-----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, JRJP9pNhJDe150GbAjkYfDHu1aK6hVz7o9rj1ezt2J4/TRS3BkgMKZYKuTlJn0gF tp4Sqx5sOaezWQba640yEQ== 0000061004-00-000015.txt : 20000421 0000061004-00-000015.hdr.sgml : 20000421 ACCESSION NUMBER: 0000061004-00-000015 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000420 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-K/A SEC ACT: SEC FILE NUMBER: 001-00106 FILM NUMBER: 605847 BUSINESS ADDRESS: STREET 1: 401 THEODORE FREMD AVENUE CITY: RYE STATE: NY ZIP: 10580 BUSINESS PHONE: 9149217601 MAIL ADDRESS: STREET 1: 401 THEODORE FREMD AVENUE STREET 2: SUITE 290 CITY: RYE STATE: NY ZIP: 10580 10-K/A 1 AMENDED 10-K - 12-31-99 FORM 10-K/A SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1999 Commission file number 1-106 - -------------------------------------------- ----- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to LYNCH CORPORATION ----------------- (Exact name of Registrant as specified in its charter) Indiana 38-1799862 ------- ---------- State of other jurisdiction (I.R.S. Employer Incorporation or organization Identification No.) 401 Theodore Fremd Avenue, Rye, NY 10580 - ---------------------------------- ----- Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (914) 921-7601 -------------- Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange - ------------------- on which registered ------------------- Common Stock, No Par Value American Stock Exchange Securities registered pursuant to section 12(g) of the Act: None 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 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 by mark if disclosure of delinquent filers pursuant to Item 405 of Regulations S - K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K. [X] The aggregate market value of voting stock held by non-affiliates of the Registrant (based upon the closing price of the Registrant's Common Stock on the American Stock Exchange on March 15, 2000 of $30 per share) was $32,048,000. (In determining this figure, the Registrant has assumed that all of the Registrant's directors and officers are affiliates. This assumption shall not be deemed conclusive for any other purpose.) The number of outstanding shares of the Registrant's Common Stock was 1,510,183 as of March 29, 2000. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Item 5 is amended in its entirety as follows: The Common Stock of Lynch Corporation is traded on the American Stock Exchange under the symbol "LGL." The market price highs and lows in consolidated trading of the Common Stock during the two years ended December 31, 1999 and 1998, are as follows:
Three Months Ended 1999 March 31 June 30 Sept. 30 Dec. 31 -------- ------- -------- -------- 7/1-9/1- 9/2-9/30 High ............. 85 1/2 84 87 34 3/4 26 1/2 Low .............. 70 1/2 69 78 26 1/2 18 7/8
1998 March 31 June 30 Sept. 30 Dec. 31 ------ ------ ------ ------ High ............. 109 113 100 1/2 82 Low .............. 77 1/4 88 76 69 1/2
At March 15, 2000, the Company had 901 shareholders of record. On September 1, 1999, the Company spun off the shares of Lynch Interactive Corporation to its shareholders. As a result, stock prices before and after that date are not comparable. The high and low sales prices of Lynch Interactive from September 1, 1999 to December 31, 1999, were $120 and $42, respectively, and the closing price at December 31, 1999, was $99 7/8. The Board of Directors has adopted a policy of not paying cash dividends, a policy which is reviewed annually. This policy takes into account the long term growth objectives of the Company, especially its acquisition program, shareholders' desire for capital appreciation of their holdings and the current tax law disincentives for corporate dividend distributions. Accordingly, no cash dividends have been paid since January 30, 1989 and none are expected to be paid in 2000. ITEM 6. SELECTED FINANCIAL DATA Item 6 is amended in its entirety as follows: LYNCH CORPORATION AND SUBSIDIARIES CONSOLIDATED SELECTED FINANCIAL DATA (Adjusted to Reflect Discontinued Operations and Spin Off of Lynch Interactive Corporation) (in thousands except per share amounts)
Year Ended December 31 ( a ) 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Revenues.......................................... $ 194,222 $ 187,644 $ 153,735 $ 166,976 $ 157,146 Operating Profit (b).............................. 85 4,074 6,730 8,473 11,945 Net Financing Activities.......................... (9,528) (8,392) (4,884) (5,166) (3,463) Gain in Sale of Subsidiary Stock and Other Operating Assets................................ -- 2,090 (91) 5,072 -- Income (Loss) from Continuing Operatins before Income Taxes, Minority Interests, Discontinued Operation and Extraordinary Items............... (9,443) (2,228) 1,755 8,379 8,482 (Provision) Benefits For Income Taxes............. 2,544 1,408 (301) (3,571) (3,267) Minority Interest................................. 2,647 1,107 (121) (119) (634) ------ ------ ------ ------ ------ Income (Loss) From Continuing Operations Before Discontinued Operations and Extraordinary Item.. (4,252) 287 1,333 4,689 4,581 Operations of Lynch Interactive Corporation (f) (7,493) 4,929 (3,349) (818) 467 Discontinued Operations (c)...................... (572) (1,859) (862) 173 97 Minority Interests Gain (Loss) on Sale of Spinnaker's Industrial Tape Segment................................... 10,431 -- -- -- -- Extraordinary Items (d) 303 -- -- (1,348) -- ------ ------ ------ ------ ------ Net Income (Loss)............................... $ (1,583) $3,357 $( 2,878) $ 2,696) $ 5,145 ======== ======== ========= ======== ======== Per Common Share (e) Income (Loss) from Continuing Operation Befopre Discontinued Operations and Extraordinary Items........................... Basic...................................... $ (3.00) $ .20 $ .94 $ 3.38 $ 3.32 Diluted.................................... $ (3.00) .20 .94 3.34 3.25 Net Income (Loss) Basic...................................... (1.12) 2.37 (2.03) 1.94 3.73 Diluted.................................... (1.12) 2.37 (2.03) 1.92 3.66 Cash, Securities and Short-Term Investments..... $ 13,106 $ 1,132 $ 6,499 $ 10,561 $ 5,405 Restricted Cash (h) 56,026 -- -- -- -- Total Assets (Net of assets distributed to shareholders(f)........................... 211,192 251,658 183,720 144,417 144,984 Long-Term Debt (g) ............................. 116,765 126,976 115,159 96,577 62,557 Shareholders Equity (Deficit)(f)................ 15,991 11,441 14,464 (6,083) 6,085 Notes: (a) The data presented herein reflect the spin off of Lynch Interactive Corporation (Interactive) from the Company and the sale by Spinnaker Industries, Inc. (Spinnaker), a 47.6% owned consolidated subsidiary of the Company, of its industrial tape units, all of which transactions occurred in the third quarter of 1999. Accordingly, the operating results of both Interactive and the industrial tape segment have been segregated from continuing operations of the Company and are reported as separate line items. The data presented also includes results of the business acquired from S. D. Warren (name changed to Spinnaker Coating-Maine, Inc.) from March 17, 1998. (b) Operating profit is sales and revenues less operating expenses, which excludes investment income, interest expense, share of operations of affiliated companies, minority interests and taxes. (c) Discontinued operations of the industrial tape segment of Spinnaker Industries(See Note 3 to Financial Statements)and Lynch Tri-Can International in 1995 and 1996. (d) Gain (loss) on early extinguishment of debt at Spinnaker in 1996 and 1999 (e) Based on weighted average number of common shares outstanding - restated to conform to SFAS #128 in 1996 and prior years. (f) No cash dividends have been declared over the period. In 1999, for each share of Lynch Common Stock, shareholders received one share of Lynch Interative Corporation in a Spin Off of the multimedia and transportation business. (See Note 4 to Financial Statements). In 1997, for each share of Lynch Common Stock, shareholders received one share of East/West Communications, Inc., an F- block PCS licensee with licenses covering a population of 20 million. For years prior to 1999, shareholders equity has been restated to reflect the net assets of Lynch Interactive distributed to shareholders. (g) Includes $115.6 million of long-term debt at December 31, 1999 of 47.6% owned Spinnaker Industries. (h) See dicussion of Restricted Cash in Note 6-Notes Payable and Long-Term Debt.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Item 7 is amended in its entirety as follows: RESULTS OF OPERATIONS YEAR 1999 COMPARED TO 1998 The accompanying audited consolidated financial statements reflect the Spin Off of Lynch Interactive Corporation (Interactive) from Lynch Corporation (Lynch) that occurred in the third quarter of 1999 and also the sale by Spinnaker Industries, Inc. (Spinnaker), a consolidated subsidiary of the Company, of its two industrial tape units, Central Products Company and Spinnaker Electrical, that also occurred in the third quarter of 1999. Accordingly, the operating results of both Interactive and the industrial tape segment have been segregated from continuing operations of the Company and are reported as separate line items on the financial statements as discontinued operations. The comparative amounts for 1998 have also been restated to reflect the above transactions. The ensuing narrative considers these changes and only includes discussions of the Company as it is currently composed. EBITDA is presented because it is a widely accepted financial indicator of value and ability to incur and service debt. EBITDA is not a substitute for operating income or cash flows from operating activities in accordance with generally accepted accounting principles. Revenues for the year ended December 31, 1999 were $194.2 million, an increase of $6.6 million from the comparable 1998 period. Spinnaker's 1999 net sales were $162.1 million, compared to $159.1 million in 1998. The growth in net sales for 1999 is attributed to approximately $7.6 million in net sales from the acquisition of Coating-Maine and higher unit sales of certain label stocks from 1998, which were offset by increased domestic capacity and the disruption of business at Entoleter from a mid-summer labor dispute. Revenues at M-tron increased by $3.7 million due to increased demand from the telecommunications industry and increased sales of new products. Lynch Systems' revenues were essentially flat. Operating profit for 1999 declined by $4.0 million from the operating profit in the prior year. Spinnaker's operating profit declined by $3.7 million principally due to lower gross margins as a result of the lower pricing and the impact of the Entoleter labor dispute, partially offset by gains on sale of fixed assets and lower selling, general and administrative expenses. M-tron's operating profit increased by $.4 million due to increased volume. Subsequent to the spin off of Interactive, the Company, with the concurrence of the holders of all outstanding SAR units, terminated its SAR program for corporate management, including all outstanding units, thus eliminating possible future profit and loss and cash flow distortions associated with the program. As a result of the termination, the Company recorded approximately $700,000 of related corporate expense. In order to improve operational efficiencies, Spinnaker Coating restructured operations at its Maine unit in early 2000. Also, in view of the narrowed scope of the Spinnaker business as a result of the sale of the industrial tape business, steps are being taken to reduce Spinnaker corporate overhead by transferring functions from the Dallas headquarters to the main Spinnaker Coatings office in Ohio. As a result, Spinnaker has announced it expects to record a charge of approximately $500,000 in the first quarter of 2000. Investment income increased due to the investment in short term securities of approximately $75 million in proceeds remaining, after payment of certain debt obligations, from the sale by Spinnaker of its Central Products and Electrical Tape businesses. Interest expense was $11.9 million and increased from the prior year due to the allocation of a portion of the interest associated with the Spinnaker 10.75% Senior Secured Notes Due 2006 (the Senior Notes) to the discontinued industrial tape segment that ceased at the time of their sale in the third quarter of 1999. Interest expense also increased due to higher debt levels resulting from Spinnaker's acquisition of the Warren assets. Interest expense from continuing operations is subject to certain matters associated with the use of the net proceeds from the sales of the industrial tape units of Spinnaker, including retirement of senior debt or "permitted investments" as defined under the Indenture. The income tax benefit includes federal, as well as state and local taxes. The tax benefit for the year ended December 31, 1999, and 1998, represents effective tax rates of 27% for 1999 and 63% for 1998. The differences from the federal statutory rate are principally due to the effect of state income taxes, operating losses of subsidiaries and amortization of non-deductible goodwill. Minority interests contribution to the net income (loss) increased by $1.5 million for the year from the prior year due to the increased losses from continuing operations at Spinnaker and the January 1, 1999, repurchase of M-tron minority interest. On August 12, 1999, the Board of Directors approved a plan to distribute the stock of Lynch Interactive Corporation on a one for one basis to the shareholders of Lynch Corporation ( the spin off). Lynch completed the spin off of Lynch Interactive Corporation on September 1, 1999, to stockholders of record on August 23, 1999. Pursuant to the spin off, each Lynch shareholder received one share of Interactive stock for each share of Lynch owned. Lynch had received a private letter ruling from the Internal Revenue Service that the spin off would be tax free to Lynch shareholders. Interactive has listed its stock on the American Stock Exchange. (LIC) Interactive owns all of what was Lynch's multimedia and service businesses while Lynch retains the manufacturing businesses. Interactive owns the telephone companies, television interests and PCS interests, as well as the 55% equity interest of the Morgan Group, Inc. In addition, Interactive owns a 13.6% equity interest in Spinnaker Industries, Inc. Lynch owns a 48% equity interest in Spinnaker after the spin off, as well as M-tron Industries, Inc. and Lynch Systems, Inc. As a result of the spin off, the Company's multimedia and services segments are being reported as operations distributed to shareholders in the accompanying consolidated financial statements. Accordingly, operating results of Lynch Interactive Corporation have been segregated from continuing operations and reported as a separate line item on the statement of operations. Lynch has restated its prior year financial statements to present the operating results of Lynch Interactive on a comparable basis. Interactive's net sales were $204.6 million for the year ended December 31, 1999, and $205.1 million and $194.1 million for the fiscal years ended December 31, 1998 and 1997, respectively. Prior to the spin off, Lynch Interactive recorded a $15.4 million valuation reserve due to the decline in market value of its investment in personal communications licenses. As a result, Lynch Interactive reported an operating loss for the first eight months of 1999. In the third quarter of 1999, Spinnaker sold its two industrial tape units, Central Products Company and Spinnaker Electrical, which comprise its industrial tape segment. Accordingly, operating results of the industrial tape segment have been segregated from continuing operations and reported separately in the statement of operations. Lynch has restated its prior years financial statements to present the operating results of the industrial tape segment as a discontinued operation. The industrial tape segment's net sales, up to the point of its sale, were $69.5 million for the year ended December 31, 1999, and $121.8 million and $119.7 million for the fiscal years ended December 31, 1998 and 1997, respectively. Net loss for the year ended December 31, 1999, was $1.6 million, or ($1.12) per share, which compares to the net income of $3.4 million, or $2.37 per share, for the same period of 1998 due primarily to the operating losses mentioned above and the loss incurred by Interactive, offset by Spinnaker's gain on sale of its industrial tape units ($10.4 million after income taxes and minority interest). Total backlog of manufactured products at December 31, 1999 was $35.3 million, which represents an increase of $25.5 million from the backlog of $9.8 million at December 31, 1998. All operating units contributed significantly to the increase in backlog at December 31, 1999. Included in this backlog for both periods is a $2.4 million payment from a customer for an earlier glass press order at Lynch Systems which was subsequently cancelled. The customer can use this amount for future orders and, if not utilized, will be forfeited to Lynch Systems. Included in the backlog at December 31, 1999, is a $14 million order for large glass press machines at Lynch Systems. In connection with this order, Lynch Systems has obtained a substantial credit facility to protect advances by the customer and for working capital. YEAR 1998 COMPARED TO 1997 Revenues increased to $187.6 million in 1998 from $153.7 million in 1997, a 22% increase. The acquisition made during 1998 by Spinnaker Industries, Inc. was the most significant contributor to this increase. On March 17, 1998, Spinnaker acquired from S. D. Warren its assets in Westbrook, Maine utilized to manufacture pressure sensitive label stock. This operation contributed $47.0 million to Spinnaker's revenue increase. Spinnaker Coating, Inc. (Ohio) reported small revenue decreases during 1998 as a result of higher unit volume, but at overall lower prices, while Spinnaker's Entoleter subsidiary had a 39% increase. Lynch Systems' revenues decreased by $13 million from 1997 to 1998 due to lack of order activity for CRT glass press machines. During 1998 and early 1999, Lynch Systems added several new consumer glass press machines to its product offerings in an effort to be less dependent on orders for CRT glass press machines in the future. Operating profits for 1998 were $4.1 million, down from $6.7 million in 1997. Operating profits fell by $2.6 million due to the EBITDA increase offset by increased depreciation and amortization of $1.7 million associated with the S. D. Warren acquisition. Effective September 30, 1998, the Company amended its SAR (stock appreciation rights) Program so that the SARs become exercisable only in the event the price for the Company's shares double from the SAR grant price within five years from the original issuance. The grant prices of the 42,700 SARs outstanding at December 31, 1998 range from $63.03 to $84.63. On December 31, 1998, the closing price of the Company's common shares in trading on the American Stock Exchange was $70.50. This amendment eliminated the recording of the profit and loss effect from changes in the market price in the Company's common stock until it is probable that the SARs will become exercisable. During 1997, the Company recorded $0.4 million SAR expense and in 1998, prior to the amendment of the program, $0.2 million in SAR income. Investment income was approximately $.2 million in 1998 and $.3 million in 1997. Interest expense increased by $3.4 million in 1998 compared to 1997. The increase is due primarily to the effect of financing the Spinnaker acquisition of the Warren assets. On July 31, 1998, Spinnaker Industries, Inc. completed the acquisition of the electrical tape division of tesa tape, inc. A portion of the purchase price was satisfied by the issuance of 200,000 shares, subject to certain adjustments, of Spinnaker's Class A common stock. As a result of this issuance, the Company recorded a gain on sale of subsidiary stock of $2.1 million, or $1.2 million ($0.87 per share) after income taxes. The 1998 tax benefit of $1.4 million, includes federal, state and local taxes and represents an effective rate of 63% versus 17.2% effective tax rate in 1997. The difference in the effective rates is primarily due to the effects of the amortization of goodwill, the state and local income taxes and losses of subsidiaries. During 1998, minority interest was income of $1.1 million versus $.1 million expense in 1997. The variance was primarily associated with additional losses recorded by Spinnaker (61% owned subsidiary by the Company at December 31, 1998) during 1998. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1999, the Company had current assets of $79.7 million and current liabilities of $56.5 million. Working capital was therefore $23.2 million as compared to $18.8 million at December 31, 1998. The increase was primarily due to the increase in cash and reduction of short term working capital debt at Spinnaker resulting from the sale of its industrial tape segment. Capital expenditures were $3.8 million in 1999 and $3.3 million in 1998. Overall 2000 capital expenditures are expected to be approximately 25% higher than the 1999 level. At December 31, 1999, total debt was $141.6 million, which was $47.1 million less than the $188.7 million at the end of 1998. Debt at year end 1999 included $118.4 million of fixed interest rate debt, at an average interest rate of 10.7%, and $23.2 million of variable interest rate debt at an average interest rate of 8.1%. Additionally, the Company had $12.3 million in unused lines of credit at December 31, 1999, of which $11.5 million was attributed to Spinnaker. Since 1987, the Board of Directors of Lynch has authorized the repurchase of 400,000 common shares. At December 31, 1999, Lynch's remaining authorization is to repurchase an additional 161,000 shares of common stock. In 1999, 8,130 shares were purchased for treasury at a cost of $523,000. The Board of Directors has adopted a policy of not paying cash dividends, a policy which is reviewed annually. This policy takes into account the long term growth objectives of the Company, especially its acquisition program, shareholders' desire for capital appreciation of their holdings and the current tax law disincentives for corporate dividend distributions. Accordingly, no cash dividends have been paid since January 30, 1989 and none are expected to be paid in 2000. In March, 2000 Lynch Systems completed a project specific line of credit totaling $7.1 million related to a contract to deliver equipment in 2000. Substantially all assets of Lynch Systems are pledged in support of the credit facility. In addition, the Company has guaranteed the full amount of the credit facility and has pledged $4 million of its Spinnaker Class A Common Stock as additional collateral. Lynch Corporation 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. As the result of acquisitions, Lynch consolidated, Spinnaker and certain acquisition subsidiaries have relatively high debt to equity ratios. The Company has a significant need for resources to fund the operations of the holding company and future growth. There currently is no credit facility in place at the Lynch corporate level, and the Company is currently considering various long and short term financing arrangements. One alternative could be to sell a portion or all of certain investments in operating entities either directly or through an exchangeable debt instrument. Additional debt and/or equity financing vehicles at corporate and/or subsidiaries are also being considered. While management expects to obtain adequate financing resources to enable the company to meet its obligations, there is no assurance that such can be readily obtained or at reasonable costs. The Company is exploring all options with respect to Spinnaker, including liquifying and monetizing its investment, and searching for ways to provide the Company with a more financially visible investment with respect to M-tron. There is no assurance that any transaction will be implemented. In March, 2000, the Company completed the previously announced sale of 100,000 shares of its common stock to its Chairman at $30 per share, or $3 million. This transaction is subject to shareholder ratification at the Company's 2000 annual meeting. These funds will be available for general corporate purposes. YEAR 2000 The Company had initiated a comprehensive review of its computer systems to identify the systems that could be affected by the "Year 2000" issue and developed an implementation plan to resolve the issue. The Year 2000 issue was the result of computer programs being written using two digits (rather than four) to define the applicable year. Any of the Company's programs or programs utilized by vendors to the Company that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could have resulted in a major system failure or miscalculation. The Company's Year 2000 review was performed primarily by internal staff, and in certain operations supplemented by outside consultants. The principal Information Technology (IT) systems for the Company are sales order entry, shop floor control, inventory control and accounting. The Year 2000 may have also impacted various non-IT systems, including among other things security systems, HVAC, elevator systems, and communications systems. In addition, each of the Company's businesses may have been impacted by the Year 2000 readiness of third party vendors/suppliers. The assessment phase for the Company's manufacturing businesses was completed by the 4th quarter of 1999. Based upon its identification and assessment efforts, the Company determined that certain of its computer and software used in manufacturing and accounting systems required replacement or modification. Such replacements and modifications were completed in the 4th quarter of 1999. The total cost of Year 2000 remediation was $0.2 million. A comprehensive contingency plan had been completed in the 4th quarter of 1999. The assessment, implementation and contingency plans for the Company's Year 2000 program were based on management's estimates and were developed using numerous assumptions of future events, some of which were beyond the Company's control. The Company believed that with modifications to existing software and the conversion to new software, the Year 2000 issue would not pose significant operational problems for the Company as a whole. The Company experienced no significant occurrences related to the Year 2000 issue. MARKET RISK The Company is exposed to market risk relating to changes in the general level of U.S. interest rates. Changes in interest rates affect the amounts of interest earned on the Company's cash equivalents and short-term investments and restricted cash. The Company generally finances the debt portion of the acquisition of long-term assets with fixed rate, long-term debt. The Company generally maintains the majority of its debt as fixed rate in nature either by borrowing on a fixed long-term basis or, on a limited basis, entering into interest rate swap agreements. The Company does not use derivative financial instruments for trading or speculative purposes. Management does not foresee any significant changes in the strategies used to manage interest rate risk in the near future, although the strategies may be reevaluated as market conditions dictate. At December 31, 1999, approximately $23.2 million, or 16% of the Company's long-term debt and notes payable bears interest at variable rates. Accordingly, the Company's earnings and cash flows are affected by changes in interest rates. Assuming the current level of borrowings for variable rate debt and assuming a one percentage point change in the 1999 average interest rate under these borrowings, it is estimated that the Company's 1999 and 1998 interest expense would have changed by $.2 million and $.5 million, respectively. In the event of an adverse change in interest rates, management would likely take actions to further mitigate its exposure. However, due to the uncertainty of the actions that would be taken and their possible effects, the analysis assumes no such actions. Further, the analysis does not consider the effects of the change in the level of overall economic activity that could exist in such an environment. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Item 8 is amended in its entirety as follows: See Item 14(a). PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this amendment to Form 10-K Annual Report: (1) Financial Statements: The Report of Independent Auditors and the following Consolidated Financial Statements of the Registrant are amended in their entirety as follows: Consolidated Balance Sheets at December 31, 1999 and 1998 Consolidated Statements of Operations - Years ended December 31, 1999, 1998, and 1997 Consolidated Statements of Shareholders' Equity - Years ended December 31, 1999, 1998, and 1997 Consolidated Statements of Cash Flows - Years ended December 31, 1999, 1998, and 1997 Notes to Consolidated Financial Statements (2) Financial Statement Schedules as of December 31, 1999 and 1998 and for the three years ended December 31, 1999: Schedule I - Condensed Financial Information of Registrant Schedule II - Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions, or are inapplicable, and therefore have been omitted. See Page 2 above re Forward Looking Information. ----------------------------------------------- (c) The following Exhibits listed in the Exhibit Index are filed with this amendment to Form 10-K Annual Report: 23.1 - Consent of Ernst & Young LLP 27.A - Amended Financial Data Schedule (d) Financial Statement Schedules: Financial Statement Schedules are listed in response to Item 14(a)(2) REPORT OF INDEPENDENT AUDITORS Shareholders and Board of Directors Lynch Corporation We have audited the accompanying consolidated balance sheets of Lynch Corporation and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. Our audits also included the financial statement schedules listed in the index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Lynch Corporation and subsidiaries at December 31, 1999 and 1998 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects the information set forth therein. /s/ ERNST & YOUNG LLP Stamford, Connecticut March 28, 2000 LYNCH CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands)
ASSETS December 31 December 31 1999 1998 CURRENT ASSETS: Cash and cash equivalents .................................... $ 13,106 $ 1,132 Trade accounts receivables, less allowances of $361 and $395 . 24,642 25,320 Inventories .................................................. 31,680 28,396 Deferred income taxes ........................................ 8,943 11,714 Other current assets ......................................... 1,303 1,787 Net current assets of subsidiaries distributed to shareholders -- 58,047 Net current assets of discontinued operations ................ -- 36,226 --------- --------- TOTAL CURRENT ASSETS .............................................. 79,674 162,622 Restricted Cash ................................................... 56,026 -- PROPERTY, PLANT AND EQUIPMENT: Land ......................................................... 672 672 Buildings and Improvements ................................... 11,015 12,585 Machinery and Equipment ...................................... 54,529 51,306 --------- --------- 66,216 64,563 Accumulated Depreciation ...................................... (22,137) (17,534) --------- --------- 44,079 47,029 EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED, NET .................................................. 22,020 21,075 OTHER ASSETS ...................................................... 9,393 7,328 NET NON - CURRENT ASSETS OF SUBSIDIARIES DISTRIBUTED TO SHAREHOLDERS ................................................. -- 170,295 NET NON - CURRENT ASSETS OF DISCONTINUED OPERATIONS ............... -- 71,651 --------- --------- TOTAL ASSETS ...................................................... $ 211,192 $ 480,000 ========= =========
See accompanying notes LYNCH CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (In Thousands)
December 31 December 31 1999 1998 CURRENT LIABILITIES Notes payable to banks ............................... $ 23,178 $ 59,686 Trade accounts ....................................... 14,404 18,178 Accrued interest payable ............................. 2,426 2,575 Accrued liaiblites ................................... 13,956 3,580 Customer advances .................................... 860 2,406 Current maturities of long-term debt ................. 1,636 2,027 Net current liabilities of subsidiaries distributed to shareholders......................... -- 37,240 Net current liabilities of discontinued operations ... -- 18,162 --------- --------- TOTAL CURRENT LIABILITIES ............................... 56,460 143,854 LONG-TERM DEBT .......................................... 116,765 126,976 DEFERRED INCOME TAXES ................................... 6,225 11,715 OTHER LONG-TERM LIABILITIES ............................. 4,866 2,182 MINORITY INTERESTS ...................................... 10,885 3,999 NET NON-CURRENT LIABILITIES OF SUBSIDIARIES DISTRIBUTED TO SHAREHOLDERS ........................... -- 147,600 NET NON-CURRENT LIABILITIES OF DISCONTINUED OPERATIONS ........................................... -- 3,881 COMMITMENT AND CONTINGINCIES 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 ............................ 8,302 8,554 RETAINED EARNING ...................................... 3,843 26,771 ACCUMULATED OTHER COMPREHENSIVE INCOME(LOSS) .......... (40) 59 TREASURY STOCK OF 61,008 AND 52,943 SHARES AT COST .... (1,253) (730) --------- --------- 15,991 39,793 --------- --------- $ 211,192 $ 480,000 ========= =========
See accompanying notes LYNCH CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except share amounts)
Years Ended December 31 1999 1998 1997 SALES AND REVENUES ..................................... $ 194,222 $ 187,644 $ 153,735 Costs and expenses: Manufacturing ....................................... 172,567 162,735 126,570 Selling and Administrative .......................... 21,570 20,835 20,435 ----------- ----------- ----------- OPERATING PROFIT ..................................... 85 4,074 6,730 Other Income (expense): Investment Income .................................... 2,354 199 305 Interest Expense ..................................... (11,882) (8,591) (5,189) Gain on Sale of Stock by Subsidiary .................. -- 2,090 (91) ----------- ----------- ----------- (9,528) (6,302) (4,975) ----------- ----------- ----------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES, MINORITY INTERESTS, DISCONTINUED OPERATIONS AND EXTRAORDINARY ITEM .................... (9,443) (2,228) 1,755 Benefit (provision) for income taxes ................... 2,544 1,408 (301) Minority interests ..................................... 2,647 1,107 (121) ----------- ----------- ----------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE DISCONTINUED OPERATIONS AND EXTRAORDINARY ITEM ......... (4,252) 287 1,333 DISCONTINUED OPERATIONS: Income (loss) from operations of Lynch Interactive Corporation distributed to shareholders (less income Tax (provision) benefit of $3,068, ($5,012), and $736 and minority interests of $578, $1,226, and $714)...... (7,493) 4,929 (3,349) (Loss) from discontinued operations of Industrial tape segment (less income tax benefit of $308, $2,192, and $226 and minority interests of $558, $1,429, and $239) .................................... (572) (1,859) (862) Gain on sale of Industrial tape segment (less income tax provision of $6,495 and minority interest of $7,013) ......................... 10,431 -- -- EXTRAORDINARY ITEM: Gain on early extinguishment of debt (less income tax provision of $355 and minority interest of $300) .................................... 303 -- -- ----------- ----------- ----------- NET INCOME (LOSS) ...................................... $ (1,583) $ 3,357 $ (2,878) =========== =========== =========== Weighted average shares outstanding .................... 1,415,000 1,418,000 1,415,000 Basic and diluted earnings (loss) per share: Income (loss) from continuing operations before discontinued operations ........................ $ (3.00) $ .20 $ 0.94 Income (loss) from operations of Lynch Interactive Corporation ....................... (5.30) 3.48 (2.36) Income (loss) from gain on sale and operations of industrial tape segement .......................... 6.97 (1.31) (0.61) Extraordinary item ..................................... .21 -- -- ----------- ----------- ----------- NET INCOME (LOSS) ...................................... $ (1.12) $ 2.37 $ (2.03) =========== =========== ===========
Accmpanying notes Lynch Corporation and Subsidiaries Consolidated Statements of Shareholders' Equity For the Three Years Ended December 31, 1999 (In Thousands except for shares of common stock)
ACCUMULATED ADDITIONAL OTHER SHARES OF COMMON COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY STOCK OUTSTANDING STOCK CAPITAL EARNINGS INCOME STOCK TOTAL ------------ ---------- ----------- ------------ ------------ ---------- --------- BALANCE AT DEC 31, 1996 ..... 1,391,034 $ 5,139 $ 8,417 $ 26,472 -- $ (1,105) $ 38,923 Issuance of Treasury Stock .. 26,014 -- 313 -- -- 359 672 Capital transactions of The Morgan Group, Inc. -- -- (86) -- -- -- (86) Dividend of East/West Communications, Inc. -- -- -- (180) -- -- (180) Net income (loss) for year .. -- -- -- (2,878) -- -- (2,878) ---------- ---------- ---------- ---------- ---------- ---------- ---------- BALANCE AT DEC 31, 1997 ..... 1,417,048 5,139 8,644 23,414 -- (746) 36,451 Issuance of Treasury Stock .. 1,200 -- 74 -- -- 16 90 Capital transactions of The Morgan Group, Inc. -- -- (164) -- -- -- (164) Net income (loss) for year .. -- -- -- 3,357 -- -- 3,357 Other comprehensive income -- -- -- -- 59 -- 59 ---------- ---------- ---------- ---------- ---------- ---------- ---------- BALANCE AT DEC 31, 1998 ..... 1,418,248 5,139 8,554 26,771 59 (730) 39,793 Purchase of Treasury Stock (8,065) -- -- -- -- (523) (523) Capital transactions of The Morgan Group, Inc. -- -- (252) -- -- -- (252) Dividend of Lynch Interactive Corporation -- -- -- (21,345) (59) -- (21,404) Net income (loss) for year -- -- -- (1,583) -- -- (1,583) Other comprehensive income -- -- -- -- (40) -- (40) ---------- ---------- ---------- ---------- ---------- ---------- ---------- BALANCE AT DEC 31, 1999 ..... 1,410,183 $ 5,139 $ 8,302 $ 3,843 $ (40) $ (1,253) $ 15,991 ---------- ---------- ---------- ---------- ---------- ---------- ----------
LYNCH CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands) Years Ended December 31 ----------------------------------------- 1999 1998 1997 ----------------------------------------- OPERATING ACTIVITIES Net income (loss) ($1,583) $3,357 ($2,878) Adjustments to reconcile net income (loss) to net cash provided by operating activities of continuing operations: Adjustment from discontinued operations: (Income) loss from operations of Lynch Interactive Corporation 7,493 (4,929) 3,349 Loss from operations of industrial tape segment 572 1,859 862 Gain on sale of industrial tape segment (10,431) - - Extraordinary item (303) - - Depreciation and amortization 6,234 5,165 3,216 Amortization of deferred financing charges 786 771 632 Gain on sale of stock by subsidiary corporation -- (4,778) (169) Deferred taxes (2,719) (1,488) (1,279) Minority interests (2,636) (2,536) (367) Gain on sale of fixed assets (854) - - Changes in operating assets and liabilities: Receivables 678 2,560 1,959 Inventories (3,284) 2,270 22 Accounts payable and accrued liabilities (3,949) 8,317 (3,450) Other 864 (728) (479) ------------- ---------- ------------ Cash provided by operating activities of continuing operations (9,132) 9,840 1,418 ------------- ---------- ------------ INVESTING ACTIVITIES Capital Expenditures (3,795) (3,297) (3,231) Investment in Spinnaker Coating - Maine - (47,933) - Proceeds from sale of industrial tape segment 104,450 - - Proceeds from sale of fixed assets 2,403 2,696 - Other 509 (128) (1,339) ------------- ---------- ------------ Cash provided by (used in) investing activities of continuing operations 103,567 (48,662) (4,570) ------------- ---------- ------------ FINANCING ACTIVITIES Net borrowings (repayments) of notes payable (36,127) 42,268 1,121 Issuance of long-term debt - 6,025 1,262 Repayment of long-term debt (10,937) (1,954) (1,991) Deferred financing costs (580) (726) - (Purchase) sale of treasury stock (523) 90 672 Other - (841) 755 ------------- ---------- ------------ Cash provided by (used in) financiging activities of continuing operations (48,167) 44,862 1,819 ------------- ---------- ------------ Net increase (decrease) in cash and cash equivalents 46,268 6,040 (1,333) Cash provided by (used by) Lynch Interactive Corporation 15,987 (1,880) (557) Cash provided by (used by) industrial tape segment 5,745 (7,025) 864 ------------- ----------- ------------ Increase (decrease) in cash and cash equivalents 68,000 (2,865) (1,026) Cash and cash equivalents at beginning of period 1,132 3,997 5,023 ------------- ---------- ------------ Cash and cash equivalents at end of period, including $56,026 of Restricted Cash at December 31, 1999 $69,132 $1,132 $3,997 ============= ========== ============
Lynch Corporation and Subsidiaries Notes to Consolidated Financial Statements December 31, 1999 1. Accounting and Reporting Policies Principles of Consolidation The consolidated financial statements include the accounts of Lynch Corporation (the "Company" or "Lynch") and entities in which it has majority voting control. All material intercompany transactions and accounts have been eliminated in consolidation. See Note 4 for details of the spin off of Lynch Interactive Corporation which occurred on September 1, 1999. Uses of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Cash Equivalents Cash equivalents consist of highly liquid investments with a maturity of less than three months when purchased. At December 31, 1999 and 1998, assets of $1.1 million and $1.3 million, which are classified as cash and cash equivalents, are invested in United States Treasury money market funds for which affiliates of the Company serve as investment managers to the respective funds. Restricted Cash At December 31, 1999 the Company had $56 million of Restricted Cash. See discussion of Restricted Cash in Note 6 - Notes Payable and Long-Term Debt. Property, Plant and Equipment Property, plant and equipment are recorded at cost and include expenditures for additions and major improvements. Maintenance and repairs are charged to operations as incurred. Depreciation is computed for financial reporting purposes using the straight-line method over the estimated useful lives of the assets, which range from 3 years to 35 years. For income tax purposes, accelerated depreciation methods are used. Excess of Cost over Fair Value of Net Assets of Companies Acquired Excess of cost over fair value of net assets of companies acquired (goodwill) is being amortized on a straight-line basis over periods ranging from twenty to forty years. The Company periodically reviews goodwill to assess recoverability, and impairments would be recognized in operating results if a permanent diminution in value were to occur. The Company measures the potential impairment of recorded goodwill by the undiscounted value of expected future cash flows in relation to its net capital investment in the subsidiary. Based on its review, the Company does not believe that an impairment of its goodwill has occurred. Excess of cost over fair value of net assets acquired include acquisition intangibles of $23.4 million and $21.6 million, net of accumulated amortization of $1,391,000 and $574,000 at December 31, 1999 and 1998, respectively. Revenue Recognition Revenues, with the exception of certain long-term contracts discussed below, are recognized on shipment. Research and Development Costs Research and development costs are charged to operations as incurred. Such costs were $571,000, $1,030,000, and $1,022,000 in 1999, 1998, and 1997, respectively. Earnings Per Share In 1997, the Company adopted Financial Accounting Standards Board Statement ("SFAS") No. 128, "Earnings Per Share". SFAS No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants, and convertible securities. Diluted earnings per share are very similar to the previously reported fully diluted earnings per share. The Company's basic and diluted earnings per share are equivalent as the Company has no dilutive securities. Segment Information Effective December 1998, the Company adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information". SFAS No. 131 superseded SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise". SFAS No. 131 establishes new standards for reporting information about operating segments. SFAS No. 131 requires disclosure of selected financial and descriptive information for each operating segment based on management's internal organizational decision-making structure. Additional information is required on a company-wide basis for revenues by product or service, revenues and identifiable assets by geographic location and information about significant customers. The adoption of SFAS No. 131 did not affect results of operations or financial position, but did affect the disclosure of segment information. Prior year amounts have been reclassified to conform to the requirements of SFAS No. 131. See Note 14. Pension and Other Post-Retirement Benefits In February 1998, the FASB issued SFAS No. 132, "Employers Disclosures About Pensions and Other Post-Retirement Benefits", which is an amendment to SFAS No.'s 87, 88, and 106. This SFAS revises employers' disclosures about pension and other post-retirement benefits plans. It does not change the measurement or recognition of those plans. The adoption of SFAS No. 132 in 1998 did not have a significant impact on the Company's consolidated financial statements as the Company's benefit plans are not material. Accounting for Long-Term Contracts Lynch Systems, Inc., a 91% owned subsidiary of the Company is engaged in the manufacture and marketing of glass-forming machines and specialized manufacturing machines. Certain sales contracts require an advance payment (usually 15% of the contract price) which is accounted for as a customer advance. The contractual sales prices are paid either (i) as the manufacturing process reaches specified levels of completion or (ii) based on the shipment date. Guarantees by letter of credit from a qualifying financial institution are required for most sales contracts. Because of the specialized nature of these machines and the period of time needed to complete production and shipping, Lynch Systems accounts for these contracts using the percentage-of-completion accounting method as costs are incurred. At December 31, 1999 and 1998, costs in excess of billings were $95,000 and $0, respectively. Impairments The Company accounts for impairments of long-lived assets in accordance with the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". The Company periodically assesses the net realizable value of its long-lived assets and evaluates such assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. For assets to be held and used, impairment is determined to exist if estimated undiscounted future cash flows are less than the carrying amount. For assets to be disposed of, impairment is determined to exist if the estimated net realizable value is less than the carrying amount. Stock Based Compensation The Company accounts for stock based compensation in accordance with the provisions of SFAS No. 123, "Accounting for Stock Based Compensation". SFAS No. 123 establishes a fair value method of accounting and reporting standards for stock based compensation plans. However as permitted by SFAS No. 123, the Company has elected to continue to apply the provisions of Accounting Principles Board Opinion ("APB") No. 25, if the exercise price of the Company's employee stock options was not less than the market price of the underlying stock on the date of grant, no compensation expense is recognized. The Company is required to disclose the pro forma net income (loss) and net income (loss) per share as if the fair value method defined in SFAS No. 123 had been applied to all grants made on or after January 1, 1995. See Note 8 for pro forma disclosures. Fair Value of Financial Instruments Cash and cash equivalents, trade accounts receivable, short-term borrowings, trade accounts payable and accrued liabilities are carried at cost which approximates fair value due to the short-term maturity of these instruments. The carrying account of the Company's borrowings under its revolving lines of credit approximates fair value, as the obligations bear interest at a floating rate. The fair value of other long-term obligations approximates cost based on borrowing rates for similar instruments, excluding the Spinnaker Industries, Inc. ("Spinnaker") senior-secured debt with a carrying value of $109 million at December 31, 1999 and $115 million at December 31, 1998 and a fair value of between $87.8 million and $92.3 million, and $100.1 million, respectively, at December 31, 1999 and 1998, based on quoted market prices. Issuance of Stock by Subsidiaries and Investees Changes in the Company's equity in a subsidiary or an investee caused by issuance of the subsidiary's or investees' stock are accounted for as gains or losses where such issuance is not part of a broader reorganization (see Note 9). Reclassifications The consolidated financial statements reflect the spin off of Lynch Interactive Corporation (Interactive) from Lynch Corporation that occurred in the third quarter of 1999 and also the sale by Spinnaker Industries, Inc. (Spinnaker), of its two industrial tape units, Central Products Company and Spinnaker Electrical that also occurred in the third quarter of 1999. Accordingly, the operating results of both Interactive and the industrial tape segment have been segregated from continuing operations of the Company and are reported as separate line items on the financial statements as discontinued operations. The comparative amounts for 1998 and 1997 have also been restated to reflect the above transactions. Certain other amounts in the 1998 and 1997 financial statements have been reclassified to conform to the 1999 presentation. These other reclassifications are immaterial to the consolidated financial statements taken as a whole. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which is required to be adopted in years beginning after June 15, 2000. SFAS No. 133 requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in fair value are either offset against the changes in fair value of assets and liabilities through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. Because of the Company's minimal use of derivatives, management does not anticipate that the adoption of SFAS No. 133 will have a significant effect on its earnings or financial position. 2. Acquisitions On July 31, 1998, the Company's subsidiary, Spinnaker, acquired tesa tape, Inc.'s pressure-sensitive electrical tape product line and its Carbondale, IL manufacturing plant (the "Spinnaker Electrical Acquisition"). The purchase price totaled $10.7 million, comprised of 200,000 shares of Spinnaker common stock (subject to adjustment) valued at $3.7 million, $4.5 million in term debt, $2.0 million in cash, and a $0.5 million subordinated note. The acquired business produces electrical tape for insulating motors, coils and transformers for customers in Europe, Canada and the U.S. This company was subsequently sold within the industrial tape segment. See Note 3 - Discontinued Operations. On March 17, 1998, Spinnaker Coating-Maine, Inc., a wholly owned subsidiary of Spinnaker, acquired the assets of the pressure-sensitive adhesive-backed label stock business of S. D. Warren (the "S.D. Warren Acquisition"). The purchase price was approximately $51.8 million, plus the assumption of certain liabilities and transaction costs, and was funded by issuing the seller a convertible subordinated note of $7.0 million with the remainder funded by Spinnaker's revolving credit facility. As a result of this transaction, the Company recorded approximately $23.1 million in goodwill which is being amortized over 30 years. All of the above acquisitions were accounted for as purchases, and accordingly, the assets acquired and liabilities assumed were recorded at their estimated fair market values on their respective dates of acquisition. The operating results of the acquired companies are included in the Consolidated Statements of Operations from their respective acquisition dates except for the tesa tape acquisition, which is included in discontinued operations. The following unaudited pro forma information shows the results of the Company's operations presented as if the S. D. Warren Acquisition was made at the beginning of 1997. The unaudited pro forma information is not necessarily indicative of the results of operations that would have occurred had the transactions been made at that date nor is it necessarily indicative of future results of operations.
For the years ended December 31 (In thousands, except per share amounts) 1998 1997 Sales .................................. $ 199,758 $ 217,614 ========= ========= Income (loss) from continuing operations $ (3,053) $ 2,274 ========= ========= Net income (loss) ...................... $ 3,197 $ (1,937) ========= ========= Basic and diluted earnings per share: Income (loss) from continuing operations $ (2.15) $ 1.61 ========= ========= Net income (loss)....................... $ 2.25 $ (1.37) ========= =========
3. Discontinued Operations On April 9, 1999, Spinnaker entered into a definitive agreement to sell its industrial tape segment to Intertape for approximately $105 million and five-year warrants to purchase 300,000 shares of Intertape common stock (New York Stock Exchange Symbol "ITP") at an exercise price of $29.50 per share. The warrants were valued at approximately $3.0 million using the Black-Scholes option pricing model and are reflected in other assets. Accordingly, operating results of the industrial tape segment have been segregated from continuing operations and reported as a separate line item on the statement of operations. The sale of the two industrial tape businesses closed on August 10, 1999 and July 30, 1999, respectively. The Company recorded gains totaling $17.4 million, net of applicable income taxes of approximately $6.5 million. Spinnaker offset the cash tax liability by utilizing net operating loss carry forwards. The Company has restated its prior financial statements to present the operating results of the industrial tape segment as a discontinued operation. The industrial tape segment net sales were $69.5 million, $121.8 million and $119.7 million for the periods ended December 31, 1999 (through the date of sale), 1998 and 1997, respectively. General corporate office expenses related to finance and administrative functions including public company compliance reporting, bank and investor relations, taxes other than income taxes and holding company payroll, historically allocated and charged to the industrial tape segment were reversed and allocated back to continuing operations. These expenses were not considered to be directly attributed to discontinued operations. Historical expenses allocated back to continuing operations totaled $1.0 million, $1.5 million and $0.9 million in the periods ended December 31, 1999, 1998 and 1997, respectively. Interest expense attributed to the Senior Notes and related deferred financing has historically been allocated based on the pro rata share of subsidiary debt obligations retired with the proceeds from the issuance of the Senior Notes, to total debt obligations retired. The Senior Note proceeds were used to extinguish certain outstanding term and revolver obligations in October 1996. Interest expenses charged to the discontinued industrial tape segment totaled $5.2 million for the period ended December 31, 1999 and $8.5 million in the periods ended December 31, 1998 and 1997. The assets and liabilities of the industrial tape segment of Spinnaker included in the accompanying consolidated balance sheet at December 31, 1998 consist of the following (in thousands): Accounts receivable, net .......................... $14,815 Inventories, net .................................. 18,167 Prepaids and other ................................ 3,244 ------- Current assets of discontinued operations ......... $36,226 ======= Property, plant and equipment, net ................ $48,312 Goodwill and other assets ......................... 23,339 ------- Non-current assets of discontinued operations ..... $71,651 ======= Accounts Payable .................................. $13,720 Accrued liabilities ............................... 4,442 ------- Current liabilities of discontinued operations .... $18,162 ======= Non-current liabilities of discontinued operations $ 3,881 =======
4. Spin Off On August 12, 1999, the Board of Directors approved a plan to distribute the stock of Lynch Interactive Corporation on a one for one basis to the shareholders of Lynch Corporation ("spin off"). Lynch completed the spin off of Lynch Interactive Corporation ("Interactive") on September 1, 1999, to stockholders of record on August 23, 1999. Pursuant to the spin off, each Lynch shareholder received one share of Interactive common stock for each share of Lynch owned. Lynch had received a private letter ruling from the Internal Revenue Service that the spin off would be tax free to Lynch shareholders. Interactive is listed on the American Stock Exchange under the symbol "LIC". Interactive owns all of what were Lynch's multimedia and service businesses while Lynch retained the manufacturing businesses. Interactive owns the telephone companies, television interests and PCS interests, as well as the 55% equity interest of The Morgan Group, Inc. In addition, Interactive owns a 13.6% equity interest in Spinnaker Industries, Inc. Lynch owns a 47.6% equity interest in Spinnaker (60.4% of voting interest), as well as 100% of M-tron Industries, Inc. and 92% of Lynch Systems, Inc. As a result, the Company's multimedia and services segments are being reported as operations distributed to shareholders in the accompanying consolidated financial statements. Accordingly, operating results of Lynch Interactive Corporation have been segregated from continuing operations and reported as a separate line item on the statements of operations. Lynch has restated its prior year financial statements to present the operating results of the Company on a comparable basis. Interactive's net sales were $ 204.6 million, $205.2 million, and $194.1 million for the fiscal years ended December 31, 1999, 1998, and 1997, respectively. In the third quarter of 1999, Lynch acquired by merger, all of the stock of Central Scott Telephone Company. This company became part of Lynch Interactive and was included in the spin off. Lynch Interactive and Lynch have entered into certain agreements governing various ongoing relationships, including the provision of support services and a tax allocation agreement. The tax allocation agreement provides for the allocation of tax attributes to each company as if it had actually filed with the respective tax authority. At the spin off, the employees of the corporate office of Lynch Corporation became the employees of Lynch Interactive Corporation and Lynch Interactive Corporation began providing certain support services to Lynch. The Company was charged a management fee for these services amounting to approximately $200,000 in 1999. The net assets of Interactive included in the accompanying audited consolidated balance sheet as of December 31, 1998 consist of the following: (in thousands) Cash, cash equivalents and marketable securities ......... $ 27,988 Accounts receivable, net ................................ 18,853 Deferred income taxes .................................... 4,265 Prepaid expenses and other ............................... 6,941 -------- Current assets of subsidiaries distributed to shareholders $ 58,047 ======== Property, plant and equipment, net .................... $ 91,183 Goodwill ................................................. 47,740 Investment in and advances to PCS license holders ..... 23,360 Other assets ............................................ 8,012 -------- Non-current assets of subsidiaries distributed to shareholders ........................... $170,295 ======== Notes payable ............................................ $ 2,037 Accounts payable ......................................... 4,662 Accrued liabilities ...................................... 21,902 Current portion of long term debt ........................ 8,639 -------- Current liabilities of subsidiaries distributed to shareholders ............................ $ 37,240 ======== Long Term Debt............................................ $119,024 Deferred income tax ...................................... 13,062 Other long term debt .................................... 4,987 Minority interest ........................................ 10,527 -------- Non-current liabilities and minority interest of subsidiaries distributed to shareholders ............................. $147,600 ========
The net assets distributed to interactive were estimated to be $ 23.0 million at September 1, 1999. Such amount was subsequently decreased in the fourth quarter by $1.6 million to reflect revised estimates of liabilities distributed. 5. Inventories Inventories are stated at the lower of cost or market value. Inventories valued using the last-in, first-out (LIFO) method comprised approximately 12% and 9% of consolidated inventories at December 31, 1999 and 1998, respectively. Inventories at Spinnaker Coating, 80% and 82% of inventories at December 31, 1999 and 1998, respectively, are valued using the specific identification method. The balance of inventories are valued using the first-in-first-out (FIFO) method.
December 31 1999 1998 (In Thousands) Raw materials and supplies $10,407 $ 7,711 Work in progress ......... 2,114 1,273 Finished goods ........... 19,159 19,412 ------- ------- Total ................. $31,680 $28,396 ======= =======
Current cost exceeded the LIFO value of inventories by $829,000 and $880,000 at December 31, 1999 and 1998, respectively. 6. Notes Payable and Long-term Debt Long-term debt consists of (all interest rates are at December 31, 1999):
December 31 1999 1998 (In Thousands) Spinnaker Industries, Inc. 10.75% Senior Secured Notes due 2006 .............................................. $ 108,585 $ 115,000 Unsecured note issued in connection with acquisition at a fixed interest rate of 10% ......................... 7,000 7,500 Other .................................................................. 2,816 6,503 --------- -------- 118,401 129,003 Current maturities ..................................................... (1,636) (2,027) --------- -------- $ 116,765 $126,976 ========= ========
On October 23, 1996, Spinnaker completed the issuance of $115,000,000 of 10.75% 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 Spinnaker Coating. Financing costs were incurred by Spinnaker in conjunction with the issuance of the 10.75% senior secured notes and other financing activities. These financing costs are deferred and amortized over the term of the related debt. Unamortized financing costs of $5.4 million and $5.7 million at December 31, 1999 and 1998, respectively, are included in other assets. The notes are redeemable, in whole or in part, at the option of Spinnaker on or after October 15, 2001, at redemption prices beginning at 105.375% of the principal amount declining to 100% of the principal amount on October 15, 2005, plus accrued and unpaid interest. The notes are unconditionally guaranteed, jointly and severally, by Spinnaker's subsidiaries, Spinnaker Coating, Inc., and Entoleter, Inc. Spinnaker completed the sale of Central Products on August 10, 1999 and $18.2 million of the proceeds were used to repay the working capital revolver debt. Any net cash proceeds from the sale of Central Products ("Restricted Proceeds") not invested in any business within 270 days after the sale of Central Products or not used within that time to permanently reduce indebtedness (other than subordinated debt) shall be deemed to be excess proceeds. At December 31, 1999, the amount of net cash proceeds, which are restricted in their future use, has been classified as Restricted Cash on the Company's balance sheet. If any excess proceeds exist 270 days after the sale of Central Products, Spinnaker is obligated to utilize those proceeds to make an offer to purchase the Senior Notes at par plus accrued interest. During the third and fourth quarters of 1999, Spinnaker Electrical purchased a total of $6.4 million of the outstanding Senior Notes on the open market at an average price of 81.5% of par value. The Company has recorded a gain on the early extinguishment of debt of approximately $303,000, which amount has been reduced by the write-off of a proportional amount of deferred financing costs and after giving effect to taxes and minority interest. The proceeds from the sale of Spinnaker Electrical, an unrestricted subsidiary under the Indenture, were used to repay approximately $6.9 million of certain term debt and working capital revolver debt collateralized by the assets of Spinnaker Electrical. The remaining net proceeds will be used for general corporate purposes, which may include purchasing Senior Notes in the open market. Other options include acquisitions, capital expenditures, and / or repurchase shares of Spinnaker common stock. Subsequent to December 31, 1999, Spinnaker utilizing the Restricted Proceeds, purchased $33.4 million (par value) of outstanding Senior Notes on the open market at an average price of 83.6%. In addition, Spinnaker purchased all of the Senior Note holdings of Spinnaker Electrical at 81.5% of par value, plus accrued interest, representing Spinnaker Electrical's cost basis. At December 31, 1998, the Company had two lines of credit totaling $20.0 million, of which $4.9 million was available. In conjunction with the spin off of Lynch Interactive, these credit facilities were transferred from the Company to Interactive. On a consolidated basis, at December 31, 1999, Lynch maintains short-term and long-term line of credit facilities totaling $43.7 million (subject to limitations that reduce the availability to $35.4 million), of which $12.3 million was available for future borrowings. Spinnaker Industries, Inc. maintains lines of credit at its subsidiaries which in the aggregate total $40.0 million (subject to limitations that reduce the availability to $32.0 million), of which $11.5 million was available at December 31, 1999. These facilities, as well as facilities at other subsidiaries of Lynch, generally limit the credit available under the lines of credit to certain variables, such as inventories and receivables, and are secured by the operating assets of the subsidiary, and include various financial covenants. At December 31, 1999, $ 3.7 million of these total facilities expire within one year and subsequent to year-end were extended to March of 2001. The weighted average interest rate for short-term borrowings at December 31, 1999 was 8.05%. The Company pays fees ranging from 0% to 0.375% on its unused lines of credit. In general, the long-term debt facilities are secured by substantially all of the Company's property, land and equipment, inventory, receivables and common stock of certain subsidiaries and contain certain covenants restricting distributions to Lynch. At December 31, 1999, and 1998, substantially all the subsidiaries' net assets are restricted. Cash payments for interest were $10.6 million, $7.2 million and $4.8 million for the years ended December 31, 1999, 1998 and 1997, respectively. Aggregate principal maturities of long-term debt for each of the next five years are as follows: 2000 -- $ 1.6 million; 2001 -- $ .4 million; 2002 -- $ .4 million; 2003 -- $ 7.6 million and 2004 -- $0 million. 7. Minority Interests and Related Party Transactions On July 31, 1998, Spinnaker completed the acquisition of the electrical tape division of tesa tape, inc. (see Note 2). A portion of the purchase price was 200,000 newly issued shares of Spinnaker Class A common stock (subject to certain adjustments). In accordance with the Company's policy, as a result of this issuance, the Company recorded a pre-tax gain on the sale of subsidiary stock of $2.1 million in 1998. On June 13, 1994, Spinnaker entered into a management agreement (the "Management Agreement") with Boyle, Fleming & Co., Inc. ("BF"), of which a former Director of the Company is a principal, to assume the management of Spinnaker. Effective August 31, 1996, the Management Agreement was terminated at which time Messrs. Boyle and Fleming became employees of Spinnaker. Spinnaker and BF also entered into a Warrant Purchase Agreement in 1994, pursuant to which BF received warrants to purchase common stock of Spinnaker (equating to a 20% ownership of Spinnaker at that time) at any time on or before June 30, 1999, subject to certain restrictions. The remaining warrants were exercised in January 1998. Mr. Boyle is currently a member of the Office of the Chairman and Mr. Fleming remains President. On October 23, 1996, concurrent with the issuance of the $115 million senior notes (see Note 6), Spinnaker acquired the remaining 25% minority interest in its Spinnaker Coating subsidiary. The terms of the acquisition involved a cash payment of approximately $2.3 million and the issuance of 9,613 shares of Spinnaker Common Stock. In addition, as part of the consideration for the shares of capital stock of Spinnaker Coating, the minority shareholders received the right to a contingent payment, which is exercisable at any time during the period beginning October 1, 1998 and ending September 30, 2000. The contingent payment is based upon the percentage of the capital stock owned by the former Spinnaker Coating entity at the time of the merger multiplied by the fair market value of the capital stock of Spinnaker Coating, as determined in accordance with certain economic assumptions and including an adjustment for a minority ownership discount, as of the date such right is exercised, less the consideration received at closing. The contingent price is payable through the issuance of Common Stock of Spinnaker, unless Spinnaker elects to pay the contingent price in cash. If such payments are made in cash, they could give rise to a default under the Senior Notes, unless there is sufficient availability under provisions regarding restricted payments contained in the Senior Notes. The amount of the contingent payment is currently being determined. Any contingent consideration paid in the future will be allocated to goodwill. In connection with the purchase of the Spinnaker Coating minority interest, all the Spinnaker Coating options were accelerated and in turn certain key executives of Spinnaker Coating management exercised those options to purchase 71,065 shares of Spinnaker Coating common stock at various prices between $7.16 and $14.69 per share, for a total of approximately $670,000. The options were originally granted in 1994 and were issued at not less than 100% of the fair market value of the common stock at the date of grant. 8. Stock Option Plans In accordance with Spinnaker's directors stock option plan, Spinnaker may grant stock options to directors who are not employees of Spinnaker. In February 1996, Spinnaker granted 30,000 stock options for the purchase of one share each of Spinnaker Class A Common Stock and Spinnaker Common Stock at a total price of $40 per option exercised (adjusted for the stock dividend in August 1996) to qualifying directors. The options vest over a two-year period with 15,000 options becoming exercisable two years after the grant date. The options expire on the fifth anniversary after the grant date or 30 days after the director ceases to be a director. In January of 1997, under the same terms, Spinnaker issued 10,000 stock options for the purchase of one share of Common Stock at an exercise price of $27 per share. As permitted by SFAS No. 123, Spinnaker elected to account for these options under APB No. 25 and as such no compensation expense was recorded because the option exercise price was not less than the market price at the date of grant. All of these options are currently outstanding and exercisable. Pro forma information regarding net income and earnings per share is required by SFAS No. 123, and has been determined as if Spinnaker had accounted for its director stock options under the fair value method of that statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions: risk-free interest rates of 6.09%-5.58%; dividend yields of 0%, volatility factors of the expected market price of the Spinnaker's common stock of .50; and a weighted-average expected life of the options of 3 years. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options vesting period. The estimated weighted-average fair value per option is approximately $14.62 and $10.40 for the 1997 and 1996 options, respectively. The pro forma effect on Lynch's 1999, 1998 and 1997 operations is as follows (in thousands, except for per share amounts):
-------------------------------------------- 1999 1998 1997 -------------------------------------------- As reported: Net Income (loss) $ (1,583) $ 3,357 $ (2,878) Per share: Basic $ (1.12) $ 2.37 $ (2.03) Diluted (1.12) 2.37 (2.03) Pro forma: Net income (loss) $ (2,832) $ 3,326 $ (2,950) Per share: Basic $ (2.00) $ 2.35 $ (2.08) Diluted (2.00) 2.35 (2.08)
9. Shareholders' Equity The Board of Directors has authorized the purchase of up to 400,000 shares of Common Stock. Through December 31, 1999, 238,991 shares had been purchased at an average cost of $14.88 per share. In January 1994, an officer was granted stock options to purchase up to 24,516 shares of Lynch common stock at an exercise price of $23.125, the closing price on the date of grant. These options were exercised in January 1997 and shares were issued from Treasury. On February 1, 1996, the Company adopted a plan to provide a portion of the compensation for its directors in common shares of the Company. The amount of common stock is based upon the market price at the end of the previous year. Through December 31, 1999, 4,126 shares have been awarded under this program. On February 29, 1996, the Company adopted a Stock Appreciation Rights program for certain employees. To date, 43,000 of Stock Appreciation Rights ("SAR") have been granted at prices ranging from $63 to $85 per share (pre spin off prices). Upon the exercise of a SAR, the holder is entitled to receive an amount in cash equal to the amount by which the market value of the Company's common stock on the exercise date exceeds the grant price of the SAR. Effective September 30, 1998, the Company amended the SAR Program so that the SAR's became exercisable only if the market price for the Company's shares exceeds 200% of the SAR exercise price within five years from original grant date. This amendment eliminated the recording of the profit and loss effect of the SAR's for changes in the market price in the Company's common stock until it becomes probable that the SAR's will become exercisable. The net income (expense) relating to this program, prior to the time of the amendment, was $185,000 in income in 1998 and ($439,000) of expense in 1997. Subsequent to the spin off of Interactive, the Company, with the concurrence of the holders of all outstanding SAR units, terminated its SAR program for corporate management, including all outstanding units, thus eliminating possible future profit and loss and cash flow distortions associated with the progam. As a result of the termination, the Company recorded approximately $700,000 of related corporate expense in the fourth quarter. 10. Income Taxes The Company files consolidated federal income tax returns which include all subsidiaries including Interactive through the date of the spin off, but excluding Spinnaker for all periods. Deferred income taxes for 1999 and 1998 are provided for the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities. Cumulative temporary differences and carryforwards at December 31, 1999 and 1998 are as follows:
December 31, 1999 December 31, 1998 (In thousands) Deferred Tax Deferred Tax Asset Liability Asset Liability Inventory reserve ............ $ 1,493 -- $ 451 -- Fixed assets written up under Purchase accounting and Tax over book depreciation -- $ 6,782 -- $ 11,144 Discount on long-term debt ... -- -- -- (1,783) Basis difference in subsidiary and affiliate stock ....... -- 1,105 -- 1,123 Net operating losses of Subsidiaries ................. 850 -- 7,166 -- Other reserves and accruals .. 6,600 -- 1,622 -- Other ........................ -- (1,662) 2,475 1,231 ------- -------- -------- -------- Total deferred income taxes .. $ 8,943 $ 6,225 11,714 $ 11,715 ======== ======== ======== ========
Spinnaker has net operating loss carryforwards of approximately $2.2 million at December 31, 1999 which expire in 2018. The provision (benefit) for income taxes from continuing operations is summarized as follows:
(In Thousands) 1999 1998 1997 Current: Federal ..................................... $ (158) $ 2,048 $ 5,171 State and local ............................. -- 921 250 ------- ------- ------ Deferred: ...................................... (158) 2,969 5,421 ------- ------- ------ Federal ..................................... (2,386) (3,435) (5,069) State and local ............................. -- (942) (51) ------- ------- ------ (2,386) (4,377) (5,120) ------- ------- ------ $(2,544) $(1,408) $ 301 ======= ======= ======
A reconciliation of the provision (benefit) for income taxes from continuing operations and the amount computed by applying the statutory federal income tax rate to income before income taxes, minority interest and extraordinary item:
(In Thousands) 1999 1998 1997 Tax at statutory rate ....................... $(3,211) $ (757) $ 597 Increases (decreases): State and local taxes, net of federal benefit -- (288) 135 Amoritization of goodwill ................... 60 81 129 Operating losses of subsidiaries ............ 164 (546) (126) Additional tax provision... ................. 338 -- -- Other ....................................... 105 102 (434) ------ ------ ------ $(2,544) $(1,408) $ 301 ======= ======= =======
11. Employee Benefit Plans The Company, through its operating subsidiaries, has several and various employee retirement type plans including defined benefit, defined contribution, multi-employer, profit sharing, and 401 (k) plans. The following table sets forth the consolidated expenses for these plans (dollars in thousands):
(In Thousands) 1999 1998 1997 Defined Contribution $ 561 $ 643 $ 839 Defined Benefit .... 166 150 473 Multi-Employer ..... 121 80 173 ------ ------ ------ Total ........... $ 848 $ 873 $1,485
The Company's most significant benefit plans are maintained by Spinnaker's Coating business. Following are details of those plans: The net periodic pension cost for the year ended December 31, 1999 and 1998 included the following components:
1999 1999 1998 1998 ------------------------------------- Union Non-Union Union Non-Union ------------------------------------- Service Cost - benefits earned during the period $ 105 $ 137 $ 69 $ 100 Interest cost on projected benefit obligation .. 21 51 11 50 Expected return on assets ...................... (6) (9) -- -- Recognized (gains) or losses ................... 1 (13) -- -- ----- ----- ----- ----- Net periodic pension cost ...................... $ 121 $ 166 $ 80 $ 150 ----- ----- ----- -----
Theforegoing measurement of net periodic pension cost is based on the following assumptions: Weighted-average discount rate ... 8.00% 8.00% 7.50% 7.50% Weighted-average rate of compensation increase ...... N/A 4.00% N/A 4.00% Weighted-average expected long-term rate of return on plan 8.00% 8.00% 8.00% 8.00%
The following table sets forth the union and non-union plans' benefit obligation information as of December 31, 1999 and 1998:
1999 1999 1998 1998 ---------------------------------------- Union Non-Union Union Non-Union ----------------------------------------- (In Thousands) Benefit obligation at acquisition date ......... $ 288 $ 1,081 $ 186 $ 835 Service cost - benefits earned during the period 106 137 69 100 Interest cost on projected benefit obligation .. 21 51 11 50 Actuarial (gains) losses ....................... (44) (504) 22 96 Benefits paid .................................. (1) (2) -- -- ------- ------- ------- ------- Benefit obligation at end of year .............. $ 370 $ 763 $ 288 $ 1,081 ------- ------- ------- -------
There were no plan assets for the union and non-union plans as of December 31, 1999 and 1998. The following table sets forth the union and non-union plans' funded status as of December 31, 1999 and 1998:
1999 1999 1998 1998 ----------------------------------------- Union Non-Union Union Non-Union ---------------------------------------- (In thousands) Funded status .......................... $ (173) $ (481) $ (288) $(1,081) Unrecognized actuarial (gains) losses (25) (398) 22 96 ------- ------- ------- ------- Net amount recognized .................. $ (198) $ (879) $ (266) $ (985) ------- ------- ------- ------- Amounts recognized in the balance sheet: Net amount recognized .................. $ (198) $ (879) $ (266) $ (985) ------- ------- ------- -------
Spinnaker Coating has a defined contribution plan that covers substantially all of its employees. Under the plan, Spinnaker Coating can match, at its discretion, up to 50% of employee contributions not exceeding 8% of the employee's compensation. Amounts contributed to the plan by Spinnaker Coating are 20% vested each year for five years. On the acquisition date, employees of Spinnaker Coating who were previously employed by Kimberly-Clark Corporation received vesting rights based on the years of credited service with Kimberly-Clark Corporation. Spinnaker Coating recorded expense for its contributions under the plan of approximately $542,000, $559,000, and $442,000 in 1999, 1998 and 1997, respectively. 12. Commitments and Contingencies In the normal course of business subsidiaries of the Company are defendants in certain product liability, worker claims and other litigation in which the amounts being sought may exceed insurance coverage levels. The resolution of these matters is not expected to have a material effect on the Company's financial condition or operations. Future minimum rental payments under long-term non-cancelable operating leases are as follows at December 31, 1999 (in thousands): 2000-------------------------------------------------------- $ 278 2001-------------------------------------------------------- 256 2002-------------------------------------------------------- 256 2003-------------------------------------------------------- 283 2004-------------------------------------------------------- 281 Thereafter-------------------------------------------------- 200 ------- $1,554
Rent expense under operating leases were $1,222,000, $952,000 and $416,000 for the years ended December 31, 1999, 1998 and 1997, respectively. The Company leases certain property and equipment, including warehousing and sales and distribution equipment, under operating leases that extend from one to ten years. Certain of these leases have renewal options and escalation provisions. The Company is party to a lease for its corporate office for an annual payment of approximately $30,000 with an affiliate of its Chairman. 13. Segment Information The Company has two reportable business segments. The larger of the two is the manufacture and sale of adhesive backed label stock for labels and related applications. The other reportable segment is the manufacture and sale of frequency control devices (quartz crystals and oscillators). The Company is also engaged in the manufacture and sale of glass forming, impact milling and other equipment, and these results are combined and reported as Other Manufacturing. Each of the businesses is located domestically, and export sales were approximately $22.6 million in 1999, $21.2 million in 1998 and $26.2 million in 1997. For the years ended December 31, 1999, 1998 and 1997 one customer accounted for $18.3 million, $17.7 million, and $21.4 million, respectively, of the adhesive-backed label stock segment's net sales. The Company considers concentrations of credit risk to be minimal due to its diverse customer base. EBITDA (before corporate allocation) for operating segments is equal to operating profit before depreciation, amortization and allocated corporate expenses. EBITDA is presented because it is a widely accepted financial indicator of value and ability to incur and service debt. EBITDA is not a substitute for operating income or cash flows from operating activities in accordance with generally accepted accounting principles. Operating profit (loss) is equal to revenues less operating expenses, excluding unallocated general corporate expenses, interest and income taxes. The Company allocates a portion of its general corporate expenses to its operating segments. Such allocation was $ 300,000 per year during the years ended December 31, 1999, 1998 and 1997, respectively. Identifiable assets of each industry segment are the assets used by the segment in its operations excluding general corporate assets. General corporate assets are principally cash and cash equivalents, short-term investments and certain other investments and receivables.
Years ended December 31 1999 1998 1997 (In thousands) Revenues Adhesive-backed label stock .................. $ 155,112 $ 151,561 $ 106,787 Frequency control devices .................... 26,484 22,798 22,828 Other manufacturing .......................... 12,626 13,285 24,120 --------- --------- --------- Consolidated total ........................... $ 194,222 $ 187,644 $ 153,735 ========= ========= ========= EBITDA (before corporation allocation) Adhesive-backed label stock .................. $ 8,889 $ 12,010 $ 9,027 Frequency control devices .................... 2,640 2,073 2,199 Other manufacturing .......................... (1,188) (1,411) 1,206 Corporate manufacturing expenses ............. (2,681) (2,903) (2,112) --------- --------- --------- Total manufacturing .......................... 7,660 9,769 10,320 Corporate expenses, gross .................... (1,452) (530) (374) --------- --------- --------- Consolidated total ........................... $ 6,208 $ 9,239 $ 9,946 ========= ========= ========= Operating Profit Adhesive-backed label stock .................. $ 4,155 $ 8,104 $ 6,923 Frequency control devices .................... 1,800 1,428 1,610 Other manufacturing .......................... (1,821) (1,922) 850 Corporate manufacturing expenses ............. (2,894) (3,006) (2,279) --------- --------- --------- Total manufacturing .......................... 1,240 4,604 7,104 Unallocated corporate expense ................ (1,155) (530) (374) --------- --------- --------- Consolidated Total ........................... $ 85 $ 4,074 $ 6,730 ========= ========= ========= Depreciation and Amortization Adhesive-backed label stock .................. $ 4,785 $ 3,906 $ 2,104 Frequency control devices .................... 740 645 589 Other manufacturing .......................... 528 511 429 Corporate manufacturing expenses ............. 967 874 726 --------- --------- --------- Consolidated Total ........................... $ 7,020 $ 5,936 $ 3,848 ========= ========= ========= Capital expenditures Adhesive-backed label stock .................. $ 2,625 $ 2,219 $ 1,854 Frequency control devices .................... 804 878 688 Other manufacturing .......................... 366 200 689 --------- --------- --------- Consolidated Total ........................... $ 3,795 $ 3,297 $ 3,231 ========= ========= ========= Total Assets Adhesive-backed label stock .................. $ 105,674 $ 105,463 $ 47,188 Frequency control devices .................... 10,940 8,898 8,858 Other manufacturing .......................... 86,699 19,688 27,892 Discontinued Operations: Lynch Interactive ......................... -- 228,342 239,918 Industrial tape business .................. -- 110,256 95,582 General Corporate ............................ 7,879 7,353 4,198 --------- --------- --------- Consolidated Total ........................... $ 211,192 $ 480,000 $ 423,636 ========= ========= ========= Total operating profit for reportable segments $ 85 $ 4,074 $ 6,730 Other profit or loss: Investment income .......................... 2,354 199 305 Interest expense ........................... (11,882) (8,591) (5,189) Gain on sales of subsidiary stock ........... -- 2,090 (91) --------- --------- --------- Income (loss) from continuing operations before income taxes, minority interests and extraordinary item .................... $ (9,443) $ (2,228) $ 1,755 ========= ========= =========
14. Quarterly Results of Operations (unaudited) The following is a summary of the quarterly results of operations for the years ended December 31, 1999 and 1998 (in thousands, except per share amounts):
1999 Three Months Ended Mar. 31(a) June 30 Sep. 30 (b) Dec. 31 (b) Sales and revenues .................. $ 46,411 $ 47,363 $ 51,070 $ 49,378 Operating profit .................... (312) 701 1,013 (1,317) Income (loss) from continuing Operations ....................... (975) (500) (617) (2,160) Net income (loss) ................... (10,991) 427 7,892 1,089 Basic and diluted earnings per share: Income (loss) from continuing operations Net income (loss) ................... (0.69) (0.35) (0.44) (1.53) (7.75) 0.30 5.59 (.77) 1998 Three Months Ended Mar. 31 June 30 Sep. 30(c) Dec. 31 Sales and revenues .................. $ 39,505 $ 49,505 $ 49,824 $ 49,257 Operating profit (loss) ............. 1,242 1,575 1,663 (385) Income (loss) from continuing Operations ....................... (98) (358) 1,070 (3,507) Net income (loss) ................... (436) 1,324 2,149 320 Basic and diluted earnings per share: Income (loss) from continuing operations ....................... (0.06) (0.26) 0.76 (2.48) Net income (loss) ................... (0.30) 0.93 1.52 0.22 NOTE: a) Includes write down of PCS licenses of $15.4 million of Lynch Interactive Corporation b) Includes gain on sale of Industrial Tape Segment of Spinnaker of $10.4 million after income taxes, and minority interest. c) Includes gain on sale of subsidiary stock of $2,127.
15. Subsequent Events In March 2000 Lynch Systems completed a project specific line of credit totaling $7.1 million related to a contract to deliver equipment in 2000. Substantially all assets of Lynch Systems are pledged in support of the credit facility. In addition, the Company has guaranteed the full amount of the credit facility and has pledged $4 million of its Class A Common Stock of Spinnaker as additional collateral. In March, 2000 the Company completed the previously announced sale of 100,000 shares of its common stock to its Chairman at $30 per share, or $3 million. This transaction is subject to shareholder approval at the Company's 2000 annual meeting. These funds will be available for general corporate purposes. SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT LYNCH CORPORATION (PARENT COMPANY) CONDENSED BALANCE SHEETS
December 31 ------------------------- ASSETS 1999 1998 -------------------------- CURRENT ASSETS Cash and Cash Equivalents ....................... $ 1,154 $ 291 Marketable Securities and Short Term Investments 24 874 Deferred Income Taxes ...... ................... 412 140 Other Current Assets ........................... 81 40 ------- ------- 1,671 1,345 OFFICE EQUIPMENT - Net .............................. -- 52 OTHER ASSETS (Principally investments in and amounts due from consolidated subsidiaires)...... 16,643 72,729 ------- ------- TOTAL ASSETS ...................................... $18,314 $74,126 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITITES .............................. $ 2,110 $22,832 LONG TERM DEBT .................................... -- 8,623 DEFERRED INCOME TAXES ......... ................... -- 980 LONG TERM LIABILITIES ............................. 213 -- DEFERRED CHARGES .................................. -- 1,898 SHAREHOLDERS' EQUITY Common Stock 5,139 5,139 Other Shareholders' Equity 10,852 34,654 ------- ------- TOTAL SHAREHOLDERS' EQUITY ........................ $15,991 $39,793 ------- ------- Total Liabilities and Shareholders' Equity ........ $18,314 $74,126 ======= =======
See accompanying Notes to Condensed Financial Information CONDENSED FINANCIAL INFORMATION OF REGISTRANT LYNCH CORPORATION (PARENT COMPANY) CONDENSED STATEMENTS OF OPERATIONS
Years Ended December 31 ----------------------------------- 1999 1998 1997 ----------------------------------- Interest, Dividends & Gains on Sale of Marketable Securities $ 17 $ 128 $ 377 Interest & Other Income from Subsidiaries 23 35 35 ------- ------- ------- TOTAL INCOME ............................................... 40 163 412 Costs & Expenses: Unallocated Corporate Administrative Expense ............... 1,155 1,371 1,436 Interest Expense ........................................... 7 1,394 1,257 Interest Expense to Subsidiaries ........................... 23 830 741 ------- ------- ------- TOTAL COSTS AND EXPENSES.................................... 1,185 3,595 3,434 ------- ------- ------- LOSS BEFORE INCOME TAXES AND EQUITY IN NET (LOSS) OF SUBSIDIARIES ..................................... (1,145) (3,432) (3,022) Income Tax Benefit ......................................... 321 1,648 1,142 Equity in Net Income (Loss) of Subsidiaries ................ (759) 5,141 (998) NET INCOME (LOSS) .......................................... ($1,583) $ 3,357 ($2,878) ======= ======= =======
See accompanying Notes to Condensed Financial Information CONDENSED FINANCIAL INFORMATION OF REGISTRANT LYNCH CORPORATION (PARENT COMPANY) CONDENSED STATEMENTS OF CASH FLOW
Year Ended December 31 ----------------------------- 1999 1998 1997 --------- -------- ------- Cash provided from (used in) Operating Activities $ 405 $ 1,049 (25) ------- ------- ------- INVESTING ACTIVITIES: Investment in Lynch Manufacturing ................ 981 3,000 1,135 Investment and Advances to Brighton Communications -- -- (17) Investment in and advances to PCS Partnerships ... -- 3,692 (8,628) Other ............................................ -- (176) (94) ------- ------- ------- NET CASH PROVIDED FROM (USED IN) INVESTING ACTIVITIES .................................... 981 6,516 (7,604) ------- ------- ------- FINANCING ACTIVITIES: Net Borrowings ................................... -- (7,564) 7,179 Lines of Credit .................................. -- -- -- (Purchase) Sale of Treasury Stock ................ (523) -- 672 Other ............................................ -- -- -- ------- ------- ------- NET CASH (USED IN) PROVIDED FROM FINANCING ACTIVITIES .................................... (523) (7,564) 7,851 ------- ------- ------- TOTAL INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................................... 863 1 222 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 291 290 68 ------- ------- ------- CASH AND CASH EQUIVALENTS AT END OF YEAR ......... $ 1,154 $ 291 $ 290 ======= ======= =======
See accompanying Notes to Condensed Financial Information NOTES TO CONDENSED FINANCIAL STATEMENTS NOTE A - BASIS OF PRESENTATION In the parent company's financial statements, the Company's investment in subsidiaries is stated at cost plus equity in undistributed earnings of the subsidiaries. NOTE B - SPIN OFF OF LYNCH INTERACTIVE CORPORATION On August 12, 1999, the Board of directors approved a plan to distribute the stock of Lynch Interactive Corporation on a one for one basis to the shareholders of Lynch Corporation ("spin off"). Lynch completed the spin off of Lynch Interactive Corporation ("Interactive") on September 1, 1999, to stockholders of record on August 23, 1999. Pursuant to the spin off, each Lynch shareholder received one share of Interactive common stock for each share of Lynch owned. Lynch had received a private letter ruling from the Internal Revenue Service that the spin off would be tax free to Lynch shareholders. Interactive is listed on the American Stock Exchange under the symbol "LIC". NOTE C - DIVIDENDS FROM SUBSIDIARIES Cash dividends paid to Lynch Corporation from the Registrant's consolidated subsidiaries were $0 in 1999, $3,060,000 in 1998 and $1,195,000 in 1997. No other dividends were received from subsidiaries or investees. NOTE D - LONG-TERM DEBT At December 31, 1998 the Company had a note payable to a subsidiary with a principal amount of $6.0 million at a fixed interest rate of 6%, due 2001. Such note was transferred to Lynch Interactive in connection with the spin-off. NOTE E - SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR ADDITIONAL INFORMATION. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS LYNCH CORPORATION AND SUBSIDIARIES YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E ADDITIONS ADDITIONS BALANCE AT CHARGED TO BEGINNING CHARGED TO COSTS OTHER ACCOUNTS BALANCE AT END OF PERIOD AND EXPENSES DESCRIBE DEDUCTIONS OF PERIOD DESCRIBE (B) DESCRIPTION YEAR ENDED DECEMBER 31, 1999 ALLOWANCE FOR UNCOLLECTIBLE $ 395,000 $ 81,000 $ 0 $115,000 $361,000 YEAR ENDED DECEMBER 31, 1998 $910,000(A) ALLOWANCE FOR UNCOLLECTIBLE $1,448,000 $723,000 $ 0 $866,000 $395,000 YEAR ENDED DECEMBER 31, 1997 ALLOWANCE FOR UNCOLLECTIBLE $1,525,000 $742,000 $ 0 $819,000 $1,448,000 (A) ALLOCATION OF VALUATION ACCOUNT TO SEGMENTS SOLD OR SPUN OFF (B) UNCOLLECTIBLE ACCOUNTS WRITTEN OFF ARE NET OF RECOVERIES
LYNCH CORPORATION Pursuant to the requirements of Section 13 and 15 (d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this amendment to be signed on its behalf by the undersigned, thereunto duly authorized. By:s/LOUIS A. GUZZETTI - ---------------------- LOUIS A. GUZZETTI Chief Executive Officer (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this amendment has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Capacity Date * MARIO J. GABELLI Chairman of the Board of - ------------------ MARIO J. GABELLI Directors and Director April 20, 2000 s/LOUIS A. GUZZETTI Principal Executive Officer April 20, 2000 - ------------------- LOUIS A. GUZZETTI and Director * E. VAL CERUTTI Director April 20, 2000 - ---------------- E. VAL CERUTTI *AVRUM GRAY Director April 20, 2000 - ----------- AVRUM GRAY * RALPH R. PAPITTO Director April 20, 2000 - ------------------ RALPH R. PAPITTO s/ROBERT E. DOLAN Director April 20, 2000 - ------------------ ROBERT E. DOLAN s/ROGER J. DEXTER ROGER J. DEXTER (Principal Financial and Accounting Officer) April 20, 2000 *By:ROBERT A. HURWICH - -------------------- ROBERT A. HURWICH Attorney-in-fact for Messrs. Gabelli, Cerutti, Gray and Papitto
EXHIBIT INDEX The following exhibits are filed with this amendment for Form 10-K. Exhibit No. Description 23.1 Consent of Ernst & Young LLP 27.A Amended Financial Data Schedule EX-23 2 CONSENT OF EXPERT Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the use of our report dated March 28, 2000, included in the Annual Report on Form 10-K of Lynch Corporation for the year ended December 31, 1999, with respect to the consolidated financial statements, as amended, included in this Form 10-K/A. /s/ ERNST & YOUNG LLP Stamford, Connecticut April 19, 2000 EX-27.A 3 FDS --
5 This schedule contains summary information extracted from the Company's Finacial Statements as of December 31, 1999 and is qualified in its entirety by reference to such financial statements. 0000061004 Lynch Corporation 1000 U.S. Dollar 12-MOS DEC-31-1999 JAN-01-1998 DEC-31-1999 1 13,106 0 25,003 (361) 31,680 79,674 66,216 (22,137) 211,192 56,460 116,765 0 0 5,139 10,852 211,192 194,222 194,222 172,567 194,137 0 0 11,882 (9,528) (2,544) (4,252) (8,065) 303 0 (1,583) (1.12) (1.12)
-----END PRIVACY-ENHANCED MESSAGE-----