-----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, B/POU9OvADx5iYYGY9967+qUsAYv3RjDMxGR/Q/lN8Dxo4kosYuZ7dpllJxd0f8Q 4DnSLdlsAaJJZpZL0OB+FA== 0000061004-96-000058.txt : 19961118 0000061004-96-000058.hdr.sgml : 19961118 ACCESSION NUMBER: 0000061004-96-000058 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 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: 96665821 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 September 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 November 1, 1996 Common Stock, no par value 1,390,679 INDEX LYNCH CORPORATION AND SUBSIDIARIES PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed Consolidated Statement of Operations: - Three months ended September 30, 1996 and 1995 - Nine months ended September 30, 1996 and 1995 Condensed Consolidated Balance Sheet: - September 30, 1996 - December 31, 1995 (Audited) Condensed Consolidated Statement of Cash Flows: - Nine months ended September 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 - ----------------------------- Item 1- Financial Statements - ----------------------------- LYNCH CORPORATION AND SUBSIDIARIES ---------------------------------- CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS ---------------------------------------------- (UNAUDITED) (In thousands, except share amounts)
Three Months Nine Months Ended September 30 Ended September 30 ---------- ---------- ---------- ---------- 1996 1995 1996 1995 SALES AND REVENUES ---------- ---------- ---------- ---------- Multimedia $ 7,397 $ 5,902 $ 20,753 $ 17,503 Services 35,306 33,250 102,510 91,608 Manufacturing 74,618 41,449 217,026 115,558 ---------- ---------- ---------- ---------- 117,321 80,601 340,289 224,669 Costs and expenses: ---------- ---------- ---------- ---------- Multimedia 5,223 4,455 14,824 13,066 Services 32,417 29,977 94,922 82,598 Manufacturing 63,063 32,349 180,670 91,091 Selling and administrative 9,904 8,879 31,839 24,663 ---------- ---------- ---------- ---------- OPERATING PROFIT 6,714 4,941 18,034 13,251 Other income (expense): Investment Income 519 577 1,667 2,196 Interest expense (4,254) (2,275) (12,439) (6,687) Share of operations of affiliated companies 8 (66) 74 (60) Gain on sale of stock by subsidiaries 0 0 4,178 59 ---------- ---------- ---------- ---------- (3,727) (1,764) (6,520) (4,492) ---------- ---------- ---------- ---------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND MINORITY INTERESTS 2,987 3,177 11,514 8,759 Provision for income taxes (1,240) (1,201) (4,666) (3,466) Minority interests (498) (568) (1,160) (1,588) ---------- ---------- ---------- ---------- INCOME FROM CONTINUING OPERATIONS 1,249 1,408 5,688 3,705 ---------- ---------- ---------- ---------- DISCONTINUED OPERATIONS: LOSS FROM OPERATIONS OF DIS- CONTINUED LYNCH TRI-CAN INTER- NATIONAL (LESS APPLICABLE INCOME TAXES OF $40,186,127) 0 (115) (259) (131) LOSS ON DISPOSAL OF LYNCH TRI-CAN INTERNATIONAL (LESS APPLICABLE INCOME TAXES OF $249) 0 0 (484) 0 ---------- ---------- ---------- ---------- NET INCOME $ 1,249 $ 1,293 $ 4,945 $ 3,574 ========== ========== ========== ========== Weighted average shares outstanding 1,408,000 1,413,000 1,404,000 1,409,000 INCOME PER COMMON SHARE: INCOME FROM CONTINUING OPERATIONS $ 0.89 $ 1.00 $ 4.05 $ 2.63 LOSS FROM DISCONTINUED OPERATIONS 0.00 (0.08) (0.53) (0.09) ---------- ---------- ---------- ---------- INCOME PER COMMON SHARE $ 0.89 $ 0.92 $ 3.52 $ 2.54 ========== ========== ========== ==========
LYNCH CORPORATION AND SUBSIDIARIES ----------------------------------- CONDENSED CONSOLIDATED BALANCE SHEET ------------------------------------
(In thousands) September 30 December 31 1996 1995 (Unaudited) (A) ASSETS ------------ ------------ CURRENT ASSETS: Cash and Cash Equivalents $ 16,768 $ 15,921 Marketable Securities and Short-Term Investments 1,971 11,432 Receivables, less Allowances of $1431 and $1732 55,047 52,306 Inventories 39,188 33,235 Deferred Income Tax Benefits 3,944 3,944 Other Current Assets 9,096 6,810 --------- --------- Total Current Assets 126,014 123,648 PROPERTY, PLANT AND EQUIPMENT: Land 2,096 2,068 Buildings and Improvements 20,170 16,675 Machinery and Equipment 149,877 128,397 ---------- --------- 172,143 147,140 Less Accumulated Depreciation 49,103 36,093 ---------- --------- Net Property, Plant and Equipment 123,040 111,047 INVESTMENT IN AND ADVANCES TO AFFILIATED COMPANIES 23,810 8,982 ACQUISITION INTANGIBLES 52,344 53,060 OTHER ASSETS 6,280 5,702 ---------- --------- Total Assets $ 331,488 $ 302,439 ========== ========= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Notes Payable to Banks $ 12,157 $ 9,622 Trade Accounts Payable 20,977 20,147 Accrued Liabilities 28,983 28,545 Current Maturities of Long-Term Debt 51,943 39,708 ---------- --------- Total Current Liabilities 114,060 98,022 LONG-TERM DEBT 140,039 138,029 DEFERRED INCOME TAXES 19,619 17,912 MINORITY INTERESTS 16,620 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 8,400 7,873 RETAINED EARNINGS 28,721 23,776 TREASURY STOCK OF 80,512 AND 92,528 SHARES, AT COST (1,110) (1,276) ---------- --------- Total Shareholders' Equity 41,150 35,512 ---------- --------- Total Liabilities and $331,488 $302,439 Shareholders' Equity ========== =========
(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 statements. LYNCH CORPORATION AND SUBSIDIARIES ----------------------------------- CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS ---------------------------------------------- (UNAUDITED) (In thousands)
Nine Months Ended September 30 ---------- ---------- 1996 1995 ---------- ---------- OPERATING ACTIVITIES Net Income $ 4,945 $ 3,574 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 12,514 7,753 Net effect of sales of trading securities 9,461 2,184 Deferred taxes 1,707 0 Share of operations of affiliated companies (74) 60 Minority interests 1,160 1,588 Gain on sale of stock by subsidiaries (4,178) 0 Changes in operating assets and liabilities: Receivables (2,741) (9,128) Inventories (5,953) (3,155) Accounts payable and accrued liabilities 1,268 7,184 Other (3,255) (5,194) -------- -------- NET CASH FROM OPERATING ACTIVITIES 14,854 4,866 -------- -------- INVESTING ACTIVITIES Capital Expenditures (17,435) (12,584) Acquisition of telephone lines (5,680) 0 Investment in Personal Communications Services Partnerships (14,306) 0 Other (363) 0 -------- -------- NET CASH USED IN INVESTING ACTIVITIES (37,784) (12,584) -------- -------- FINANCING ACTIVITIES Issuance of debt, net 22,410 6,181 Treasury stock transactions 730 0 Minority interest transactions 637 (454) -------- -------- NET CASH FROM FINANCING ACTIVITIES 23,777 5,727 -------- -------- Net increase (decrease) in cash and cash equivalents 847 (1,991) Cash and cash equivalents at beginning of period 15,921 18,010 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $16,768 $16,019 ======== ========
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 Interactive Corporation 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) 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. Lynch PCS Communications Corporation Lynch PCS Corporation (A) Lynch PCS Corporation (B) Lynch PCS Corporation (C) Lynch PCS Corporation (D) Lynch PCS Corporation (E) Lynch PCS Corporation (F) 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 nine month period ended September 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. (a 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 Nine Months Ended Sept. 30 Sept. 30 1996 1995 1996 1995 (In thousands, except per share data) Sales and Revenues $117,321 $111,140 $340,289 $315,938 Operating Profit 6,714 6,692 18,034 19,404 Income from Continuing Operations 1,249 1,436 5,688 3,746 Net Income 1,249 1,321 4,945 3,615 Income from Continuing Operations Per Share 0.89 1.02 4.05 2.66 Net Income Per Share 0.89 0.93 3.52 2.57
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 $3.5 million, respectively, for the nine months ended September 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 September 30, 1996, inventories were valued by three methods: last-in, first-out (LIFO) - 54%, specific identification - 42%, and first-in, first-out (FIFO) - 4%. At December 31, 1995, the respective percentages were 58%, 38%, and 4%.
In Thousands Sept. 30, 1996 December 31, 1995 Raw materials and supplies $13,042 $10,676 Work in process 3,921 10,286 Finished goods 22,225 12,273 TOTAL INVENTORIES $39,188 $33,235
F. Indebtedness On a consolidated basis, at September 30, 1996, the Registrant maintains short- term and long-term lines of credit facilities totaling $95.5 million, of which $34.0 million was available. The Registrant maintains a $12.0 million short term line of credit facility, of which $3.5 million was available at September 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 $6.4 million was available at September 30, 1996. The Spinnaker facilities were replaced on October 23, 1996 (see discussion below). The Morgan Group maintains lines of credit totaling $18.9 million, $11.8 million of which was available at September 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 September 30, 1996, $48.6 million of these total facilities expire within one year. Long-term debt consists of (all interest rates are weighted averages, where applicable at September 30, 1996):
In Thousands 9-30-96 12-31-95 Rural Electrification Administration and Rural Telephone Bank notes payable in equal quarterly installments through 2023 at fixed rates (4.0%) 31,894 27,543 Bank credit facilities utilized by certain telephone and telephone holding companies at both 9.5% fixed and 9.0% variable rates 33,400 28,255 Unsecured notes issued in connection with telephone company acquisitions at 10% fixed rate 16,062 16,149 Debt associated with Central Products: Revolving line of credit 9.25% variable rate 15,687 14,126 Term loans 9.5% variable rate 34,500 35,625 Notes to seller 7.0% fixed rate 19,250 30,000 Spinnaker bridge loan 10.7% variable rate 8,500 Bank debt associated with Brown-Bridge at variable rates 9.5%: Revolving line of credit 20,274 12,646 Term loan 5,120 6,691 Other 7,295 6,702 191,982 177,737 Current Maturities (51,94) (39,708) $140,039 $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. On October 23, 1996, Spinnaker Industries completed the issuance of $115,000,000 of 10-3/4% senior-secured debt due 2006. The debt proceeds were used to extinguish substantially all existing bank debt, bridge loans and lines of credit at Spinnaker and its two major operating subsidiaries, Central Products and Brown-Bridge. In addition, Spinnaker established a $40 million asset-backed senior-secured revolving credit facility. The extinguishment of debt will result in an extraordinary charge to fourth quarter earnings of approximately $1.1 million, or $0.83 per share after-tax and minority interest. G. Gain on Sale of Stock by Spinnaker As a result of the conversion of a $6.0 million Spinnaker Note into Spinnaker Common Stock on May 5, 1996 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. H. Income Taxes The income tax provision includes federal, as well as state and local taxes. The tax provisions for the nine months ending September 30, 1996 and 1995 represent effective tax rates of 40.5% and 39.6%, 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. I. 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 September 30, 1996, the Registrant had purchased 230,861 shares of Common Stock to date at an average price of $13.15. J. 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 third quarter of 1996 increased by $36.7 million or 45.6% from the third quarter of 1995. Contributions to the overall increase from the multimedia, services and manufacturing segments were 4.1%, 5.6%, and 90.3%, 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 $31.7 million in the third quarter of 1996, represented 95.6% of the increase in the manufacturing segment and 86% of the overall increase in the Registrant's revenues. Revenues at Brown Bridge Industries increased by $4.5 million as a result of recently obtained contracts. Revenues at the Morgan Group, Inc. increased by $2.1 million reflecting increased demand in its manufactured housing segment, offset by a decline in recreational vehicle shipments. Offsetting these increases were shortfalls at Lynch Machinery, Inc. ($2.2 million) due to lower production activities associated with extra-large glass presses and M-tron Industries, Inc. ($1.7 million due to softness in industry demand). For the nine months ended September 30, 1996, revenues increased by $115.6 million, or 51.5%. The same factors that contributed to the third quarter increase also contributed to the year-to-date increase. Specifically: (1) The acquisition of Central Products added $95.1 million, or 94%; (2) increased revenues at Morgan, partly due to the acquisition of Transfer Drivers, Inc. on May 22, 1995 ($3.3 million), contributed $10.9 million, or 9% of the overall increase; and (3) increased revenues at Brown Bridge of $11.1 million, contributed 9.6% of the over-all increase. Revenues at Lynch Machinery decreased by $4.9 million between the two periods as a result of reduced production activity associated with shipment of extra-large glass presses in 1996 versus 1995. Operating Profit Operating profit for the third quarter of 1996, increased by $1.8 million, or 36.0%, from the third quarter of 1995. On a segment basis, multimedia and manufacturing operations increased by $0.7 million and $1.1 million, respectively, while the operating profit of the services segment declined by $0.3 million. The inclusion of the Central Products operations in the third quarter of 1996 increased operating profit by $1.3 million. Additional volume due to additional major contracts plus productivity improvements resulted in improved operating profit of Brown-Bridge of $1.1 million. Within the multimedia segment, improved profits at Western New Mexico due in part to a $0.5 million revenue true-up was the primary cause of increased operating profits. In addition, the increased level of capital expenditures by our telephone operations resulted in increased revenue recovery. The decline in operating profit at The Morgan Group of $0.3 million, resulted from reduced recreational vehicle margins due to reduced demand, and higher claims and system development costs. Operating profit at Lynch Machinery declined by $0.4 million due to the lower sales volume of extra-large glass presses. M-tron's operating profits declined by $0.4 million due to reduced volume. For the nine months ended September 30, 1996, operating profit increased by $4.8 million. The same factors that affected operating profit in the third quarter also affected the year-to-date amounts. Specifically: (1) The acquisitions of Central Products contributed $5.4 million; (2) Brown-Bridge operating profit increased by $1.2 million; (3) Morgan's results were lower by $1.7 million; and (4) Western New Mexico operating profits increased by $0.8 million; and (5) Lynch Machinery's operating profit were $0.9 million lower than last year. At M-tron, a higher first half of 1996 offset a lower third quarter which resulted in overall increased operating profit in the nine month period of $0.3 million. Other Income (Expense), Net Investment income earned during the third quarter of 1996 was $58 thousand lower than the third quarter of the previous year due to lower investments in investment generating current income. With regard to the nine month period, investment income was $0.5 million lower in 1996 than 1995 also due primarily to lower dollar investment in investments generating current income. Interest expense in the third quarter of 1996 was $2.0 million higher than the third quarter of the previous year due to interest expense associated with the acquisition of Central Products of $1.7 million, funding of deposits for PCS licenses of $0.2 million and multimedia acquisitions made in late 1995 and 1996 of $0.3 million. Nine month interest expense amounts for Central Products was $5.2 million. 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. See Note G to the Consolidated Financial Statements. Tax Provision The income tax provision includes federal, as well as state and local taxes. The tax provisions for the three months ended September 30, 1996 and 1995, represent effective tax rates of 40.5 and 39.6%, 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 $70 thousand lower in the third quarter of 1996 versus the third quarter of 1995, predominantly due to the lower contribution of Morgan to the 1996 results offset by increased earnings at the telephone companies and Brown-Bridge. Income From Continuing Operations Income from continuing operations for the three months ended September 30, 1996 was $1.2 million, or $0.89 per share, as compared to $1.4 million, or $1.00 per share, in the previous year. Income from continuing operations for the nine months ended September 30, 1996 was $5.7 million, or $4.05 per share, as compared to $3.7 million, or $2.63 per share in the previous year. The above mentioned gain on the sale of the stock by a subsidiary, at $1.74 per share after-tax, was the primary cause of the increases. Extraordinary Item As described in Note F, on October 23, 1996, Spinnaker Industries, Inc. refinanced certain debt associated with the acquisition of Central Products and Brown-Bridge. As a result of this refinancing, Spinnaker will write-off $2.7 million of costs associated with original financing of these acquisitions. The net effect of their write-off on the consolidated financial statements of the Registrant will be $1.1 million, or $0.82 per share after tax and minority interests. 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 September 30, 1996 was $1.2 million, or $0.89 per share, as compared to $1.3 million, or $0.92 per share in the previous year. Net income for the nine months ended September 30, 1996 was $4.9 million, or $3.52 per share as compared to $3.6 million, or $2.54 per share in the previous year's period. Backlog/New Orders Total backlog of manufactured products at September 30, 1996 was $32.2 million, which represents a decrease of $1.8 million from the backlog of $34.0 million at December 31, 1995. The backlog at Central Products and Brown-Bridge increased by $0.8 million and $3.3 million, respectively, but was offset by declines at M- tron and Lynch Machinery of $2.4 million, and $4.0 million respectively. Liquidity/Capital Resources At September 30, 1996, the Registrant had $18.7 million in cash and short-term investments, $0.5 million of which was at the Parent Company, which was $8.7 million less than the amount reported at December 31, 1995. Working capital at September 30, 1996, was $12.0 million compared to $25.6 million at December 31, 1995. Additional loans of $14.3 million were made in 1996 to the PCS partnerships to fund down payments required by the Federal Communications Commission with regard to personal communications service licenses awarded to these partnerships in the "C" Block Auction. Total debt was $204.1 million at September 30, 1996 compared to $187.4 million at December 31, 1995. As reported in the Registrant's Consolidated Statement of Cash Flow, during the nine months ended September 30, 1996, operating activities generated $14.9 million in cash, investing activities utilized $37.8 million, and financing activities generated $23.8 million. The respective amounts for the nine months ended September 30, 1995 were $4.9 million, $12.6 million and $5.7 million, respectively. The sale of trading securities was the primary contributor to the increase in net cash from operating activities. Deposits with the FCC caused the increase in net cash used in investing activities. As described in Footnote F of Notes to Consolidated Financial Statement, Spinnaker Industries completed the issuance of new debt to be used primarily to extinguish previously existing credit facilities. In the fourth quarter, Spinnaker will write-off associated deferred financing fees resulting from the refinancing of these credit facilities. The net effect of this write-off will be an extraordinary charge to the Registrant's fourth quarter earnings of approximately $1.1 million, on an after-tax basis. 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 September 30, 1996, the Registrant has $34.0 million of unused short-term and long-term lines of credit facilities, $3.5 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 Forms 10-Q for the quarters ended June 30, 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, 10% (or $21.6 million) of the purchase price of the licenses was paid as a down payment on September 24, 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, $21.6 million of which has been met as of September 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. Build out of these franchises will also require significant financial resources. 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 PCS 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 Gabelli & Company, Inc., 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 the 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. Item 5 below for additional information on personal communications services investments. Included in this Management Discussion and Analysis of Financial Consolidation 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 5. Other Information See also Item 5 of Registrant's Form 10-Q for the first and second quarters of 1996 for further information on Registrant's involvement with personal communications services and uncertainties and risks related thereto. 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 None 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 November 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. 9-MOS DEC-31-1996 SEP-30-1996 16,768 1,971 55,047 1,431 39,188 126,014 172,143 49,103 331,488 114,060 140,039 0 0 5,139 36,011 331,488 340,289 340,289 290,416 322,255 0 0 12,439 11,514 4,666 5,688 743 0 0 4,945 3.52 3.52
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