SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
-------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission File No. 1-106
-----
LYNCH CORPORATION
(Exact name of Registrant as specified in its charter)
Indiana 38-1799862
-----------------------------------------------------------------------------
(State or other jurisdiction of I.R.S. Employer
incorporation or organization) (Identification No.)
401 Theodore Fremd Avenue, Rye, New York 10580
(Address of principal executive offices) Zip Code)
(914) 921-7601
Registrant's telephone number, including area code
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- ----
Indicate the number of shares outstanding of each of the Registrant's classes of
Common Stock, as of the latest practical date.
Class Outstanding at July 31, 2000
----- ------------------------------------
Common Stock, no par value 1,510,183
<PAGE>
INDEX
LYNCH CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets:
- June 30, 2000
- December 31, 1999
Condensed Consolidated Statements of Operations:
- Three and six months ended June 30, 2000 and 1999
Condensed Consolidated Statements of Cash Flows:
- Six months ended June 30, 2000 and 1999
Notes to Consolidated Financial Statements:
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits 27 - Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURES
<PAGE>
Part 1 - FINANCIAL INFORMATION -
Item 1 - Financial Statements
<TABLE>
LYNCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
<CAPTION>
June 30 December 31
2000 1999
(unaudited) (A)
----------------- -----------------
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash and Cash Equivalents $19,742 $13,106
Receivables, less allowances of $423 and $361 31,237 24,642
Inventories 33,364 31,680
Deferred income tax benefits 9,010 8,943
Other current assets 1,063 1,303
----------------- -----------------
TOTAL CURRENT ASSETS 94,416 79,674
Restricted Cash - 56,026
PROPRTY, PLANT AND EQUIPMENT
Land 672 672
Buildings and improvements 11,028 11,015
Machinery and equipment 55,758 54,529
----------------- -----------------
67,458 66,216
Accumulated Depreciation (24,964) (22,137)
----------------- -----------------
42,494 44,079
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED, NET 22,118 22,020
OTHER ASSETS 7,483 9,393
----------------- -----------------
TOTAL ASSETS $166,511 $211,192
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks $23,974 $23,178
Trade accounts payable 19,375 14,404
Accrued liabilities 16,862 16,382
Customer advances 3,327 860
Current maturities of long-term debt 1,554 1,636
----------------- -----------------
TOTAL CURRENT LIABILITIES 65,092 56,460
LONG TERM DEBT 58,952 116,765
DEFERRED INCOME TAXES 6,229 6,225
OTHER LONG TERM LIABILITIES 4,156 4,866
MINORITY INTERESTS 11,464 10,885
SHAREHOLDERS' EQUITY
COMMON STOCK, NO PAR VALUE - 10,000,000 SHARES
AUTHORIZED; 1,513,191 and 1,471,191 shares issued 5,139 5,139
respectively (at stated value)
ADDITIONAL PAID-IN CAPITAL 10,111 8,302
RETAINED EARNINGS 5,470 3,843
ACCUMULATED OTHER COMPREHENSIVE INCOME (40) (40)
TREASURY STOCK OF 3,008 and 61,008 SHARES, AT COST (62) (1,253)
TOTAL SHAREHOLDERS' EQUITY 20,618 15,991
----------------- -----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $166,511 $211,192
================= =================
<FN>
(A) The Balance Sheet at December 31, 1999 has been derived from the Audited
Financial Statements at that date, but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
</FN>
See accompanying notes
</TABLE>
<PAGE>
<TABLE>
LYNCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except share amounts)
<CAPTION>
Three Months Six Months
Ended June 30 Ended June 30
-----------------------------------------------
2000 1999 2000 1999
--------------------- -----------------------
<S> <C> <C> <C> <C>
SALES AND REVENUES $53,008 $47,363 $105,482 $93,774
Costs and expenses:
Manufacturing cost of sales 45,448 41,014 91,775 82,785
Selling and administrative 6,028 5,642 11,790 10,144
Restructuring charge - - 527 450
---------------------- -----------------------
OPERATING PROFIT 1,532 707 1,390 395
Other income (expense):
Investment Income 273 (4) 961 7
Interest expense (2,491) (2,328) (5,941) (4,529)
----------------------- -----------------------
(2,218) (2,332) (4,980) (4,522)
----------------------- -----------------------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES, MINORITY INTERESTS, DISCONTINUED OPERATIONS AND
EXTRAORDINARY ITEM (686) (1,625) (3,590) (4,127)
Benefit from income taxes 15 671 1,079 1,637
Minority interests 811 454 1,893 1,015
----------------------- -----------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
DISCONTINUED OPERATIONS AND EXTRAORDINARY ITEM 140 (500) (618) (1,475)
DISCONTINUED OPERATIONS:
Income (loss) from operations of Lynch Interactive Corporation
distributed to shareholders (less income tax (provision) benefit
of ($776) and $3,871
and minority interests of $232 and $431) - 948 - (8,517)
Loss from discontinued operations of industrial tape segment of
Spinnaker Industries (less applicable income tax benefit of $106
and $753
and minority interests of $138 and $558) - (21) - (572)
EXTRAORDINARY ITEM
Gain on early extinguishment of debt (less income tax provision of
1,035 and $2,612 and minority interest of $1,091 and $2,472) 991 - 2,245
$2,472)
----------------------- -----------------------
NET INCOME (LOSS) $1,131 $427 $1,627 ($10,564)
========= ========= ========= =========
Weighted average shares outstanding 1,510,000 1,416,000 1,472,000 1,417,000
========= ========= ========= =========
Basic and diluted earnings per share:
Income ( Loss) from continuing operations before discontinued
Operations and extraordinary item $0.09 ($0.35) ($0.42) ($1.04)
Income (loss) from Lynch Interactive Corporation - 0.67 - (6.01)
Income (loss) from discontinued operations - (0.01) - (0.40)
Extraordinary item 0.66 - 1.53 -
---------------------- -----------------------
NET INCOME (LOSS) $0.75 $0.30 $1.11 ($7.46)
========= ========= ========= =======
See accompanying notes
</TABLE>
<PAGE>
<TABLE>
LYNCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
<CAPTION>
Six Months Ended
June 30
--------------------------------
2000 1999
------------- ---------------
OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss) $1,627 ($10,564)
Adjustment to reconcile net income (loss) to net cash provided by (used in)
operating activities of continuing operations:
Loss from operations of Lynch Interactive Corporation - 8,517
Loss from operations of industrial tape segment - 572
Extraordinary item (2,245) -
Depreciation and amortization 3,263 2,754
Amortization of deferred financing charges 402 435
Deferred taxes (63) -
Minority interests 579 (1,015)
Changes in operating assets and liabilities:
Receivables (6,595) 1,011
Inventories (1,684) (3,081)
Accounts payable and accrued liabilities 7,918 411
Other 240 414
------------- ---------------
Cash provided by (used in) operating activities of continuing operations
3,442 (546)
------------- ---------------
INVESTING ACTIVITIES
Capital expenditures (1,395) (1,895)
Other - 1,958
------------- ---------------
Cash provided by (used in) investing activities of continuing operations
(1,395) 63
------------- ---------------
FINANCING ACTIVITIES
Change in notes payable 796 (11,608)
Repayment & buy back of long-term debt (54,650) (4,183)
Deferred financing costs (69) (145)
Sale of common stock 3,000 (474)
Other (514) 968
------------- ---------------
Cash (used in) operating activities of continuing operations
(51,437) (15,442)
------------- ---------------
Net decrease in cash and cash equivalents (49,390) (15,925)
Cash provided by Lynch Interactive Corporation - 9,521
Cash provided by industrial tape segment - 5,417
------------- ---------------
Decrease in cash and cash equivalents (49,390) (987)
Cash and cash equivalents at beginning of period including
%56,026 of Restricted Cash at December 31, 1999 69,132 1,132
------------- ---------------
Cash and cash equivalents at end of period $19,742 $145
============= ===============
See accompanying notes
</TABLE>
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A. Subsidiaries of the Registrant
As of June 30, 2000, the Subsidiaries of the Registrant are as follows:
<TABLE>
<CAPTION>
Subsidiary Owned By Lynch
---------- --------------
<S> <C>
Lynch Display Technologies, Inc. 100.0%
Lynch Systems, Inc. 92.0%
Lynch International Holding Corporation 92.0%
Lynch-AMAV LLC 69.0%
M-tron Industries, Inc. 100.0%
M-tron Industries, Ltd. 100.0%
Spinnaker Industries, Inc. 47.6%(O/60.4%(V)
Entoleter, Inc. 47.6%(O/60.4%(V)
Spinnaker Coating, Inc. 47.6%(O/60.4%(V)
Spinnaker Coating-Maine, Inc. 47.6%(O/60.4%(V)
Spinnaker Electrical Tape Company 47.6%(0/60.4%(V)
Notes: (V)=Percentage voting control; (O)=Percentage of equity ownership.
</TABLE>
B. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the six month period
ended June 30, 2000 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2000. For further information, refer to
the consolidated financial statements and footnotes thereto included in the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1999.
The accompanying unaudited condensed consolidated financial statements reflect
the spin off of Lynch Interactive Corporation ("Interactive") from Lynch
Corporation ("Lynch" or "Registrant") that occurred in the third quarter of 1999
(see Note D) and the sale of the industrial tape segment of Spinnaker
Industries, Inc., that occurred in the third quarter of 1999 (see Note C).
C. Discontinued Operations
In the third quarter of 1999, the Company's 48% owned subsidiary, Spinnaker
Industries, Inc. sold its two industrial tape units, Central Products Company
and Spinnaker Electrical, which comprised its industrial tape segment, to
Intertape Polymer Group, Inc. ("Intertape"). The consideration for the sale was
approximately $105 million and 300,000 five-year warrants to purchase shares of
Intertape common stock at $29.50 each. Spinnaker recognized a gain on the
transactions of $24 million before tax and the Registrant recognized a similar
gain before income tax and minority interests. The agreement to sell Spinnaker
Electrical was completed on July 30, 1999 and the agreement to sell Central
Products was completed on August 10, 1999. As a result, the Company's industrial
tape segment is being reported as a discontinued operation in the accompanying
condensed consolidated financial statements. Accordingly, operating results of
the industrial tape segment have been segregated from continuing operations and
reported as a separate line item on the statements of operations. The industrial
tape segment's net sales were $29.3 million and $58.8 million, respectively for
the three and six month periods ended June 30, 1999.
D. 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 ("Interactive") ("Spin Off"). Lynch completed the Spin Off
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 is listed on the American Stock Exchange under the
symbol "LIC".
<PAGE>
Interactive owns all of what was Lynch's multimedia and service businesses while
Lynch retains to 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 M-tron Industries, Inc. and
Lynch Systems, Inc.
As a result, the Company's multimedia and services segments are being reported
as operations distributed to shareholders in the accompanying condensed
consolidated financial statements. Accordingly, operating results of Interactive
have been segregated from continuing operations and reported as a separate line
item on the statement of operations.
Interactive's net sales for the three and six month periods ended June 30, 1999
were $54.2 million and $102.9 million, 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 Interactive and was
included in the Spin Off.
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 became the employees of Interactive and Interactive began providing
certain corporate management services to Lynch, which is charged a management
fee for these services. This charge was $60,000 and $180,000 for the three and
six months ended June 30, 2000, respectively.
Net assets of approximately $23 million were distributed to Interactive at the
Spin Off. Such amount was subsequently decreased in the fourth quarter of 1999
by $1.6 million to reflect a revision in the allocation of certain liabilities.
E. Inventories
Inventories are stated at the lower of cost or market value. At June 30, 2000
and December 31, 1999, inventories were valued by three methods: last-in,
first-out (LIFO) - 18% specific identification - 80%, and first-in, first-out
(FIFO) - 2%. At December 31, 1999, the respective percentages were 12%, 80%, and
8%, respectively.
<TABLE>
(In Thousands)
<CAPTION>
June 30, Dec. 31,
2000 1999
---------- --------------
<S> <C> <C>
Raw materials $ 11,042 $10,407
Work in process 2,372 2,114
Finished goods 19,950 19,159
---------- --------------
Total Inventories $ 33,364 $ 31,680
========== ==============
</TABLE>
F. Indebtedness
Spinnaker Industries, Inc. maintains revolving lines of credit at its
subsidiaries which total $40 million, of which $23.4 million was outstanding as
of June 30, 2000 and had $9.1 million of available borrowings. These facilities
were refinanced in conjunction with the sale of Central Products and Spinnaker
Electrical.
<PAGE>
In general, the credit facilities are secured by property, plant and equipment,
inventory, receivables and common stock of certain subsidiaries and contain
certain covenants restricting distributions to the Registrant.
<TABLE>
<CAPTION>
Long term debt consists of: June 30, Dec.31,
2000 1999
------------------ -----------
<S> <C> <C>
Spinnaker Industries, Inc. 10.75% Senior Secured Note due 2006 $51,135 $108,585
10% Subordinated Note with PIK interest and
principal due on January 31, 2002 7,000 7,000
Other 2,371 2,816
------------------ -----------
60,506 118,401
Current Maturities (1,554) (1,636)
------------------ ----------
$58,952 $116,765
============== ===========
</TABLE>
As of June 30, 2000 proceeds from the sale of Central Products (see Note C
above) have been utilized in accordance with the terms of the Senior Secured
Notes Indenture to either repay indebtedness or invest in the adhesive-backed
paper business. During the second quarter of 2000, Spinnaker purchased $24.1
million (par value) of the outstanding Senior Notes on the open market at an
average price of 82.3% of par value recognizing a pre-tax gain of $3.1 million.
The Registrant recognized a similar gain before income taxes and minority
interest. For the six months ended June 30, 2000 Spinnaker purchased $57.5
million (par value) of these same rates at an average price of 83.1% reflecting
a pre-tax gain of $7.5 million after the charge off of applicable deferred
financing costs.
The Senior Note purchases to date and capital expenditures in the business have
fully utilized the Restricted Proceeds from the above referenced sale.
During the second quarter of 2000, Lynch Systems entered into a project specific
line of credit for $800,000 related to a contract to deliver equipment in 2001.
The Company has guaranteed the full amount of the credit facility. During the
first half of 2000 the Company has guaranteed project specific credit facilities
for Lynch Systems totaling approximately $8 million. At June 30, 2000 there are
no amounts borrowed on these facilities and it is expected that any amounts
borrowed on these facilities in the future will be repaid by the second quarter
of 2001.
G. Earnings per share
------------------
Basic earnings per common share amounts are based on the average number of
common shares outstanding during each period, excluding the dilutive effects of
options, warrants, and convertible securities of which there were none.
H. Segment Information
After the distribution to shareholders of the stock of Interactive, the Company
is engaged in the manufacture of adhesive-backed label stock, frequency control
devices and other manufacturing. The Company measures performance of its
segments primarily by revenues, operating profit and EBITDA (operating profit
before income taxes, depreciation, amortization and allocated corporate
expenses). Except for Spinnaker (the adhesive-backed label stock business) using
approximately $56.0 million of restricted cash to repurchase debt and for
capital asset purchases. Indentifiable assets of each segment have not changed
materially since December 31, 1999.
EBITDA for operating segments is equal to operating profit before interest,
taxes, depreciation, amortization. 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
interest and income taxes. Prior to the Spin Off, Lynch allocated a portion of
its general corporate expenses to its operating segments. Subsequent to the Spin
Off, Interactive is providing certain corporate management services to the
Registrant and charging a corporate overhead management fee while the Registrant
still allocates a portion of its general corporate expenses to its operating
segments.
<PAGE>
General corporate office expenses related to finance and administrative
functions including public company compliance reporting, bank and investor
relations, taxes and 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 attributable to discontinued operations.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------------------ -----------------------------
2000 1999 2000 1999
--------------- -------------- --------------- -------------
Revenues:
<S> <C> <C> <C> <C>
Adhesive-backed label stock $37,332 $38,065 $77,618 $76,656
Frequency control devices 10,074 6,946 18,484 12,371
Other Manufacturing 5,602 2,352 9,380 4,747
--------------- -------------- --------------- -------------
Consolidated Total $53,008 $47,363 $105,482 $93,774
--------------- -------------- --------------- -------------
EBITDA
Adhesive-backed label stock $2,161 $2,341 $3,968 $4,689
Frequency control devices 1,310 567 2,494 1,088
Other manufacturing 766 (600) 615 (1,059)
Corporate manufacturing expenses (587) (167) (1,141) (838)
--------------- -------------- --------------- -------------
Total manufacturing 3,650 2,141 5,936 3,880
Corporate expenses (379) (123) (756) (240)
Restructuring charge - Spinnaker - - (527) (450)
--------------- -------------- --------------- -------------
Consolidated Total $3,271 $2,018 $4,653 $3,190
--------------- -------------- --------------- -------------
Operating Profit
Adhesive-backed label stock $705 $1,399 $1,416 $2,646
Frequency control devices 1,139 484 2,159 842
Other manufacturing 633 (727) 349 (1,318)
Corporate manufacturing expenses (491) (268) (1,101) (945)
--------------- -------------- --------------- -------------
Total manufacturing 1,986 888 2,823 1,225
Unallocated corporate expenses (454) (181) (906) (380)
Restructuring charge - Spinnaker - - (527) (450)
--------------- -------------- --------------- -------------
Consolidated Total $1,532 $707 $1,390 $395
=============== ============== =============== =============
Total Operating Profit for reportable segments $1,532 $707 $1,390 $395
Other profit or loss
Investment Income 273 (4) 961 7
Interest expense (2,491) (2,328) (5,941) (4,529)
--------------- -------------- --------------- -------------
Loss from continuing operations
before income taxes, minority
Interest discontinued operations
and extraordinary items $(686) $(1,625) $(3,590) $(4,127)
=============== ============== =============== =============
</TABLE>
<PAGE>
I. Acquisitions
In October 1996, Spinnaker acquired all of the approximately 25% minority
interest in its Spinnaker Coating subsidiary held by such subsidiary's other
shareholders. The terms of the acquisition involved a cash payment of
approximately $2.3 million and the issuance of 9,613 shares of Common Stock. As
additional consideration for the shares of capital stock of Spinnaker Coating,
the minority shareholders received the right to a contingent payment
("Contingent Value Rights" or "CVR's").
On May 4, 2000, Spinnaker Electrical Tape, a Spinnaker subsidiary,
acquired all of the CVR's held by the former minority ownership group of
Spinnaker Coating for $500,000 in cash. Accordingly, the contingent payment was
recorded as an addition to goodwill during the second quarter of 2000.
J. Accounting and Reporting Policies
Securities and Exchange Commission's Staff Accounting Bulletin 101 summarizes
certain of the staff's views in applying generally accepted accounting
principles to revenue recognition in the financial statements. The Registrant is
currently assessing the impact, if any, that SAB will have on its revenue
recognition policy when it is adopted in the fourth quarter of 2000.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
-----------------------------------------------------------------------
Sales and Revenues
Revenues for the second quarter of 2000 increased by $5.6 million or 11.9%, to
$53.0 million, from the second quarter of 1999. Revenues for the six months
ended June 30, 2000 increased by $11.7 million or 12.5% from the comparable 1999
period reflecting increased order flow.
Revenues from Spinnaker Industries, Inc. continuing operations fell by $1.1
million between the two quarters primarily due to lower volumes in EDP and other
general purpose products and the timing of sales of pressure sensitive postage
paper stock. The market's rapid transition from EDP to thermal transfer paper
stock technologies has exceeded management's expectations and as a result caused
Spinnaker to experience lower volumes and average selling prices, as the market
balances quality and performance against lower priced solutions. Unit sales of
pressure sensitive postage paper stock continue to be impacted by the uneven
ordering pattern of the Bureau of Printing and Engraving. Spinnaker's revenue
for the six months ended June 30, 2000 were $80.3 million, exceeding the
corresponding 1999 period by approximately $.6 million. The increase in net
sales for 2000 is attributed to strong sales in pressure sensitive sheet
products, in which volumes increased approximately 65% over the comparable 1999
period, and increased sales volume of specialty and general-purpose roll
products. These increases were substantially offset by the effects of
outsourcing the manufacturing and sales of dry gum and other conventional
product lines in the fourth quarter of 1999. Although volumes of pressure
sensitive postage material for the fist six months of 2000 declined compared to
the corresponding 1999 period, it was substantially offset by an increased
average selling price. Revenues at M-tron increased by $3.1 million or 45% to
$10.1 million for the three month period due to increased demand from the
telecommunications industry and increased sales of new products. Revenues for
the six month period increased $6.1 million or 49% to $18.5 million due to the
same factors. Lynch Systems' revenues for the second quarter increased by $3.6
million to $4.5 million reflecting increased orders and sales of glass press
machines. Lynch Systems revenues for the six month period increased $5.0 million
to $6.7 million for the same reasons.
Operating profit for the second quarter 2000 increased by $0.8 million to $1.5
million compared to the prior year. For the six month period operating profit
increased by $1.0 million to $1.4 million compared to the 1999 period.
Spinnaker's operating profit in the second quarter declined by $.3 million due
to lower volumes, and reduction in gross margins as a result of the lower
pricing noted above. These factors also affected the six month period where
there was an operating loss of $.2 million compared to an operations profit of
$1.6 million in 1999. The 1999 period included a $.9 million gain from the sale
of operating assets. For the second quarter M-tron's operating profit increased
by $0.7 million to $1.3 million due to increased sales volume mentioned above.
For the six months, M-tron's operating profits increased by $1.3 million to $2.2
million due to strong order flow and increased sales volume. Lynch Systems' had
an operating profit of $.7 million compared to an operating loss of $1.0 million
in the second quarter of 1999. For the six month period Lynch Systems also had
an operating profit of $.3 million compared to an operating loss of $1.7 million
in the comparable period in 1999. This turnaround for both periods at Lynch
Systems is due to the increased sales mentioned above and better absorption of
overhead.
Other Income (Expense), Net
Investment income increased for the quarter and the six months due to the net
proceeds of the 1999 sale of Spinnaker's industrial tape units, which were
invested in short term instruments during the periods.
Interest expense was $2.5 million for the quarter and increased by $.2 million.
During the six-month period ended June 30, 2000, interest expense increased by
$1.4 million. These increases were primarily due to allocations during the 1999
periods of a portion of the interest expense to the discontinued industrial tape
segment until the time of their sale.
Tax Provision
The income tax benefit includes federal, as well as state and local taxes. The
tax benefit for the six months ended June 30, 2000 and 1999, represents
effective tax rates of 30% and 40%, respectively. The differences from the
federal statutory rate are principally due to the effect of state income taxes
and amortization of non-deductible goodwill.
Minority Interest
Minority interests contribution to the net income (loss) increased by $.4
million for the quarter and $0.9 million for the six months, from the respective
prior year periods of 1999 due to the increased net losses from continuing
operations at Spinnaker for both periods and the increase in the minority
interest percentage at this subsidiary.
Discontinued Operations
As a result of the Spin Off (see Note D), the Company's multimedia and services
segments are being reported as operations distributed to shareholders in the
accompanying condensed consolidated financial statements for the 1999 periods.
Accordingly, operating results of Interactive have been segregated from
continuing operations and reported as a separate line item on the statement of
operations.
As a result of Spinnaker's sale of its industrial tape segment (see Note C) in
the third quarter of 1999, operating results of the industrial tape segment have
been segregated from continuing operations and reported separately in the
statement of operations for 1999.
Net Income/Loss
Net income for the six months ended June 30, 2000 was $1.6 million, or $1.11 per
share, as compared to a net loss of ($10.6 million), or $7.46 per share in the
previous year's six month period. The absence of the losses in the discontinued
operations, the gain on the early extinguishement of debt at Spinnaker and the
improved operating results were the primary reasons for this turnabout.
Net income for the three months ended June 30, 2000 was $1.1 million or $.75 per
share as compared to a net income of $.4 million or $.30 per share for the 1999
quarter. The same factors mentioned above were the primary reasons for the
improvement.
Backlog/New Orders
Total backlog of manufactured products from continuing operations at June 30,
2000 was $41.5 million, which represents an increase of $6.2 million from the
backlog of $35.3 million at December 31, 1999. Increased order receipt at M-tron
accounted for the significant increase to the backlog at June 30, 2000.
FINANCIAL CONDITION
Liquidity/Capital Resources
As of June 30, 2000, the Company had current assets of $94.4 million and current
liabilities of $65.1 million. Working capital was therefore $29.3 million as
compared to $23.2 million at December 31, 1999. The increase is primarily due to
the improved operating results.
First six months capital expenditures were $1.4 million in 2000 and $1.9 million
in 1999. The Company plans to spend approximately $4.8 million on capital
expenditures for the year and anticipates that it will have sufficient cash flow
from operations and borrowing availability under various credit facilities at
its subsidiaries to fund such capital expenditure plans.
At June 30, 2000, total debt was $84.5 million, which was $57.1 million less
than the $141.6 million at the end of 1999. The reduction is primarily due to
principal repayments and debt repurchases. Long term debt at June 30, 2000
included $60.5 million of fixed interest rate debt, at an average cash interest
rate of 10.6% and $24.0 million of variable interest rate debt at an average
interest rate of 9.0%. Additionally, the Company had unused lines of credit
facilities of which the Spinnaker Credit Facility is a major portion. The
Spinnaker Credit Facility is available to fund acquisitions and support periodic
fluctuations in working capital. Credit availability under the Spinnaker Credit
Facility is subject to certain variables, such as inventory and receivables
eligible to be included in the borrowing base. The Company is charged an
available credit fee of 0.375% per annum. Outstanding borrowings bear interest
at variable rates related to the prime interest rate or LIBOR. At June 30, 2000,
the combined effective interest rate was 9.0%. In conjunction with the
industrial tape sale, the Spinnaker Credit Facility was refinanced and the
aggregate facility was decreased from $60 million to $40 million. The Refinanced
Credit Facility will expire December 31, 2001. As of July 26, 2000 aggregate
availability under the Refinanced Credit Facility was approximately $32.5
million, of which approximately $23.4 million was outstanding. During the second
quarter of 2000, Lynch Systems entered into a project specific line of credit
for $800,000 related to a contract to deliver equipment in 2001. The Company has
guaranteed the full amount of the credit facility. During the first half of 2000
the Company has guaranteed project specific credit facilities for Lynch Systems
totaling approximately $8 million. At June 30, 2000 there are no amounts
borrowed on these facilities used for Lynch Corporation and it is expected that
any amounts borrowed on these facilities in the future will be repaid by the
second quarter of 2001.
The Company does not at present have credit facilities at the parent company
level. Management believes it has adequate working capital at this level to fund
current operations into the near future.
Lynch Corporation may make additional acquisitions which would probably be
financed with a significant component of debt. This acquisition debt as well as
current debt outstanding would contain restrictions on the amount of readily
available funds that can be transferred to Lynch Corporation from its
subsidiaries.
Accounting and Reporting Policies
Securities and Exchange Commission's Staff Accounting Bulletin 101 summarizes
certain of the staff's views in applying generally accepted accounting
principles to revenue recognition in the financial statements. The Registrant is
currently assessing the impact, if any, that SAB will have on its revenue
recognition policy when it is adopted in the fourth quarter of 2000.
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
(approximately $19.5 million at June 30, 2000). 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 by borrowing on a fixed long-term basis. 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 June 30, 2000, approximately $24.0 million, or 28% 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 2000 average interest rate under these
borrowings, it is estimated that the Company's six months 2000 interest expense
would have changed by less than $.15 million. 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.
-----------------------
<PAGE>
Included in this Management Discussion and Analysis of Financial Condition and
Results of Operations are certain forward looking financial and other
information, including without limitation matters relating to Spinnaker, Year
2000 matters and Market Risk. It should be recognized that such information are
projections, estimates or forecasts based on various assumptions, including
without limitation, meeting its assumptions regarding expected operating
performance and other matters specifically set forth, as well as the expected
performance of the economy as it impacts the Registrant's businesses, government
and regulatory actions and approvals, and tax consequences, and the risk factors
and cautionary statements set forth in reports filed by Registrant and Spinnaker
with the Securities and Exchange Commission. As a result, such information is
subject to uncertainties, risks and inaccuracies, which could be material.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
See "Market Risk" under Item 2 above.
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
At the Annual Meeting of Stockholders of the Registrant held on May 11, 2000 the
following persons were elected as Directors with the following votes:
<TABLE>
<CAPTION>
Name Votes For Votes Withheld
---- --------- --------------
<S> <C> <C>
E. Val Cerutti 1,397,809 4,886
Robert E. Dolan 1,397,704 4,991
Mario J. Gabelli 1,397,764 4,931
Avrum Gray 1,397,709 4,986
Louis A. Guzzetti, Jr. 1,397,649 5,046
Ralph R. Papitto 1,397,809 4,886
</TABLE>
In addition, the sale of 100,000 shares of Registrant's Common Stock to Mario J.
Gabelli, Registrant's Chairman and Chief Executive Officer, was ratified as
follows:
For: 582,619
Against: 3,954
Abstain: 403,092*
Broker Nonvotes: 413,092
*Mr. Gabelli abstained with respect to shares of Registrant's Common Stock
beneficially owned by him. Also, Amendments to Registrant's Principal Executive
Bonus Plan were approved as follows:
For: 1,383,790
Against: 12,159
Abstain: 6,746
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 - Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LYNCH CORPORATION
(Registrant)
By: s/Roger J. Dexter
Roger J. Dexter
Chief Financial Officer
August 14, 2000
