-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FbymvxbqayRmI99ENgJMgJeJUQmZ+O30+VsDIQXVVpEoSdl+4QEH5NZKrsXDkH3y weVG3gA6UYOQ3Qk5g6qI6A== 0000061004-96-000052.txt : 19960816 0000061004-96-000052.hdr.sgml : 19960816 ACCESSION NUMBER: 0000061004-96-000052 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960814 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: LYNCH CORP CENTRAL INDEX KEY: 0000061004 STANDARD INDUSTRIAL CLASSIFICATION: TRUCKING (NO LOCAL) [4213] IRS NUMBER: 381799862 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-00106 FILM NUMBER: 96615198 BUSINESS ADDRESS: STREET 1: 8 SOUND SHORE DR STE 290 CITY: GREENWICH STATE: CT ZIP: 06830 BUSINESS PHONE: 2036293333 MAIL ADDRESS: STREET 1: 8 SOUND SHORE DRIVE STREET 2: SUITE 290 CITY: GREENWICH STATE: CT ZIP: 06830 10-Q 1 SECURITIES AND 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, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 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.) 8 Sound Shore Drive, Suite 290, Greenwich, Connecticut 06830 (Address of principal executive offices) (Zip code) (203) 629-3333 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 August 1, 1996 Common Stock, no par value 1,390,579 INDEX LYNCH CORPORATION AND SUBSIDIARIES PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed Consolidated Statement of Operations: - Three months ended June 30, 1996 and 1995 - Six months ended June 30, 1996 and 1995 Condensed Consolidated Balance Sheet: - June 30, 1996 - December 31, 1995 (Audited) Condensed Consolidated Statement of Cash Flows: - Six months ended June 30, 1996 and 1995 Notes to Condensed Consolidated Financial Statements Item 2. Managements's Discussion and Analysis of Financial Condition and Results of Operations PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K SIGNATURES Part 1- FINANCIAL INFORMATION Financial Statements LYNCH CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS ---------------------------------------------- (UNAUDITED) (In thousands, except share amounts)
Three Months Six Months Ended June 30 Ended June 30 -------------------------------------------- 1996 1995 1996 1995 SALES AND REVENUES -------------------------------------------- Multimedia $ 6,641 $ 5,916 $ 13,356 $ 11,601 Services 36,698 31,555 67,204 58,358 Manufacturing 70,154 37,912 142,408 74,109 -------------------------------------------- 113,493 75,383 222,968 144,068 -------------------------------------------- Costs and expenses: Multimedia 4,991 4,386 9,601 8,611 Services 33,944 28,388 62,505 52,621 Manufacturing 57,855 29,576 117,607 58,742 Selling and administrative 11,320 8,724 21,935 15,784 ------------------------------------------ OPERATING PROFIT 5,383 4,309 11,320 8,310 Other income (expense): Investment income 715 735 1,148 1,619 Interest expense (4,241) (2,221) (8,185) (4,412) Share of operations of affiliated companies 47 76 66 6 Gain on sale of stock by subsidiaries 4,134 59 4,178 59 -------------------------------------------- 655 (1,351) (2,793) (2,728) -------------------------------------------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND MINORITY INTERESTS 6,038 2,958 8,527 5,582 Provision for income taxes (2,449) (1,177) (3,426) (2,265) Minority interests (374) (597) (662) (1,020) -------------------------------------------- INCOME FROM CONTINUING OPERATIONS 3,215 1,184 4,439 2,297 -------------------------------------------- DISCONTINUED OPERATIONS: LOSS FROM OPERATIONS OF DIS- CONTINUED LYNCH TRI-CAN INTERNATIONAL(LESS APPLICABLE INCOME TAXES OF $76,17,90,and 9) (125) (28) (148) (16) LOSS ON DISPOSAL OF LYNCH TRI-CAN INTERNATIONAL INCLUDING PROVISION OF $150 FOR OPERATING LOSSES DURING PHASE-OUT PERIOD (LESS APPLICABLE INCOME TAXES OF $305) (595) 0 (595) 0 -------------------------------------------- NET INCOME $ 2,495 $ 1,156 $ 3,696 $ 2,281 Weighted average ============================================ shares outstanding 1,408,000 1,407,000 1,402,000 1,404,000 INCOME PER COMMON SHARE: - -------------------------- INCOME FROM CONTINUING OPERATIONS $2.28 $0.84 $3.17 $1.63 INCOME (LOSS) FROM DISCONTINUED OPERATIONS (0.51) (0.02) (0.53 (0.01) -------------------------------------------- INCOME PER COMMON SHARE $1.77 $0.82 $2.64 $1.62 ============================================
LYNCH CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET ------------------------------------
June 30 December 31 1996 1995 (Unaudited) (A) ----------------------- ASSETS CURRENT ASSETS: Cash and Cash Equivalents $ 21,026 $ 15,921 Marketable Securities and Short-Term Investments 4,035 11,432 Receivables, Less Allowances of 1,314 and $1,732 52,911 52,306 Inventories 38,431 33,235 Deferred Income Tax Benefits 3,944 3,944 Other Current Assets 8,760 6,810 ----------------------- Total Current Assets 129,107 123,648 PROPERTY, PLANT AND EQUIPMENT: Land 2,086 2,068 Buildings and Improvements 19,609 16,675 Machinery and Equipment 141,786 128,397 ----------------------- 163,481 147,140 Less Accumulated Depreciation 45,660 36,093 ----------------------- Net PROPERTY, PLANT and EQUIPMENT 117,821 111,047 INVESTMENT IN AND ADVANCES TO AFFILIATE COMPANIES 12,742 8,982 ACQUISITION INTANGIBLES 52,489 53,060 OTHER ASSETS 8,304 5,702 ----------------------- Total Assets $320,463 $302,439 ======================= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Notes Payable to Banks $10,765 $9,622 Trade Accounts Payable 22,771 20,147 Accrued Liabilities 27,247 28,545 Current Maturities of Long-Term Debt 45,541 39,708 ----------------------- Total Current Liabilities 106,324 98,022 LONG-TERM DEBT 138,444 138,029 DEFERRED INCOME TAXES 19,619 17,912 MINORITY INTERESTS 16,172 12,964 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 8,404 7,873 RETAINED EARNINGS 27,472 23,776 TREASURY STOCK OF 80,612 AND 92,528 SHARES, AT COST (1,111) (1,276) ----------------------- Total Shareholders' Equity 39,904 35,512 ----------------------- Total Liabilities and Shareholders' Equity $320,463 $302,439 =======================
(A) The Balance Sheet At December 31, 1995, 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 information. LYNCH CORPORATION AND SUBSIDIARIES ---------------------------------------- CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS ------------------------------------------- (UNAUDITED) (In thousands)
Six Months Ended June 30 ---------- ---------- 1996 1995 ---------- ---------- OPERATING ACTIVITIES Net Income 3,696 2,281 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 8,249 5,144 Net effect of sales of trading securities 7,397 1,375 Deferred taxes 1,707 0 Share of operations of affiliated companies (66) (6) Minority interests 662 1,020 Gain on sale of stock by subsidiaries (4,178) 0 Changes in operating assets and liabilities: Receivables (605) (6,317) Inventories (5,196) (5,376) Accounts payable and accrued liabilities 1,326 4,836 Other (4,290) (1,912) ---------- ---------- NET CASH FROM OPERATING ACTIVITIES 8,702 1,045 ---------- ---------- INVESTING ACTIVITIES Capital Expenditures (9,786) (7,314) Acquisition of lines from U.S. West (4,680) 0 Investment in Personal Communications Services Partnerships (3,326) 0 Other (312) 0 ---------- ---------- NET CASH USED IN INVESTING ACTIVITIES (18,104) (7,314) ---------- ---------- FINANCING ACTIVITIES Borrowings of debt, net 13,087 4,122 Treasury stock transactions 723 0 Minority interest transactions 697 (307) ---------- ---------- NET CASH FROM FINANCING ACTIVITIES 14,507 3,815 ---------- ---------- Net increase (decrease)in cash and cash equivalents 5,105 (2,454) Cash and cash equivalents at beginning of period 15,921 18,010 ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD 21,026 15,556 ========== ==========
See Notes to Condensed Consolidated Financial Statements. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS A. Subsidiaries of the Registrant The present operating subsidiaries of the Registrant are as follows: Lynch Multimedia Corporation CLR Video LLC (60% owned) Lynch Telecommunications Corporation Lynch Telephone Corporation (80.1% owned) Western New Mexico Telephone Company, Inc. WNM Communications Corporation Lynch Telephone Corporation II (83.0% owned) Inter-Community Telephone Company Inter-Community Telephone Company II Lynch Telephone Corporation III (81% owned) Cuba City Telephone Exchange Company Belmont Telephone Company Lafayette County Satellite TV, Inc. Brighton Communications Corporation Lynch Telephone Corporation IV Bretton Woods Telephone Company Lynch Telephone Corporation VI (98% owned) J.B.N. Telephone Company, Inc. J.B.N. Finance Corporation Lynch Telephone Corporation VII USTC Kansas Inc. Haviland Telephone Company Haviland Finance Corporation Global Television Inc. Lynch Entertainment Corporation Coronet Communications Company (20% owned) Lynch Entertainment Corporation II Capital Communications Corporation (49% owned) The Morgan Group, Inc. (equity ownership 49% - voting ownership 64%) Morgan Drive Away, Inc. Transport Services Unlimited, Inc. Interstate Indemnity Inc. Morgan Finance, Inc. Lynch Capital Corporation Lynch Manufacturing Corporation Lynch Machinery, Inc. (90% owned) Tri-Can International, Ltd. M-tron Industries, Inc. (94% owned) M-tron Industries, Ltd. Spinnaker Industries, Inc. (previously named Safety Railway Service Corporation) (73.5% owned) Central Products Acquisition Corp. Brown-Bridge Industries, Inc. (80.1% owned) Entoleter, Inc. Lynch International Exports, Inc. B. Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of 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, 1996 are not necessarily indicative of the results that may be expected for the year ended December 31, 1996. 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, 1995. C. Acquisitions On October 4, 1995, Central Products Acquisition Corp., a wholly-owned subsidiary of Spinnaker Industries, Inc. (an 73.5% owned subsidiary of Lynch) acquired from Alco Standard Corporation ("Alco"), the assets and stock of Central Products Company. Central Products manufactures a wide variety of carton sealing tapes and related equipment. The cost of the acquisition was $80.0 million. As a result of this transaction, the Company recorded $27.2 million in goodwill which is being amortized over 25 years. This transaction was accounted for as a purchase, and accordingly, the assets acquired and liabilities assumed were recorded at their estimated fair market value. The operating results of the acquired company are included in the consolidated statements of operations from their respective acquisition dates. The following combined proforma information shows the results of the Registrant's operations presented as though the purchase of Central Products had been made at the beginning of 1995.
Three Months Ended Six Months Ended June 30 June 30 1996 1995 1996 1995 (In thousands, except per share data) Sales and Revenues $113,493 $105,103 $222,968 $204,798 Operating Profit 5,343 6,281 11,320 12,712 Income from Continuing Operations 3,215 952 4,439 2,310 Net Income 2,495 924 3,696 2,294 Income from Continuing Operations Per Share 2.28 0.68 3.17 1.65 Net Income Per Share 1.77 0.66 2.64 1.63
The above proforma data has been revised by Registrant for certain refinements in the proforma adjustments determined in June, 1996. The above data has been adjusted to reflect these changes. D. Discontinued Operations During the second quarter, the Registrant decided to discontinue the operations of Tri-Can International, Ltd. ("Tri-Can") and sell the assets of that operation. The sale was completed in August 1996. Tri-Can, a manufacturer of packaging machinery, recorded sales of $1.3 million and $2.6 million, respectively, for the six months ended June 30, 1996 and 1995, and $4.5 million and $5.4 million for the years ended December 31, 1995 and 1994, respectively. The assets to be sold primarily consist of inventory fixed assets, inventory and intangibles. As a result of this decision, the Registrant, during the three months ended June 30, 1996, recorded a provision for loss of $750,000, $495,000, or $0.35 per share after-taxes, to reflect the write-down of certain assets and costs estimated to be incurred prior to the disposal and a provision for operating losses of $150,000 for the period, $100,000, or $0.07 per share after-tax, between June 30, 1996 and the date of the sale. E. Inventories Inventories are stated at the lower of cost or market value. At June 30, 1996, inventories were valued by three methods: last-in, first-out (LIFO) - 56%, specific identification - 39%, and first-in, first-out (FIFO) - 5%. At December 31, 1995, the respective percentages were 58%, 38%, and 4%.
In Thousands June 30, 96 December 31, 95 Raw materials and supplies $11,712 $10,676 Work in process 12,388 10,286 Finished goods 14,331 12,273 TOTAL INVENTORIES $38,431 $33,235
F. Indebtedness On a consolidated basis, at June 30, 1996, the Registrant maintains short-term and long-term lines of credit facilities totaling $82.1 million, of which $26.3 million is available. The Registrant maintains a $12.0 million short term line of credit facility, of which $4.7 million was available at June 30, 1996. This facility expires on April 15, 1997. Spinnaker Industries, Inc. maintains lines of credit at its subsidiaries which total $45.5 million, of which $8.8 million was available at June 30, 1996 and The Morgan Group maintains lines of credit totaling $18.5 million, $11.6 million of which was available at June 30, 1996. These facilities, as well as facilities at other subsidiaries of the Registrant, generally limit the credit available under the lines of credit to certain variables; such as inventories and receivables, which are secured by the operating assets of the subsidiary, and include various financial covenants. At June 30, 1996, $35.1 million of these total facilities expire within one year. Long-term debt consists of (all interest rates are weighted averages, where applicable at June 30, 1996):
In Thousands 6-30-96 12-31-95 Rural Electrification Administration and Rural Telephone Bank notes payable in equal quarterly installments through 2023 at fixed rates (3.6%) 29,762 27,543 Bank credit facilities utilized by certain telephone and telephone holding companies at both 9.5% fixed and 9.0% variable rates 32,810 28,255 Unsecured notes issued in connection with telephone company acquisitions at 10% fixed rate 16,091 16,149 Debt associated with Central Products: Revolving line of credit 9.25% variable rate 14,413 14,126 Term loans 9.5% variable rate 34,875 35,625 Notes to seller 7.0% fixed rate 19,250 30,000 Bridge loan 10.4% variable rate 8,500 Bank debt associated with Brown-Bridge at variable rates 9.5%: Revolving line of credit 15,103 12,646 Term loan 5,441 6,691 Other 7,740 6,702 183,985 177,737 Current Maturities (45,541) (39,708) $138,444 $138,029
In general, the long-term debt credit facilities are secured by property, plant and equipment, inventory, receivables and common stock of certain subsidiaries and contain certain covenants restricting distributions to the Registrant. G. Central Products Refinance As part of Spinnaker's acquisition of Central Products Company from Alco Standard on October 4, 1995 (see note C), Alco provided two loans totaling $25 million and received the right to sell these notes to Spinnaker and demand payment (the "Put Agreement"). Lynch agreed to guarantee the notes and provide funds for the Put Agreements. As of January 2, 1996, Alco exercised the rights under the Put Agreement to sell the notes back to Spinnaker and in connection therewith, as described below, Spinnaker entered into a new financing agreement with the seller and a third party to make a partial principal payment on the note and replace the balance with a new financing arrangement. On April 5, 1996, Spinnaker entered into an agreement with a third party for an $8.5 million bridge loan. The bridge loan is due on December 30, 1996, and if not paid will convert into a 5 year term loan. The third party will be entitled to receive a warrant to purchase 2.5% of the common equity of Spinnaker for each quarter the term loan is outstanding up to 20% on a fully diluted basis, of the common equity of Spinnaker. The bridge loan bears interest at the greater of the LIBOR reference rate or the Treasury rate plus 5% for the first 90 days, then incrementally increasing by .25% for every subsequent 90 day period. Spinnaker may also fix the rate at 18% if the floating rate increases to or above that rate. The bridge loan and term loan include a payment in kind ("PIK") feature that allows Spinnaker to pay an interest in excess of 16% (the maximum cash interest) by issuing additional bridge notes. On April 5, 1996, an entity affiliated with Richard J. Boyle and Ned N. Fleming III ("BF"), the Company's Chairman and Chief executive Officer and President, respectively, exercised warrants to purchase 187,476 shares of Spinnaker's common stock resulting in proceeds of $500,000 which will be used by the Company to make scheduled interest payments on the bridge loans. The agreement requires BF to continue to exercise its warrants to provide funds to satisfy the outstanding interest that will be due on the bridge loan and term loans. The Company has pledged its shares of Spinnaker stock to secure such loans. Concurrently with the closing of the bridge loan, Spinnaker paid Alco $7.5 million of which $5.5 million was a principal payment on the $25 million note, approximately $1.0 million related to accrued interest and $1.0 million was applied toward a $1.75 million purchase price for a warehouse facility in Denver, Colorado. The unpaid balance of the $25 million note, together with the balance due on the warehouse facility was restructured into a series of new convertible subordinated notes consisting of the following: (a) A 7%, $6 million convertible subordinated note that automatically converts including accrued interest, into Spinnaker common stock. On May 5, 1996, the Note converted into 171,429 shares of Spinnaker Stock; (b) A 7%, $7 million convertible subordinated note due April 1997. The note contains a PIK feature that allows Spinnaker, at its option, to satisfy the interest by increasing the principal amount of the note. However, if Spinnaker selects the PIK option, the interest rate on the note is 9%. All or any part of this note can be converted at Alco's option into shares of Spinnaker's common stock after April 1, 1997 at the then market price; and (c) A 7%, $7.25 million convertible subordinated note due April 1998. The note contains a PIK feature that allows Spinnaker, at its option, to satisfy interest by increasing the principal amount of the note. However, if Spinnaker selects the PIK option, the interest rate on the note is 9%. All or any part of this note can be converted at Alco's option into shares of Spinnaker common stock after April 1, 1998 at the then current market price. Spinnaker is pursuing various alternatives to refinance the indebtedness of Spinnaker and its subsidiaries, including refinancing the bridge loan before it matures. There can be no assurance that Spinnaker can successfully complete any such refinancing. H. Gain of Sale of Stock by Spinnaker As a result of the conversion of the $6.0 million Alco Note into Spinnaker Common Stock on May 5, 1996 (see Note G) and other transactions, the Registrant, in accordance with its accounting policy, recognized a gain of $4.1 million, $2.4 million or $1.70 per share after taxes, in the second quarter of 1996. I. Income Taxes The income tax provision includes federal, as well as state and local taxes. The tax provisions for the six months ending June 30, 1996 and 1995 represent effective tax rates of 40.2% and 40.6%, respectively. The rates differ from the federal statutory rate principally due to the effect of state income taxes, amortization of non-deductible goodwill, and, in 1995 a valuation reserve provided on the benefit associated with the Registrant's equity in losses of Capital Communications Corporation. J. Capital Stock In 1987 and 1992, the Board of Directors authorized the purchase of up to a total of 300,000 shares of Common Stock of the Registrant. These shares will be retained as treasury stock for future use as required. Through June 30, 1996, the Registrant had purchased 230,861 shares of Common Stock to date at an average price of $13.15. K. Earnings Per Share Earnings per common and common equivalent share amounts are based on the average number of common shares outstanding during each period, assuming the exercise of all stock options having an exercise price less than the average market price of the common stock using the treasury stock method. Fully diluted earnings per share reflect the effect, where dilutive, of the exercise of all stock options having an exercise price less than the greater of the average or closing market price at the end of the period of the Common Stock of the Registrant using the treasury stock method. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Sales and Revenues Revenues for the second quarter of 1996 increased by $38.1 million or 50.6% from the second quarter of 1995. Contributions to the overall increase from the multimedia, services and manufacturing segments were 1.9%, 13.5%, and 84.6%, respectively. The acquisition of Central Products Company by Spinnaker Industries, on October 4, 1995, was the predominant cause of the increase. Central Products, with revenues of $31.4 million in the second quarter of 1996, represented 97.5% of the increase in the manufacturing segment and 82.4% of the overall increase in the Registrant's revenues. Revenues at Brown Bridge Industries increased by $2.4 million as a result of recently obtained contracts. Revenues at the Morgan Group, Inc. increased by $5.1 million reflecting increased demand in its manufactured housing and driver outsourcing segment, partly the result of the acquisition of Transfer Drivers, Inc. ("TDI") on May 22, 1995 ($1.4 million), offset by a decline in recreational vehicle shipments. For the six months ended June 30, 1996, revenues increased by $78.9 million, or 54.8%. The same factors that contributed to the second quarter increase also contributed to the year-to-date increase. Specifically: (1) The acquisition of Central Products added $63.4 million, or 80.3%; (2) increased revenues at Morgan, partly due to the acquisition of TDI ($3.3 million), contributed $8.8 million, or 11.2% of the overall increase; and (3) increased revenues at Brown Bridge of $6.7 million, contributed 8.5% of the over-all increase. Revenues at Lynch Machinery decreased by $2.7 million between the two periods as a result of reduced production activity associated with shipment of extra-large glass presses in 1996 versus 1995. On a prospective basis, the inclusion of the Central Products operation for a full year is expected to result in increased reported revenues by the Registrant in the third quarter of 1996 versus the respective prior year periods. Operating Profit Operating profit for the second quarter of 1996, increased by $1.1 million, or 24.9%, from the second quarter of 1995. On a segment basis, multimedia and manufacturing operations increased by $0.2 million and $2.0 million, respectively, while the operating profit of the services segment declined by $0.6 million. The inclusion of the Central Products operations in the second quarter of 1996 increased operating profit by $2.0 million. Improved results at M-tron, contributed $0.3 million to the operating profit improvement. Within the multimedia segment, the inclusion of CLR Video, which acquired a 4,500 subscriber cable operation on December 1, 1995, contributed $0.1 million in operating profits for the quarter. In addition, the increased level of capital expenditures by our telephone operations resulted in increased revenue recovery and operating profit in 1996. The decline in operating profit at The Morgan Group of $0.6 million, resulted from reduced recreational vehicle margins due to reduced demand plus higher claims costs. Operating profit at Lynch Machinery declined by $0.2 million due to the lower sales volume. Net corporate expenses were higher by $0.5 million reflecting increased level of corporate bonus accrual associated with the higher level of net earnings. For the six months ended June 30, 1996, operating profit increased by $3.0 million. The same factors that affected operating profit in the second quarter also affected the year-to-date amounts. Specifically: (1) The acquisitions of Central Products and CLR Video cable operation contributed $4.1 million and $0.2 million, respectively; (2) M-tron's operating profits were $0.7 million greater than last year; (3) Morgan's results were lower by $1.3 million; and (4) Lynch Machinery's operating profit were $0.4 million lower than last year. On a prospective basis and assuming no material adverse change in operations, the inclusion of Central Products is expected to result in increased reported operating profit by the Registrant in the third quarter of 1996 versus the respective prior year period. Other Income (Expense), Net Investment income in the second quarter of 1996 was essentially the same as the second quarter of the previous year as increased net marketable securities gains offset lower investments in securities generating current investment income. With regard to the six month period, the first quarter of 1996 contained less marketable securities gain than the first quarter of 1995. Interest expense in the second quarter of 1996 was $2.0 million higher than the second quarter of the previous year due to interest expense associated with the acquisitions of Central Products and CLR Video of $1.7 million and $0.1 million, respectively. Six month interest expense amounts for Central Products and CLR Video were $3.1 million and $0.1 million, respectively. As described in Note F to the Condensed Consolidated Financial Statements, as part of Spinnaker's acquisition of Central Products, Spinnaker issued to Alco a $6 million Convertible Subordinated Note that converted into Spinnaker Common Stock on May 5, 1996 at a conversion price per share of approximately $35. As it is the accounting policy of the Registrant to recognize gains and losses on the sale of stock by a subsidiary, the conversion of this Note resulted in a pre-tax gain of $4.1 million to the Registrant. In addition, during 1996, Spinnaker is pursuing various alternatives to refinance its indebtedness in order to pay off the $8,500,000 loan before it converts into a term loan, to simplify its capital structure, to remove restrictions imposed by various lenders and to reduce the administrative burdens resulting from having multiple lenders. Such refinancing could result in a charge to earnings related to the early extinguishment of the existing debt. Tax Provision The income tax provision includes federal, as well as state and local taxes. The tax provisions for the three months ended June 30, 1996 and 1995, represent effective tax rates of 40.2% and 40.6%, respectively. The rates differ from the federal statutory rate principally due to the effect of state income taxes, amortization of non-deductible goodwill, and, in 1995, a valuation reserve provided on the benefit associated on the Registrant's equity in losses in Capital Communications Corporation. Minority Interest Minority interest was $0.2 million lower in the second quarter of 1996 versus the second quarter of 1995, predominantly due to the lower contribution of Morgan to the 1996 results. Income From Continuing Operations Income from continuing operations for the three months ended June 30, 1996 was $3.2 million, or $2.28 per share, as compared to $1.2 million, or $0.84 per share, in the previous year. Income from continuing operations for the six months ended June 30, 1996 was $4.4 million, or $3.17 per share, as compared to $2.3 million, or $1.63 per share in the previous year. The above mentioned gain on the sale of the stock by a subsidiary was the primary cause of the increases. Discontinued Operations As described in Note D of the interim financial statement, the Registrant has decided to discontinue the operation of Tri-Can International, Ltd. Accordingly, its operating results and a loss reserve provided in the second quarter of 1996 are treated as discontinued operations. Net Income Net income for the three months ended June 30, 1996 was $2.5 million, or $1.77 per share, as compared to $1.2 million, or $0.82 per share in the previous year. Net income for the six months ended June 30, 1996 was $3.7 million, or $2.64 per share as compared to $2.3 million, or $1.62 per share in the previous quarter. Backlog/New Orders Total backlog of manufactured products at June 30, 1996 was $32.6 million, which represents a decrease of $1.5 million from the backlog of $34.0 million at December 31, 1995. The backlog at Central Products and Entoleter increased by $1.1 million and $0.8 million, respectively, but was offset by declines at M-tron, Brown-Bridge and Lynch Machinery of $2.2 million, $1.0 million, and $0.3 million respectively. Liquidity/Capital Resources At June 30, 1996, the Registrant had $25.1 million in cash and short-term investments, $1.0 million of which was at the Parent Company, which was $2.3 million less than the amount reported at December 31, 1995. Working capital at June 30, 1996, was $22.8 million compared to $25.6 million at December 31, 1995. Total debt was $194.8 million at June 30, 1996 compared to $187.4 million at December 31, 1995. As reported in the Registrant's Consolidated Statement of Cash Flow, during the six months ended June 30, 1996, operating activities generated $8.7 million in cash, investing activities utilized $18.1 million, and financing activities generated $14.5 million. The respective amounts for the six months ended June 30, 1995 were $1.0 million, $7.3 million and $3.8 million, respectively. Increased sales of marketable securities and a seasonable build up of inventories at Spinnaker in the first half of 1996 weres primarily responsible for the significant fluctuation in cash generated from operating activities between the two periods. Registrant 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. At June 30, 1996, the Registrant has $26.3 million of unused short-term and long-term lines of credit facilities, $4.7 million of which applied to the Parent Company. Subsidiaries of the Registrant hold limited partnership interests in and have loan commitments to five partnerships which were the winning bidders on an aggregate of 31 licenses in the Federal Communications Commission's ("FCC") recently concluded C-Block auction for 30 megahertz of broadband spectrum to be used for personal communications services (PCS). See Item 5 of Registrant's Form 10-Q for the quarter ended March 31, 1995. The licenses have an aggregate purchase price of $215 million, after a 25% bidding credit that the FCC provides to "small businesses." Under FCC regulations, 5% (or $10.8 million) of the purchase price of the licenses was paid on May 15, 1996 and 5% (or $10.8 million) is due at the time the licenses are awarded, which is expected to occur in the third quarter of 1996. The remaining 90% will be funded by a loan from the U.S. Government with a ten-year life with principal payments beginning in year seven. Registrant's subsidiaries have an aggregate commitment to loan the partnerships $41.8 million, $10.8 million of which has been met as of June 30, 1996, to be utilized principally by the partnerships to fund down payments on the licenses and interest payments on the Government loans. The Registrant is pursuing various alternatives to obtain the financing necessary to meet this current funding commitment, but there can be no assurance that the Registrant can successfully complete any such financing. The funding aspects of the acquisition and potential acquisition of licenses and the subsequent mandatory build out requirements plus the amortization of the license, could significantly and materially impact Registrant's reported net income over the next several years. Under the current structure and consolidations rules, the ramifications of this would not impact reported revenues and operating profit in the future. A subsidiary of Registrant is a 49.9% limited partner in a partnership which has filed an application with the FCC to bid in the FCC's F-Block Auction licenses for 10 megahertz of spectrum to be used for personal communications services and has loaned the partnership $12 million for five years for bidding purposes. Registrant has borrowed $12 million for one year from a subsidiary of GSI, an affiliate of the Chairman of the Registrant, to fund the subsidiary's loan obligation, secured by the vote from the partnership, the subsidiary's 49.9% interest in the Partnership and the stock of certain of Registrant's subsidiaries. The F-Block Auction is restricted to certain "entrepreneurs," and winning bidders will receive government financing for 80% of price of licenses won (after any bidding credits). On November 4, 1995, a contract was signed to acquire for $22 million, subject to certain conditions, Dunkirk & Fredonia Telephone Company, a local exchange company in New York, with approximately 11,000 access lines. On July 26, 1996, the New York State Public Service Commission authorized this transaction subject to certain conditions. The Registrant is in the process of negotiating the placement of the financing for this transaction though there is no assurance that such financing can be obtained. See Footnote G, supra, as to Spinnaker financing and Item 5 below for additional information on personal communications services investments. On June 27, 1996, the shareholders of the Registrant approved a proposal described in Registrant's Proxy Statement dated June 7, 1996, whereby the Registrant may request Gabelli & Company, Inc. ("GSI") to assist the Registrant in obtaining up to $25 million in funds to be used for general operating purposes including investments in the PCS partnerships, although GSI has no obligation to do so. To the extent the Registrant obtains funds, such borrowings would be evidenced by an interest bearing promissory note due not earlier than 120 days from issuance. If the Registrant should default in the payment of the notes, the holder would have the right to exchange the promissory notes for notes convertible into common stock of the Registrant at a conversion price that may be substantially below the market price of the stock. Registrant's shareholders would have the opportunity under certain circumstances to acquire convertible notes if convertible notes are issued to GSI or certain of its Principal Accounts. Included in this Management Discussion and Analysis of Financial Condition and Results of Operations are certain forward looking financial and other information. It should be recognized that such information are 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, and which accordingly are subject to uncertainties and risks. PART II OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders (a) At the Annual Meeting of Stockholders of the Registrant held on June 27, 1996, the following persons were elected as directors with the following votes:
Name Votes For Votes Withheld Morris Berkowitz 1,290,479 5,723 E. Val Cerutti 1,290,479 5,723 Paul J. Evanson 1,292,679 3,523 Mario J. Gabelli 1,292,632 3,580 Salvatore Muoio 1,290,579 5,623 Ralph R. Papitto 1,290,579 5,623 Paul P. Woolard 1,292,579 3,623
(b) The following shares were voted as indicated on Item 2 of the Registrant's Proxy Statement, dated June 7, 1996: Right to exchange promissory notes in a principal amount of up to $25 million that may be issued by the Registrant into convertible notes under certain circumstances. For: 959,462 Against: 16,432 Abstain: 10,550 Broker non-votes totaled 303,750. See the last paragraph of Item 2 Supra. Item 5. Other Information A subsidiary of Registrant is a 49.9% limited partner in a partnership which has filed an application with the FCC to bid in the F-Block Auction licenses for 10 megahertz of spectrum to be used for personal communications services and has loaned the partnership $11.8 million for five years for bidding purposes. Registrant has borrowed $11.8 million for one year from Gabelli Funds, Inc. ("GFI") to fund the subsidiary's loan obligation, secured by the note from the partnership, the subsidiary's 49.9% interest in the partnership and the stock of certain of Registrant's subsidiaries. The $11.8 million loan from GSI includes a special fee payable to the GSI equal to 10% of the profits on the subsidiary's investment in the partnership. The F-Block Auction is restricted to certain "entrepreneurs," and winning bidders will receive government financing for 80% of price of licenses won (after any bidding credits). Another subsidiary of Registrant has an agreement with Rivgam Communicators L.L.C., an applicant in the FCC's D and E Block Auctions and a subsidiary of GSI, to provide certain services to it and will receive a fee equal to 10% of the profits of Rivgam. The D-E-F Block Auctions are scheduled to commence on August 26, 1996. PCS is subject to numerous uncertainties and risks. There can be no assurance that either applicant will win any licenses or if they win any licenses, that such licenses can be successfully developed. See also Item 5 of Registrant's Form 10-Q for the first quarter of 1996 for further information on Registrant's involvement with personal communications services and uncertainties and risks related thereto. Registrant's majority-owned subsidiary, Spinnaker Industries, Inc. ("Spinnaker") has given notice to terminate its management agreement with Boyle, Fleming, George & Co., Inc. on August 31, 1996, with the intent of having Messrs. Boyle and Fleming, Chairman and Chief Executive Officer and President, respectively, enter into employment arrangements with Spinnaker. Negotiations between Spinnaker and Messrs. Boyle and Fleming are continuing. Spinnaker is also negotiating to acquire the approximately 19.9% minority interest in its Brown-Bridge Industries subsidiary. The terms of any such acquisition, which may involve cash payments, issuance of Spinnaker stock and/or other arrangements, have not been agreed to and there can be no assurance this transaction will ultimately be consummated. Registrant may from time to time provide certain forward looking financial and/or other information in press releases, filings with the Securities and Exchange Commission or otherwise. It should be recognized that such information are 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, and which accordingly are subject to uncertainties and risks. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 27-Financial Data Schedule (b) Reports on Form 8-K On April 19, 1996, May 14, 1996, and June 4, 1996, Registrant filed Amendments (6)-(8), respectively, to its Form 8-K, dated October 4, 1995, with respect to the Central Products acquisition and financing and on April 4, 1996, Registrant filed Amendment No. 1 to its Form 8-K dated March 19, 1996, with respect to a change of auditors at The Morgan Group, Inc. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LYNCH CORPORATION (Registrant) BY:s/Robert E. Dolan Robert E. Dolan Chief Financial Officer August 14, 1996 EX-27 2
5 This schedule contains summary financial information extracted from Condensed Consolidated Statements of Operations and Condensed Consolidated Balance Sheets and is qualified in its entirety by reference to such Form 10-Q. 0000061004 LYNCH CORPORATION 6-MOS DEC-31-1996 JUN-30-1996 21,026 4,035 52,911 1,314 38,431 129,107 163,481 45,660 320,463 106,324 138,444 0 0 5,139 34,765 320,463 222,968 222,968 189,713 211,648 0 0 8,185 8,527 3,426 4,439 743 0 0 3,696 2.64 2.64
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