-----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, O9GpAUt0s2ER8ZtKlWffksdCYDCSqBEtTdKa6WSokFnJ3d8woDq4tI1ccCmjKPsW GAbb5O6NJ6X9NwbSCnNSPQ== 0000061004-97-000030.txt : 19970815 0000061004-97-000030.hdr.sgml : 19970815 ACCESSION NUMBER: 0000061004-97-000030 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 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: 97661154 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 & 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, 1997 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.) 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 (20 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, 1997 Common Stock, no par value 1,416,834 INDEX LYNCH CORPORATION AND SUBSIDIARIES PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed Consolidated Statements of Operations: - Three and six months ended June 30, 1997 and 1996 Condensed Consolidated Balance Sheet: - June 30, 1997 - December 31, 1996 (Audited) Condensed Consolidated Statements of Cash Flows: - Six months ended June 30, 1997 and 1996 Notes to Consolidated Financial Statements: Item 2. Management'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 LYNCH CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands) June 30 December 31 1997 1996 (Unaudited) (A) ASSETS CURRENT ASSETS: Cash and Cash Equivalents $ 24,553 $ 33,946 Marketable Securities and Short-Term Investments 1,682 2,156 Receivables, Less Allowances of $1650 and $1525 51,228 52,963 Inventories 38,426 36,859 Deferred Income Tax Benefits 5,571 5,571 Other Current Assets 11,042 8,598 Total Current Assets 132,502 140,093 PROPERTY, PLANT AND EQUIPMENT: Land 1,472 1,367 Buildings and Improvements 23,484 21,334 Machinery and Equipment 184,407 157,025 209,363 179,726 Less Accumulated Depreciation 54,374 46,707 Net Property, Plant and Equipment 154,989 133,019 INVESTMENTS IN AND ADVANCES TO PCS ENTITIES 30,191 34,116 INVESTMENTS IN AND ADVANCES TO AFFILIATED COMPANIES 1,293 2,529 EXCESS OF COSTS OVER FAIR VALUE OF NET ASSETS ACQUIRED 75,573 69,206 OTHER ASSETS 22,160 13,657 Total Assets $416,708 $392,620 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Notes Payable to Banks $ 17,294 $ 17,419 Trade Accounts Payable 22,214 20,998 Accrued Liabilities 45,264 36,275 Current Maturities of Long-Term Debt 12,886 23,769 Total Current Liabilities 97,658 98,461 LONG-TERM DEBT 240,437 219,579 DEFERRED INCOME TAXES 24,945 22,389 MINORITY INTERESTS 13,420 13,268 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 8,648 8,417 RETAINED EARNINGS 27,210 26,472 TREASURY STOCK OF 54,357 AND 80,157 SHARES AT COST (749) (1,105) Total Shareholders' Equity 40,248 38,923 Total Liabilities and Shareholders' Equity $416,708 $392,620
(A)The Balance Sheet at December 31, 1996 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. 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 Six Months Ended June 30 Ended June 30 SALES AND REVENUES 1997 1996 1997 1996 Multimedia $ 12,095 $ 6,641 $ 22,162 $ 13,356 Services 39,211 36,698 72,844 67,204 Manufacturing 70,120 70,154 135,199 142,408 121,426 113,493 230,205 222,968 Costs and expenses: Multimedia 8,985 4,991 16,792 9,601 Services 35,884 33,944 66,853 62,505 Manufacturing 57,763 57,460 113,205 117,607 Selling and administrative 10,678 11,715 21,003 21,935 OPERATING PROFIT 8,116 5,383 12,352 11,320 Other income (expense): Investment Income 424 715 857 1,148 Interest expense (5,808) (4,241) (11,277) (8,185) Share of operations of affiliated companies 57 47 71 66 Gain on Sale of Subsidiary Stock 260 4,134 260 4,178 (5,067) 655 (10,089) (2,793) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND MINORITY INTERESTS 3,049 6,038 2,263 8,527 Provision for income taxes (1,217) (2,449) (902) (3,426) Minority interests (582) (374) (623) (662) INCOME FROM CONTINUING OPERATIONS $ 1,250 $ 3,215 $ 738 $ 4,439 DISCONTINUED OPERATIONS: LOSS FROM OPERATIONS OF DIS- CONTINUED LYNCH TRI-CAN INTER- NATIONAL (LESS APPLICABLE INCOME TAXES OF $76 AND 90) 0 (125) 0 (148) LOSS ON DISPOSAL OF LYNCH TRI-CAN INTER-NATIONAL(LESS APPLICABLE INCOME TAXES OF $305) 0 (595) 0 (595) NET INCOME $ 1,250 $ 2,495 $ 738 $ 3,696 Weighted average shares outstanding 1,417,000 1,408,000 1,413,000 1,402,000 INCOME PER COMMON SHARE: INCOME FROM CONTINUING OPERATIONS 0.88 2.28 0.52 3.17 LOSS FROM DISCONTINUED OPERATIONS 0.00 (0.51) 0.00 (0.53) 0.88 1.77 0.52 2.64
LYNCH CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (In thousands)
Six Months Ended June 30 1997 1996 OPERATING ACTIVITIES Net Income $ 738 $ 3,696 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 10,375 8,249 Net effect of purchases and sales of trading securities 474 7,397 Deferred taxes 0 1,707 Share of operations of affiliated companies (71) (66) Minority interests 623 662 Gain on sale of stock by subsidiaries 0 (4,178) Changes in operating assets and liabilities: Receivables 1,895 (605) Inventories (1,567) (5,196) Accounts payable and accrued liabilities 8,510 1,326 Other (1,426) (4,290) NET CASH FROM OPERATING ACTIVITIES 19,551 8,702 INVESTING ACTIVITIES Capital Expenditures (8,467) (9,786) Acquisition of lines from U.S. West 0 (4,680) Investment in Coronet Communications Company 2,995 0 Investment in Upper Peninsula Telephone Company (25,235) 0 Investment in Personal Communications Services Partnerships 3,925 (3,326) Other (102) (312) NET CASH USED IN INVESTING ACTIVITIES (26,884) (18,104) FINANCING ACTIVITIES Repayments of debt, net (2,226) 13,087 Treasury stock transactions 657 723 Minority interest transactions (491) 697 NET CASH FROM (USED IN)FINANCING ACTIVITIES (2,060) 14,507 Net increase (decrease) in cash and cash equivalents (9,393) 5,105 Cash and cash equivalents at beginning of period 33,946 15,921 CASH AND CASH EQUIVALENTS AT END OF PERIOD 24,553 21,026
See Notes to Condensed Consolidated Financial Statements. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS A. Subsidiaries of the Registrant
Owned by Subsidiary Lynch Brighton Communications Corporation 100.0% Lynch Telephone Corporation IV 100.0% Bretton Woods Telephone Company, Inc. 100.0% World Surfer, Inc. 100.0% Lynch Kansas Telephone Corporation 100.0% Lynch Telephone Corporation VI 98.0% J.B.N. Telephone Company, Inc. 98.0% J.B.N. Finance Corporation 98.0% Giant Communications, Inc. 100.0% Lynch Telephone Corporation VII 100.0% USTC Kansas, Inc. 100.0% Haviland Telephone Company, Inc. 100.0% Haviland Finance Corporation 100.0% DFT Communications Corporation 100.0% Dunkirk & Fredonia Telephone Company 100.0% Cassadaga Telephone Company 100.0% Macom, Inc. 100.0% Comantel, Inc. 100.0% D&F Cellular Telephone, Inc. 100.0% Erie Shore Communications, Inc. 100.0% DFT Long Distance Corporation 100.0% LMT Holding Corporation 100.0% Lynch Michigan Telephone Holding Corporation 100.0% Upper Peninsula Telephone Company 100.0% Alpha Enterprises Limited 100.0% Upper Peninsula Cellular North, Inc. 100.0% Upper Peninsula Cellular South, Inc. 100.0% Global Television, Inc. 100.0% Inter-Community Acquisition Corporation 83.0% Home Transport Services, Inc. 100.0% Lynch Capital Corporation 100.0% Lynch Entertainment Corporation 100.0% Lynch Entertainment Corporation II 100.0% Lynch International Exports, Inc. 100.0% Lynch Manufacturing Corporation 100.0% Lynch Display Technologies, Inc. 100.0% Lynch Machinery, Inc. 90.0% M-tron Industries, Inc. 94.0% M-tron Industries, Ltd. 94.0% Spinnaker Industries, Inc 73.4% Entoleter, Inc. 73.4% Brown-Bridge Industries, Inc. 73.4% Central Products Company 73.4% Lynch Multimedia Corporation 100.0% CLR Video, L.L.C. 60.0% The Morgan Group, Inc. 66.24%(V)/50.95%(O) Morgan Drive Away, Inc. 66.24%(V)/50.95%(O) Transport Services Unlimited, Inc. 66.24%(V)/50.95%(O) Interstate Indemnity Company 66.24%(V)/50.95%(O) Morgan Finance, Inc. 66.24%(V)/50.95%(O) TDI, Inc. 66.24%(V)/50.95%(O) Home Transport Corporation 66.24%(V)/50.95%(O) MDA Corporation 66.24%(V)/50.95%(0) Lynch PCS Communications Corporation 100.0% Lynch PCS Corporation A 100.0% Lynch PCS Corporation F 100.0% Lynch PCS Corporation G 100.0% Lynch Interactive Corporation 100.0% Lynch Telecommunications Corporation 100.0% Lynch Telephone Corporation 80.1% Western New Mexico Telephone Co., Inc. 80.1% WNM Communications Corporation 80.1% Wescel Cellular, Inc. 80.1% Wescel Cellular of New Mexico Limited Partnership 40.9% Wescel Cellular, Inc. II 80.1% Northwest New Mexico Cellular, Inc. 40.1% Northwest New Mexico Cellular of New Mexico Limited Partnership 20.5% Enchantment Cable Corporation 80.1% Lynch Telephone Corporation II 83.0% Inter-community Telephone Company 83.0% Inter-community Telephone Company II 83.0% Lynch Telephone Corporation III 81.0% Cuba City Telephone Exchange Company 81.0% Belmont Telephone Company 81.0%
Notes: (V)=Percentage voting control; (O)=Percentage of equity ownership 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 the management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended June 30, 1997 are not necessarily indicative of the results that may be expected for the year ended December 31, 1997. 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, 1996. C. Acquisitions On March 18, 1997, Lynch Michigan Telephone Holding Company, a wholly-owned subsidiary of the Registrant, acquired approximately 60% of the outstanding shares of Upper Peninsula Telephone Company for $15.2 million. The Registrant completed the acquisition of the remaining 40% on May 23, 1997. The total cost of the acquisition was $26.1 million. As a result of this transaction, the Registrant recorded approximately $8.1 million in goodwill which is being amortized over 25 years. On December 30, 1996, The Morgan Group, Inc., an approximately 51% owned subsidiary of the Registrant, acquired the operating assets of Transit Homes of America, Inc., a provider of transportation services to a number of producers in the manufactured housing industry. The purchase price was approximately $4.4 million, including assumed obligations. On November 25, 1996, DFT Communications Corporation, a wholly-owned subsidiary of the Registrant, acquired all of the outstanding shares of Dunkirk & Fredonia Telephone Company, a local exchange company serving portions of Western New York. The total cost of this transaction was $27.7 million. As a result of this transaction, the Registrant recorded $13.8 million in goodwill which is being amortized over 25 years. All of these acquisitions were accounted for as purchases, and, accordingly, the assets and liabilities were recorded at their estimated fair market value. The operating results of the acquired companies are included in the Consolidated Statement of Income from their respective acquisition dates. The following unaudited proforma information shows the results of the Registrant's operations as though the purchase of Upper Peninsula Telephone Company, Transit Homes and Dunkirk & Fredonia were made at the beginning of 1996.
Three Months Ended Six Months Ended June 30 June 30 1997 1996 1997 1996 (In thousands, except per share data) Sales and Revenues $121,426 $126,847 $232,461 $247,217 Operating Profit 8,116 6,475 13,262 18,436 Income from Continuing Operations Before Income Taxes and Minority Interest 3,049 6,024 2,491 13,353 Net Income 1,250 2,389 834 6,727 Net Income Per Share $ 0.88 $ 1.70 $ 0.59 $4.80
The proforma results for the six months ending June 30, 1996, reflect the sale of Dunkirk & Fredonia's cellular telephone interests which resulted in a pre- tax gain of $5.1 million, or $3.65 per share, included in operating profit. The after-tax gain on the sale of the cellular interests was $3.4 million, or $2.43 per share. D. Discontinued Operations During the second quarter of 1996, 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 for the six months ended June 30, 1996. The assets sold primarily consisted of inventory, fixed assets and intangibles. Accordingly, during the three and six months ended June 30, 1996, results of Tri-Can are presented as "discontinued operations." E. Inventories Inventories are stated at the lower of cost or market value. At June 30, 1997, inventories were valued by three methods: last-in, first-out (LIFO) - 60%, specific identification - 36%, and first-in, first-out (FIFO) - 4%. At December 31, 1996, the respective percentages were 53%, 42%, and 5%.
In Thousands 6-30-97 12-31-96 Raw material and supplies $10,758 $10,987 Work in process 5,482 3,950 Finished goods 22,186 21,922 Total Inventories $38,426 $36,859
F. Indebtedness On a consolidated basis, at June 30, 1997, the Registrant maintains short-term and long-term lines of credit facilities totaling $91.4 million, of which $53.8 million was available. The Registrant (Parent Company) maintains an $18.0 million short-term line of credit facility, of which $6.0 million was available at June 30, 1997. This facility decreases by $1.0 million per month starting on November 30, 1997 and will expire on February 16, 1998. Spinnaker Industries, Inc. maintains lines of credit at its subsidiaries which total $40.0 million, of which $39.2 million was available at June 30, 1997. The Morgan Group maintains lines of credit totaling $10.4 million, $3.2 million was available at June 30, 1997. 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, 1997, $41.0 million of these total facilities expire within one year. 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 million 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 $40.0 million asset- backed senior-secured revolving credit facility.
Long term debt consists of: 6-30-97 12-31-96 Spinnaker Industries, Inc. 10.75% Senior Secured Note due 2006 $115,000 $115,000 Rural Electrification Administration and Rural Telephone Bank notes payable in equal quarterly installments through 2027 at fixed interest rates ranging from 2% to 7.5% (4.7% weighted average) 47,231 34,734 Bank credit facilities utilized by certain telephone and telephone holding companies through 2009, $37.0 million at a fixed interest rate averaging 8.9% and $13.8 million at variable interest rates averaging 8.7% 50,829 41,513 Unsecured notes issued in connection with telephone company acquisitions at fixed interest averaging 9% 28,045 28,044 Gabelli Funds, Inc. and affiliates loans at fixed rates of 10% due on August 12, 1997 1,800 11,800 Other 10,418 12,257 253,323 243,348 Current Maturities (12,886) (23,769) $240,437 $219,579
H. Gain on Sale of Subsidiary Stock As a result of the conversion of the $6.0 million Convertible Subordinated Alco Note of Spinnaker into their 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. I. 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 1997 increased by $7.9 million, or 7%, from the second quarter of 1996. Within the operating segments, multimedia, whose revenues increased by 82%, contributed $5.5 million to the increase and services, whose revenues increased by 7%, contributed $2.5 million to the overall increase. Revenues of the manufacturing segment were essentially the same as the previous year. The acquisitions of Dunkirk & Fredonia Telephone Company ($2.5 million contribution), which occurred on November 26, 1996, and Upper Peninsula Telephone Company ($2.2 million contribution), which a majority interest was obtained on March 18, 1997, were the primary contributors to the increase in multimedia's operating revenues. Revenues of $4.3 million as a result of the acquisition of Transit Homes of America, Inc., which occurred on December 30, 1996, offset by lower "Truckaway" revenues, was the primary contributor to the increased revenues at The Morgan Group, Inc. Within the manufacturing group, revenues for Spinnaker were the same for the second quarter of 1996. At Central Products Company, competitive pricing pressure offset higher unit demand and capacity limitations and resulted in lower revenues. Bolstered by additional orders for postage stamps, Brown-Bridge revenues increased by $1.6 million. Lack of orders for extra-large glass presses resulted in a $1.3 million period to period short-fall in revenues at Lynch Machinery, Inc. and improved demand for electronic components, predominantly by telecommunications capital equipment suppliers, resulted in higher revenues of $1.2 million at M-tron. For the six months ended June 30, 1997, revenues increased by $7.2 million, or 3% from the six months ended June 30, 1996. Multimedia revenues increased by $8.8 million reflecting the acquisitions of Dunkirk & Fredonia and Upper Peninsula of $5.0 million and $2.2 million, respectively. Morgan's revenues increased by $5.6 million reflecting revenues of Transit Homes of America of $9.7 million, offset by lower driver outsourcing Truckaway revenues. Manufacturing revenues decreased by $7.2 million reflecting (1) pricing pressure at Central Products, $3.3 million decrease, and (2) order short-fall at Lynch Machinery, $3.1 lower. Operating Profit Operating profit for the second quarter of 1997 increased by $2.7 million from the second quarter of 1996. Operating profit in the multimedia and services segments increased by $1.4 million and $0.6 million, respectively, while manufacturing operating profits grew by $0.3 million. Corporate expenses fell by $0.4 million. In the multimedia segment, higher revenues resulted in increased EBITDA (earnings before interest, taxes, depreciation and amortization) of $2.5 million, offset by increased depreciation and amortization expense of $1.1 million, both primarily associated with the acquisitions of Dunkirk & Fredonia Telephone Company and Upper Peninsula Telephone Company. Increased revenues and absence of the unprofitable Truckaway operation, increased operating profit at Morgan by $0.6 million or 90%. The increase in the operating profit at the manufacturing group related to improved product mix at Brown-Bridge, offset by lower operating profit at Lynch Machinery of $0.4 million. For the six months ended June 30, 1997, operating profit increased by $1.0 million, or 9%. Multimedia operating profit increased by $1.5 million reflecting the acquisition of Dunkirk & Fredonia and Upper Peninsula of $0.5 million and $0.9 million, respectively. Morgan's operating profit increased by $1.1 million reflecting higher revenues and improved product mix. Manufacturing operating profit fell by $1.9 million. Spinnaker's operating profit fell by $0.5 million as improved profit at Brown-Bridge did not offset lower results at Central Products and higher corporate costs. Lynch Machinery's operating profit fell by $1.0 million reflecting lack of orders. Other Income (Expense), Net Investment income in the second quarter of 1997 was $0.4 million which was a reduction of $0.3 million from the second quarter of 1996. During 1996, the Registrant recognized $0.3 million of income associated with the increase in market value of its investment in Tremont Advisers, Inc. (NASDAQ:TMAVA). This variance also applies to the six months shortfall of $0.3 million. Interest expense increased by $1.6 million to $5.8 million in the second quarter of 1997 from $4.2 in the first quarter of 1996. The increase was a result of an increase in interest payments and amortization of deferred financing costs of $1.0 million at Spinnaker Industries, Inc., as a result of the issuance of $115 million of senior secured notes on October 23, 1996, and interest expenses of $0.5 million each associated with the acquisition of Dunkirk & Fredonia Telephone Company and Upper Peninsula Telephone Company. These amounts were offset by $0.6 million of capitalized interest associated with the development of the personal communications services ("PCS") licenses. On a year to date basis, the acquisition of Dunkirk & Fredonia contributed $1.0 million of interest expense, Upper Peninsula contributed $.05 million of additional interest expense and Spinnaker's high yield results in $2.0 million of incremental interest expense. This amount was offset by $1.0 million of capitalized interest for PCS licenses. 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. 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 the second quarter of 1996. During the second quarter of 1997, the Registrant recognized a pre-tax gain of $260 thousand on the sale of a subsidiary, Lafayette County Satellite TV, which provided satellite television service to Lafayette County, Wisconsin. Tax Provision The income tax provision (benefit) includes federal, as well as state and local taxes. The tax provision (benefit) for the three months ended June 30, 1997 and 1996, represent effective tax rates of 40.0% and 41.0%, respectively. The rates differ from the federal statutory rate principally due to the effect of state income taxes and amortization of non-deductible goodwill. Minority Interest Minority interest was $208 thousand higher in the second quarter of 1997 versus the second quarter of 1996, predominantly due to increased net profits at The Morgan Group, Inc., a 50% owned subsidiary. Income From Continuing Operations During the second quarter of 1997, the Registrant recorded income from continuing operations of $1.3 million, or $0.88 per share, as compared to income from continuing operations of $3.2 million, or $2.28 per share, in the second quarter of 1996. The gain on the sale of Lafayette County Satellite TV in 1997, had a net profit effect of $158 thousand, or $0.11 per share, and the gain on the conversion of the Alco note in the second quarter of 1996, had a net profit effect of $2.4 million, or $1.70 per share in 1996. Accordingly, income generated from our continuing operations, absent the sale of subsidiary interests, was $1.1 million, or $0.77 per share as compared to $0.8 million, or $0.58 per share in the second quarter of 1996, a 34% increase. Discontinued Operations The Registrant had decided to discontinue the operations at Tri-Can International, Ltd. in the second quarter of 1996 (see Note D). Accordingly, its operating results in the three and six months ended June 30, 1996 are treated as discontinued operations. Net Income Net income for the three months ended June 30, 1997 was $1.3 million, or $0.88 per share, as compared to a net income of $2.5 million, or $1.77 per share in the previous year's quarter. Net income for the six months ended June 30, 1997 was $0.7 million, or $0.52 per share, as compared to $3.7 million, or $2.64 per share, for the comparable period in 1996. Backlog/New Orders Total backlog of manufactured products at June 30, 1997 was $25.6 million, which represents an increase of $4.7 million from the backlog of $20.9 million at December 31, 1996. An $8.1 million extra-large glass press order at Lynch Machinery helped increase their backlog by $4.0 million. Liquidity/Capital Resources At June 30, 1997, the Registrant has $26.2 million in cash and short-term investments, $0.2 million of which was at the Parent Company, which was $9.9 million less than the amount reported at December 31, 1996. Working capital at June 30, 1997, was $34.8 million compared to $41.6 million at December 31, 1996. The decrease in cash and working capital were primarily the result of funding the acquisition of Upper Peninsula and investments in PCS partnerships for interest and down payments for licenses awarded. Total debt was $270.6 million at June 30, 1997 compared to $260.8 million at December 31, 1996. The increase was due primarily to debt incurred to fund the Registrant's acquisition of Upper Peninsula Telephone Company. As reported in the Registrant's Consolidated Statement of Cash Flow, during the six months ended June 30, 1997, operating activities generated $19.6 million in cash, investing activities used $26.9 million, and financing activities used $2.1 million. Respective amounts for six months ended June 30, 1996, were $8.7 million, $18.1 million, and $14.5 million in cash generated from investing activities. Lower net sales of trading securities, reduced inventory build up at Spinnaker, and lower investment in other assets resulted in increased cash generated from operating activities for the six months ended June 30, 1997 versus the six months ending June 30, 1996. With regard to investment activities, the acquisition of Upper Peninsula Telephone Company, offset by repayment of a note by Coronet Communications Corporation, and return of bidding deposits from the FCC with respect to activities by Aer Force Communications B, L.P., resulted in an $8.8 million increase in cash used in investing activities as compared to the prior year period. The $2.1 million used for financing activities resulted when the Registrant repaid a $10 million affiliate loan with funds received from the return of the F-Block bidding deposit, borrowed $10 million to finance the acquisition of 60% of the shares of Upper Peninsula Telephone Company and the payment of the first interest installment on the C-Block debt (see below). The Registrant borrowed an additional $10 million in July to pay for the 40% of Upper Peninsula. This compared to a net borrowings in the first half of 1996 due to capital expenditures and acquisition of telephone access lines by the Registrant's telephone companies. 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, 1997, the Registrant has $53.8 million of unused short-term and long-term lines of credit facilities, $6.0 million of which applied to the Parent Company. Subsidiaries of the Registrant hold limited partnership interests in and have loan commitments to two partnerships which were the winning bidders in the Federal Communications Commission's ("FCC") C-Block and F-Block Auctions for 30 megahertz and 10 megahertz, respectively, of broadband spectrum to be used for PCS. In the C-Block Auction, an entity, Fortunet Communications L.P. ("Fortunet"), 49% owned by the Registrant, acquired 31 licenses to provide PCS to geographic areas of the United States with a population of 7.0 million. The cost of these licenses was $216.2 million. $194.6 million of the cost of these licenses was funded via a loan from the United States Government. The loan requires quarterly interest payments of 7% (The Registrant argues strenuously that the interest rate should have been 6.51%, the applicable treasury rate at the time the licenses were awarded), and with quarterly principal amortization in years 7, 8, 9, and 10. On March 31, 1997, the FCC has suspended until further notice the quarterly payments, pending resolutions of certain matters. As of June 30, 1997, Registrant's subsidiary invested $598,000 in partnership equity and $24.4 million in loans to Fortunet and has funding commitments to provide an additional $16.3 million in loans. Fortunet recently filed with the FCC a letter asking for certain relief with regard to the interest and principal payments and ownership restrictions associated with licenses won by Fortunet. The FCC is considering whether to restructure the government installment debt since many of the "C" Block licensees are experiencing difficulty in obtaining financing needed via the public and private markets to fund the Government loan as well as the capital build-out and operating loss and working capital requirements. Bankruptcy of Pocket Communications, a "C" Block licensee, further clouds the near term outlook for financing and development of the PCS licenses. Lynch does not know what action, if any, the FCC will take but expects the FCC to make a decision by year end. The future realizability of Registrant's investment in these licenses will be based on the decisions of the FCC, and as a result of those decisions, Fortunet's ability to obtain vendor and other third party financing as well as entering into operating agreements for our licenses. In the F-Block Auction, Aer Force Communications B, L.P. ("Aer Force"), 49.9% owned by Registrant, acquired five licenses to provide personal communications services in geographic areas of the United States with a total population of 20 million. The cost of these licenses was $19.0 million. $15.2 million of the cost of the licenses will be financed with a loan from the United States Government. The interest rate on the loan will be the long-term Government rate at the date of issuance and with quarterly principal amortization in year 3 to 10. On May 12, 1997, the Registrant loaned the entity $1.0 million to make its final down payment on four of the five licenses (which were awarded) and the interest rate on the United States Government loan of $8.1 million was set at 6.25%. As of June 30, 1997, Registrant's subsidiary has invested $99 thousand in partnership equity and provided the entity with a loan of $2.5 million funded by a short-term secured borrowing by the Registrant and has a funding commitment of $8.9 million to the entity. On July 14, 1997, the Registrant loaned the entity $0.9 million to make the final down payment on the fifth license which was awarded at that time. The Registrant has borrowed the $3.5 million on a short-term basis to fund its F-Block loan commitment. In addition, the Registrant has under consideration a proposed dividend to its shareholders of its 49.9% ownership in Aer Force. The Registrant's subsidiaries are currently seeking alternatives to minimize or raise funds for their funding commitments to the entities. There are many risks associated with PCS. In addition, funding aspects of acquisition of licenses and the subsequent mandatory build out requirements plus the amortization of the license, could significantly and materially impact the Registrant's reported net income over the next several years. Of note, under the current structure, the ramifications of this should not impact reported revenues and EBITDA in the future. For further information on PCS, including various risks, see Item 1 -I(c) of Form 10-K for the year ended December 31, 1996. In December, 1996, the Registrants' Board of Directors announced that it is examining the possibility of splitting, through a "Spin-off," of either its communications operations or its manufacturing operations. A spin-off could improve management focus, facilitate and enhance financings and set the stage for future growth, including acquisitions. A split could also help surface the underlying values of the company as the different business segments appeal to differing "value" and "growth" cultures in the investment community. There are a number of matters to be examined in connection with a possible spin-off, including tax consequences, and there is no assurance that such a spin-off will be effected. In order to fund future growth of the Registrant's manufacturing subsidiaries, each of these subsidiaries, Spinnaker Industries, Inc., Lynch Display Technologies, Inc. and M-tron Industries, Inc. is in the process of undertaking refinancing/strategic initiative program, that is, to either raise financing for future acquisitions or form a joint venture strategic partnership. There is no assurance that any or all of these companies can accomplish these programs. In February 1997, the Financial Accounting Standards Board issued, Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," which changes the methodology of calculating earnings per share. SFAS No.128 requires a disclosure of diluted earnings per share regardless of its difference from basic earnings per share. The Registrant plans to adopt SFAS No. 128 in December 1997. Early adoption is not permitted. The Registrant does not expect the adoption of SFAS No. 128 to have a material effect on the financial statements. 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 PCS, a possible spin-off and a refinancing/strategic initiative program. 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, and what actions the FCC may take with respect to PCS. As a result, such information is subject to uncertainties, risks and inaccuracies. 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 May 8, 1997, the following persons were elected as Directors with the following votes;
Name Votes For Votes Withheld Morris Berkowitz 1,281,178 1,485 E. Val Cerutti 1,281,178 1,485 Paul J. Evanston 1,281,178 1,485 John C. Ferrara 1,281,178 1,485 Mario J. Gabelli 1,281,178 1,485 Salvatore Muoio 1,281,178 1,485 Ralph R. Papitto 1,281,178 1,485 Paul P. Woolard 1,281,178 1,485
(b) The following shares were voted as indicted on Item 2 of the Registrant's Proxy Statement, dated April 16, 1997: The Principal Executive Bonus Plan. For: 872,462 Against: 19,649 Abstain: 39,863 Broker non-votes totaled 350,689. Item 5. Other Information Reference is made to Item 2. Management's Discussions and Analysis of Financial Condition and Results of Operations - Liquidity/Capital Resources for information on personal communications services, particularly Fortunet Communications, L.P. See also Item 1-I(c) Personal Communications Services ("PCS") in Registrant's Form 10-K for the year ended December 31, 1996. On May 23, 1997, Registrant acquired the remaining 40% of the stock of Upper Peninsula Telephone Company for $10 million. Registrant had acquired approximately 60% of the stock of Upper Peninsula Telephone Company on March 18, 1996 for $15 million. The acquisition costs set forth above do not include debt of Upper Peninsula Telephone Company assumed and transaction costs. See Item 6(b). Item 6. Exhibits and Reports on Form 8-K (a) Exhibits *10(o) - Directors Stock Plan as Amended 27 - Financial Data Schedule (b) Reports on Form 8-K On April 1, 1997, Registrant filed a report on Form 8-K (dated March 18, 1997) re the acquisition of Upper Peninsula Telephone Company, and on May 29, 1997, Registrant filed a Form 8-K/A containing financial statements re the Upper Peninsula Telephone Company acquisition. 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/Robert E. Dolan Robert E. Dolan Chief Financial Officer August 14, 1997 EX-10 2 LYNCH CORPORATION DIRECTORS STOCK PLAN (the "Plan") 1. Each person who is a director of Lynch Corporation (the "Corporation") (but is not an employee of the Corporation) on the first business day of each year (except that the date of grant for 1996 shall be February 1, 1996) shall be granted as of said business day a number of shares of common stock of the Corporation ("Common Stock") equal to $15,000 divided by the average closing price of the Common Stock on the American Stock Exchange for the 30 trading days preceding the date of grant of the shares (January 2, 1996 in the case of the 1996 grant) (whether or not the Common Stock traded on said day). Any person who becomes such a director after the first business day of a year may, at the option of the Board of Directors, be granted a number of shares of Common Stock for that year up to the number of shares awarded to other directors for that year. Unless otherwise determined by the Board of Directors, if a director receiving a grant in a particular year is not a director on March 31, June 30, September 30 and December 31 of said year, the director shall promptly transfer to the Corporation 100%, 75%, 50%, or 25%, respectively, of the shares received for that year. Certificates issued by the Corporation may contain (i) an appropriate legend as to the foregoing obligation and (ii) an appropriate securities laws legend. 2. The Plan may be amended in any respect or discontinued at any time by action of the Board of Directors of the Corporation; provided, however, that any such action shall not affect any shares of Common Stock previously granted and provided further that the Plan provisions may not be amended more than once every six months, other than to comply with changes in the Internal Revenue Code, the Employee Retirement Income Security Act or the rules therewith. Adoption of the Plan does not create any limitation on the power of the Board of Directors to create other plans or programs for directors. EX-27 3
5 This schedule contains summary financial information extracted from Condensed Consolidated Statements of Operations and Condensed Consolidated0Balance Sheets and is qualified in its entirety by reference to such Form 10-Q. 0000061004 LYNCH CORPORATION 6-MOS DEC-31-1997 JUN-30-1997 24,553 1,682 51,228 1,650 38,426 132,502 209,363 54,374 416,708 97,658 240,437 0 0 5,139 35,109 416,708 230,205 230,205 196,850 217,853 0 0 11,277 2,263 902 738 0 0 0 738 .52 .52
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