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 September 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 October 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: - September 30, 2000 - December 31,
1999
Condensed Consolidated Statements of Operations: - Three and nine months
ended September 30, 2000 and 1999
Condensed Consolidated Statements of Cash Flows: - Nine months ended
September 30, 2000 and 1999
Notes to Condensed 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 6. Exhibits and Reports on Form 8-K
(a) Exhibit 4(d)
(b) Exhibit 4(d)(i)
(c) Exhibit 4(d)(ii)
(d) Exhibits 27 - Financial Data Schedule
(e) Reports on Form 8-K - None
<PAGE>
SIGNATURES
<PAGE>
Part 1 - FINANCIAL INFORMATION -
Item 1 - Financial Statements
<TABLE>
LYNCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
<CAPTION>
September 30, December 31,
2000 1999
(unaudited) (A)
------------- ------------
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents ................................. $ 19,227 $ 13,106
Receivables, less allowances of $306 and $361 ............. 36,916 24,642
Inventories ............................................... 37,280 31,680
Deferred income tax benefits .............................. 9,381 8,943
Other current assets ...................................... 1,096 1,303
----------- -----------
TOTAL CURRENT ASSETS ...................................... 103,900 79,674
Restricted Cash ................................................ -- 56,026
PROPERTY, PLANT AND EQUIPMENT
Land ...................................................... 672 672
Buildings and improvements ................................ 11,028 11,015
Machinery and equipment ................................... 56,084 54,529
----------- -----------
67,784 66,216
Accumulated depreciation .................................. (25,932) (22,137)
----------- -----------
41,852 44,079
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED,NET ...... 21,912 22,020
OTHER ASSETS ................................................... 7,641 9,393
----------- -----------
TOTAL ASSETS ............................................... $ 175,305 $ 211,192
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks .................................... $ 24,531 $ 23,178
Trade accounts payable .................................... 21,768 14,404
Accrued liabilities ....................................... 19,586 16,382
Customer advances ......................................... 5,610 860
Current maturities of long-term debt ...................... 3,237 1,636
----------- -----------
TOTAL CURRENT LIABILITIES ................................. 74,732 56,460
LONG TERM DEBT ................................................. 58,864 116,765
DEFERRED INCOME TAXES .......................................... 6,048 6,225
OTHER LONG TERM LIABILITIES .................................... 4,417 4,866
MINORITY INTERESTS ............................................. 10,405 10,885
SHAREHOLDERS' EQUITY
COMMON STOCK, NO PAR VALUE - 10,000,000 SHARES AUTHORIZED;
1,513,191 and 1,471,191 shares issued
(at stated value) ......................................... 5,139 5,139
ADDITIONAL PAID-IN CAPITAL .................................. 10,111 8,302
RETAINED EARNINGS ........................................... 5,691 3,843
ACCUMULATED OTHER COMPREHENSIVE LOSS ........................ (40) (40)
TREASURY STOCK OF 3,008 and 61,008 SHARES, AT COST .......... (62) (1,253)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY .................................. 20,839 15,991
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .................. $ 175,305 $ 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 STATEMENTS OF OPERATIONS
(In thousands, except share amounts)
<CAPTION>
Three Months Nine months
Ended September 30, Ended September 30,
--------------------- -----------------------
2000 1999 2000 1999
--------------------- -----------------------
<S> <C> <C> <C> <C>
SALES AND REVENUES ............................................ $ 56,192 $ 51,070 $ 161,674 $ 144,844
Costs and expenses:
Manufacturing cost of sales ............................... 47,926 45,380 139,701 128,165
Selling and administrative ................................ 7,758 4,683 19,554 14,827
Restructuring charge ...................................... -- -- 527 450
----------- ----------- ----------- ----------
OPERATING PROFIT .............................................. 508 1,007 1,892 1,402
Other income (expense):
Investment Income ......................................... 335 565 1,296 572
Interest expense .......................................... (2,471) (3,267) (8,412) (7,796)
----------- ----------- ----------- -----------
(2,136) (2,702) (7,116) (7,224)
----------- ----------- ----------- -----------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES, MINORITY INTERESTS, DISCONTINUED
OPERATIONS AND EXTRAORDINARY ITEM ........................... (1,628) (1,695) (5,224) (5,822)
Benefit from income taxes .................................... 796 700 1,875 2,337
Minority interests ............................................ 1,058 378 2,951 1,393
----------- ----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
DISCONTINUED OPERATIONS AND EXTRAORDINARY ITEM ............. 226 (617) (398) (2,092)
DISCONTINUED OPERATIONS:
Income (loss) from operations of Lynch Interactive
Corporation distributed to shareholders (less income tax
(provision) benefit of ($803) and $3,068 and minority
interests of $147 and $578) ................................ -- 1,024 -- (7,493)
Loss from discontinued operations of industrial tape
segment of Spinnaker Industries (less applicable income
tax benefit of $308 and minority interests of $558) ....... -- -- -- (572)
Gain on sale of Spinnaker's Industrial Tape operations
(less income tax provision of $9,495 and minority
interest of $7,013) ....................................... -- 7,431 -- 7,431
EXTRAORDINARY ITEM
Gain on early extinguishment of debt (less income tax
provision of $73, $2,612 and $73 minority interest of
$60, $2,472 and $60) .................................... -- 54 2,245 54
----------- ----------- ----------- -----------
NET INCOME (LOSS) ............................................. $ 226 $ 7,892 $ 1,847 ($ 2,672)
=========== =========== =========== ===========
Weighted average shares outstanding ........................ 1,510,000 1,412,000 1,485,000 1,415,000
=========== =========== =========== ===========
Basic and diluted earnings per share:
Income ( loss) from continuing operations .................. $ 0.15 ($ 0.44) ($ 0.27) ($ 1.48)
Income (loss) from Lynch Interactive Corporation .......... -- 0.73 -- (5.30)
Income from Spinnaker Tape operations and sale ............ -- 5.26 -- 4.85
Extraordinary item ........................................ -- 0.04 1.51 0.04
----------- ----------- ----------- -----------
NET INCOME (LOSS) ............................................. $ 0.15 $ 5.59 $ 1.24 ($ 1.89)
=========== =========== =========== ===========
See accompanying notes
</TABLE>
<PAGE>
<TABLE>
LYNCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<CAPTION>
Nine months Ended
September 30,
2000 1999
---------- ----------
OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) ............................................ $ 1,847 ($ 2,672)
Adjustment to reconcile net income (loss) to net cash
provided by operating activities of continuing operations:
Loss from operations of Lynch Interactive Corporation ... -- 7,493
Loss from operations of industrial tape segment ......... -- 572
Gain on sale of industrial tape segment ................. -- (7,431)
Extraordinary item ...................................... (2,245) (54)
Depreciation and amortization ........................... 4,968 4,226
Amortization of deferred financing charges .............. 1,168 630
Deferred taxes .......................................... (615) (805)
Minority interests ...................................... (480) (1,393)
Gain on sale of fixed assets ............................ -- (854)
Changes in operating assets and liabilities:
Receivables .......................................... (12,274) 495
Inventories .......................................... (5,600) (3,563)
Accounts payable and accrued liabilities ............. 15,318 3,091
Other ................................................ 208 418
--------- ---------
Cash provided by operating activities of
continuing operations 2,295 153
--------- ---------
INVESTING ACTIVITIES:
Capital expenditures ......................................... (2,317) (2,828)
Proceeds from sale of Spinnaker's industrial tape segment .... -- 104,450
Proceeds from sale of fixed assets ........................... -- 2,442
Other ........................................................ 75 (737)
--------- ---------
Cash provided by (used in) investing activities
of continuing operations ................................... (2,242) 103,327
--------- ---------
FINANCING ACTIVITIES:
Change in notes payable ...................................... 1,353 (39,026)
Repayment & buy back of long-term debt ....................... (53,986) (5,100)
Deferred financing costs ..................................... (69) (468)
Sale of common stock ......................................... 3,000 (474)
Other ........................................................ (256) (1,188)
--------- ---------
Cash (used in) financing activities of continuing operations
(49,958) (46,256)
--------- ---------
Net (decrease) increase in cash and cash equivalents ......... (49,905) 57,224
Cash provided by Lynch Interactive Corporation ............... -- 15,987
Cash provided by industrial tape segment ..................... -- 4,310
--------- ---------
(Decrease) increase in cash and cash equivalents ............. (49,905) 77,521
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 ................... $ 19,227 $ 78,653
========= =========
See accompanying notes
</TABLE>
<PAGE>
LYNCH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A. Subsidiaries of the Registrant
<TABLE>
As of September 30, 2000, the Subsidiaries of the Registrant are as follows:
<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)
<FN>
Notes:(O)=Percentage of equity ownership; (V)=Percentage voting control
</FN>
</TABLE>
<PAGE>
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 nine month
period ended September 30, 2000 are not necessarily indicative of the results
that may be expected for the year ending 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 $10.7 million and $69.5 million, respectively for
the three and nine month periods ended September 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 ("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".
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 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 condensed
consolidated financial statements. Accordingly, operating results of Interactive
have been segregated from continuing operations and reported as a separate line
item on the statements of operations.
Interactive's net sales for the three and nine month periods ended September 30,
1999 were $52.8 million and $155.8 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 $240,000 for the three and
nine months ended September 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 September 30,
2000 and December 31, 1999, inventories were valued by three methods: last in,
first-out (LIFO)- 26%; specific identification - 72%; and first in, first out
(FIFO) - 2%. At December 31, 1999, the percentages were 12%, 80%, and 8%,
respectively.
<TABLE>
<CAPTION>
(In Thousands)
September 30, December 31,
2000 1999
---------------------
<S> <C> <C>
Raw materials ..... $10,265 $10,407
Work in process ... 3,507 2,114
Finished goods .... 23,508 19,159
------- -------
Total Inventories $37,280 $31,680
======= =======
</TABLE>
F. Indebtedness
Spinnaker Industries, Inc. maintains revolving lines of credit at its
subsidiaries which total $40 million, of which $23.6 million was outstanding as
of September 30, 2000 and had $5.8 million of available borrowings. These
facilities were refinanced in conjunction with the sale of Central Products and
Spinnaker Electrical.
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>
(In Thousands)
Long term debt consists of: September 30, December 31,
2000 1999
-------------------------
<S> <C> <C>
Spinnaker - 10.75% Senior Secured Note due 2006 ....................... $ 51,135 $ 108,585
Spinnaker - 10% Subordinated Note with PIK interest and principal due on
January 31, 2002 ....................................................... 7,000 7,000
Other .................................................................. 3,966 2,816
--------- ---------
62,101 118,401
Current Maturities ..................................................... (3,237) (1,636)
--------- ---------
$ 58,864 $ 116,765
========= =========
</TABLE>
As of September 30, 2000, proceeds from the sale of Central Products (see Note
C) 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. For the nine months ended September 30, 2000 Spinnaker purchased $57.5
million (par value) of the outstanding Senior Notes on the open market 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 Registrant recognized a
similar gain before income taxes and minority interest. There were no purchases
in the third quarter.
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 first nine months of 2000 the Company has guaranteed project specific
credit facilities for Lynch Systems totaling approximately $8 million. At
September 30, 2000 there was $1.7 million borrowed on these facilities and it is
expected that these and any other amounts borrowed on these facilities in the
future will be repaid in the first 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, identifiable 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, and 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 is equal to revenues less operating expenses, excluding
interest, minority interests 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.
In 1999, 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.
On October 27, the Company announced that M-tron, our frequency control devices
business had filed a registration statement with the Securities and Exchange
Commission for a rights offering of shares of M-tron's common stock that would
represent an approximate 13% interest in M-tron. Subject to the effectiveness of
the registration statement, Lynch presently contemplates that it will distribute
to its shareholders one right for each share of Lynch common stock owned on the
record date to be established. One and one-half rights will permit the holder to
purchase one share of M-tron stock for $5 per share. Nothing contained herein is
intended to constitute an offer of M-tron's common stock.
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine months Ended
September 30, September 30,
------------------ -----------------
2000 1999 2000 1999
------ ------ ------ ------
Revenues:
<S> <C> <C> <C> <C>
Adhesive-backed label stock ............. $ 35,756 $ 39,535 $ 113,374 $ 116,191
Frequency control devices ............... 10,900 7,087 29,384 19,458
Other Manufacturing ..................... 9,536 4,448 18,916 9,195
--------- --------- --------- ---------
Consolidated Total ...................... $ 56,192 $ 51,070 $ 161,674 $ 144,844
--------- --------- --------- ---------
EBITDA
Adhesive-backed label stock ............. $ 609 $ 1,864 $ 4,577 $ 6,553
Frequency control devices ............... 1,391 951 3,885 2,039
Deferred incentive compensation-frequency
frequency control devices ............. (420) -- (420) --
Other manufacturing ..................... 1,296 228 1,911 (831)
Corporate manufacturing expenses ........ (313) (223) (1,454) (1,061)
--------- --------- --------- ---------
Total manufacturing ..................... 2,563 2,820 8,499 6,700
Corporate expenses ...................... (356) (382) (1,112) (622)
Restructuring charge - Spinnaker ........ -- -- (527) (450)
--------- --------- --------- ---------
Consolidated Total ...................... $ 2,207 $ 2,438 $ 6,860 $ 5,628
--------- --------- --------- ---------
Operating Profit
Adhesive-backed label stock ............ $ (734) $ 916 $ 682 $ 3,562
Frequency control devices .............. 1,214 668 3,373 1,510
Deferred incentive compensation-
frequency control devices ........... (420) -- (420) --
Other manufacturing .................... 1,161 151 1,510 (1,167)
Corporate manufacturing expenses ....... (282) (721) (1,389) (1,666)
--------- --------- --------- ---------
Total manufacturing .................... 939 1,014 3,756 2,239
Unallocated corporate expenses ......... (431) (7) (1,337) (387)
Restructuring charge - Spinnaker ....... -- -- (527) (450)
--------- --------- --------- ---------
Consolidated Total ..................... $ 508 $ 1,007 $ 1,892 $ 1,402
========= ========= ========= =========
Other profit or loss
Investment income ...................... 335 565 1,296 572
Interest expense ....................... (2,471) (3,267) (8,412) (7,796)
--------- --------- --------- ---------
Loss from continuing operations
before taxes, minority interest
and extraordinary items ................ $ (1,628) $ (1,695) $ (5,224) $ (5,822)
========= ========= ========= =========
</TABLE>
I. 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
has assessed the impact that SAB 101 will have on its revenue recognition policy
when it is adopted in the fourth quarter of 2000 and has determined that there
is little, if any, exposure.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Sales and Revenues
Revenues for the third quarter of 2000 increased by $5.1 million or 10%, to
$56.2 million, from the third quarter of 1999. Revenues for the nine months
ended September 30, 2000 increased by $16.8 million or 11.6% from the comparable
1999 period reflecting increased order flow.
Revenues from Spinnaker Industries, Inc.'s continuing operations fell by $4.5
million between the two quarters primarily due to an extremely competitive
pricing environment resulting in lower average selling prices and volumes in
Spinnaker's general purpose pressure-sensitive products. Additionally, as
compared to the same period in 1999, lower sales are the result of a joint
venture entered into to outsource the manufacturing and sales of non-pressure
sensitive product lines in the fourth quarter of 1999. Offsetting these declines
is the continued growth in sales of pressure sensitive sheet products, which
increased by approximately $1.1 million from the corresponding 1999 period.
Spinnaker's revenues for the nine months ended September 30, 2000 were $117.6
million, compared to $121.5 million in the corresponding 1999 period. The
decrease in net sales for 2000 is attributed to entering into a joint venture to
outsource the manufacturing and sales of non-pressure sensitive product lines in
the fourth quarter of 1999 and lower sales volumes of general purpose
pressure-sensitive products. Net sales were also impacted by lower prices from
intense price competition in the general purpose and other pressure-sensitive
product lines. Offsetting these declines were strong sales of pressure sensitive
sheet products, in which volumes increased approximately 62% over the comparable
1999 period.
Revenues at M-tron increased by $3.8 million or 54%, to $10.9 million for the
three month period due to increased demand from the telecommunications industry
and increased sales of new products. Revenues at M-tron for the nine month
period increased $9.9 million, or 51%, to $29.4 million due to the same factors.
Lynch Systems' revenues for the third quarter increased by $5.8 million to $8.0
million reflecting increased orders and sales of glass press machines. Lynch
Systems revenues for the nine month period increased $10.8 million to $14.7
million for the same reasons.
Operating profit for the third quarter 2000 of $.5 million decreased by $.5
million compared to the prior year. For the nine month period operating profit
of $1.9 million increased by $.5 million compared to the 1999 period.
Spinnaker's operating profit in the third quarter declined by $2.0 million due
to lower volumes, and reduction in gross margins as a result of the lower
pricing noted above. These factors also affected the nine month period for
Spinnaker where there was an operating loss of $1.1 million compared to an
operating profit of $1.8 million in 1999. The 1999 period included a $.9 million
gain from the sale of operating assets. For the third quarter M-tron's operating
profit increased by $.5 million to $1.2 million due to increased sales volume
mentioned above. For the nine months, M-tron's operating profits increased by
$1.8 million to $3.4 million due to strong order flow and increased sales
volume. The current quarter and year-to-date results were before an
accrual of $420,000 for deferred incentive compensation. No payment will be due
under this arrangement in the event M-tron goes public, as presently
contemplated, in which case this obligation will be eliminated. Lynch Systems
had an operating profit of $1.0 million compared to an operating loss of $.7
million in the third quarter of 1999. For the nine month period Lynch Systems
had an operating profit of $1.3 million compared to an operating loss of $2.0
million in the comparable period in 1999. This turnaround for both periods at
Lynch Systems is principally due to increased activity on orders received in
1999 and earlier this year. The 2000 Operating profit also benefited as a result
of better absorption of overhead.
Other Income (Expense), Net
Investment income decreased for the quarter as the utilization of restricted
cash from the 1999 sale of Spinnaker's industrial tape units to buy back debt
reduced the funds available for short term investment. Investment income
increased for the nine 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 until the debt repurchase mentioned above.
Interest expense was $2.5 million for the quarter and decreased by $.8 million,
primarily due to the repuchase of Spinnaker's Senior Notes. During the
nine-month period ended September 30, 2000, interest expense increased by $.6
million. This increases for the nine months was primarily due to allocations
during the 1999 periods of a portion of the interest expense to the discontinued
industrial tape units 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 nine months ended September 30, 2000 and 1999, represents
effective tax rates of 36% and 40%, respectively. The differences from the
federal statutory rate are principally due to the effect of state income taxes,
foreign income (loss) and amortization of non-deductible goodwill.
Minority Interest
Minority interests contribution to net income increased by $.7 million for the
quarter and $1.6 million for the nine 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 three months ended September 30, 2000 was $226,000, or $.15
per share, as compared to a net income of $7.9 million, or $5.59 per share in
the previous year's three month period. The absence of the income in the spun
off operations of Interactive and the gain on the sale of the industrial tape
segment at Spinnaker in 1999 were the primary reasons for this reduction in Net
Income, although income from continuing operations improved.
Net income for the nine months ended September 30, 2000 was $1.8 million or
$1.24 per share, as compared to a net loss of $2.7 million or $1.89 per share
for the 1999 period. The absence of the losses in the discontinued operations,
the gain on the early extinguishment of debt at Spinnaker and improved operating
results from continuing operations, offset by the gain on sale of Spinnaker's
industrial tape segment, were the primary reasons for this improvement.
Backlog/New Orders
Total backlog of manufactured products from continuing operations at September
30, 2000 was $44.7 million, which represents an increase of $9.4 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 September 30,
2000.
FINANCIAL CONDITION
Liquidity/Capital Resources
As of September 30, 2000, the Company had current assets of $103.9 million and
current liabilities of $74.7 million. Working capital was therefore $29.2
million as compared to $23.2 million at December 31, 1999. The increase is
primarily due to improved operating results.
Capital expenditures for the nine months were $2.3 million in 2000 and $2.8
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 September 30, 2000, total debt was $86.6 million, which was $55.0 million
less than the $141.6 million at the end of 1999. The reduction is primarily due
to principal repayments and debt repurchases. Total debt at September 30, 2000
included $60.3 million of fixed interest rate debt, at an average cash interest
rate of 10.6%, and $26.3 million of variable interest rate debt at an average
interest rate of 9.2%. Additionally, the Company had unused lines of credit
facilities of which the Spinnaker Credit Facility is the 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 September 30,
2000, the combined effective interest rate was 9.2%. 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 November 1, 2000, aggregate
availability under the Refinanced Spinnaker Credit Facility was approximately
$28.2 million, of which approximately $23.6 million was outstanding. During the
first nine months of 2000, the Company has guaranteed project specific credit
facilities for Lynch Systems totaling approximately $8 million. At September 30,
2000, there was $1.7 million borrowed on these facilities and it is expected
that these facilities will be repaid in the first 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 for the foreseeable future.
Current debt outstanding at subsidiaries contains restrictions on the amount of
readily available funds that can be transferred to Lynch Corporation.
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
was assessed the impact that SAB will have on its revenue recognition policy
when it is adopted in the fourth quarter of 2000 and has determined that there
is little, if any, exposure.
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 $19.2 million at September 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 September 30, 2000, approximately $26.3 million, or 30% 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 nine months 2000 interest expense
would have changed by less than $.2 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.
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 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 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4(d) Referenced Credit Agreement among Spinnaker Coating, Inc., Spinnaker
Coating-Maine, Inc. and Entoleter, Inc. as Borrowers, Spinnaker
Industries, Inc. as Guarantor, each of the financial institutions
listed as Schedule 1 hereto and Transamerica Business Corporation, as
Agent, dated August 9, 19999 and the First, Second and Third
Amendments thereto (incorporated by reference to Exhibits 10.5, 10.6,
10.7 and 10.8 to Spinnaker's Form 10-K for the year ended December 31,
1999).
4(d)(i) Fourth Amendment to Referenced Credit Agreement dated April 17,
2000 (incorporated by reference to Exhibit 10.1 to Spinnaker's form
10-Q for the quarter ended March 31, 2000).
4(d)(ii) Fifth Amendment to Referenced Credit Agreement dated September 30,
2000 (incorporated by reference to Exhibit 10.1 to Spinnaker's Form
10-Q for the quarter ended September 30, 2000).
27 - Financial Data Schedule
(b) Reports on Form 8-K
None
<PAGE>
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
November 13, 2000