considered
to be directly attributed to discontinued operations. Historical expenses
allocated back to continuing operations totaled $1.0 million, $1.5 million and
$0.9 million in the periods ended December 31, 1999, 1998 and 1997,
respectively.
Interest expense attributed to the Senior Notes and related deferred financing
has historically been allocated based on the pro rata share of subsidiary debt
obligations retired with the proceeds from the issuance of the Senior Notes, to
total debt obligations retired. The Senior Note proceeds were used to extinguish
certain outstanding term and revolver obligations in October 1996. Interest
expenses charged to the discontinued industrial tape segment totaled $5.2
million for the period ended December 31, 1999 and $8.5 million in the periods
ended December 31, 1998 and 1997.
The assets and liabilities of the industrial tape segment of Spinnaker included
in the accompanying consolidated balance sheet at December 31, 1998 consist of
the following (in thousands):
<TABLE>
<S> <C>
Accounts receivable, net .......................... $14,815
Inventories, net .................................. 18,167
Prepaids and other ................................ 3,244
-------
Current assets of discontinued operations ......... $36,226
=======
Property, plant and equipment, net ................ $48,312
Goodwill and other assets ......................... 23,339
-------
Non-current assets of discontinued operations ..... $71,651
=======
Accounts Payable .................................. $13,720
Accrued liabilities ............................... 4,442
-------
Current liabilities of discontinued operations .... $18,162
=======
Non-current liabilities of discontinued operations $ 3,881
=======
</TABLE>
4. Spin Off
On August 12, 1999, the Board of Directors approved a plan to distribute the
stock of Lynch Interactive Corporation on a one for one basis to the
shareholders of Lynch Corporation ("spin off"). Lynch completed the spin off of
Lynch Interactive Corporation ("Interactive") on September 1, 1999, to
stockholders of record on August 23, 1999. Pursuant to the spin off, each Lynch
shareholder received one share of Interactive common stock for each share of
Lynch owned. Lynch had received a private letter ruling from the Internal
Revenue Service that the spin off would be tax free to Lynch shareholders.
Interactive is listed on the American Stock Exchange under the symbol "LIC".
Interactive owns all of what were Lynch's multimedia and service businesses
while Lynch retained the manufacturing businesses. Interactive owns the
telephone companies, television interests and PCS interests, as well as the 55%
equity interest of The Morgan Group, Inc. In addition, Interactive owns a 13.6%
equity interest in Spinnaker Industries, Inc. Lynch owns a 47.6% equity interest
in Spinnaker (60.4% of voting interest), as well as 100% of M-tron Industries,
Inc. and 92% of Lynch Systems, Inc.
As a result, the Company's multimedia and services segments are being reported
as operations distributed to shareholders in the accompanying consolidated
financial statements. Accordingly, operating results of Lynch Interactive
Corporation have been segregated from continuing operations and reported as a
separate line item on the statements of operations.
Lynch has restated its prior year financial statements to present the operating
results of the Company on a comparable basis. Interactive's net sales were $
204.6 million, $205.2 million, and $194.1 million for the fiscal years ended
December 31, 1999, 1998, and 1997, respectively.
In the third quarter of 1999, Lynch acquired by merger, all of the stock of
Central Scott Telephone Company. This company became part of Lynch Interactive
and was included in the spin off.
Lynch Interactive and Lynch have entered into certain agreements governing
various ongoing relationships, including the provision of support services and a
tax allocation agreement. The tax allocation agreement provides for the
allocation of tax attributes to each company as if it had actually filed with
the respective tax authority. At the spin off, the employees of the corporate
office of Lynch Corporation became the employees of Lynch Interactive
Corporation and Lynch Interactive Corporation began providing certain support
services to Lynch. The Company was charged a management fee for these services
amounting to approximately $200,000 in 1999.
The net assets of Interactive included in the accompanying audited consolidated
balance sheet as of December 31, 1998 consist of the following: (in thousands)
<TABLE>
<S> <C>
Cash, cash equivalents and marketable securities ......... $ 27,988
Accounts receivable, net ................................ 18,853
Deferred income taxes .................................... 4,265
Prepaid expenses and other ............................... 6,941
--------
Current assets of subsidiaries distributed to shareholders $ 58,047
========
Property, plant and equipment, net .................... $ 91,183
Goodwill ................................................. 47,740
Investment in and advances to PCS license holders ..... 23,360
Other assets ............................................ 8,012
--------
Non-current assets of subsidiaries
distributed to shareholders ........................... $170,295
========
Notes payable ............................................ $ 2,037
Accounts payable ......................................... 4,662
Accrued liabilities ...................................... 21,902
Current portion of long term debt ........................ 8,639
--------
Current liabilities of subsidiaries
distributed to shareholders ............................ $ 37,240
========
Long Term Debt............................................ $119,024
Deferred income tax ...................................... 13,062
Other long term debt .................................... 4,987
Minority interest ........................................ 10,527
--------
Non-current liabilities and
minority interest of subsidiaries
distributed to shareholders ............................. $147,600
========
</TABLE>
The net assets distributed to interactive were estimated to be $ 23.0 million at
September 1, 1999. Such amount was subsequently decreased in the fourth quarter
by $1.6 million to reflect revised estimates of liabilities distributed.
5. Inventories
Inventories are stated at the lower of cost or market value. Inventories valued
using the last-in, first-out (LIFO) method comprised approximately 12% and 9% of
consolidated inventories at December 31, 1999 and 1998, respectively.
Inventories at Spinnaker Coating, 80% and 82% of inventories at December 31,
1999 and 1998, respectively, are valued using the specific identification
method. The balance of inventories are valued using the first-in-first-out
(FIFO) method.
<TABLE>
<CAPTION>
December 31
1999 1998
(In Thousands)
<S> <C> <C>
Raw materials and supplies $10,407 $ 7,711
Work in progress ......... 2,114 1,273
Finished goods ........... 19,159 19,412
------- -------
Total ................. $31,680 $28,396
======= =======
</TABLE>
Current cost exceeded the LIFO value of inventories by $829,000 and $880,000 at
December 31, 1999 and 1998, respectively.
6. Notes Payable and Long-term Debt
<TABLE>
Long-term debt consists of (all interest rates are at December 31, 1999):
<CAPTION>
December 31
1999 1998
(In Thousands)
<S> <C> <C>
Spinnaker Industries, Inc. 10.75% Senior
Secured Notes due 2006 .............................................. $ 108,585 $ 115,000
Unsecured note issued in connection with
acquisition at a fixed interest rate of 10% ......................... 7,000 7,500
Other .................................................................. 2,816 6,503
--------- --------
118,401 129,003
Current maturities ..................................................... (1,636) (2,027)
--------- --------
$ 116,765 $126,976
========= ========
</TABLE>
On October 23, 1996, Spinnaker completed the issuance of $115,000,000 of 10.75%
senior-secured debt due 2006. The debt proceeds were used to extinguish
substantially all existing bank debt, bridge loans and lines of credit at
Spinnaker and its two major operating subsidiaries, Central Products and
Spinnaker Coating. Financing costs were incurred by Spinnaker in conjunction
with the issuance of the 10.75% senior secured notes and other financing
activities. These financing costs are deferred and amortized over the term of
the related debt. Unamortized financing costs of $5.4 million and $5.7 million
at December 31, 1999 and 1998, respectively, are included in other assets.
The notes are redeemable, in whole or in part, at the option of Spinnaker on or
after October 15, 2001, at redemption prices beginning at 105.375% of the
principal amount declining to 100% of the principal amount on October 15, 2005,
plus accrued and unpaid interest. The notes are unconditionally guaranteed,
jointly and severally, by Spinnaker's subsidiaries, Spinnaker Coating, Inc., and
Entoleter, Inc.
Spinnaker completed the sale of Central Products on August 10, 1999 and $18.2
million of the proceeds were used to repay the working capital revolver debt.
Any net cash proceeds from the sale of Central Products ("Restricted Proceeds")
not invested in any business within 270 days after the sale of Central Products
or not used within that time to permanently reduce indebtedness (other than
subordinated debt) shall be deemed to be excess proceeds. At December 31, 1999,
the amount of net cash proceeds, which are restricted in their future use, has
been classified as Restricted Cash on the Company's balance sheet. If any excess
proceeds exist 270 days after the sale of Central Products, Spinnaker is
obligated to utilize those proceeds to make an offer to purchase the Senior
Notes at par plus accrued interest.
During the third and fourth quarters of 1999, Spinnaker Electrical purchased a
total of $6.4 million of the outstanding Senior Notes on the open market at an
average price of 81.5% of par value. The Company has recorded a gain on the
early extinguishment of debt of approximately $303,000, which amount has been
reduced by the write-off of a proportional amount of deferred financing costs
and after giving effect to taxes and minority interest.
The proceeds from the sale of Spinnaker Electrical, an unrestricted subsidiary
under the Indenture, were used to repay approximately $6.9 million of certain
term debt and working capital revolver debt collateralized by the assets of
Spinnaker Electrical. The remaining net proceeds will be used for general
corporate purposes, which may include purchasing Senior Notes in the open
market. Other options include acquisitions, capital expenditures, and / or
repurchase shares of Spinnaker common stock. Subsequent to December 31, 1999,
Spinnaker utilizing the Restricted Proceeds, purchased $33.4 million (par value)
of outstanding Senior Notes on the open market at an average price of 83.6%. In
addition, Spinnaker purchased all of the Senior Note holdings of Spinnaker
Electrical at 81.5% of par value, plus accrued interest, representing Spinnaker
Electrical's cost basis.
At December 31, 1998, the Company had two lines of credit totaling $20.0
million, of which $4.9 million was available. In conjunction with the spin off
of Lynch Interactive, these credit facilities were transferred from the Company
to Interactive.
On a consolidated basis, at December 31, 1999, Lynch maintains short-term and
long-term line of credit facilities totaling $43.7 million (subject to
limitations that reduce the availability to $35.4 million), of which $12.3
million was available for future borrowings. Spinnaker Industries, Inc.
maintains lines of credit at its subsidiaries which in the aggregate total $40.0
million (subject to limitations that reduce the availability to $32.0 million),
of which $11.5 million was available at December 31, 1999. These facilities, as
well as facilities at other subsidiaries of Lynch, 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. At December 31, 1999, $ 3.7 million of
these total facilities expire within one year and subsequent to year-end were
extended to March of 2001. The weighted average interest rate for short-term
borrowings at December 31, 1999 was 8.05%. The Company pays fees ranging from 0%
to 0.375% on its unused lines of credit.
In general, the long-term debt facilities are secured by substantially all of
the Company's property, land and equipment, inventory, receivables and common
stock of certain subsidiaries and contain certain covenants restricting
distributions to Lynch. At December 31, 1999, and 1998, substantially all the
subsidiaries' net assets are restricted.
Cash payments for interest were $10.6 million, $7.2 million and $4.8 million for
the years ended December 31, 1999, 1998 and 1997, respectively.
Aggregate principal maturities of long-term debt for each of the next five years
are as follows: 2000 -- $ 1.6 million; 2001 -- $ .4 million; 2002 -- $ .4
million; 2003 -- $ 7.6 million and 2004 -- $0 million.
7. Minority Interests and Related Party Transactions
On July 31, 1998, Spinnaker completed the acquisition of the electrical tape
division of tesa tape, inc. (see Note 2). A portion of the purchase price was
200,000 newly issued shares of Spinnaker Class A common stock (subject to
certain adjustments). In accordance with the Company's policy, as a result of
this issuance, the Company recorded a pre-tax gain on the sale of subsidiary
stock of $2.1 million in 1998.
On June 13, 1994, Spinnaker entered into a management agreement (the "Management
Agreement") with Boyle, Fleming & Co., Inc. ("BF"), of which a former Director
of the Company is a principal, to assume the management of Spinnaker. Effective
August 31, 1996, the Management Agreement was terminated at which time Messrs.
Boyle and Fleming became employees of Spinnaker. Spinnaker and BF also entered
into a Warrant Purchase Agreement in 1994, pursuant to which BF received
warrants to purchase common stock of Spinnaker (equating to a 20% ownership of
Spinnaker at that time) at any time on or before June 30, 1999, subject to
certain restrictions. The remaining warrants were exercised in January 1998. Mr.
Boyle is currently a member of the Office of the Chairman and Mr. Fleming
remains President.
On October 23, 1996, concurrent with the issuance of the $115 million senior
notes (see Note 6), Spinnaker acquired the remaining 25% minority interest in
its Spinnaker Coating subsidiary. The terms of the acquisition involved a cash
payment of approximately $2.3 million and the issuance of 9,613 shares of
Spinnaker Common Stock. In addition, as part of the consideration for the shares
of capital stock of Spinnaker Coating, the minority shareholders received the
right to a contingent payment, which is exercisable at any time during the
period beginning October 1, 1998 and ending September 30, 2000. The contingent
payment is based upon the percentage of the capital stock owned by the former
Spinnaker Coating entity at the time of the merger multiplied by the fair market
value of the capital stock of Spinnaker Coating, as determined in accordance
with certain economic assumptions and including an adjustment for a minority
ownership discount, as of the date such right is exercised, less the
consideration received at closing. The contingent price is payable through the
issuance of Common Stock of Spinnaker, unless Spinnaker elects to pay the
contingent price in cash. If such payments are made in cash, they could give
rise to a default under the Senior Notes, unless there is sufficient
availability under provisions regarding restricted payments contained in the
Senior Notes. The amount of the contingent payment is currently being
determined. Any contingent consideration paid in the future will be allocated to
goodwill.
In connection with the purchase of the Spinnaker Coating minority interest, all
the Spinnaker Coating options were accelerated and in turn certain key
executives of Spinnaker Coating management exercised those options to purchase
71,065 shares of Spinnaker Coating common stock at various prices between $7.16
and $14.69 per share, for a total of approximately $670,000. The options were
originally granted in 1994 and were issued at not less than 100% of the fair
market value of the common stock at the date of grant.
8. Stock Option Plans
In accordance with Spinnaker's directors stock option plan, Spinnaker may grant
stock options to directors who are not employees of Spinnaker. In February 1996,
Spinnaker granted 30,000 stock options for the purchase of one share each of
Spinnaker Class A Common Stock and Spinnaker Common Stock at a total price of
$40 per option exercised (adjusted for the stock dividend in August 1996) to
qualifying directors. The options vest over a two-year period with 15,000
options becoming exercisable two years after the grant date. The options expire
on the fifth anniversary after the grant date or 30 days after the director
ceases to be a director. In January of 1997, under the same terms, Spinnaker
issued 10,000 stock options for the purchase of one share of Common Stock at an
exercise price of $27 per share. As permitted by SFAS No. 123, Spinnaker elected
to account for these options under APB No. 25 and as such no compensation
expense was recorded because the option exercise price was not less than the
market price at the date of grant. All of these options are currently
outstanding and exercisable.
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123, and has been determined as if Spinnaker had accounted for its
director stock options under the fair value method of that statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions: risk-free
interest rates of 6.09%-5.58%; dividend yields of 0%, volatility factors of the
expected market price of the Spinnaker's common stock of .50; and a
weighted-average expected life of the options of 3 years. For purposes of pro
forma disclosures, the estimated fair value of the options is amortized to
expense over the options vesting period. The estimated weighted-average fair
value per option is approximately $14.62 and $10.40 for the 1997 and 1996
options, respectively. The pro forma effect on Lynch's 1999, 1998 and 1997
operations is as follows (in thousands, except for per share amounts):
<TABLE>
<CAPTION>
--------------------------------------------
1999 1998 1997
--------------------------------------------
<S> <C> <C> <C>
As reported:
Net Income (loss) $ (1,583) $ 3,357 $ (2,878)
Per share:
Basic $ (1.12) $ 2.37 $ (2.03)
Diluted (1.12) 2.37 (2.03)
Pro forma:
Net income (loss) $ (2,832) $ 3,326 $ (2,950)
Per share:
Basic $ (2.00) $ 2.35 $ (2.08)
Diluted (2.00) 2.35 (2.08)
</TABLE>
9. Shareholders' Equity
The Board of Directors has authorized the purchase of up to 400,000 shares of
Common Stock. Through December 31, 1999, 238,991 shares had been purchased at an
average cost of $14.88 per share.
In January 1994, an officer was granted stock options to purchase up to 24,516
shares of Lynch common stock at an exercise price of $23.125, the closing price
on the date of grant. These options were exercised in January 1997 and shares
were issued from Treasury.
On February 1, 1996, the Company adopted a plan to provide a portion of the
compensation for its directors in common shares of the Company. The amount of
common stock is based upon the market price at the end of the previous year.
Through December 31, 1999, 4,126 shares have been awarded under this program.
On February 29, 1996, the Company adopted a Stock Appreciation Rights program
for certain employees. To date, 43,000 of Stock Appreciation Rights ("SAR") have
been granted at prices ranging from $63 to $85 per share (pre spin off prices).
Upon the exercise of a SAR, the holder is entitled to receive an amount in cash
equal to the amount by which the market value of the Company's common stock on
the exercise date exceeds the grant price of the SAR. Effective September 30,
1998, the Company amended the SAR Program so that the SAR's became exercisable
only if the market price for the Company's shares exceeds 200% of the SAR
exercise price within five years from original grant date. This amendment
eliminated the recording of the profit and loss effect of the SAR's for changes
in the market price in the Company's common stock until it becomes probable that
the SAR's will become exercisable. The net income (expense) relating to this
program, prior to the time of the amendment, was $185,000 in income in 1998 and
($439,000) of expense in 1997.
Subsequent to the spin off of Interactive, the Company, with the concurrence of
the holders of all outstanding SAR units, terminated its SAR program for
corporate management, including all outstanding units, thus eliminating possible
future profit and loss and cash flow distortions associated with the progam. As
a result of the termination, the Company recorded approximately $700,000 of
related corporate expense in the fourth quarter.
10. Income Taxes
The Company files consolidated federal income tax returns which include all
subsidiaries including Interactive through the date of the spin off, but
excluding Spinnaker for all periods.
<PAGE>
Deferred income taxes for 1999 and 1998 are provided for the temporary
differences between the financial reporting basis and the tax basis of the
Company's assets and liabilities. Cumulative temporary differences and
carryforwards at December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
(In thousands) Deferred Tax Deferred Tax
Asset Liability Asset Liability
<S> <C> <C> <C> <C>
Inventory reserve ............ $ 1,493 -- $ 451 --
Fixed assets written up under
Purchase accounting and
Tax over book depreciation -- $ 6,782 -- $ 11,144
Discount on long-term debt ... -- -- -- (1,783)
Basis difference in subsidiary
and affiliate stock ....... -- 1,105 -- 1,123
Net operating losses of
Subsidiaries ................. 850 -- 7,166 --
Other reserves and accruals .. 6,600 -- 1,622 --
Other ........................ -- (1,662) 2,475 1,231
------- -------- -------- --------
Total deferred income taxes .. $ 8,943 $ 6,225 11,714 $ 11,715
======== ======== ======== ========
</TABLE>
Spinnaker has net operating loss carryforwards of approximately $2.2 million at
December 31, 1999 which expire in 2018.
The provision (benefit) for income taxes from continuing operations is
summarized as follows:
<TABLE>
<CAPTION>
(In Thousands) 1999 1998 1997
Current:
<S> <C> <C> <C>
Federal ..................................... $ (158) $ 2,048 $ 5,171
State and local ............................. -- 921 250
------- ------- ------
Deferred: ...................................... (158) 2,969 5,421
------- ------- ------
Federal ..................................... (2,386) (3,435) (5,069)
State and local ............................. -- (942) (51)
------- ------- ------
(2,386) (4,377) (5,120)
------- ------- ------
$(2,544) $(1,408) $ 301
======= ======= ======
</TABLE>
A reconciliation of the provision (benefit) for income taxes from continuing
operations and the amount computed by applying the statutory federal income tax
rate to income before income taxes, minority interest and extraordinary item:
<TABLE>
<CAPTION>
(In Thousands) 1999 1998 1997
<S> <C> <C> <C>
Tax at statutory rate ....................... $(3,211) $ (757) $ 597
Increases (decreases):
State and local taxes, net of federal benefit -- (288) 135
Amoritization of goodwill ................... 60 81 129
Operating losses of subsidiaries ............ 164 (546) (126)
Additional tax provision... ................. 338 -- --
Other ....................................... 105 102 (434)
------ ------ ------
$(2,544) $(1,408) $ 301
======= ======= =======
</TABLE>
11. Employee Benefit Plans
The Company, through its operating subsidiaries, has several and various
employee retirement type plans including defined benefit, defined contribution,
multi-employer, profit sharing, and 401 (k) plans. The following table sets
forth the consolidated expenses for these plans (dollars in thousands):
<TABLE>
<CAPTION>
(In Thousands) 1999 1998 1997
<S> <C> <C> <C>
Defined Contribution $ 561 $ 643 $ 839
Defined Benefit .... 166 150 473
Multi-Employer ..... 121 80 173
------ ------ ------
Total ........... $ 848 $ 873 $1,485
</TABLE>
The Company's most significant benefit plans are maintained by Spinnaker's
Coating business. Following are details of those plans:
The net periodic pension cost for the year ended December 31, 1999 and 1998
included the following components:
<TABLE>
<CAPTION> 1999 1999 1998 1998
-------------------------------------
Union Non-Union Union Non-Union
-------------------------------------
<S> <C> <C> <C> <C>
Service Cost - benefits earned during the period $ 105 $ 137 $ 69 $ 100
Interest cost on projected benefit obligation .. 21 51 11 50
Expected return on assets ...................... (6) (9) -- --
Recognized (gains) or losses ................... 1 (13) -- --
----- ----- ----- -----
Net periodic pension cost ...................... $ 121 $ 166 $ 80 $ 150
----- ----- ----- -----
</TABLE>
Theforegoing measurement of net periodic pension cost is based on the following
assumptions:
<TABLE>
<S> <C> <C> <C> <C>
Weighted-average discount rate ... 8.00% 8.00% 7.50% 7.50%
Weighted-average rate
of compensation increase ...... N/A 4.00% N/A 4.00%
Weighted-average expected
long-term rate of return on plan 8.00% 8.00% 8.00% 8.00%
</TABLE>
The following table sets forth the union and non-union plans' benefit obligation
information as of December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1999 1998 1998
----------------------------------------
Union Non-Union Union Non-Union
-----------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Benefit obligation at acquisition date ......... $ 288 $ 1,081 $ 186 $ 835
Service cost - benefits earned during the period
106 137 69 100
Interest cost on projected benefit obligation .. 21 51 11 50
Actuarial (gains) losses ....................... (44) (504) 22 96
Benefits paid .................................. (1) (2) -- --
------- ------- ------- -------
Benefit obligation at end of year .............. $ 370 $ 763 $ 288 $ 1,081
------- ------- ------- -------
</TABLE>
There were no plan assets for the union and non-union plans as of December 31,
1999 and 1998.
The following table sets forth the union and non-union plans' funded status as
of December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1999 1998 1998
-----------------------------------------
Union Non-Union Union Non-Union
----------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Funded status .......................... $ (173) $ (481) $ (288) $(1,081)
Unrecognized actuarial (gains) losses
(25) (398) 22 96
------- ------- ------- -------
Net amount recognized .................. $ (198) $ (879) $ (266) $ (985)
------- ------- ------- -------
Amounts recognized in the balance sheet:
Net amount recognized .................. $ (198) $ (879) $ (266) $ (985)
------- ------- ------- -------
</TABLE>
Spinnaker Coating has a defined contribution plan that covers substantially all
of its employees. Under the plan, Spinnaker Coating can match, at its
discretion, up to 50% of employee contributions not exceeding 8% of the
employee's compensation. Amounts contributed to the plan by Spinnaker Coating
are 20% vested each year for five years. On the acquisition date, employees of
Spinnaker Coating who were previously employed by Kimberly-Clark Corporation
received vesting rights based on the years of credited service with
Kimberly-Clark Corporation. Spinnaker Coating recorded expense for its
contributions under the plan of approximately $542,000, $559,000, and $442,000
in 1999, 1998 and 1997, respectively.
12. Commitments and Contingencies
In the normal course of business subsidiaries of the Company are defendants in
certain product liability, worker claims and other litigation in which the
amounts being sought may exceed insurance coverage levels. The resolution of
these matters is not expected to have a material effect on the Company's
financial condition or operations.
Future minimum rental payments under long-term non-cancelable operating leases
are as follows at December 31, 1999 (in thousands):
<TABLE>
<S> <C>
2000-------------------------------------------------------- $ 278
2001-------------------------------------------------------- 256
2002-------------------------------------------------------- 256
2003-------------------------------------------------------- 283
2004-------------------------------------------------------- 281
Thereafter-------------------------------------------------- 200
-------
$1,554
</TABLE>
Rent expense under operating leases were $1,222,000, $952,000 and $416,000 for
the years ended December 31, 1999, 1998 and 1997, respectively. The Company
leases certain property and equipment, including warehousing and sales and
distribution equipment, under operating leases that extend from one to ten
years. Certain of these leases have renewal options and escalation provisions.
The Company is party to a lease for its corporate office for an annual payment
of approximately $30,000 with an affiliate of its Chairman.
13. Segment Information
The Company has two reportable business segments. The larger of the two is the
manufacture and sale of adhesive backed label stock for labels and related
applications. The other reportable segment is the manufacture and sale of
frequency control devices (quartz crystals and oscillators). The Company is also
engaged in the manufacture and sale of glass forming, impact milling and other
equipment, and these results are combined and reported as Other Manufacturing.
Each of the businesses is located domestically, and export sales were
approximately $22.6 million in 1999, $21.2 million in 1998 and $26.2 million in
1997. For the years ended December 31, 1999, 1998 and 1997 one customer
accounted for $18.3 million, $17.7 million, and $21.4 million, respectively, of
the adhesive-backed label stock segment's net sales. The Company considers
concentrations of credit risk to be minimal due to its diverse customer base.
EBITDA (before corporate allocation) for operating segments is equal to
operating profit before depreciation, amortization and allocated corporate
expenses. EBITDA is presented because it is a widely accepted financial
indicator of value and ability to incur and service debt. EBITDA is not a
substitute for operating income or cash flows from operating activities in
accordance with generally accepted accounting principles.
Operating profit (loss) is equal to revenues less operating expenses, excluding
unallocated general corporate expenses, interest and income taxes. The Company
allocates a portion of its general corporate expenses to its operating segments.
Such allocation was $ 300,000 per year during the years ended December 31, 1999,
1998 and 1997, respectively. Identifiable assets of each industry segment are
the assets used by the segment in its operations excluding general corporate
assets. General corporate assets are principally cash and cash equivalents,
short-term investments and certain other investments and receivables.
<TABLE>
<CAPTION>
Years ended December 31
1999 1998 1997
(In thousands)
Revenues
<S> <C> <C> <C>
Adhesive-backed label stock .................. $ 155,112 $ 151,561 $ 106,787
Frequency control devices .................... 26,484 22,798 22,828
Other manufacturing .......................... 12,626 13,285 24,120
--------- --------- ---------
Consolidated total ........................... $ 194,222 $ 187,644 $ 153,735
========= ========= =========
EBITDA (before corporation allocation)
Adhesive-backed label stock .................. $ 8,889 $ 12,010 $ 9,027
Frequency control devices .................... 2,640 2,073 2,199
Other manufacturing .......................... (1,188) (1,411) 1,206
Corporate manufacturing expenses ............. (2,681) (2,903) (2,112)
--------- --------- ---------
Total manufacturing .......................... 7,660 9,769 10,320
Corporate expenses, gross .................... (1,452) (530) (374)
--------- --------- ---------
Consolidated total ........................... $ 6,208 $ 9,239 $ 9,946
========= ========= =========
Operating Profit
Adhesive-backed label stock .................. $ 4,155 $ 8,104 $ 6,923
Frequency control devices .................... 1,800 1,428 1,610
Other manufacturing .......................... (1,821) (1,922) 850
Corporate manufacturing expenses ............. (2,894) (3,006) (2,279)
--------- --------- ---------
Total manufacturing .......................... 1,240 4,604 7,104
Unallocated corporate expense ................ (1,155) (530) (374)
--------- --------- ---------
Consolidated Total ........................... $ 85 $ 4,074 $ 6,730
========= ========= =========
Depreciation and Amortization
Adhesive-backed label stock .................. $ 4,785 $ 3,906 $ 2,104
Frequency control devices .................... 740 645 589
Other manufacturing .......................... 528 511 429
Corporate manufacturing expenses ............. 967 874 726
--------- --------- ---------
Consolidated Total ........................... $ 7,020 $ 5,936 $ 3,848
========= ========= =========
Capital expenditures
Adhesive-backed label stock .................. $ 2,625 $ 2,219 $ 1,854
Frequency control devices .................... 804 878 688
Other manufacturing .......................... 366 200 689
--------- --------- ---------
Consolidated Total ........................... $ 3,795 $ 3,297 $ 3,231
========= ========= =========
Total Assets
Adhesive-backed label stock .................. $ 105,674 $ 105,463 $ 47,188
Frequency control devices .................... 10,940 8,898 8,858
Other manufacturing .......................... 86,699 19,688 27,892
Discontinued Operations:
Lynch Interactive ......................... -- 228,342 239,918
Industrial tape business .................. -- 110,256 95,582
General Corporate ............................ 7,879 7,353 4,198
--------- --------- ---------
Consolidated Total ........................... $ 211,192 $ 480,000 $ 423,636
========= ========= =========
Total operating profit for reportable segments $ 85 $ 4,074 $ 6,730
Other profit or loss:
Investment income .......................... 2,354 199 305
Interest expense ........................... (11,882) (8,591) (5,189)
Gain on sales of subsidiary stock ........... -- 2,090 (91)
--------- --------- ---------
Income (loss) from continuing operations
before income taxes, minority interests
and extraordinary item .................... $ (9,443) $ (2,228) $ 1,755
========= ========= =========
</TABLE>
14. Quarterly Results of Operations (unaudited)
The following is a summary of the quarterly results of operations for the years
ended December 31, 1999 and 1998 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1999 Three Months Ended
Mar. 31(a) June 30 Sep. 30 (b) Dec. 31 (b)
<S> <C> <C> <C> <C>
Sales and revenues .................. $ 46,411 $ 47,363 $ 51,070 $ 49,378
Operating profit .................... (312) 701 1,013 (1,317)
Income (loss) from continuing
Operations ....................... (975) (500) (617) (2,160)
Net income (loss) ................... (10,991) 427 7,892 1,089
Basic and diluted earnings per share:
Income (loss) from continuing
operations
Net income (loss) ................... (0.69) (0.35) (0.44) (1.53)
(7.75) 0.30 5.59 (.77)
1998 Three Months Ended
Mar. 31 June 30 Sep. 30(c) Dec. 31
Sales and revenues .................. $ 39,505 $ 49,505 $ 49,824 $ 49,257
Operating profit (loss) ............. 1,242 1,575 1,663 (385)
Income (loss) from continuing
Operations ....................... (98) (358) 1,070 (3,507)
Net income (loss) ................... (436) 1,324 2,149 320
Basic and diluted earnings per share:
Income (loss) from continuing
operations ....................... (0.06) (0.26) 0.76 (2.48)
Net income (loss) ................... (0.30) 0.93 1.52 0.22
<FN>
NOTE:
a) Includes write down of PCS licenses of $15.4 million of Lynch Interactive
Corporation
b) Includes gain on sale of Industrial Tape Segment of Spinnaker of $10.4
million after income taxes, and minority interest.
c) Includes gain on sale of subsidiary stock of $2,127.
</FN>
</TABLE>
15. Subsequent Events
In March 2000 Lynch Systems completed a project specific line of credit totaling
$7.1 million related to a contract to deliver equipment in 2000. Substantially
all assets of Lynch Systems are pledged in support of the credit facility. In
addition, the Company has guaranteed the full amount of the credit facility and
has pledged $4 million of its Class A Common Stock of Spinnaker as additional
collateral.
In March, 2000 the Company completed the previously announced sale of 100,000
shares of its common stock to its Chairman at $30 per share, or $3 million. This
transaction is subject to shareholder approval at the Company's 2000 annual
meeting. These funds will be available for general corporate purposes.
SCHEDULE I
<TABLE>
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
LYNCH CORPORATION (PARENT COMPANY)
CONDENSED BALANCE SHEETS
<CAPTION>
December 31
-------------------------
ASSETS 1999 1998
--------------------------
CURRENT ASSETS
<S> <C> <C>
Cash and Cash Equivalents ....................... $ 1,154 $ 291
Marketable Securities and Short Term Investments 24 874
Deferred Income Taxes ...... ................... 412 140
Other Current Assets ........................... 81 40
------- -------
1,671 1,345
OFFICE EQUIPMENT - Net .............................. -- 52
OTHER ASSETS (Principally investments in and
amounts due from consolidated subsidiaires)...... 16,643 72,729
------- -------
TOTAL ASSETS ...................................... $18,314 $74,126
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITITES .............................. $ 2,110 $22,832
LONG TERM DEBT .................................... -- 8,623
DEFERRED INCOME TAXES ......... ................... -- 980
LONG TERM LIABILITIES ............................. 213 --
DEFERRED CHARGES .................................. -- 1,898
SHAREHOLDERS' EQUITY
Common Stock 5,139 5,139
Other Shareholders' Equity 10,852 34,654
------- -------
TOTAL SHAREHOLDERS' EQUITY ........................ $15,991 $39,793
------- -------
Total Liabilities and Shareholders' Equity ........ $18,314 $74,126
======= =======
</TABLE>
See accompanying Notes to Condensed Financial Information
<PAGE>
<TABLE>
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
LYNCH CORPORATION (PARENT COMPANY)
CONDENSED STATEMENTS OF OPERATIONS
<CAPTION>
Years Ended December 31
-----------------------------------
1999 1998 1997
-----------------------------------
<S> <C> <C> <C>
Interest, Dividends & Gains on Sale of Marketable Securities $ 17 $ 128 $ 377
Interest & Other Income from Subsidiaries 23 35 35
------- ------- -------
TOTAL INCOME ............................................... 40 163 412
Costs & Expenses:
Unallocated Corporate Administrative Expense ............... 1,155 1,371 1,436
Interest Expense ........................................... 7 1,394 1,257
Interest Expense to Subsidiaries ........................... 23 830 741
------- ------- -------
TOTAL COSTS AND EXPENSES.................................... 1,185 3,595 3,434
------- ------- -------
LOSS BEFORE INCOME TAXES AND EQUITY IN NET
(LOSS) OF SUBSIDIARIES ..................................... (1,145) (3,432) (3,022)
Income Tax Benefit ......................................... 321 1,648 1,142
Equity in Net Income (Loss) of Subsidiaries ................ (759) 5,141 (998)
NET INCOME (LOSS) .......................................... ($1,583) $ 3,357 ($2,878)
======= ======= =======
</TABLE>
See accompanying Notes to Condensed Financial Information
<TABLE>
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
LYNCH CORPORATION (PARENT COMPANY)
CONDENSED STATEMENTS OF CASH FLOW
<CAPTION>
Year Ended December 31
-----------------------------
1999 1998 1997
--------- -------- -------
Cash provided from (used in)
<S> <C> <C> <C>
Operating Activities $ 405 $ 1,049 (25)
------- ------- -------
INVESTING ACTIVITIES:
Investment in Lynch Manufacturing ................ 981 3,000 1,135
Investment and Advances to Brighton Communications -- -- (17)
Investment in and advances to PCS Partnerships ... -- 3,692 (8,628)
Other ............................................
-- (176) (94)
------- ------- -------
NET CASH PROVIDED FROM (USED IN) INVESTING
ACTIVITIES .................................... 981 6,516 (7,604)
------- ------- -------
FINANCING ACTIVITIES:
Net Borrowings ................................... -- (7,564) 7,179
Lines of Credit .................................. -- -- --
(Purchase) Sale of Treasury Stock ................ (523) -- 672
Other ............................................ -- -- --
------- ------- -------
NET CASH (USED IN) PROVIDED FROM FINANCING
ACTIVITIES .................................... (523) (7,564) 7,851
------- ------- -------
TOTAL INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ................................... 863 1 222
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 291 290 68
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR ......... $ 1,154 $ 291 $ 290
======= ======= =======
</TABLE>
See accompanying Notes to Condensed Financial Information
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
In the parent company's financial statements, the Company's investment in
subsidiaries is stated at cost plus equity in undistributed earnings of the
subsidiaries.
NOTE B - SPIN OFF OF LYNCH INTERACTIVE CORPORATION
On August 12, 1999, the Board of directors approved a plan to distribute the
stock of Lynch Interactive Corporation on a one for one basis to the
shareholders of Lynch Corporation ("spin off"). Lynch completed the spin off of
Lynch Interactive Corporation ("Interactive") on September 1, 1999, to
stockholders of record on August 23, 1999. Pursuant to the spin off, each Lynch
shareholder received one share of Interactive common stock for each share of
Lynch owned. Lynch had received a private letter ruling from the Internal
Revenue Service that the spin off would be tax free to Lynch shareholders.
Interactive is listed on the American Stock Exchange under the symbol "LIC".
NOTE C - DIVIDENDS FROM SUBSIDIARIES
Cash dividends paid to Lynch Corporation from the Registrant's consolidated
subsidiaries were $0 in 1999, $3,060,000 in 1998 and $1,195,000 in 1997. No
other dividends were received from subsidiaries or investees.
NOTE D - LONG-TERM DEBT
At December 31, 1998 the Company had a note payable to a subsidiary with a
principal amount of $6.0 million at a fixed interest rate of 6%, due 2001. Such
note was transferred to Lynch Interactive in connection with the spin-off.
NOTE E - SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR ADDITIONAL
INFORMATION.
<TABLE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
LYNCH CORPORATION AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
ADDITIONS ADDITIONS
BALANCE AT CHARGED TO
BEGINNING CHARGED TO COSTS OTHER ACCOUNTS BALANCE AT END
OF PERIOD AND EXPENSES DESCRIBE DEDUCTIONS OF PERIOD
DESCRIBE (B)
DESCRIPTION
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1999
ALLOWANCE FOR UNCOLLECTIBLE $ 395,000 $ 81,000 $ 0 $115,000 $361,000
YEAR ENDED DECEMBER 31, 1998 $910,000(A)
ALLOWANCE FOR UNCOLLECTIBLE $1,448,000 $723,000 $ 0 $866,000 $395,000
YEAR ENDED DECEMBER 31, 1997
ALLOWANCE FOR UNCOLLECTIBLE $1,525,000 $742,000 $ 0 $819,000 $1,448,000
<FN>
(A) ALLOCATION OF VALUATION ACCOUNT TO SEGMENTS SOLD OR SPUN OFF
(B) UNCOLLECTIBLE ACCOUNTS WRITTEN OFF ARE NET OF RECOVERIES
</FN>
</TABLE>
<PAGE>
LYNCH CORPORATION
Pursuant to the requirements of Section 13 and 15 (d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this amendment to be signed
on its behalf by the undersigned, thereunto duly authorized.
By:s/LOUIS A. GUZZETTI
- ----------------------
LOUIS A. GUZZETTI
Chief Executive Officer (Principal
Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
amendment has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
<S> <C> <C>
* MARIO J. GABELLI Chairman of the Board of
- ------------------
MARIO J. GABELLI Directors and Director April 20, 2000
s/LOUIS A. GUZZETTI Principal Executive Officer April 20, 2000
- -------------------
LOUIS A. GUZZETTI and Director
* E. VAL CERUTTI Director April 20, 2000
- ----------------
E. VAL CERUTTI
*AVRUM GRAY Director April 20, 2000
- -----------
AVRUM GRAY
* RALPH R. PAPITTO Director April 20, 2000
- ------------------
RALPH R. PAPITTO
s/ROBERT E. DOLAN Director April 20, 2000
- ------------------
ROBERT E. DOLAN
s/ROGER J. DEXTER
ROGER J. DEXTER (Principal Financial
and Accounting Officer) April 20, 2000
*By:ROBERT A. HURWICH
- --------------------
ROBERT A. HURWICH
Attorney-in-fact for Messrs.
Gabelli, Cerutti, Gray and
Papitto
</TABLE>
EXHIBIT INDEX
The following exhibits are filed with this amendment for Form 10-K.
Exhibit No. Description
23.1 Consent of Ernst & Young LLP
27.A Amended Financial Data Schedule
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated March 28, 2000, included in the
Annual Report on Form 10-K of Lynch Corporation for the year ended December 31,
1999, with respect to the consolidated financial statements, as amended,
included in this Form 10-K/A.
/s/ ERNST & YOUNG LLP
Stamford, Connecticut
April 19, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from the Company's Finacial
Statements as of December 31, 1999 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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 13,106
<SECURITIES> 0
<RECEIVABLES> 25,003
<ALLOWANCES> (361)
<INVENTORY> 31,680
<CURRENT-ASSETS> 79,674
<PP&E> 66,216
<DEPRECIATION> (22,137)
<TOTAL-ASSETS> 211,192
<CURRENT-LIABILITIES> 56,460
<BONDS> 116,765
0
0
<COMMON> 5,139
<OTHER-SE> 10,852
<TOTAL-LIABILITY-AND-EQUITY> 211,192
<SALES> 194,222
<TOTAL-REVENUES> 194,222
<CGS> 172,567
<TOTAL-COSTS> 194,137
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,882
<INCOME-PRETAX> (9,528)
<INCOME-TAX> (2,544)
<INCOME-CONTINUING> (4,252)
<DISCONTINUED> (8,065)
<EXTRAORDINARY> 303
<CHANGES> 0
<NET-INCOME> (1,583)
<EPS-BASIC> (1.12)
<EPS-DILUTED> (1.12)
</TABLE>
