UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 2005
-----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _____________
COMMISSION FILE NUMBER: 1-106
LYNCH CORPORATION
-----------------
(Exact name of Registrant as Specified in Its Charter)
INDIANA 38-1799862
------- ----------
(State or other (I.R.S.
jurisdiction of Employer
Incorporation or Identification
Organization) No.)
140 GREENWICH AVE,
4TH FL,
GREENWICH,
CONNECTICUT 06830
----------- -----
(Address of Principal (Zip Code)
Executive Offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (203) 622-1150
--------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- -------------------------
Common Stock, American Stock Exchange
$0.01 Par Value
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Indicate by check mark if the Registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the Registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check 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]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
Indicate by check mark whether the Registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one): Large accelerated filer___ Accelerated filer___ Non-accelerated filer X
Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of voting and non-voting common equity held by
non-affiliates of the Registrant (based upon the closing price of the
Registrant's Common Stock on the American Stock Exchange on June 30, 2005 of
$8.30 per share) was $8.3 million. (In determining this figure, the Registrant
has assumed that all of the Registrant's directors and officers are affiliates.
This assumption should not be deemed a determination or an admission by the
Registrant that such individuals are, in fact, affiliates of the Registrant.
The number of outstanding shares of the registrant's common stock was
2,154,702 as of March 21, 2006.
DOCUMENTS INCORPORATED BY REFERENCE: Certain portions of the registrant's
definitive Proxy Statement for the 2006 Annual Meeting of Shareholders, which
will be filed with the Securities and Exchange Commission not later than May 1,
2006, are incorporated by reference in Part III of this Report.
================================================================================
ITEM 1. BUSINESS
Lynch Corporation (the "Company"), incorporated in 1928 under the laws of
the State of Indiana, is a diversified holding company with subsidiaries engaged
in manufacturing. The Company's executive offices are located at 140 Greenwich
Ave, 4th Floor, Greenwich, Connecticut 06830. Its telephone number is (203)
622-1150.
The Company has three principal operating subsidiaries, M-tron Industries,
Inc. ("Mtron"), Piezo Technology, Inc. ("PTI") and Lynch Systems, Inc. ("Lynch
Systems"). The combined operations of Mtron and PTI are referred to herein as
"Mtron/PTI."
The Company's business development strategy is to expand its existing
operations through internal growth and merger and acquisition opportunities. It
may also, from time to time, consider the acquisition of other assets or
businesses that are not related to its present businesses. As used herein, the
Company includes subsidiary corporations.
Mtron/PTI
OVERVIEW
Mtron/PTI, the result of the acquisition of PTI by Mtron effective
September 30, 2004, is a designer, manufacturer and marketer of custom designed
electronic components that are used primarily to control the frequency or timing
of signals in electronic circuits. Its devices, which are commonly called
frequency control devices, crystals, crystal oscillators or electronic filters,
are used extensively in infrastructure equipment for the telecommunications and
network equipment industries. Its devices are also used in electronic systems
for military applications, avionics, medical devices, instrumentation,
industrial devices and global positioning systems.
Mtron/PTI's frequency control devices consist of packaged quartz crystals,
crystal oscillators and electronic filters. Our products produce an electrical
signal that has the following attributes:
o accuracy -- the frequency of the signal does not change
significantly over a period of time;
o stability -- the frequency of the signal does not vary
significantly when our product is subjected to a range of
operating environments; and
o low electronic noise -- the signal does not add interfering
signals that can degrade the performance of electronic systems.
Mtron/PTI has more than 40 years of experience designing, manufacturing and
marketing crystal based frequency control products. Its customers rely on the
skills of Mtron/PTI's engineering and design team to help them solve frequency
control problems during all phases of their products' life cycles, including
product design, prototyping, manufacturing and subsequent product improvements.
SELECTED FINANCIAL INFORMATION
For financial reporting purposes, Mtron/PTI comprises the Company's
"frequency control devices" segment. For information about this segment's
revenues, profit or loss, and total assets for each of the last three fiscal
years, please see Note 12 "Segment Information" to the Company's Consolidated
Financial Statements.
Mtron/PTI'S OBJECTIVES
Mtron/PTI's intends to build on the strength of its core expertise in
packaged quartz crystal oscillator technologies and electronic filter
technologies to become the supplier of choice to original equipment
manufacturers that supply equipment with high-performance timing needs.
Mtron/PTI intends to increase its investment in technical resources,
including design and engineering personnel, to enable it to provide a higher
level of design and engineering support to its customers and potential
customers. It believes that technical participation with its original equipment
manufacturer customers in the early stages of their design process will lead to
Mtron/PTI's frequency control devices being designed into their products more
regularly.
Mtron/PTI has a long-standing relationship with offshore contract
manufacturers who have added capacity on its behalf. Mtron/PTI's near term
objective is to reduce the time it takes to manufacture its products, which will
result in better service to its customers.
Mtron/PTI intends to design, manufacture and sell devices that offer higher
frequencies or greater precision than its current products. It also plans to
expand its offering of integrated timing systems to offer complete timing
subsystems to its customers. It intends to achieve this through a combination of
focused research and development and strategic acquisitions, if they are
appropriate.
Mtron/PTI believes that it can significantly enhance its business
opportunities by acquiring technology, product portfolios and/or customer bases.
Some of these may offer immediate sales opportunities, while others may meet
longer term objectives. It plans to pursue these opportunities by making
strategic acquisitions or by acquiring or licensing technology.
PRODUCTS
Mtron/PTI's products are high quality, reliable, technically advanced
frequency control devices, including packaged quartz crystals, oscillators
incorporating those crystals and electronic filter products. The October 2002
acquisition of "Champion" provided Mtron/PTI an entry to the timing modules
market. The September 2004 acquisition of PTI provided Mtron/PTI with its
families of very high precision oven-controlled crystal oscillators and its
electronic filter products.
Mtron/PTI designs and produces a wide range of packaged quartz crystals,
quartz crystal based oscillators and electronic filter products. There is a
variety of features in its product family. The Packaged Crystal is a single
crystal in a hermetically sealed package and is used by electronic equipment
manufacturers, along with their own electronic circuitry, to build oscillators
for frequency control in their electronic devices. The Clock Oscillator is the
simplest of its oscillators. It is a self-contained package with a crystal and
electronic circuitry that is used as a subsystem by electronic equipment
manufacturers to provide frequency control for their devices. The Voltage
Controlled Crystal Oscillator (VCXO) is a variable frequency oscillator whose
frequency can be changed by varying the control voltage to the oscillator. The
Temperature Compensated Crystal Oscillator (TCXO) is a stable oscillator
designed for use over a range of temperatures. Oven-Controlled Crystal
Oscillators are designed to produce a much higher level of stability over a wide
range of operating conditions with very low phase noise. The Electronic Filters
use either crystal technology or precise manufacturing of inductive/capacitive
circuits to provide filters with carefully defined capabilities to filter out
unwanted portions of a timing signal. This variety of features in Mtron/PTI's
product family offers the designers at electronic equipment manufacturers a
range of options as they create the needed performance in their products.
Currently, Mtron/PTI's oscillator products operate at frequencies ranging
from 2 kilohertz to over 2.5 gigahertz, which constitute most of the oscillator
frequencies that are now in use in its target markets. It offers crystal and
inductive/capacitive filters with central frequencies from a Direct Current to
15 gigahertz. However, many of its products, through amplification or other
means, are ultimately incorporated into products that operate at higher
frequencies.
Mtron/PTI's products are employed in numerous applications within the
communications industry, including computer and telephone network switches,
high-speed gigabit Ethernet, modems, wireless transmitters/receivers,
multiplexers, data recovery/regeneration devices, fiber channel networks,
repeaters, data transceivers, line interface devices and base station
controllers. Its products are incorporated into end products that serve all
elements of the communications industry.
The crystals, oscillators and filters intended for non-communications
applications are found in military applications for communications and
armaments. Avionics applications include ground and flight control systems.
Industrial applications are in security systems, metering systems, electronic
test instruments and industrial control systems. Mtron/PTI's products are also
2
used in medical instrumentation applications, as well as in various computer
peripheral equipment such as storage devices, printers, modems, monitors, video
cards and sound cards.
Mtron/PTI's timing module, an electronic subsystem, is a pre-assembled
circuit that integrates several different functions into a small, single,
self-contained module for control of timing in a circuit. Today, timing modules
are frequently used for the synchronization of timing signals in digital
circuits, particularly in wireless and optical carrier network systems.
MANUFACTURING
Mtron/PTI has manufacturing facilities in Yankton, South Dakota, Orlando,
Florida and Noida, India. It has established long-term relationships with
several contract manufacturers in Asia. Approximately 14% of Mtron/PTI's
revenues in 2005 were attributable to one such contract manufacturer located in
both Korea and China. While Mtron/PTI does not have written long-term agreements
with this contract manufacturer, Mtron/PTI believes that it occasionally
receives preferential treatment on production scheduling matters. Mtron/PTI
maintains a rigorous quality control system and is an ISO 9001/2000 qualified
manufacturer. Mtron/PTI's Hong Kong subsidiary (Mtron Industries, Limited) does
not manufacture, but acts as a buying agent, regional warehouse, quality control
and sales representative for its parent company.
RESEARCH AND DEVELOPMENT
At December 31, 2005, Mtron/PTI employed 30 engineers and technicians
primarily in South Dakota and Florida who devote most of their time to research
and development. Its research and development expense was approximately
$2,408,000, $1,089,000 and $600,000 in 2005, 2004 and 2003, respectively.
Mtron/PTI expects to increase its spending on research and development by up to
15% during 2006.
CUSTOMERS
Mtron/PTI markets and sells its frequency control devices primarily to:
o original equipment manufacturers of communications, networking,
military, avionics, instrumentation and medical equipment;
o contract manufacturers for original equipment manufacturers; and
o distributors who sell to original equipment manufacturers and
contract manufacturers.
In 2005, an electronics manufacturing services company accounted for
approximately 14% of Mtron/PTI's revenues, compared to approximately 18% and 12%
for Mtron/PTI's largest customer in 2004 and 2003, respectively. No other
customer accounted for more than 10% of its 2005 revenues. Revenues from its ten
largest customers accounted for approximately 63% of revenues in 2005, compared
to approximately 48% and 40% of revenues for 2004 and 2003, respectively.
DOMESTIC REVENUES
Mtron/PTI's domestic revenues were $19,078,000, $12,096,000 and $7,282,000
for 2005, 2004 and 2003, respectively.
INTERNATIONAL REVENUES
Mtron/PTI's international revenues were $15,973,000, $11,317,000 and
$7,901,000 for 2005, 2004 and 2003, representing approximately 46%, 48% and 52%
of its revenues for 2005, 2004 and 2003, respectively. In 2005, these revenues
included approximately 9% from customers in Canada, 24% from customers in Asia,
7% from customers in Western Europe and 5% from customers in Mexico. Mtron/PTI
has increased its international sales efforts by adding distributors and
manufacturers' representatives in Western Europe and Asia. The Company avoids
currency exchange risk by transacting substantially all international revenues
in United States dollars.
3
BACKLOG
Mtron/PTI had backlog orders of $8,906,000 at December 31, 2005 compared to
$7,647,000 at December 31, 2004. Mtron/PTI's backlog may not be indicative of
future revenues, because of its customers' ability to cancel orders.
COMPETITION
Frequency control devices are sold in a highly competitive industry. There
are numerous domestic and international manufacturers who are capable of
providing custom designed quartz crystals, oscillators and electronic filters
comparable in quality and performance to Mtron/PTI's products. Competitors
include Vectron International (a division of Dover Corporation), CTS
Corporation, K&L (a division of Dover Corporation) and Saronix (a division of
Pericom Semiconductor Corporation). Mtron/PTI does not operate in the same
markets as high volume manufacturers of standard products; rather it focuses on
manufacturing lower volumes of more precise, custom designed frequency control
devices. Many of its competitors and potential competitors have substantially
greater financial, engineering, manufacturing and marketing resources than it
does. Mtron/PTI seeks to manufacture custom designed, high performance crystals
and oscillators, which it believes it can sell competitively based upon
performance, quality, order response time and a high level of engineering
support.
INTELLECTUAL PROPERTY
Mtron/PTI has no patents, trademarks or licenses that are considered to be
important to Mtron/PTI's business or operations. Rather, Mtron/PTI believes that
its technological position depends primarily on the technical competence and
creative ability of its engineering and technical staff in areas of product
design and manufacturing processes as well as proprietary know-how and
information.
LYNCH SYSTEMS
OVERVIEW
Lynch Systems designs, develops, manufactures and markets a broad range of
manufacturing equipment for the electronic display and consumer glass
industries. Lynch Systems also produces replacement parts for various types of
packaging and glass container-making machines that Lynch Systems does not
manufacture. Lynch Systems is concentrating its efforts on developing its glass
forming machinery business segment. While Lynch Systems' cathode-ray tube
business segment remains an important component of its business, Lynch Systems
anticipates declining demand for products based on such technology.
SELECTED FINANCIAL INFORMATION
For financial reporting purposes, Lynch Systems comprises the Company's
"glass manufacturing equipment" segment. For information about this segment's
revenues, profit or loss, and total assets for each of the last three fiscal
years, please see Note 12 "Segment Information" to the Company's Consolidated
Financial Statements.
LYNCH SYSTEMS OBJECTIVES
Lynch Systems expects to continue to build on its name recognition and
reputation as one of the world's leading manufacturers of glass forming
machinery. Lynch Systems is the oldest glass-forming supplier to the consumer
(daily use) glass industry. Lynch Systems is the only independent supplier in
the CRT (cathode ray tube) glass forming field and it is Lynch Systems'
intention to use this strength to form closer partnerships with its customers in
their pursuit of innovative glass making machinery. In addition, Lynch Systems
will use its expertise to provide technical assistance to other glass product
manufacturers.
Lynch Systems' long term intentions are to monitor the market direction and
to be at the forefront of technology in order to respond to market demand for
new and innovative types of machinery needed to produce glass. Lynch Systems
anticipates that it will continue to research and develop state-of-the-art
4
machinery within its core competence, and also to seek new markets, such as
container ware, where its experience and proven success can be utilized to
develop new products and increase its growth.
Within the consumer glass industry, Lynch has defined the market into three
distinct groups having potential for our equipment as follows: 1) customers with
growth potential (sales driven), 2) customers in a "stagnant" market (cost
driven) and 3) new customer base (i.e. container market).
Lynch Systems is currently developing and marketing products to appeal to
these three groups, which include a new low-cost feeder and shear; a new machine
designed to produce press and blow glass articles with an in-line modular
concept; and gob weight controls and inspection systems.
PRODUCTS AND MANUFACTURING
Lynch Systems manufactures and installs forming equipment that sizes, cuts,
and forms tableware such as glass tumblers, plates, cups, saucers, pitchers,
architectural glass block, industrial lighting, commercial optical glass and
automobile lenses. Lynch Systems also manufactures glass-forming presses and
electronic controls to provide high-speed automated systems to form different
sizes of face panels and CRT display tubes for television screens and computer
monitors, including presses to build large screen televisions for the HDTV (high
definition television) market. Additionally, Lynch Systems manufactures and
installs, electronic controls and retrofit systems for CRT display and consumer
glass presses.
Lynch Systems' worldwide customers require capital equipment that produces
a wide variety of Tableware products to remain competitive. In support of this
market demand, Lynch Systems has invested in Research & Development (R&D)
programs to manufacture new lines of capital equipment such as Stretch Machines
for one-piece Stemware, Firepolishers for high quality Tableware and Spinning
Machines for high speed, high quality Dishware. The production of glassware
entails the use of machines, which heat glass and, using great pressure, form an
item by pressing it into a desired shape. Because of the high cost of bringing
the machine and materials up to temperature, a machine for producing glassware
must be capable of running continuously.
To further expand Lynch Systems' Tableware product lines, additional
product lines have been acquired through royalty partnerships with leading
industry concerns. In 1999, Lynch Systems acquired the H-28 Press and Blow
machine from Emhart Glass SA. This high production machine produces both round
and geometric design Tumblers and is now marketed by Lynch Systems as the LH-28
with numerous Electronic Control improvements. In accordance with the terms of
the agreement, Lynch Systems is obligated to pay Emhart a royalty of 13% on
parts sales up to $2,000,000 a year, a 5% royalty rate on all parts sales in
excess of $2,000,000, and 5% on all machine sales through 2008. In 2000, the
Eldred product line of Burnoff Machines, used to fire finish the rims of the
H-28 Tumblers, and four-color Decorating Machines were acquired by Lynch
Systems. In accordance with the terms of the agreement, Lynch Systems is
obligated to pay Eldred a royalty of 10% on sales up to $300,000 per year and 8%
royalty on sales over $300,000 per year until 2010. All Tableware capital
equipment requires moulds in the production of any article. In 2002, agreement
was reached with Merkad Glassware Mould, Ltd., a producer of high quality
moulds, to represent and distribute moulds throughout North and South America.
Lynch Systems has no contractual obligations to Merkad.
RESEARCH AND DEVELOPMENT
Research and development expense was $97,000, $104,000 and $180,000 in
2005, 2004 and 2003, respectively. Lynch Systems expects to increase its
spending on research and development by up to 50% during 2006.
CUSTOMERS
Lynch Systems has historically had a small number of customers. One
customer (though not the same one in each year) accounted for 46%, 36% and 27%
of Lynch Systems' revenues for 2005, 2004 and 2003, respectively.
5
DOMESTIC REVENUES
Lynch Systems' domestic revenues were $1,992,000, $1,114,000 and $3,677,000
for 2005, 2004 and 2003, respectively.
INTERNATIONAL REVENUES
Lynch Systems' international revenues were $9,140,000, $9,307,000 and
$9,109,000 for 2005, 2004 and 2003, respectively, representing approximately
82%, 89% and 71% of its revenues for those years. International revenues in the
past three years mainly derived from customers in Indonesia, China, South Korea,
Lithuania and the Netherlands. The profitability of international revenues is
approximately equivalent to that of domestic revenues. As many international
orders require partial advance deposits, with the balance often secured by
irrevocable letters of credit from banks in the foreign country, the Company
believes that most of the credit risks commonly associated with doing business
in international markets are minimized. The Company avoids currency exchange
risk by transacting substantially all international sales in United States
dollars.
BACKLOG
Lynch Systems had an order backlog of $4,954,000 at December 31, 2005,
compared to $9,927,000 at December 31, 2004. Backlog decreased due to shipment
of large CRT machines in 2005. Most of Lynch Systems' $4,954,000 backlog as of
December 31, 2005 is scheduled to be delivered in 2006. Lynch Systems includes
as backlog only those orders that are subject to written contract or written
purchase orders.
COMPETITION
Lynch Systems believes that in the worldwide press ware market it is one of
the largest suppliers of consumer ware forming machines to glass companies that
do not manufacture their own press ware machines. Competition is based on
service, performance and technology. Competitors include various companies in
Italy, Japan, Korea and Germany. Several of the largest domestic and
international producers of glass press ware frequently build their own
glass-forming machines and produce spare parts in-house.
RAW MATERIALS
Raw materials are generally available to Lynch Systems in adequate supply
from a number of suppliers. The price of steel, a major component of glass
forming machinery, has increased due to high demand. Lynch Systems has been
required to absorb a portion of that price increase with little ability to pass
price increases along to our customers.
INTELLECTUAL PROPERTY
Lynch Systems owns patents and proprietary know-how that are important to
its business and the maintenance of its competitive position. Its most important
patent is for a rotary glass-molding press with cushioned trunnion mounted
hydraulic drive, expiring October, 2012.
----------------------------------------------
EMPLOYEES
As of December 31, 2005, the Company employed 355 people, including 6 in
Hong Kong, 2 in Germany and 9 in India. None of its employees is represented by
a labor union and the Company considers its employee relations to be good.
SPINNAKER INDUSTRIES, INC.
Prior to September 30, 2001, the Company owned 48% and 60%, respectively,
of the equity and voting power of Spinnaker Industries, Inc. ("Spinnaker").
Under accounting principles generally accepted in the United States, the Company
consolidated the results of Spinnaker and was required to record all of the
6
losses of Spinnaker. On September 26, 2001, the Company made a charitable
disposition of 430,000 shares, as a result of which: (a) the Company's equity
interest and voting power in Spinnaker were reduced to 41.8% and 49.5%,
respectively, (b) the Company deconsolidated Spinnaker for financial reporting
purposes, effective September 30, 2001, (c) the Company recorded a non-cash gain
of $27,406,000 on September 30, 2001, (d) from September 30, 2001 until
September 23, 2002, the Company accounted for its ownership of Spinnaker using
the equity method of accounting and (e) the Company did not record any
additional losses from Spinnaker, as it had no obligation to further fund such
losses.
On September 23, 2002, the Company sold its remaining interest in Spinnaker
to an independent party for nominal consideration, because the Company
determined that the Spinnaker shares had no value as a result of Spinnaker's
ongoing reorganization under Chapter 11 of the Bankruptcy Code. As a result of
this transfer, the Company recorded a $19,420,000 non-cash gain and consequently
an increase in shareholders' equity of $19,420,000 in the third quarter of 2002.
This action increased the Company's total shareholders' equity of the Company to
approximately $11,644,000 at September 30, 2002 from a deficit of $7,615,000 on
June 30, 2002.
ENVIRONMENTAL
The European Union recently issued its Restriction of Hazardous Substances
Directive (the "RHSD"). Mtron/PTI has began to make appropriate adjustments in
its materials and manufacturing, and expects to be fully compliant within the
time frame provided. As a result of the RHSD, Mtron/PTI has experienced
increased costs, mainly in the form of managing the transition.
The capital expenditures, earnings and competitive position of the Company
have not been materially affected to date by compliance with current federal,
state, and local laws and regulations relating to the protection of the
environment; however, the Company cannot predict the effect of future laws and
regulations. The Company has not experienced difficulties relative to fuel or
energy shortages.
SEASONALITY
No portion of the business of the Company is regarded as seasonal.
CUSTOMERS
In 2005, the largest single customer accounted for 11.2% of consolidated
revenues, while the next largest customer represented 11.0%. In 2004, the
largest single customer accounted for 12.2% of consolidated revenues, while the
next largest customer represented 10.9%. In 2003, the largest single customer
accounted for 12% of consolidated revenues, while the next largest customer
represented 10%.
LONG-LIVED ASSETS
Long-lived assets, including intangible assets subject to amortization, are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount thereof may not be recoverable. Management assesses the
recoverability of the cost of the assets based on a review of projected
undiscounted cash flows. In the event an impairment loss is identified, it is
recognized based on the amount by which the carrying value exceeds the estimated
fair value of the long-lived asset. If an asset is held for sale, management
reviews its estimated fair value less cost to sell. Fair value is determined
using pertinent market information, including appraisals or broker's estimates,
and/or projected discounted cash flows.
EXECUTIVE OFFICERS OF THE COMPANY
Pursuant to General Instruction G (3) of Form 10-K, the following list of
executive officers of the Company is included in Part I of this Annual Report on
Form 10-K in lieu of being included in the Proxy Statement for the 2006 Annual
Meeting of Shareholders. Such list sets forth the names and ages of all
executive officers of the Company indicating all positions and offices with the
Company held by each such person and each such person's principal occupations or
employment during the past five years.
7
NAME OFFICES AND POSITIONS HELD AGE
---- -------------------------- ---
Marc Gabelli............... Chairman (September 2004 to present) and Director (May 2003 to May 2004) of 38
Lynch Corporation; Managing director (1996 to 2004) and President (2004 to
present) of Gabelli Group Capital Partners, Inc., the parent company of Gabelli
Asset Management, Inc., a private corporation which makes investments for
its own account; President of Gemini Capital Management LLC; President of
Venator Merchant Fund, LP.
John C. Ferrara............ President and Chief Executive Officer (October 2004 to present) of Lynch 54
Corporation; Private investor from March 2002 to present; President and Chief
Executive Officer (2001 to March 2002) and Chief Financial Officer (1999 to
2001) of Space Holding Corporation, a private multimedia company dedicated to
space, science and technology; Executive Vice President and Chief Financial
Officer (1998 to 1999) of Golden Books Family Entertainment, Inc., a NASDAQ
listed publisher, licenser and marketer of entertainment products; Vice
President and Chief Financial Officer (1989 to 1997) of Renaissance
Communications Corp., a NYSE listed owner and operator of television
stations; Director of Gabelli Asset Management Inc. and Lynch Interactive
Corporation.
Eugene Hynes............... Vice President of Finance (September 2004 to present) of Lynch Corporation; 40
Vice President and Controller of Space Holding Corporation (1999 to September
2004); Manager Financial Planning and Analysis of Golden Books Family
Entertainment, Inc. (1998-1999).
The executive officers of the Company are elected annually by the Board of
Directors at its organizational meeting and hold office until the organizational
meeting in the next year and until their respective successors are elected and
qualify.
ITEM 1A. RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE INVESTING IN
OUR PUBLICLY TRADED SECURITY. THE RISKS DESCRIBED BELOW ARE NOT THE ONLY ONES
FACING US. ADDITIONAL RISKS NOT CURRENTLY KNOWN TO US OR THAT WE CURRENTLY
BELIEVE ARE IMMATERIAL ALSO MAY IMPAIR OUR BUSINESS OPERATIONS AND OUR
LIQUIDITY.
WE HAVE INCURRED OPERATING LOSSES IN TWO OF THE PAST THREE YEARS AND FACE
UNCERTAINTY IN OUR ABILITY TO SUSTAIN OPERATING PROFITS IN THE FUTURE.
We have incurred operating losses in two of the past three years. We
suffered operating losses of $2,888,000 and $832,000 in 2004 and 2003,
respectively. While we achieved an operating profit of $1,178,000 in 2005, we
are uncertain whether we will be able to sustain operating profits in the
future.
IF WE ARE UNABLE TO SECURE NECESSARY FINANCING, WE MAY NOT BE ABLE TO FUND
OUR OPERATIONS OR STRATEGIC GROWTH.
In order to achieve our strategic business objectives, we may be required
to seek additional financing. We may be unable to renew our existing credit
facilities or obtain new financing on acceptable terms, or at all. Under certain
of our existing credit facilities, we are required to obtain the lenders'
consent for most additional debt financing and to comply with other covenants,
including specific financial ratios. For example, we may require further capital
to continue to develop our technology and infrastructure and for working capital
purposes. In addition, future acquisitions would likely require additional
equity and/or debt financing. Our failure to secure additional financing could
have a material adverse effect on our continued development or growth.
8
AS A HOLDING COMPANY, WE DEPEND ON THE OPERATIONS OF OUR SUBSIDIARIES TO
MEET OUR OBLIGATIONS.
We are a holding company that transacts all of our business through
operating subsidiaries. Our primary assets are the shares of our operating
subsidiaries. Our ability to meet our operating requirements and to make other
payments depends on the surplus and earnings of our subsidiaries and their
ability to pay dividends or to advance or repay funds. Payments of dividends and
advances and repayments of inter-company debt by our subsidiaries are restricted
by our credit agreements.
WE MAY MAKE ACQUISITIONS THAT ARE NOT SUCCESSFUL OR FAIL TO PROPERLY
INTEGRATE ACQUIRED BUSINESSES INTO OUR OPERATIONS.
We intend to explore opportunities to buy other businesses or technologies
that could complement, enhance or expand our current business or product lines
or that might otherwise offer us growth opportunities. We may have difficulty
finding such opportunities or, if we do identify such opportunities, we may not
be able to complete such transactions for reasons including a failure to secure
necessary financing.
Any transactions that we are able to identify and complete may involve a
number of risks, including:
o the diversion of our management's attention from our existing
business to integrate the operations and personnel of the
acquired or combined business or joint venture;
o possible adverse effects on our operating results during the
integration process;
o substantial acquisition related expenses, which would reduce our
net income in future years;
o the loss of key employees and customers as a result of changes in
management; and
o our possible inability to achieve the intended objectives of the
transaction.
In addition, we may not be able to successfully or profitably integrate,
operate, maintain and manage our newly acquired operations or employees. We may
not be able to maintain uniform standards, controls, procedures and policies,
and this may lead to operational inefficiencies.
YOUR ABILITY TO INFLUENCE CORPORATE DECISIONS MAY BE LIMITED BECAUSE OUR
PRINCIPAL SHAREHOLDERS OWN IN THE AGGREGATE 41% OF OUR COMMON STOCK.
Our principal shareholders currently own in the aggregate approximately 41%
of our outstanding common stock. These shareholders may be able to determine who
will be elected to our board of directors and to control substantially all
matters requiring approval by our shareholders, including mergers, sales of
assets and approval of other significant corporate transactions, in a manner
with which you may not agree or that may not be in your best interest. This
concentration of stock ownership may adversely affect the trading price for our
common stock because investors often perceive disadvantages in owning stock in
companies with controlling shareholders.
PROVISIONS IN OUR CHARTER DOCUMENTS AND UNDER INDIANA LAW MAY PREVENT OR
DELAY A CHANGE OF CONTROL OF US AND COULD ALSO LIMIT THE MARKET PRICE OF OUR
COMMON SHARES.
Provisions of our certificate of incorporation and bylaws, as well as
provisions of Indiana corporate law, may discourage, delay or prevent a merger,
acquisition or other change in control of our company, even if such a change in
control would be beneficial to our shareholders. These provisions may also
prevent or frustrate attempts by our shareholders to replace or remove our
management. These provisions include those:
o prohibiting our shareholders from fixing the number of our
directors;
o requiring advance notice for shareholder proposals and
nominations; and
o prohibiting shareholders from acting by written consent, unless
unanimous.
We are subject to certain provisions of the Indiana Business Corporation
Law, or IBCL, that limit business combination transactions with 10% shareholders
during the first five years of their ownership, absent approval of our board of
directors. The IBCL also contains control share acquisition provisions that
limit the ability of certain shareholders to vote their shares unless their
control share acquisition was approved in advance by shareholders. These
9
provisions and other similar provisions make it more difficult for shareholders
or potential acquirers to acquire us without negotiation and could limit the
price that investors are willing to pay in the future for our common shares.
COMPLIANCE WITH CHANGING REGULATION OF CORPORATE GOVERNANCE AND PUBLIC
DISCLOSURE WILL EITHER REQUIRE US TO INCUR ADDITIONAL EXPENSES OR CEASE TO BE A
REPORTING COMPANY.
Keeping abreast of, and in compliance with, changing laws, regulations and
standards relating to corporate governance and public disclosure, including the
Sarbanes-Oxley Act of 2002, new SEC regulations and American Stock Exchange
rules, will require an increased amount of management attention and external
resources. We would be required to invest additional resources to comply with
evolving standards, which would result in increased general and administrative
expenses and a diversion of management time and attention from
revenue-generating activities to compliance activities.
Our Board of Directors may determine that it is in the best interests of
shareholders to eliminate or reduce such expense by ceasing to be a reporting
company for purposes of the Securities Exchange Act of 1934, as amended. One
commonly used method, subject to shareholder approval, is to effect a reverse
share split to reduce the number of shareholders to fewer than 300, permitting
termination of registration. Under this method, shareholders who own less than
one whole common share following the reverse split would cease to be
shareholders and would receive a cash payment for their fractional shares. After
a reverse split, there might be no established trading market for our common
shares, although we expect that our common shares may then be quoted on the
"pink sheets."
WE MAY BE EXPOSED TO LIABILITY AS A RESULT OF BEING NAMED AS A DEFENDANT IN
A LAWSUIT BROUGHT UNDER THE SO-CALLED "QUI TAM" PROVISIONS OF THE FEDERAL FALSE
CLAIMS ACT.
The Company, Lynch Interactive Corporation, which was formed via a tax-free
spin-off from Lynch Corporation on September 1, 1999 ("Lynch Interactive") and
various other parties are defendants in a lawsuit brought under the so-called
"qui tam" provisions of the federal False Claims Act in the United States
District Court for the District of Columbia. The main allegation in the case is
that the defendants participated in the creation of "sham" bidding entities that
allegedly defrauded the U.S. Treasury Department by improperly participating in
Federal Communications Commission spectrum auctions restricted to small
businesses, and obtained bidding credits in other spectrum auctions allocated to
"small" and "very small" businesses. The lawsuit seeks to recover an unspecified
amount of damages, which amount would be automatically tripled under the
statute. Although Lynch Interactive is contractually bound to indemnify us for
any losses or damages we may incur as a result of this lawsuit, Lynch
Interactive may lack the capital resources to do so. As a result, we could be
held liable and forced to pay a significant amount of damages without recourse.
WE DO NOT ANTICIPATE PAYING CASH DIVIDENDS ON OUR COMMON SHARES IN THE
FORESEEABLE FUTURE.
We anticipate that all of our earnings will be retained for the development
of our business. The Board of Directors has adopted a policy of not paying cash
dividends on our common shares. The Company also has restrictions under our debt
agreements which limit our ability to pay dividends. We do not anticipate paying
cash dividends on our common shares in the foreseeable future.
THERE IS A LIMITED MARKET FOR OUR COMMON SHARES. OUR SHARE PRICE IS LIKELY
TO BE HIGHLY VOLATILE AND COULD DROP UNEXPECTEDLY.
There is a limited public market for our common shares, and we cannot
assure you that an active trading market will develop. As a result of low
trading volume in our common shares, the purchase or sale of a relatively small
number of shares could result in significant share price fluctuations. Our share
price may fluctuate significantly in response to a number of factors, including
the following, several of which are beyond our control:
o changes in financial estimates or investment recommendations by
securities analysts relating to our shares;
10
o loss of a major customer;
o announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments; and
o changes in key personnel.
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. We could be the target of similar litigation in the future.
Securities litigation, regardless of merit or ultimate outcome, would likely
cause us to incur substantial costs, divert management's attention and
resources, harm our reputation in the industry and the securities markets and
reduce our profitability.
SECURITIES ANALYSTS MAY NOT INITIATE COVERAGE OF OUR COMMON SHARES OR MAY
ISSUE NEGATIVE REPORTS, AND THIS MAY HAVE A NEGATIVE IMPACT ON THE MARKET PRICE
OF OUR COMMON SHARES.
We cannot assure you that securities analysts will initiate coverage and
publish research reports on us. It is difficult for companies with smaller
market capitalizations, such as us, to attract independent financial analysts
who will cover our common shares. If securities analysts do not, this lack of
research coverage may adversely affect the market price of our common shares.
IF WE ARE UNABLE TO INTRODUCE INNOVATIVE PRODUCTS, DEMAND FOR OUR PRODUCTS
MAY DECREASE.
Our future operating results are dependent on our ability to continually
develop, introduce and market innovative products, to modify existing products,
to respond to technological change and to customize some of our products to meet
customer requirements. There are numerous risks inherent in this process,
including the risks that we will be unable to anticipate the direction of
technological change or that we will be unable to develop and market new
products and applications in a timely or cost-effective manner to satisfy
customer demand.
OUR OPERATING RESULTS AND FINANCIAL CONDITION COULD BE MATERIALLY ADVERSELY
AFFECTED BY ECONOMIC, POLITICAL, HEALTH, REGULATORY AND OTHER FACTORS EXISTING
IN FOREIGN COUNTRIES IN WHICH WE OPERATE.
As we have significant international operations, our operating results and
financial condition could be materially adversely affected by economic,
political, health, regulatory and other factors existing in foreign countries in
which we operate. Our international operations are subject to inherent risks,
which may materially adversely affect us, including:
o political and economic instability in countries in which our
products are manufactured and sold;
o expropriation or the imposition of government controls;
o sanctions or restrictions on trade imposed by the United States
government;
o export license requirements;
o trade restrictions;
o currency controls or fluctuations in exchange rates;
o high levels of inflation or deflation;
o greater difficulty in collecting our accounts receivable and
longer payment cycles;
o changes in labor conditions and difficulties in staffing and
managing our international operations; and
o limitations on insurance coverage against geopolitical risks,
natural disasters and business operations.
In addition, these same factors may also place us at a competitive
disadvantage when compared to some of our foreign competitors. In response to
competitive pressures and customer requirements, we may further expand
internationally at lower cost locations. If we expand into these locations, we
will be required to incur additional capital expenditures.
11
OUR BUSINESSES ARE CYCLICAL. A DECLINE IN DEMAND IN THE ELECTRONIC
COMPONENT AND GLASS COMPONENT INDUSTRIES MAY RESULT IN ORDER CANCELLATIONS AND
DEFERRALS AND LOWER AVERAGE SELLING PRICES FOR OUR PRODUCTS.
Our subsidiaries sell to industries that are subject to cyclical economic
changes. The electronic component and glass component industries in general, and
specifically the Company, could experience a decline in product demand on a
global basis, resulting in order cancellations and deferrals and lower average
selling prices. A slowing of growth in the demand for components used by
telecommunications infrastructure manufacturers and newer technologies
introduced in the glass display industry could lead to a decline. If a slowdown
occurs, it may continue and may become more pronounced.
OUR MARKETS ARE HIGHLY COMPETITIVE, AND WE MAY LOSE BUSINESS TO LARGER AND
BETTER-FINANCED COMPETITORS.
Our markets are highly competitive worldwide, with low transportation costs
and few import barriers. We compete principally on the basis of product quality
and reliability, availability, customer service, technological innovation,
timely delivery and price. All of the industries in which we compete have become
increasingly concentrated and globalized in recent years. Our major competitors,
some of which are larger than us, and potential competitors have substantially
greater financial resources and more extensive engineering, manufacturing,
marketing and customer support capabilities than we have.
OUR SUCCESS DEPENDS ON OUR ABILITY TO RETAIN OUR KEY MANAGEMENT AND
TECHNICAL PERSONNEL AND ATTRACTING, RETAINING, AND TRAINING NEW TECHNICAL
PERSONNEL.
Our future growth and success will depend in large part upon our ability to
retain our existing management and technical team and to recruit and retain
highly skilled technical personnel, including engineers. The labor markets in
which we operate are highly competitive and most of our operations are not
located in highly populated areas. As a result, we may not be able to retain and
recruit key personnel. Our failure to hire, retain or adequately train key
personnel could have a negative impact on our performance.
Mtron/PTI'S BACKLOG MAY NOT BE INDICATIVE OF FUTURE REVENUES AND MAY
ADVERSELY AFFECT OUR BUSINESS.
Mtron/PTI's backlog comprises orders that are subject to specific
production release orders under written contracts, oral and written orders from
customers with which Mtron/PTI has had long-standing relationships and written
purchase orders from sales representatives. Mtron/PTI's customers may order
components from multiple sources to ensure timely delivery when backlog is
particularly long and may cancel or defer orders without significant penalty.
They often cancel orders when business is weak and inventories are excessive, a
phenomenon that Mtron/PTI experienced in the most recent economic slowdown. As a
result, Mtron/PTI's backlog as of any particular date may not be representative
of actual revenues for any succeeding period.
Mtron/PTI RELIES UPON ONE CONTRACT MANUFACTURER FOR A SIGNIFICANT PORTION
OF ITS FINISHED PRODUCTS, AND A DISRUPTION IN ITS RELATIONSHIP COULD HAVE A
NEGATIVE IMPACT ON Mtron/PTI'S REVENUES.
In 2005, approximately 14% of Mtron/PTI's revenue was attributable to
finished products that were manufactured by an independent contract manufacturer
located in both Korea and China. We expect this manufacturer to account for a
smaller but substantial portion of Mtron/PTI's revenues in 2006 and a material
portion of Mtron/PTI's revenues for the next several years. Mtron/PTI does not
have a written, long-term supply contract with this manufacturer. If this
manufacturer becomes unable to provide products in the quantities needed, or at
acceptable prices, Mtron/PTI would have to identify and qualify acceptable
replacement manufacturers or manufacture the products internally. Due to
specific product knowledge and process capability, Mtron/PTI could encounter
difficulties in locating, qualifying and entering into arrangements with
replacement manufacturers. As a result, a reduction in the production capability
or financial viability of this manufacturer, or a termination of, or significant
interruption in, Mtron/PTI's relationship with this manufacturer, may adversely
affect Mtron/PTI's results of operations and our financial condition.
12
Mtron/PTI PURCHASES CERTAIN KEY COMPONENTS FROM SINGLE OR LIMITED SOURCES
AND COULD LOSE SALES IF THESE SOURCES FAIL TO FULFILL OUR NEEDS.
If single source components were to become unavailable on satisfactory
terms, and could not obtain comparable replacement components from other sources
in a timely manner, our business, results of operations and financial condition
could be harmed. On occasion, one or more of the components used in our products
have become unavailable, resulting in unanticipated redesign and related delays
in shipments. We cannot assure you that similar delays will not occur in the
future. Our suppliers may be impacted by compliance to environmental regulations
including RoHS & WEEE, which could affect our continued supply of components or
cause additional costs for us to implement new components into our manufacturing
process.
Mtron/PTI'S PRODUCTS ARE COMPLEX AND MAY CONTAIN ERRORS OR DESIGN FLAWS,
WHICH COULD BE COSTLY TO CORRECT.
When we release new products, or new versions of existing products, they
may contain undetected or unresolved errors or defects. Despite testing, errors
or defects may be found in new products or upgrades after the commencement of
commercial shipments. Undetected errors and design flaws have occurred in the
past and could occur in the future. These errors could result in delays, loss of
market acceptance and sales, diversion of development resources, damage to our
reputation, legal action by our customers, failure to attract new customers and
increased service costs.
CONTINUED MARKET ACCEPTANCE OF Mtron/PTI'S PACKAGED QUARTZ CRYSTALS,
OSCILLATOR MODULES AND ELECTRONIC FILTERS IS CRITICAL TO OUR SUCCESS, BECAUSE
FREQUENCY CONTROL DEVICES ACCOUNT FOR NEARLY ALL OF Mtron/PTI'S REVENUES.
Virtually all of Mtron/PTI's 2005 and 2004 revenues came from sales of
frequency control devices, which consist of packaged quartz crystals, oscillator
modules and electronic filters. We expect that this product line will continue
to account for substantially all of Mtron/PTI's revenues for the foreseeable
future. Any decline in demand for this product line or failure to achieve
continued market acceptance of existing and new versions of this product line
may harm Mtron/PTI's business and our financial condition.
Mtron/PTI'S FUTURE RATE OF GROWTH IS HIGHLY DEPENDENT ON THE DEVELOPMENT
AND GROWTH OF THE MARKET FOR COMMUNICATIONS AND NETWORK EQUIPMENT.
Mtron/PTI's business depends heavily upon capital expenditures by the
providers of communications and network services. In 2005, the majority of
Mtron/PTI's revenues was to manufacturers of communications and network
infrastructure equipment, including indirect sales through distributors and
contract manufacturers. In 2006, Mtron/PTI expects a smaller but significant
portion of its revenues to be to manufacturers of communications and network
infrastructure equipment. Mtron/PTI intends to increase its sales to
communications and network infrastructure equipment manufacturers in the future.
Communications and network service providers have experienced periods of
capacity shortage and periods of excess capacity. In periods of excess capacity,
communications systems and network operators cut purchases of capital equipment,
including equipment that incorporates Mtron/PTI's products. A slowdown in the
manufacture and purchase of communications and network infrastructure equipment
could substantially reduce Mtron/PTI's net sales and operating results and
adversely affect our financial condition. Moreover, if the market for
communications or network infrastructure equipment fails to grow as expected,
Mtron/PTI may be unable to sustain its growth. In addition, Mtron/PTI's growth
depends upon the acceptance of its products by communications and network
infrastructure equipment manufacturers. If, for any reason, these manufacturers
do not find Mtron/PTI's products to be appropriate for their use, our future
growth will be adversely affected.
COMMUNICATIONS AND NETWORK INFRASTRUCTURE EQUIPMENT MANUFACTURERS
INCREASINGLY RELY UPON CONTRACT MANUFACTURERS, THEREBY DIMINISHING Mtron/PTI'S
ABILITY TO SELL ITS PRODUCTS DIRECTLY TO THOSE EQUIPMENT MANUFACTURERS.
There is a growing trend among communications and network infrastructure
equipment manufacturers to outsource the manufacturing of their equipment or
components. As a result, Mtron/PTI's ability to persuade these original
equipment manufacturers to specify our products has been reduced and, in the
absence of a manufacturer's specification of Mtron/PTI's products, the prices
that Mtron/PTI can charge for them may be subject to greater competition.
13
MtronPTI'S CUSTOMERS ARE SIGNIFICANTLY LARGER THAN IT AND THEY MAY EXERT
LEVERAGE THAT WILL NOT BE IN THE BEST INTEREST OF MtronPTI.
The majority of MtronPTI's sales are to companies that are many times its
size. This size differential may put MtronPTI in a disadvantage while
negotiating contractual terms and may result in terms that are not in the best
interest of MtronPTI. These items may include price, payment terms, product
warranties and product consignment obligations.
FUTURE CHANGES IN Mtron/PTI'S ENVIRONMENTAL LIABILITY AND COMPLIANCE
OBLIGATIONS MAY INCREASE COSTS AND DECREASE PROFITABILITY.
Mtron/PTI's manufacturing operations, products and/or product packaging are
subject to environmental laws and regulations governing air emissions,
wastewater discharges, and the handling, disposal and remediation of hazardous
substances, wastes and other chemicals. In addition, more stringent
environmental regulations may be enacted in the future, and we cannot presently
determine the modifications, if any, in Mtron/PTI's operations that any future
regulations might require, or the cost of compliance that would be associated
with these regulations.
THE EUROPEAN UNION HAS RECENTLY ISSUED ITS RESTRICTION OF HAZARDOUS
SUBSTANCES DIRECTIVE ("THE RHSD"), WHICH RESTRICTS THE USE OF CERTAIN HAZARDOUS
SUBSTANCES USED IN THE CONSTRUCTION OF COMPONENT PARTS EFFECTIVE JULY 1, 2006.
We may need to change our manufacturing processes, redesign some of our
products, and change components to eliminate these hazardous substances in our
products in order to be able to continue to offer them for sale within the
European Union.
SALES OF A SIGNIFICANT PORTION OF OUR PRODUCTS TO CUSTOMERS OUTSIDE OF THE
UNITED STATES SUBJECTS US TO BUSINESS, ECONOMIC AND POLITICAL RISKS.
Our export sales, which are primarily to Canada, Asia, Western Europe
accounted for 46% of revenues during 2005 and 48% of revenues during 2004. We
anticipate that sales to customers located outside of the United Sates will
continue to be a significant part of our revenues for the foreseeable future.
Because significant portions of our sales are to customers outside of the United
States, we are subject to risks including foreign currency fluctuations, longer
payment cycles, reduced or limited protection of intellectual property rights,
political and economic instability, and export restrictions. To date, very few
of our international revenue and cost obligations have been denominated in
foreign currencies. As a result, in increase in the value of the US dollar
relative to foreign currencies could make our products more expensive and thus,
less competitive in foreign markets. We do not currently engage in foreign
currency hedging activities, but may do so in the future to the extent that such
obligations become more significant.
LYNCH SYSTEMS' REVENUE IS LARGELY DEPENDENT ON DEMAND FOR ITS TELEVISIONS
AND COMPUTER MONITORS BASED ON CATHODE-RAY TUBE TECHNOLOGY. THIS TECHNOLOGY WILL
EVENTUALLY BE REPLACED BY PLASMA AND LIQUID CRYSTAL DISPLAYS.
Lynch Systems generates a significant portion of its revenue from sales to
glass producers that supply television and computer monitor displays that are
based on cathode-ray tube technology. This market is being rapidly penetrated by
thinner, lighter weight plasma displays and liquid crystal displays. Although
cathode-ray tube televisions and computer monitors currently retain advantages
in image quality and price, glass producers are investing billions of dollars to
improve the quality and lower the unit price of plasma, liquid crystal and other
display types. We believe that market penetration by plasma and liquid crystal
display producers will continue and eventually render obsolete cathode-ray tube
technology and this Lynch Systems product line.
LYNCH SYSTEMS' DEPENDENCE ON A FEW SIGNIFICANT CUSTOMERS EXPOSES IT TO
OPERATING RISKS.
Lynch Systems' sales to its ten largest customers accounted for
approximately 79% and 80% of its revenues in 2005 and 2004, respectively. Lynch
Systems' sales to its largest customer accounted for approximately 46% and 36%
14
of its revenues in 2005 and 2004, respectively. If a significant customer
reduces, delays or cancels its orders for any reason, the business and results
of operations of Lynch Systems would be negatively affected.
A MULTIPLE MACHINE ORDER WITH A SIGNIFICANT CUSTOMER IN THE TABLEWARE
MARKET MAY NOT BE REALIZED IN FULL.
Lynch Systems has a significant order for glass manufacturing machines
which may not be realized in full. In 2004, Lynch Systems signed a contract to
sell five machines for a total purchase price of $2,350,000. The contract was
accounted for under the percentage of completion method. Throughout 2004 and
2005, revenues totaling approximately $1,983,000 were recorded relating to the
five machines based upon the percentage completed. There was no profit recorded
to date on this contract. In late 2005, the first machine was completed and
shipped. The installation of the machine has been delayed several times due to
the customer temporarily closing down its plant. The customer has now indicated
that the plant will open in mid 2006 and that the machine can be installed at
that time. The customer has stated that when the first machine is operational,
it will pay for the first machine and accept deliveries on three additional
machines over the next 12 to 18 months. Management fully expects that the
customer will honor its commitment; however, the Company has provided a reserve
of $350,000 against the billed receivable, unbilled receivable and inventory
balances at December 31, 2005. If the customer does not honor its commitment,
additional provisions may be required, based upon the ultimate disposition of
the machines.
THE RESULTS OF LYNCH SYSTEMS' OPERATIONS ARE SUBJECT TO FLUCTUATIONS IN THE
AVAILABILITY AND COST OF STEEL USED TO MANUFACTURE GLASS FORMING EQUIPMENT.
Lynch Systems uses large amounts of steel to manufacture its glass forming
equipment. The price of steel has risen substantially and demand for steel is
very high. Lynch Systems has only been able to pass some of the increased costs
to its customers. As a result, Lynch Systems' profit margins on glass forming
equipment have decreased. If the price of and demand for steel continues to
rise, our profit margins will continue to decrease.
LYNCH SYSTEMS MAY BE UNABLE TO PROTECT ITS INTELLECTUAL PROPERTY.
The success of Lynch Systems' business depends, in part, upon its ability
to protect trade secrets, designs, drawings and patents, obtain or license
patents and operate without infringing on the intellectual property rights of
others. Lynch Systems relies on a combination of trade secrets, designs,
drawings, patents, nondisclosure agreements and technical measures to protect
its proprietary rights in its products and technology. The steps taken by Lynch
Systems in this regard may not be adequate to prevent misappropriation of its
technology. In addition, the laws of some foreign countries in which Lynch
Systems operates do not protect its proprietary rights to the same extent as do
the laws of the United States. Although Lynch Systems continues to evaluate and
implement protective measures, we cannot assure you that these efforts will be
successful. Lynch Systems' inability to protect its intellectual property rights
could diminish or eliminate the competitive advantages that it derives from its
technology, cause Lynch Systems to lose sales or otherwise harm its business.
----------------------------------------------
FORWARD LOOKING INFORMATION
This document contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. When used in this discussion
and throughout this document, words, such as "intends," "plans," "estimates,"
"believes," "anticipates" and "expects" or similar expressions are intended to
identify forward-looking statements. These statements are based on the Company's
current plans and expectations and involve risks and uncertainties, over which
the Company has no control, that could cause actual future activities and
results of operations to be materially different from those set forth in the
forward-looking statements. Important factors that could cause actual future
activities and operating results to differ include fluctuating demand for
capital goods such as large glass presses, delay in the recovery of demand for
components used by telecommunications infrastructure manufacturers, and exposure
to foreign economies. Important information regarding risks and uncertainties is
also set forth elsewhere in this document, including in Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The Company undertakes no
15
obligation to update publicly any forward-looking statements, whether as a
result of new information, future events or otherwise. All subsequent written or
oral forward-looking statements attributable to the Company or persons acting on
its behalf are expressly qualified in their entirety by these cautionary
statements. Readers are also urged to carefully review and consider the various
disclosures made by the Company, in this document, as well as the Company's
periodic reports on Forms 10-K, 10-Q and 8-K, filed with the Securities and
Exchange Commission ("SEC").
The Company makes available, free of charge, its annual report on Form
10-K, Quarterly Reports on Form 10-Q, and current reports, if any, on Form 8-K.
The Company also makes this information available on its website
WWW.LYNCHCORP.COM.
----------------------------------------------
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
Lynch's principal executive offices are located in Greenwich, Connecticut,
under a monthly lease for approximately 1,100 square feet of office space.
Lynch Systems' operations are housed in two adjacent buildings totaling
95,840 square feet situated on 4.86 acres of land in Bainbridge, Georgia.
Finished office area in the two buildings totals approximately 17,000 square
feet. Additionally, the Company has 18,604 square feet that is utilized for
warehouse and storage. At December 31, 2005, all such properties are subject to
security deeds relating to loans.
Mtron/PTI's operations are located in Yankton, South Dakota, Orlando,
Florida, India and Hong Kong. Mtron/PTI has two separate facilities in Yankton,
these facilities contain approximately 51,000 square feet in the aggregate. The
manufacturing facility that is owned by Mtron/PTI contains approximately 35,000
square feet, is situated on approximately 15 acres of land and is subject to
security deeds relating to loans. The other facility is leased and contains
approximately 16,000 square feet. The lease expires on September 30, 2006, with
no options to extend the lease; Mtron/PTI intends to renew the lease. Mtron/PTI
has one building, approximately 76,000 square feet, on approximately 7 acres of
land in Orlando that was purchased in connection with the acquisition of PTI.
Mtron/PTI has approximately 1,500 square feet of office space in Hong Kong; the
lease expires October 5, 2006 and does not include renewal options and the
Company leases approximately 7,500 square feet of office and manufacturing space
in Delhi, India.
It is the Company's opinion that the facilities referred to above are in
good operating condition and suitable and adequate for present uses.
ITEM 3. LEGAL PROCEEDINGS
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 adverse effect on
the Company's financial condition or operations. In addition, the Company and/or
one or more of its subsidiaries are parties to the following additional legal
proceedings:
16
IN RE: SPINNAKER COATING, INC., DEBTOR/PACE LOCAL 1-1069 V. SPINNAKER COATING,
INC., AND LYNCH CORPORATION, U.S. BANKRUPTCY COURT, DISTRICT OF MAINE, CHAPTER
11, ADV. PRO. NO. 02-2007, AND PACE LOCAL 1-1069 V. LYNCH CORPORATION AND LYNCH
SYSTEMS, INC. CUMBERLAND COUNTY SUPERIOR COURT, CV-2001-00352
On or about June 26, 2001, in anticipation of the July 15, 2001 closure of
Spinnaker's Westbrook, Maine facility, Plaintiff PACE Local 1-1069 ("PACE")
filed a three count complaint in Cumberland County Superior Court, CV-2001-00352
naming the following Defendants: Spinnaker Industries, Inc., Spinnaker Coating,
Inc., and Spinnaker Coating-Maine, Inc. (collectively, the "Spinnaker Entities")
and the Company. The complaint alleged that under Maine's Severance Pay Act both
the Spinnaker Entities and the Company would be liable to pay approximately
$1,166,000 severance pay under Maine's Severance Pay Act in connection with the
plant closure. Subsequently, the Spinnaker Entities filed for relief under
Chapter 11 of the Bankruptcy Code and the action proceeded against the Company
on the issue of whether the Company has liability to PACE's members under the
Maine Severance Pay Act.
In 2002, both PACE and the Company moved for summary judgment in the
action. On July 28, 2003, the Court issued an order denying the Company's
motion, finding that there remained a disputed issue of material fact regarding
one of the Company's primary defenses. The Court granted partial summary
judgment in favor of PACE to the extent that the Court found that the Company
was the Spinnaker Entities' "parent corporation" and, therefore, the Company was
an "employer" subject to potential liability under Maine's Severance Pay Act.
On November 3, 2004, the Superior Court granted summary judgment to PACE on
the second count of its complaint, based on the Courts' earlier ruling that the
Company was the parent corporation of the Spinnaker Entities. The Court also
issued a separate order that related to the calculation of damages, largely
agreeing with the Company on the appropriate method of calculating damages and
awarded PACE $653,018 (subsequently modified to $656,020) in severance pay,
which is approximately one-half the amount claimed by PACE. The Superior Court
rejected PACE's claim for pre-judgment interest, but granted its request for
attorney fees.
Both PACE and the Company appealed to the Maine Supreme Judicial Court. The
parties filed written briefs during April and May 2005 and made oral arguments
to the Supreme Court on September 13, 2005. On January 13, 2006, before the
Supreme Court issued its decision, the Company and PACE agreed to settle the
case. The settlement includes payment of a total of $800,000 to resolve the
claims of 67 workers who lost their jobs in 2001. The parties also withdrew
their respective appeals pending in the Supreme Court and, therefore, no
decision was ever issued by the Court.
QUI TAM LAWSUIT
The Company, Lynch Interactive and numerous other parties have been named
as defendants in a lawsuit originally brought under the so-called "qui tam"
provisions of the federal False Claims Act in the United States District Court
for the District of Columbia. The complaint was filed under seal in February
2001, and the seal was lifted at the initiative of one of the defendants in
January 2002. The Company was formally served with the complaint in July 2002.
The main allegation in the case is that the defendants participated in the
creation of "sham" bidding entities that allegedly defrauded the United States
Treasury by improperly participating in Federal Communications Commission
("FCC") spectrum auctions restricted to small businesses, as well as obtaining
"bidding credits" in other spectrum auctions allocated to "small" and "very
small" businesses. While the lawsuit seeks to recover an unspecified amount of
damages, which would be subject to mandatory trebling under the statute, a
report prepared for the relator (the private party who filed the action on
behalf of the United States) in February 2005 alleges damages of approximately
$91,000,000 in respect of "bidding credits", approximately $70,000,000 in
respect of government "financing" and approximately $206,000,000 in respect of
subsequent resales of licenses, in each case prior to trebling. The liability is
alleged to be joint and several. In September 2003, the court granted Lynch
Interactive's motion to transfer the action to the Southern District of New
York.
In September 2004, the court issued a ruling denying defendants' motion to
refer the issues in the action to the FCC. In December 2004, the defendants
filed a motion in the United States District Court in the District of Columbia
asking that court to compel the FCC to provide information subpoenaed by them to
enable them to conduct their defense. This motion was denied in May 2005, and
the defendants appealed. In February 2006, the defendants and the FCC reached an
17
agreement granting defendants discovery of certain documents and other
evidentiary materials. In November 2005, the court ruled that damages based on
profits from resales of licenses were not allowed under the False Claims Act.
Initially, in 2001, the Department of Justice notified the court that it
would not intervene in the case. However, in response to the judge's ruling in
November 2005 (described above), the DOJ recently, in March 2006, petitioned the
court to allow it to intervene. This petition is scheduled to be argued in April
2006. The case had been tentatively scheduled for trial in June 2006 but the
trial may be delayed due to the government's intervention and related issues.
The defendants believe that the action is without merit and that the relator's
damage computations are without basis, and they are defending the suit
vigorously. Under the separation agreement between the Company and Lynch
Interactive pursuant to which Lynch Interactive was spun-off to the Company's
shareholders on September 1, 1999, Lynch Interactive would be obligated to
indemnify the Company for any losses or damaged incurred by the Company as a
result of this action. Lynch Interactive has agreed in writing to defend the
case on the Company's behalf and to indemnify the Company for any losses it may
incur. Nevertheless, the Company cannot predict the ultimate outcome of the
litigation, nor can the Company predict the effect that the lawsuit or its
outcome will have on the Company's business or plan of operation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
The Common Stock of the Company 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 fiscal years ended December 31, 2005 and December
31, 2004 are as follows:
QUARTER ENDED
-----------------------------------------------------------------------
2005 MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
------- ----------------- ---------------- ------------------- ----------------
High.................... $14.97 $9.50 $13.70 $11.95
Low..................... 9.00 7.75 8.35 7.50
2004 MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
------- ----------------- ---------------- ------------------- ----------------
High.................... 17.00 16.25 15.10 16.74
Low..................... 9.80 12.26 11.65 12.25
At March 21, 2006, the Company had 1,565 shareholders of record.
DIVIDEND POLICY
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 2006. Substantially all of the subsidiaries' assets are restricted under the
Company's current credit agreements, which limit the subsidiaries' ability to
pay dividends.
ISSUER REPURCHASE OF ITS EQUITY SECURITIES
There were no repurchases made by the Company during the fourth fiscal
quarter of 2005.
18
ITEM 6. SELECTED FINANCIAL DATA
LYNCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following selected financial data is qualified by reference to, and
should be read in conjunction with, the financial statements, including the
notes thereto, and Management's Discussion and Analysis of Financial Condition
and Results of Operations included elsewhere in this Annual Report.
YEAR ENDED DECEMBER 31, (a)
---------------------------------------------------------------
2005 2004 2003 2002* 2001*
------------ ------------ ------------ ------------ -----------
Revenues.......................................... $ 46,183 $ 33,834 $ 27,969 $ 26,386 $ 141,073
Operating profit (loss)
(b)............................................. 1,178 (2,888) (832) 16,168 (19,240)
Gain (loss) on sale of subsidiary stock and
other operating assets......................... -- -- 35 (92) --
Gain on release of customer related contingency.. -- -- 728 -- --
Income (loss) from continuing operations
before income taxes and minority interests..... 1,001 (3,226) 183 15,996 (26,597)
Benefit (provision) for income taxes.............. 209 (100) (73) 1,967 (358)
Minority interests................................ -- -- -- -- 4,017
-------- --------- -------- -------- ---------
Net income (loss)................................. $ 1,210 $ (3,326) $ 110 $ 17,963 $ (22,938)
Per Common Share:(c)
Net income (loss):
Basic....................................... $ 0.73 $ (2.18) $ 0.07 $ 11.99 $ (15.24)
Diluted..................................... 0.73 (2.18) 0.07 11.99 (15.24)
DECEMBER 31, (a)
---------------------------------------------------------------
2005 2004 2003 2002* 2001*
------------ ------------ ------------ ------------ -----------
Cash, securities and short-term
Investments(e).................................. $ 8,250 $ 6,189 $ 6,292 $ 6,847 $ 4,247
Restricted cash(e)(f)............................. 650 1,125 1,125 1,125 4,703
Total assets(d)(e)................................ 32,664 33,883 23,019 23,430 31,615
Long-term debt, exclusive of current portion(e).. 5,031 3,162 833 1,089 1,678
Shareholders' equity (deficiency) (d)(e).......... 14,688 9,993 11,033 10,934 (7,451)
NOTES:
* Effective September 30, 2001, the Company's ownership and voting interest
of Spinnaker Industries, Inc. was reduced to 41.8% and 49.5% respectively,
due to the disposition of shares of Spinnaker. As a result, effective
19
September 30, 2001, the Company relinquished control of Spinnaker and has
deconsolidated Spinnaker. On September 23, 2002, the Company disposed of
its remaining interest in Spinnaker. See Note 1 to the Consolidated
Financial Statements -- "Basis of Presentation".
(a) The data presented includes results of the business acquired from PTI, from
September 30, 2004, the effective date of its acquisition, and Champion
Technologies, Inc. from October 18, 2002, the date of its acquisition.
(b) Operating profit (loss) is revenues less operating expenses, which excludes
investment income, interest expense, extraordinary items, minority
interests and taxes. Included are asset impairment and restructuring
charges and the gain on deconsolidation.
(c) Based on weighted average number of common shares outstanding.
(d) No cash dividends have been declared over the period.
(e) Excludes Spinnaker Industries as a result of the September 30, 2001
deconsolidation of Spinnaker resulting from the Company's disposition of
shares of Spinnaker that reduced its ownership and voting interest of
Spinnaker Industries, Inc. to 41.8% and 49.5% respectively, and the
Company's subsequent disposition of its remaining interest in Spinnaker on
September 23, 2002.
(f) See discussion of Restricted Cash and Notes Payable and Long-Term Debt in
Note 4 to the Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read together with the
Selected Financial Data and our Consolidated Financial Statements and the
related notes included elsewhere in this Annual Report.
RESULTS OF OPERATIONS
2005 COMPARED TO 2004
CONSOLIDATED REVENUES AND GROSS MARGIN
Consolidated revenues increased $12,349,000, or 36%, to $46,183,000 for the
year ended December 31, 2005 from $33,834,000 for the comparable period in 2004.
Revenues at Mtron/PTI increased by $11,638,000, or 50%, to $35,051,000 for
the year ended December 31, 2005 from $23,413,000 in 2004. The increase was due
to improvements in the telecommunications market, improvements in the
infrastructure segment of the telecommunications market and the contribution of
PTI, which was acquired effective September 30, 2004.
Revenues at Lynch Systems increased by $711,000, or 7%, to $11,132,000 for
the year ended December 31, 2005 from $10,421,000 in 2004. This increase was
primarily due to sales of large CRT machines in 2005, which was partially offset
by lower revenue for glass press machines.
The consolidated gross margin as a percentage of revenues in 2005
increased to 31.9%, compared to 23.8% in the prior year.
Mtron/PTI's gross margin as a percentage of revenues for the year ended
December 31, 2005 increased to 30.2% from 26.9% in 2004. The contribution from
PTI, combined with selective price increases and operational efficiencies,
resulted in the improved gross margin rates.
Lynch Systems' gross margin as a percentage of revenues for the year ended
December 31, 2005 increased to 37.3% from 16.7% in 2004. The increase was
primarily due to sales of large CRT machines, which carry higher gross margins,
20
in 2005. Although the 2005 revenues for Lynch Systems' include a large CRT
machine order, Lynch Systems has undergone a shift in its business away from
higher margin CRT machines to lower margin tableware products and repair parts
business.
OPERATING PROFIT (LOSS)
The operating profit for the year ended December 31, 2005 was $1,178,000,
compared to an operating loss of $2,888,000 for the comparable period in 2004,
primarily due to higher margins at both Mtron/PTI and Lynch Systems and a
$775,000 litigation provision recorded in 2004 compared to a $150,000 provision
in 2005.
For the year ended December 31, 2005, Mtron/PTI had operating profit of
$2,306,000, an improvement of $1,294,000 compared to $1,012,000 in 2004. The
operating profit improvement was primarily due to the significant revenue
increase and improvements in gross margin, which was partially offset by higher
operating expenses resulting from the addition of PTI, which was acquired
effective September 30, 2004.
For the year ended December 31, 2005, Lynch Systems had operating profit of
$684,000, compared to an operating loss of $1,340,000 in 2004. The operating
profit resulted from resulted from higher gross margins in 2005 directly related
to the composition of revenues by product in 2005.
Corporate expenses decreased $748,000, to $1,662,000 for the year ended
December 31, 2005 from $2,560,000 for the comparable period in 2004. The decline
was primarily due to a lawsuit settlement provision in 2005 of $150,000 compared
to $775,000 in 2004.
OTHER INCOME (EXPENSE), NET
Investment income for the year ended December 31, 2005 was $608,000,
$593,000 more than the $15,000 investment income for the comparable period in
2004, primarily due to a $567,000 realized gain on sale of marketable securities
in 2005.
Interest expense of $847,000 for the year ended December 31, 2005 was
$487,000 more than the comparable period in 2004, primarily due to an increase
in the level of debt outstanding during the year resulting from the acquisition
of PTI, borrowings at Lynch Systems, as well as higher interest rates.
Other income for the year ended December 31, 2005 was $62,000, $55,000 more
than the $7,000 recorded for the comparable period in 2004, primarily due to a
gain on the sale of a warehouse in Orlando, FL in the second quarter 2005.
INCOME TAXES
The Company files consolidated federal income tax returns, which includes
all subsidiaries.
The income tax benefit for the year period ended December 31, 2005 included
federal, as well as state, local, and foreign taxes offset by provisions made
for certain net operating loss carryforwards that may not be fully realized. The
income tax benefit also includes a non-recurring reduction to an income tax
reserve of $716,000 in the third quarter 2005, which was originally provided for
during 2001. The tax reserve was increased in the fourth quarter of 2005 by a
net $232,000 provision for federal and state tax reserves identified in that
period.
NET INCOME (LOSS)
Net income for the year ended December 31, 2005 was $1,210,000, compared to
a net loss of $3,326,000 for the comparable period in 2004. As a result, fully
diluted income per share for the year ended December 31, 2005 was $0.73 compared
to a $2.18 loss per share for the comparable period of 2004.
21
BACKLOG/NEW ORDERS
Total backlog of manufactured products at December 31, 2005 was
$13,860,000, a $3,714,000 decline compared to the backlog at December 31, 2004,
and $790,000 increase from the backlog at September 30, 2005.
Mtron/PTI had backlog orders of $8,906,000 at December 31, 2005 compared to
$7,647,000 at December 31, 2004 and $8,218,000 at September 30, 2005. Backlog
increased $1,259,000 from December 31, 2004 and increased $688,000 from
September 30, 2005. The increase in backlog is due to improved business
conditions.
Lynch Systems had backlog orders of $4,954,000 at December 31, 2005
compared to $9,927,000 at December 31, 2004 and $4,852,000 at September 30,
2005. Backlog decreased $4,973,000 from December 2004 due to shipment of large
CRT machines in 2005 and increased $102,000 from September 30, 2005. At December
31, 2005 the backlog of $4,954,000 comprised glass press machine orders and
parts and did not contain any CRT machine orders.
2004 COMPARED TO 2003
CONSOLIDATED REVENUES AND GROSS MARGIN
Consolidated revenues increased $5,865,000, or 21%, to $33,834,000 for the
year ended December 31, 2004 from $27,969,000 for the comparable period in 2003.
The increase came from Mtron/PTI, including the contribution of the PTI
acquisition, and was partially offset by lower revenues at Lynch Systems.
Revenues at Mtron/PTI increased by $8,230,000, or 54%, to $23,413,000 for
the year ended December 31, 2004 from $15,183,000 for the comparable period in
2003. The increase was due to improvements in the telecommunications market
resulting from a stronger general economy, improvements in the infrastructure
segment of the telecommunications market, new customers and the PTI acquisition
which contributed approximately $3,600,000 in revenue since it was acquired
effective September 30, 2004.
Revenues at Lynch Systems declined by $2,365,000, or 18%, to $10,421,000
for the year ended December 31, 2004 from $12,786,000 for the comparable period
in 2003. This decrease was primarily due to less revenue for glass press
machines. However, order backlog of $9,927,000 at December 31, 2004 represented
a significant improvement of approximately $7,100,000 compared to December 31,
2003. Most of Lynch Systems' $9,927,000 backlog as of December 31, 2004 is
scheduled to be delivered in 2005 with the majority scheduled to be delivered in
the second quarter.
The consolidated gross margin as a percentage of revenues in 2004 decreased
to 23.8%, compared to 27.4% in the prior year. Improvements in the gross margin
at Mtron/PTI were more than offset by lower margins at Lynch Systems.
Mtron/PTI's gross margin as a percentage of revenues for year ended
December 31, 2004, increased to 26.9% from 23.1% in 2003. The revenue
improvement at Mtron and the contribution from PTI, combined with selective
price increases and operational efficiencies resulted in the improved gross
margin rates.
Lynch Systems' gross margin as a percentage of revenues for the year ended
December 31, 2004, declined over the comparable period in 2003 from 32.9% to
16.7%. This decline was primarily due to 18% lower revenues, lower high-margin
repair part business and a shift from higher margin CRT business to lower margin
tableware products in 2004. The Company expects that revenues from the CRT
business, as a percentage of total revenues, will continue to decline.
OPERATING LOSS
The operating loss for the year ended December 31, 2004 was $2,888,000,
compared to $832,000 for the comparable period in 2003, primarily due to lower
margins at Lynch Systems and a $775,000 litigation provision.
22
For the year ended December 31, 2004, Mtron/PTI had an operating profit of
$1,012,000, an improvement of $1,182,000 compared to the $170,000 operating loss
for 2003. The operating profit improvements were due primarily to the 54% sales
increase and higher gross margin in 2004 compared to 2003.
For the year ended December 31, 2004, Lynch Systems had an operating loss
of $1,340,000, compared to an operating profit of $822,000 in the comparable
period in 2003. Declining sales prices and lower volume resulted in the
unfavorable operating results when comparing 2004 to 2003.
The Company's corporate headquarters incurred unallocated expenses of
$2,560,000 for the year ended December 31, 2004, exceeding the comparable period
in 2003 by $1,076,000, primarily due to a $775,000 provision recorded for a
potential legal settlement and higher compensation costs, professional fees and
public company expenses.
OTHER INCOME (EXPENSE), NET
Investment income for the year ended December 31, 2004 was $15,000,
$519,000 less than the $534,000 investment income for the comparable period in
2003 primarily due to a $483,000 realized gain on sale of marketable securities
in 2003 and lower average cash balances in 2004.
Interest expense of $360,000 for the year ended December 31, 2004 was
$78,000 more than the comparable period in 2003 primarily due to interest on new
loans relating to the acquisition of PTI.
Other income for the year ended December 31, 2004 was $7,000, $756,000 less
than the $763,000 recorded for the comparable period in 2003, primarily due to
$728,000 that was realized in 2003 relating to the final settlement of a
customer-related contingency.
INCOME TAXES
Income tax benefit (expense) includes federal, state, local and foreign
taxes. The Company recorded a $100,000 tax provision in 2004 for foreign taxes
at the Hong Kong tax rate on Mtron/PTI's foreign subsidiaries' earnings and
other state tax expense items.
NET INCOME (LOSS)
Net loss for the year ended December 31, 2004 was $3,326,000 compared to a
net profit of $110,000 for the comparable period in 2003. The $3,436,000
unfavorable variance was primarily due to lower operating profits as described
above, including the $775,000 litigation provision, higher interest expense and
lower other income in 2004, compared to 2003. As a result, fully diluted loss
per share for the year ended December 31, 2004 was $2.18 compared to $0.07
income per share for the comparable period of 2003.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and investments in marketable
securities at December 31, 2005 totaled $8,900,000 (including $650,000 of
restricted cash) compared to $7,314,000 at December 31, 2004. In addition, the
Company had a $5,327,000 borrowing capacity under Lynch Systems' and Mtron/PTI's
revolving line of credit at December 31, 2005, as compared to $2,751,000 at
December 31, 2004.
At December 31, 2005, the Company's net working capital was $11,925,000 as
compared to $4,042,000 at December 31, 2004. At December 31, 2005, the Company
had current assets of $24,870,000 and current liabilities of $12,945,000. At
December 31, 2004, the Company had current assets of $24,770,000 and current
liabilities of $20,728,000. The ratio of current assets to current liabilities
was 1.92 to 1.00 at December 31, 2005, compared to 1.20 to 1.00 ratio at
December 31, 2004. The increase in net working capital was primarily due to
refinancing of debt, improved operating results, gain on sale of marketable
securities and cash received from the rights offering (discussed below).
23
Cash provided by operating activities was $2,283,000 in 2005, compared to
cash used in operating activities of $1,910,000 in 2004. The year to year
favorable change in operating cash flow of $4,193,000 was primarily due to net
income of $1,360,000 for the year ended December 31, 2005 compared to a net loss
of $3,326,000 for the comparable period in 2004 and net changes in receivables,
inventory and customer advances. Capital expenditures were $343,000 in the year
ended December 31, 2005, compared to $440,000 for the comparable period in 2004.
In December 2005, the Company completed its rights offering. The fully
subscribed rights offering resulted in the issuance of 538,676 additional shares
of common stock for proceeds to the Company of approximately $3,655,000, net of
$250,000 in fees. The offering granted holders of the Company's common stock
transferable subscription rights to purchase shares of the Company's common
stock at a subscription price of $7.25 per share.
At December 31, 2005, the Company had $2,838,000 in notes payable to banks
consisting of a revolving credit loan at Mtron/PTI for $2,082,000 due May, 2006
and a working capital revolver at Lynch Systems for $756,000 due October, 2006.
The Company intends to renew these facilities with the existing banks, however,
there can be no assurances the existing facilities will be renewed. At December
31, 2005, the Company also had $1,215,000 in current maturities of long-term
debt. The Company believes that existing cash and cash equivalents, cash
generated from operations and available borrowings under its subsidiaries' lines
of credit, including the proposed renewals, will be sufficient to meet its
ongoing working capital and capital expenditure requirements for the foreseeable
future.
At December 31, 2005, total debt of $9,084,000 was $3,477,000 less than the
total debt at December 31, 2004 of $12,561,000. The debt decreased at both
Mtron/PTI and Lynch Systems due to repayments of revolving debt and scheduled
payments on long term debt. Debt outstanding at December 31, 2005 included
$4,178,000 of fixed rate debt at a year-end average interest rate of 6.8%, and
$4,906,000 of variable rate debt at a year-end average rate of 7.4%.
The Company is in compliance with all financial covenants at December 31,
2005.
In connection with the completion of the acquisition of PTI, on October 14,
2004, Mtron and PTI, each wholly-owned subsidiaries of Lynch Corporation,
entered into a Loan Agreement with First National Bank of Omaha. The Loan
Agreement provides for loans in the amounts of $2,000,000 (the "Term Loan") and
$3,000,000 (the "Bridge Loan"), together with a $5,500,000 Revolving Line of
Credit (the "Revolving Loan"). The Term Loan bears interest at the greater of
prime rate plus 50 basis points, or 4.5%, and is to be repaid in monthly
installments of $37,514, with the then remaining principal balance plus accrued
interest to be paid on the third anniversary of the Loan Agreement. The Bridge
Loan bears interest at the same rate as the Term Loan. Accrued interest thereon
is payable monthly and the principal amount thereof, together with accrued
interest. The bridge loan was paid off with the proceeds from the RBC term loan.
The Revolving Loan bears interest at the greater of prime rate or 4.5%. The
revolving loan was renewed extending the due date to May 31, 2006. All
outstanding obligations under the Loan Agreement are collateralized by security
interests in the assets of Mtron and PTI, as well as by a mortgage on PTI's
premises. The Loan Agreement contains a variety of affirmative and negative
covenants of types customary in an asset-based lending facility. The Loan
Agreement also contains financial covenants relating to maintenance of levels of
minimal tangible net worth and working capital, and current, leverage and fixed
charge ratios, restricting the amount of capital expenditures.
On October 14, 2004, in connection with the acquisition of PTI, the Company
provided $1,800,000 of subordinated financing to Mtron/PTI and Mtron/PTI issued
a subordinated promissory note to the Company in such amount increasing the
subordinated total to $2,500,000.
The Company has guaranteed a letter of credit issued to the First National
Bank of Omaha on behalf of its subsidiary, Mtron Industries, Inc. As of December
31, 2005, the $650,000 letter of credit issued by Bank of America to The First
National Bank of Omaha was secured by a $650,000 deposit at Bank of America. The
Company's outstanding letter of credit was reduced from $1,000,000 to $650,000
during 2005.
On June 30, 2005, Mtron/PTI renewed its credit agreement with First National
Bank of Omaha extending the due date to May 31, 2006. Mtron/PTI's short-term
credit facility totals $5,500,000, of which $3,418,000 was available for future
borrowings.
24
On June 29, 2005, Lynch Systems entered into an extension agreement with
SunTrust Bank to extend the due date of it credit agreement until August 31,
2005. Lynch Systems $7,000,000 short-term credit facility was reduced to
$4,300,000 in accordance with the extension agreement, of which $200,000 was
available for letters of credit. The extension agreement also calls for the
acceleration of the existing Lynch Systems term loan from August, 2013 to August
31, 2005. On August 29, 2005, Lynch Systems entered into a first amendment to
the extension agreement, dated August 25, 2005 to extend until September 30,
2005 the due date of indebtedness. On October 6, 2005, Lynch Systems entered
into a first amended and restated extension agreement by and among Lynch
Systems, Lynch Corporation and SunTrust Bank ("SunTrust"), to extend until
December 31, 2005 the due date of all remaining indebtedness of Lynch Systems to
SunTrust. On December 30, 2005, Lynch Systems entered into a first amendment to
first amended and restated extension agreement to extend until March 1, 2006 the
due date of all remaining indebtedness of Lynch Systems to SunTrust. This loan
was repaid in full in February 2006. At December 31, 2005, there were borrowings
under the term loan of $378,000.
On May 12, 2005, Venator Merchant Fund, L.P. ("Venator") made a loan to
Lynch Corporation in the amount of $700,000 due September 11, 2005 or within
seven days after demand by Venator. Venator is an investment limited partnership
controlled by Lynch's Chairman of the Board, Marc Gabelli. On September 8, 2005,
Lynch Corporation entered into a Letter Agreement extending the maturity date of
its Promissory Note in the principal amount of $700,000 to Venator. The maturity
date of the Promissory Note, which was to have been September 11, 2005 or within
seven days after demand by Venator, was changed to November 10, 2005 or within
seven days after demand by Venator. The loan was approved by the Audit Committee
of the Board of Directors of Lynch. This loan, along with $30,000 of interest
due, was repaid in full on December 22, 2005.
On September 30, 2005, Mtron/PTI entered into a Loan Agreement with RBC
Centura Bank ("RBC"). The Loan Agreement provides for a loan in the amount of
$3,040,000 (the "RBC Term Loan"), the proceeds of which were used to pay off the
$3,000,000 bridge loan with First National Bank of Omaha which had been due
October 2005. The RBC Term Loan bears interest at LIBOR Base Rate plus 2.75% and
is to be repaid in monthly installments based on a twenty year amortization,
with the then remaining principal balance to be paid on the fifth anniversary of
the RBC Term Loan. The RBC Term Loan is secured by a mortgage on PTI's premises.
In connection with this RBC Term Loan, Mtron/PTI entered into a five-year
interest rate swap from which it will receive periodic payments at the LIBOR
Base Rate and make periodic payments at a fixed rate of 7.51% with monthly
settlement and rate reset dates.
Effective October 6, 2005, Lynch Systems entered into a loan agreement (the
"BB&T Loan Agreement") with Branch Banking and Trust Company ("BB&T"). The BB&T
Loan Agreement provides for a line of credit in the maximum principal amount of
$3,500,000. This line of credit replaces the working capital revolving loan that
Lynch Systems had with SunTrust Bank, which expired by its terms on September
30, 2005. Borrowings under the BB&T Loan Agreement bear interest at the One
Month LIBOR Rate plus 2.75% and accrued interest is payable on a monthly basis,
with the principal balance due to be paid on the first anniversary of the Loan
Agreement. At December 31, 2005, there were outstanding Letters of Credit of
$398,000 and borrowings on the line of credit of $756,000.
The BB&T Loan Agreement contains a variety of affirmative and negative
covenants of types customary in an asset-based lending facility, including those
relating to reporting requirements, maintenance of records, properties and
corporate existence, compliance with laws, incurrence of other indebtedness and
liens, restrictions on certain payments and transactions and extraordinary
corporate events. The BB&T Loan Agreement also contains financial covenants
relating to maintenance of levels of minimal tangible net worth, a debt to worth
ratio, and restricting the amount of capital expenditures. In addition, the BB&T
Loan Agreement provides that the following will constitute events of default
thereunder, subject to certain grace periods: (i) payment defaults; (ii) failure
to meet reporting requirements; (iii) breach of other obligations under the BB&T
Loan Agreement; (iv) default with respect to other material indebtedness; (v)
final judgment for a material amount not discharged or stayed; and (vi)
bankruptcy or insolvency.
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 in its acquisition program,
shareholders' desire for capital appreciation of their holdings and the current
25
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 2006. (See Note 4 to the Consolidated Financial Statements - "Notes Payable
to Banks and Long-term Debts" - for restrictions on the company's assets).
OFF-BALANCE SHEET ARRANGEMENTS
Aside from the Company's stand-by Letter of Credit in the amount of
$650,000, the Company does not have any off-balance sheet arrangements.
AGGREGATE CONTRACTUAL OBLIGATIONS
Details of the Company's contractual obligations at December 31, 2005, for
short-term debt, long-term debt, leases, purchases and other long term
obligations are as follows (see Notes 4 and 11 to the Consolidated Financial
Statements):
PAYMENTS DUE BY PERIOD - INCLUDING INTEREST
-------------------------------------------
(IN THOUSANDS)
LESS THAN 1 MORE THAN 5
CONTRACTUAL OBLIGATIONS TOTAL YEAR 1 - 3 YEARS 3 - 5 YEARS YEARS
------------------------- ---------- ----------- ----------- ----------- -----------
Short-term Debt $ 3,042 $ 3,042 $ -- $ -- $ --
Long-term Debt Obligations 7,591 1,615 3,062 2,914 --
Capital Lease Obligations -- -- -- -- --
Operating Lease Obligations 264 141 120 3 --
Purchase Obligations -- -- -- -- --
Other Long-term Liabilities -- -- -- -- --
---------- ----------- ---------- ------------ ----------
TOTAL $ 10,897 $ 4,798 $ 3,182 $ 2,917 $ --
========== =========== ========== ============ ==========
CRITICAL ACCOUNTING POLICIES
The Company's significant accounting policies are described in Note 1 to
the Consolidated Financial Statements included in Item 8 of this Form 10-K. The
Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, the Company evaluates its
estimates, including those related to the carrying value of inventories,
realizability of outstanding accounts receivable, percentage of completion of
long-term contracts, and the provision for income taxes. The Company bases its
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. In the past, actual results
have not been materially different from the Company's estimates. However,
results may differ from these estimates under different assumptions or
conditions.
The Company has identified the following as critical accounting policies,
based on the significant judgments and estimates used in determining the amounts
reported in its consolidated financial statements:
ACCOUNTS RECEIVABLE
Accounts receivable on a consolidated basis consist principally of amounts
due from both domestic and foreign customers. Credit is extended based on an
evaluation of the customer's financial condition and collateral is not generally
required except at Lynch Systems where collateral generally consists of letters
of credit on large machine and international purchases. In relation to export
sales, the Company requires letters of credit supporting a significant portion
of the sales price prior to production to limit exposure to credit risk. Certain
subsidiaries and business segments have credit sales to industries that are
26
subject to cyclical economic changes. The Company maintains an allowance for
doubtful accounts at a level that management believes is sufficient to cover
potential credit losses.
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of our clients to make required payments. We base
our estimates on our historical collection experience, current trends, credit
policy and relationship of our accounts receivable and revenues. In determining
these estimates, we examine historical write-offs of our receivables and review
each client's account to identify any specific customer collection issues. If
the financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payment, additional allowances may be
required. Our failure to estimate accurately the losses for doubtful accounts
and ensure that payments are received on a timely basis could have a material
adverse effect on our business, financial condition, and results of operations.
INVENTORY VALUATION
Inventories are stated at the lower of cost or market value. Inventories
valued using the last-in-first-out (LIFO) method comprised approximately 52% and
47% of consolidated inventories at December 31, 2005 and 2004, respectively. The
balance of inventories at December 31, 2005 and 2004 are valued using the
first-in-first-out (FIFO) method. If actual market conditions are more or less
favorable than those projected by management, adjustments may be required.
REVENUE RECOGNITION AND ACCOUNTING FOR LONG-TERM CONTRACTS
Revenues, with the exception of certain long-term contracts discussed
below, are recognized upon shipment when title passes. Shipping costs are
included in manufacturing cost of sales.
Lynch Systems is engaged in the manufacture and marketing of glass-forming
machines and specialized manufacturing machines. Certain sales contracts require
an advance payment (usually 30% 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 compared to
total estimated project costs (cost to cost basis). At December 31, 2005 and
2004, unbilled accounts receivable were $902,000 and $2,507,000, respectively.
The percentage of completion method is used since reasonably dependable
estimates of the revenues and costs applicable to various stages of a contract
can be made, based on historical experience and milestones set in the contract.
Financial management maintains contact with project managers to discuss the
status of the projects and, for fixed-price engagements, financial management is
updated on the budgeted costs and required resources to complete the project.
These budgets are then used to calculate revenue recognition and to estimate the
anticipated income or loss on the project. In the past, we have occasionally
been required to commit unanticipated additional resources to complete projects,
which have resulted in lower than anticipated profitability or losses on those
contracts. We may experience similar situations in the future. Provisions for
estimated losses on contracts are made during the period in which such losses
become probable and can be reasonably estimated. To date, such losses have not
been significant.
WARRANTY EXPENSE
Lynch Systems provides a full warranty to worldwide customers who acquire
machines. The warranty covers both parts and labor and normally covers a period
of one year or thirteen months. Based upon historical experience, the Company
provides for estimated warranty costs based upon three to five percent of the
selling price of the machine. The Company periodically assesses the adequacy of
the reserve and adjusts the amounts as necessary.
27
(IN THOUSANDS)
Balance, January 1, 2005 $ 466
Warranties issued during the year 186
Settlements made during the year (282)
Changes in liabilities for pre-existing warranties during the year, including expirations (13)
-------
Balance, December 31, 2005 $ 357
=======
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes,"
which requires recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. A valuation allowance is recorded for
deferred tax assets whose realization is not likely. As of December 31, 2005 and
December 31, 2004, a valuation allowance of $2,212,000 and $2,070,000,
respectively, was recorded.
The carrying value of the Company's net deferred tax asset at December 31,
2005 and 2004 of $111,000, is equal to the amount of the Company's carry-forward
alternative minimum tax ("AMT") at that date.
The calculation of tax liabilities involves dealing with uncertainties in
the application of complex tax regulations in several different tax
jurisdictions. The Company evaluates the exposure associated with the various
filing positions and records estimated reserves for probable exposures. Based on
the Company's evaluation of current tax positions, it believes that it has
appropriately accrued for probable exposures.
EARNINGS PER SHARE AND STOCK BASED COMPENSATION
The Company's basic and diluted earnings per share are equivalent, as the
Company has no dilutive securities.
At December 31, 2005, the Company has a stock-based employee compensation
plan, which is described in Note 9 to the Consolidated Financial Statements -
"Stock Options Plans". The Company accounts for the plan under the recognition
and measurement principles of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations. No
stock-based employee compensation cost is reflected in net income, as all
options granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of grant. The Company provides
pro forma disclosures of the compensation expense determined under the fair
value provisions of Financial Accounting Standards Board Statement No. 123,
"Accounting for Stock-Based Compensation." See Notes 1 and 9 to the Consolidated
Financial Statements.
RECENT ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued SFAS No. 123 (Revised 2004), "Share-Based
Payment" ("SFAS 123-R"), which replaces SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123") and supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees." SFAS 123-R requires companies to
measure compensation costs for share-based payments to employees, including
stock options, at fair value and expense such compensation over the service
period beginning with the first interim or annual period after June 15, 2005.
The pro forma disclosures previously permitted under SFAS 123 will no longer be
an alternative to financial statement recognition. The Company is required to
adopt SFAS 123-R in the third quarter of fiscal 2005. Under SFAS 123-R,
companies must determine the appropriate fair value model to be used for valuing
share-based payments, the amortization method for compensation cost and the
transition method to be used at date of adoption. The transition methods include
prospective and retroactive adoption options. Management is evaluating the
requirements of SFAS 123-R. Since the Company currently has no unvested stock
options outstanding, the impact of adopting SFAS 123-R will have no effect on
the Company's financial results for 2005.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an
amendment of Accounting Research Bulletin No. 43, Chapter 4". The amendments
made by SFAS No. 151 clarify that abnormal amounts of idle facility expense,
freight handling costs and waste materials (spoilage) should be recognized as
current period charges and require the allocation of fixed production overheads
to inventory based on the normal capacity of the production facilities. SFAS No.
151 is the result of a broader effort by the FASB to improve the comparability
of cross-border financial reporting by working with the International Accounting
Standards Board toward development of a single set of high-quality accounting
standards. The guidance is effective for inventory costs incurred during fiscal
years beginning after June 15, 2005. The adoption of SFAS No. 151 is not
expected to have a material effect on our consolidated financial position or
results of operations.
28
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections - A Replacement of APB Opinion No. 20 and FASB No. 3." SFAS No. 154
applies to all voluntary changes in accounting principals and requires
retrospective application to prior periods' financial statements of changes in
accounting principles, unless it is impracticable, SFAS No. 154 requires that a
change in depreciation, amortization, or depletion method for long lived,
nonfinancial assets be accounted for as a change of estimate affected by a
change in accounting principles. SFAS No. 154 also carries forward without
change the guidance in APB Opinion No. 20 with respect to accounting for changes
in accounting estimates, changes in the reporting unit and correction of an
error in previously issued financial statements. We are required to adopt SFAS
No. 154 for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. The adoption of SFAS No. 154 is not expected
to have a material effect on our consolidated financial position or results of
operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT 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 and cash equivalents and restricted cash
(approximately $6,162,000 at December 31, 2005). The Company generally finances
the debt portion of the acquisition of long-term assets with fixed and variable
rate, long-term debt. 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. There
has been no significant change in market risk since December 31, 2005.
As the Company's international sales are in U.S. Dollars, there is no
monetary risk.
At December 31, 2005, $4,906,000 of the Company's debt bears interest at
variable rates. Accordingly, the Company's earnings and cash flows are affected
by changes in interest rates. In October 2005, in connection with the RBC Term
Loan, Mtron/PTI entered into a five-year interest rate swap from which it will
receive periodic payments at the LIBOR Base Rate and make periodic payments at a
fixed rate of 7.51% with monthly settlement and rate reset dates, effectively
reducing the variable rate debt to $4,906,000, from $7,936,000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 15(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
The Chief Executive Officer and Principal Financial Officer have concluded
that the Company's disclosure controls and procedures were effective as of the
end of the period covered by this report based on the evaluation of these
controls and procedures required by Exchange Act Rule 13a-15.
There have been no changes in the Company's internal control over financial
reporting that occurred during the Company's last fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 is either included in Item 1 of
this Form 10-K or included in Company's Proxy Statement for its 2006 Annual
Meeting of Shareholders, which information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is included in the Company's Proxy
Statement for its 2006 Annual Meeting of Shareholders, which information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this Item 12 is either provided in Item 5 or
included in the Company's Proxy Statement for its 2006 Annual Meeting of
Shareholders, which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is included in the Company's Proxy
Statement for its 2006 Annual Meeting of Shareholders, which information is
incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item 14 is included in the Company's Proxy
Statement for its 2006 Annual Meeting of Shareholders, which information is
incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this Form 10-K Annual Report:
(1) Financial Statements:
The Report of Independent Registered Public Accounting Firm
and the following Consolidated Financial Statements of the
Company are included herein:
Consolidated Balance Sheets at December 31, 2005 and 2004
Consolidated Statements of Operations -- Years ended December
31, 2005, 2004 and 2003
Consolidated Statements of Shareholders' Equity --
Years ended December 31, 2005, 2004, and 2003
Consolidated Statements of Cash Flows -- Years ended
December 31, 2005, 2004, and 2003
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules as of December 31, 2005 and 2004
and for the three years ended December 31, 2005:
Schedule I -- Condensed Financial Information of Company
Schedule II -- Valuation and Qualifying Accounts
30
(3) Exhibits
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.
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
3(a) Restated Articles of Incorporation of the Company (incorporated by
reference to Exhibit 3(a) to the Company's Form 10-K for the year ended
December 31, 2004).
(b) Articles of Amendment of the Articles of Incorporation of the Company
(incorporated by reference to Exhibit 3(b) to the Company's Form 10-K for
the year ended December 31, 2004).
(c) By-laws of the Company (incorporated by reference to Exhibit 3.1 to the
Company's Current Report on Form 8-K dated December 22, 2004).
10(a) Lynch Corporation 401(k) Savings Plan (incorporated by reference to
Exhibit 10(b) to the Company's Annual Report on Form 10-K for the period
ended December 31, 1995).
(b) Directors Stock Plan (incorporated by reference to Exhibit 10(o) to the
Company's Form 10-K for the year ended December 31, 1997).
(c) Lynch Corporation 2001 Equity Incentive Plan adopted December 10, 2001
(incorporated by reference to Exhibit 4 to the Company's Form 8-K filed
on December 29, 2005.
(d) Amended and Restated Credit Agreement by and between Lynch Systems, Inc.
and SunTrust Bank dated as of June 10, 2002 (incorporated by reference to
Exhibit 10(z) to the Company's Form 10-K for the year ended December 31,
2002).
(e) Unlimited Continuing Guaranty Agreement by Guarantor, Lynch Corporation,
dated June 10, 2002 (incorporated by reference to Exhibit 10(aa) to the
Company's Form 10-K for the year ended December 31, 2002).
(f) First Amendment and Waiver to Amended and Restated Credit Agreement
between Lynch Systems, Inc. and SunTrust Bank dated May 30, 2003
(incorporated by reference to Exhibit 10(ee) to the Company's Form 10-Q
for the period ending June 30, 2003).
(g) Term Loan Promissory Note between Lynch Systems, Inc. and SunTrust Bank
dated August 4, 2003 (incorporated by reference to Exhibit 10(ff) to the
Company's Form 10-Q for the period ending June 30, 2003).
(h) Second Amendment to Security Deed and Agreement dated August 4, 2003
between Lynch Systems, Inc. and SunTrust Bank (incorporated by reference
to Exhibit 10(gg) to the Company's Form 10-Q for the period ending June
30, 2003).
(i) Mortgage dated October 21, 2002 by Mortgagor, Mtron Industries, Inc., to
Mortgagee, Yankton Area Progressive Growth, Inc. (incorporated by
reference to Exhibit 10(hh) to the Company's Annual Report on Form 10-K
for the year ended December 31, 2003).
(j) Promissory Note between Mtron Industries, Inc. and Yankton Area
Progressive Growth, Inc., dated October 21, 2002 (incorporated by
reference to Exhibit 10(ii) to the Company's Annual Report on Form 10-K
for the year ended December 31, 2003).
(k) Standard Loan Agreement by and between Mtron Industries, Inc. and
Areawide Business Council, Inc., dated October 10, 2002 and Exhibits
thereto (incorporated by reference to Exhibit 10(jj) to the Company's
Annual Report on Form 10-K for the year ended December 31, 2003).
(l) Loan Agreement by and between Mtron Industries, Inc. and South Dakota
Board of Economic Development, dated December 19, 2002 (incorporated by
reference to Exhibit 10(kk) to the Company's Annual Report on Form 10-K
for the year ended December 31, 2003).
(m) Promissory Note between Mtron Industries, Inc. and South Dakota Board of
Economic Development, dated December 19, 2002 (incorporated by reference
to Exhibit 10(ll) to the Company's Annual Report on Form 10-K for the
year ended December 31, 2003).
31
(n) Employment Agreement by and between Mtron Industries, Inc. and South
Dakota Board of Economic Development, dated December 19, 2002
(incorporated by reference to Exhibit 10(mm) to the Company's Annual
Report on Form 10-K for the year ended December 31, 2003).
(o) Loan Agreement by and among Mtron Industries, Inc., Piezo Technology,
Inc. and First National Bank of Omaha (incorporated by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K dated October
20, 2004).
(p) Unconditional Guaranty for Payment and Performance with First National
Bank of Omaha (incorporated by reference to Exhibit 10.2 to the Company's
Current Report on Form 8-K dated October 20, 2004).
(q) Registration Rights Agreement by and between the Company and Venator
Merchant Fund, L.P. dated October 15, 2004 (incorporated by reference to
Exhibit 10.4 to the Company's Current Report on Form 8-K dated October
20, 2004).
(r) Form of Indemnification Agreement dated as of February 28, 2005 by and
between Lynch Corporation and its executive officers (incorporated herein
by reference to Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q filed on May 16, 2005).
(s) Promissory Note made by Lynch Corporation to Venator Merchant Fund, L.P.,
dated May 12, 2005 (incorporated herein by reference to Exhibit 10.1 the
Company's Current Report on Form 8-K filed on May 16, 2005).
(t) First Amendment to the Loan Agreement by and among M-Tron Industries,
Inc., Piezo Technology, Inc. and First National Bank of Omaha, dated May
31, 2005 (incorporated herein by reference to Exhibit 10.2 to the
Company's Current Report of on Form 8-K filed on July 6, 2005).
(u) Letter Agreement, dated September 8, 2005, by and between Lynch
Corporation and Venator Merchant Fund L.P. extending the maturity date of
the promissory note in favor of Venator Merchant Fund L.P. (incorporated
herein by reference to Exhibit 10.1 to the Company's Current Report on
Form 8-K filed on September 9, 2005).
(v) Loan Agreement, by and among M-Tron Industries, Inc., Piezo Technology,
Inc. and RBC Centura Bank, dated September 30, 2005 (incorporated herein
by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K
filed on October 4, 2005).
(w) Unconditional Guaranty for Payment by and between Lynch Corporation and
RBC Centura Bank, dated September 30, 2005 (incorporated herein by
reference to Exhibit 10.2 to the Company's Current Report on Form 8-K
filed on October 4, 2005).
(x) Loan Agreement, by and among Lynch Corporation, Lynch Systems and Branch
Bank and Trust Company, dated September 29, 2005, effective October 6,
2005 (incorporated herein by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K on October 11, 2005).
(y) Guaranty Agreement for Payment and Performance by and between Lynch
Corporation and Branch Bank and Trust Company, dated September 29, 2005,
effective October 6, 2005 (incorporated herein by reference to Exhibit
10.2 to the Company's Current Report on Form 8-K filed on October 11,
2005).
14 Amended and Restated Business Conduct Policy (incorporated by reference
to Exhibit 14 to the Company's Form 10-K for the year ended December 31,
2004).
21 Subsidiaries of the Company (incorporated by reference to Exhibit 21 to
the Company's Form 10-K for the year ended December 31, 2004).
23* Consent of Independent Registered Public Accounting Firm - Ernst & Young
LLP.
31(a)* Certification by Principal Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31(b)* Certification by Principal Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32(a)* Certification by Principal Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32(b)* Certification by Principal Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
----------
* Filed herewith.
32
The Exhibits listed above have been filed separately with the Securities
and Exchange Commission in conjunction with this Annual Report on Form 10-K or
have been incorporated by reference into this Annual Report on Form 10-K. Lynch
Corporation will furnish to each of its shareholders a copy of any such Exhibit
for a fee equal to Lynch Corporation's cost in furnishing such Exhibit. Requests
should be addressed to the Office of the Secretary, Lynch Corporation, 140
Greenwich Ave, 4th Floor, Greenwich, Connecticut 06830.
33
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
LYNCH CORPORATION
March 28, 2006 BY: /S/ JOHN C. FERRARA
--------------------------------------
JOHN C. FERRARA
CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated:
SIGNATURE CAPACITY DATE
/s/ JOHN C. FERRARA Principal Executive Officer and March 28, 2006
-------------------------------------------------- Director
JOHN C. FERRARA
/s/ MARC GABELLI Chairman of the Board of Directors March 28, 2006
-------------------------------------------------- and Director
MARC GABELLI
/s/ E. VAL CERUTTI Director March 28, 2006
--------------------------------------------------
E. VAL CERUTTI
/s/ AVRUM GRAY Director March 28, 2006
--------------------------------------------------
AVRUM GRAY
/s/ ANTHONY R. PUSTORINO Director March 28, 2006
--------------------------------------------------
ANTHONY R. PUSTORINO
/s/ EUGENE HYNES Principal Financial and Accounting Officer March 28, 2006
--------------------------------------------------
EUGENE HYNES
34
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
Lynch Corporation
We have audited the accompanying consolidated balance sheets of Lynch
Corporation and subsidiaries as of December 31, 2005 and 2004, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 2005. Our audits also
included the financial statement schedules listed in the index at Item 15(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 the standards of the Public
Company Accounting Oversight Board (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. We were not engaged to
perform an audit of the Company's internal control over financial reporting. Our
audit included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also 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, and 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, 2005 and 2004 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2005, in conformity with U.S.
generally accepted accounting principles. Also, in our opinion, the related
financial statements 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
Providence, Rhode Island
March 20, 2006
35
LYNCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31,
2005 2004
ASSETS
Current Assets:
Cash and cash equivalents.......................................................... $ 5,512 $ 2,580
Restricted cash (Note 1)........................................................... 650 1,125
Investments - marketable securities (Note 1)....................................... 2,738 3,609
Accounts receivable, less allowances of $325 and $92, respectively (Note 1)........ 7,451 6,360
Unbilled accounts receivable (Note 1).............................................. 902 2,507
Inventories (Note 3)............................................................... 7,045 7,852
Deferred income taxes.............................................................. 111 111
Prepaid expense.................................................................... 461 626
----------- -----------
Total Current Assets............................................................ 24,870 24,770
Property, Plant and Equipment
Land .............................................................................. 855 871
Buildings and improvements......................................................... 5,767 5,811
Machinery and equipment............................................................ 14,606 14,443
----------- -----------
21,228 21,125
Less: Accumulated depreciation..................................................... (14,025) (12,669)
----------- -----------
7,203 8,456
Other assets......................................................................... 591 657
----------- -----------
Total Assets.................................................................... $ 32,664 $ 33,883
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable to banks............................................................. $ 2,838 $ 5,557
Trade accounts payable............................................................. 2,900 2,667
Accrued warranty expense........................................................... 357 466
Accrued compensation expense....................................................... 1,372 1,101
Accrued income taxes............................................................... 673 966
Accrued professional fees.......................................................... 574 534
Margin liability on marketable securities.......................................... 330 1,566
Other accrued expenses............................................................. 1,312 1,139
Commitments and contingencies (Note 11)............................................ 859 775
Customer advances.................................................................. 515 2,115
Current maturities of long-term debt............................................... 1,215 3,842
----------- -----------
Total Current Liabilities....................................................... 12,945 20,728
Long-term debt....................................................................... 5,031 3,162
Total Liabilities............................................................... 17,976 23,890
Shareholders' Equity
Common stock, $0.01 par value -- 10,000,000 shares authorized; 2,188,510 and
1,649,834 shares issued; 2,154,702 and 1,632,126 shares outstanding, respectively.. 22 16
Additional paid-in capital......................................................... 21,053 17,404
Accumulated deficit................................................................ (6,576) (7,786)
Accumulated other comprehensive income (Note 9).................................... 835 849
Treasury stock, at cost, of 33,808 and 17,708 shares, respectively................. (646) (490)
----------- -----------
Total Shareholders' Equity...................................................... 14,688 9,993
----------- -----------
Total Liabilities and Shareholders' Equity...................................... $ 32,664 $ 33,883
=========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
36
LYNCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
----------------------------------------
2005 2004 2003
------------- ------------- ------------
REVENUES $ 46,183 $ 33,834 $ 27,969
Costs and expenses:
Manufacturing cost of sales 31,448 25,784 20,319
Selling and administrative 13,407 10,163 8,482
Litigation provision (Note 11) 150 775 --
------------- ------------- ------------
OPERATING PROFIT (LOSS) 1,178 (2,888) (832)
Other income (expense):
Investment income 608 15 534
Interest expense (847) (360) (282)
Other income 62 7 763
------------- ------------- ------------
(177) (338) 1,015
------------- ------------- ------------
INCOME (LOSS) BEFORE INCOME TAXES 1,001 (3,226) 183
Benefit (Provision) for income taxes 209 (100) (73)
------------- ------------- ------------
NET INCOME (LOSS) $ 1,210 $ (3,326) $ 110
============= ============= ============
Weighted average shares outstanding 1,647,577 1,524,863 1,497,900
------------- ------------- ------------
Basic and diluted income (loss) per share $ 0.73 $ (2.18) $ 0.07
============= ============= ============
SEE ACCOMPANYING NOTES TO CONSOLIDATING FINANCIAL STATEMENTS.
37
LYNCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
ACCUMULATED
SHARES OF ADDITIONAL OTHER
COMMON STOCK COMMON PAID-IN ACCUMULATED COMPREHENSIVE TREASURY
OUTSTANDING STOCK CAPITAL DEFICIT INCOME (LOSS) STOCK TOTAL
------------ -------- ---------- ---------- ------------- --------- ---------
Balance at December 31, 2002 1,497,883 $ 15 $ 15,645 $ (4,570) $ 302 $ (458) $ 10,934
Comprehensive Income (Loss):
Net income for year -- -- -- 110 -- -- 110
Other comprehensive loss -- -- -- -- (11) -- (11)
----------
Comprehensive Income 99
------------ --------- ----------- ---------- --------- ------- ----------
Balance at December 31, 2003 1,497,883 15 15,645 (4,460) 291 (458) 11,033
Comprehensive Income (Loss):
Net loss for year -- -- -- (3,326) -- -- (3,326)
Other comprehensive income -- -- -- -- 558 -- 558
Comprehensive Loss (2,768)
----------
Issuance of Common Stock to
fund acquisition, net of
fees of $40,000 136,643 1 1,759 -- -- -- 1,760
Purchase of Treasury Stock (2,400) -- -- -- -- (32) (32)
------------ --------- ----------- ---------- --------- ------- ----------
Balance at December 31, 2004 1,632,126 16 17,404 (7,786) 849 (490) 9,993
Comprehensive Income (Loss):
Net income for year -- -- -- 1,210 -- -- 1,210
Other comprehensive loss -- -- -- -- (14) -- (14)
----------
Comprehensive Income 1,196
Issuance of Common
Stock rights offering,
net of fees of $250,000 538,676 6 3,649 -- -- -- 3,655
Purchase of Treasury Stock (16,100) -- -- -- -- (156) (156)
-----------------------------------------------------------------------------------------------
Balance at December 31, 2005 2,154,702 $ 22 $ 21,053 $ (6,576) $ 835 $ (646) $ 14,688
===============================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATING FINANCIAL STATEMENTS.
38
LYNCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
-------------------------------
2005 2004 2003
-------- -------- --------
OPERATING ACTIVITIES
Net income (loss) $ 1,210 $(3,326) $ 110
Adjustments to reconcile net income (loss) to net cash provided by (used
in) operating activities:
Depreciation 1,398 980 982
Amortization of definite-lived intangible assets 111 187 257
(Gain) loss on disposal of fixed assets (69) 47 --
Gain realized on sale of marketable securities (567) -- (483)
Lawsuit settlement provision 150 775 --
Deferred taxes -- (6) 150
Other -- -- (22)
Changes in operating assets and liabilities:
Receivables 514 (1,505) (2,273)
Inventories 807 (456) 503
Accounts payable and accrued liabilities 249 (198) 1,617
Other assets/liabilities (1,520) 1,592 (1,385)
------- ------- -------
Net cash provided by (used in) operating activities 2,283 (1,910) (544)
INVESTING ACTIVITIES
Capital expenditures (343) (440) (141)
Restricted cash 475 -- --
Acquisition, net of cash acquired (See Note 2) -- (7,348) --
Proceeds from sale of marketable securities 1,348 -- 1,041
Proceeds from sale of fixed assets 307 -- --
Payment on margin liability on marketable securities (1,236) (300) (454)
Purchase of marketable securities -- (754) (1,565)
------- ------- -------
Net cash provided by (used in) investing activities 551 (8,842) (1,119)
FINANCING
Net (repayments) borrowings of notes payable (2,719) 3,581 (252)
Repayment of long--term debt (758) (972) (884)
Proceeds from long--term debt -- 5,000 794
Issuance of common stock, net of fees 3,655 1,760 --
Purchase of treasury stock (156) (32) --
Other 76 14 --
------- ------- -------
Net cash provided by (used in) financing activities 98 9,351 (342)
Increase (decrease) in cash and cash equivalents 2,932 (1,401) (2,005)
------- ------- -------
Cash and cash equivalents at beginning of year 2,580 3,981 5,986
------- ------- -------
Cash and cash equivalents at end of year $ 5,512 $ 2,580 $ 3,981
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest Paid $ 772 $ 343 $ 282
======= ======= =======
SEE ACCOMPANYING NOTES TO CONSOLIDATING FINANCIAL STATEMENTS
39
LYNCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
1. ACCOUNTING AND REPORTING POLICIES
ORGANIZATION
Lynch Corporation (the "Company" or "Lynch") is a diversified holding
company with subsidiaries engaged in manufacturing primarily in the United
States. The Company has three principal operating subsidiaries M-tron
Industries, Inc. ("Mtron"), Piezo Technology, Inc. ("PTI") (acquired effective
September 30, 2004) and Lynch Systems, Inc ("Lynch Systems"). The combined
operations of Mtron and PTI are referred to herein as Mtron/PTI. Information on
the Company's operations by segment and geographic area is included in Note 12
-- "Segment Information".
As of December 31, 2005, the Subsidiaries of the Company are as follows:
OWNED BY
LYNCH
---------
Lynch Systems, Inc..................................... 100.0%
M-tron Industries, Inc................................. 100.0%
M-tron Industries, Ltd............................ 100.0%
Piezo Technology, Inc............................. 100.0%
Piezo Technology India Private Ltd........ 99.9%
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Lynch
Corporation and entities in which Lynch had majority voting control. All
intercompany transactions and accounts have been eliminated in consolidation.
USES OF ESTIMATES
The preparation of consolidated financial statements in conformity with
U.S. generally accepted accounting principles 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.
RECLASSIFICATIONS
Certain prior year amounts in the accompanying consolidated financial
statements have been reclassified to conform to current year presentation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of highly liquid investments with a
maturity of less than three months when purchased.
At December 31, 2005 and 2004, assets of $47,000 and $145,000,
respectively, 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.
40
RESTRICTED CASH
At December 31, 2005 and 2004, the Company had $650,000 and $1,125,000,
respectively, of restricted cash that secures a letter of credit issued to the
Bank of Omaha as collateral for Mtron's loans. (See Note 4 to the Consolidated
Financial Statements - "Notes Payable to Banks and Long-term Debt").
INVESTMENTS
Investments in marketable equity securities are classified as available for
sale and are recorded at fair value as a component of other assets, pursuant to
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". Unrealized gains and losses on these
securities, net of income taxes, are included in shareholders' equity as a
component of accumulated other comprehensive income (loss). Investments in
non-marketable equity securities are accounted for under either the cost or
equity method of accounting. The Company periodically reviews investment
securities for impairment based on criteria that include the duration of the
market value decline. If a decline in the fair value of an investment security
is judged to be other than temporary, the cost basis is written down to fair
value with a charge to earnings.
The following is a summary of marketable securities (investments) held by
the Company (in thousands):
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
EQUITY SECURITIES COST GAINS LOSSES FAIR VALUE
------------------ ------ ----- ------ ----------
December 31, 2005 $1,991 $747 -- $2,738
December 31, 2004 $2,774 $835 -- $3,609
The Company has a margin liability against these investments of $330,000
and $1,566,000 as of December 31, 2005 and 2004, respectively, that must be
settled upon the disposition of the related securities, whose fair value is
based on quoted market prices.
ACCOUNTS RECEIVABLE
Accounts receivable on a consolidated basis consist principally of amounts
due from both domestic and foreign customers. Credit is extended based on an
evaluation of the customer's financial condition and collateral is not generally
required except at Lynch Systems. In relation to export sales, the Company
requires letters of credit supporting a significant portion of the sales price
prior to production to limit exposure to credit risk. Certain credit sales are
made to industries that are subject to cyclical economic changes. The Company
maintains an allowance for doubtful accounts at a level that management believes
is sufficient to cover potential credit losses.
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its clients to make required payments. Estimates
are based on historical collection experience, current trends, credit policy and
relationship between accounts receivable and revenues. In determining these
estimates, the Company examines historical write-offs of its receivables and
reviews each client's account to identify any specific customer collection
issues. If the financial condition of its customers were to deteriorate,
resulting in an impairment of their ability to make payment, additional
allowances may be required. The Company's failure to accurately estimate the
losses for doubtful accounts and ensure that payments are received on a timely
basis could have a material adverse effect on its business, financial condition,
and results of operations.
PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment are recorded at cost less accumulated
depreciation 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 5 years to 35 years
for buildings and improvements, and for 3 to 10 years for other fixed assets.
41
Property, plant, and equipment are periodically reviewed for indicators of
impairment. If any such indicators were noted, the Company would assess the
appropriateness of the assets' carrying value and record any impairment at that
time.
REVENUE RECOGNITION
Revenues, with the exception of certain long-term contracts discussed
below, are recognized upon shipment when title passes. Shipping costs are
included in manufacturing cost of sales.
ACCOUNTING FOR LONG-TERM CONTRACTS
Lynch Systems is engaged in the manufacture and marketing of glass-forming
machines and specialized manufacturing machines. Certain sales contracts require
an advance payment (usually 30% 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 generally 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 compared to
total estimated project costs (cost to cost basis). At December 31, 2005 and
2004, unbilled accounts receivable were $902.000 and $2,507,000, respectively.
The percentage of completion method is used since reasonably dependable
estimates of the revenues and costs applicable to various stages of a contract
can be made, based on historical experience and milestones set in the contract.
Financial management maintains contact with project managers to discuss the
status of the projects and, for fixed-price engagements, financial management is
updated on the budgeted costs and required resources to complete the project.
These budgets are then used to calculate revenue recognition and to estimate the
anticipated income or loss on the project. In the past, the Company has
occasionally been required to commit unanticipated additional resources to
complete projects, which has resulted in lower than anticipated profitability or
losses on those contracts. The Company may experience similar situations in the
future. Provisions for estimated losses on contracts are made during the period
in which such losses become probable and can be reasonably estimated. To date,
such losses have not been significant.
WARRANTY EXPENSE
Lynch Systems provides a full warranty to worldwide customers who acquire
machines. The warranty covers both parts and labor and normally covers a period
of one year or thirteen months. Based upon historical experience, the Company
provides for estimated warranty costs based upon three to five percent of the
selling price of the machine. The Company periodically assesses the adequacy of
the reserve and adjusts the amounts as necessary.
(IN THOUSANDS)
-----------------
Balance, January 1, 2004 $ 585
Warranties issued during the year 369
Settlements made during the year (460)
Changes in liabilities for pre-existing warranties
during the year, including expirations (28)
------
Balance, December 31, 2004 466
Warranties issued during the year 186
Settlements made during the year (282)
Changes in liabilities for pre-existing warranties
during the year, including expirations (13)
------
Balance, December 31, 2005 $ 357
======
42
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to operations as incurred. Such
costs were $2,505,000, $1,193,000 and $745,000 in 2005, 2004, and 2003,
respectively.
ADVERTISING EXPENSE
Advertising costs are charged to operations as incurred. Such costs were
$181,000, $183,000 and $136,000, in 2005, 2004 and 2003, respectively.
EARNINGS PER SHARE AND STOCK BASED COMPENSATION
The Company's basic and diluted earnings per share are equivalent, as the
Company has no dilutive securities.
At December 31, 2005, the Company has a stock-based employee compensation
plan that is described in Note 6 to the Consolidated Financial Statements -
"Stock Option Plans". The Company accounts for the plan under the recognition
and measurement principles of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations. No
stock-based employee compensation cost is reflected in net income, as all
options granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of grant. The Company provides
pro forma disclosures of the compensation expense determined under the fair
value provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation."
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
(IN THOUSANDS EXCEPT
PER SHARE INFORMATION)
--------------------------------------
DECEMBER 31,
--------------------------------------
2005 2004 2003
---------- ------------ ----------
Net (loss) income as reported $ 1,210 $ (3,326) $ 110
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effect -- (52) (154)
---------- ----------- ----------
Pro forma net (loss) income $ 1,210 $ (3,378) $ (44)
========== =========== ==========
Basic and diluted (loss) earnings per share:
As reported $ 0.73 $ (2.18) $ 0.07
Pro forma $ 0.73 $ (2.22) $ (0.03)
OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) includes the changes in fair value of
investments classified as available for sale, the changes in fair values of
derivatives designated as cash flow hedges and translation adjustments.
CONCENTRATION OF CREDIT RISK
In 2005, an electronics manufacturing services company accounted for
approximately 14% of Mtron/PTI's revenues, compared to approximately 18% for
Mtron/PTI's largest customer in 2004. No other customer accounted for more than
10% of its 2005 revenues. Sales to its ten largest customers accounted for
approximately 63% of revenues in 2005, compared to approximately 48% and 40% of
revenues for 2004 and 2003, respectively.
Lynch Systems' sales to its ten largest customers accounted for
approximately 79% and 80% of its revenues in 2005 and 2004, respectively. Lynch
Systems' sales to its largest customer accounted for approximately 46%, 36% and
43
27% of its revenues in 2005, 2004 and 2003, respectively. If a significant
customer reduces, delays or cancels its orders for any reason, the business and
results of operations of Lynch Systems would be negatively affected.
In 2005, approximately 14% of Mtron/PTI's revenue was attributable to
finished products that were manufactured by an independent contract manufacturer
located in both Korea and China. We expect this manufacturer to account for a
smaller but substantial portion of Mtron/PTI's revenues in 2006 and a material
portion of Mtron/PTI's revenues for the next several years. Mtron/PTI does not
have a written, long-term supply contract with this manufacturer. If this
manufacturer becomes unable to provide products in the quantities needed, or at
acceptable prices, Mtron/PTI would have to identify and qualify acceptable
replacement manufacturers or manufacture the products internally. Due to
specific product knowledge and process capability, Mtron/PTI could encounter
difficulties in locating, qualifying and entering into arrangements with
replacement manufacturers. As a result, a reduction in the production capability
or financial viability of this manufacturer, or a termination of, or significant
interruption in, Mtron/PTI's relationship with this manufacturer, may adversely
affect Mtron/PTI's results of operations and our financial condition.
SEGMENT INFORMATION
The Company reports segment information in accordance with Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 requires companies to
report financial and descriptive information for each operating segment based on
management's internal organizational decision-making structure. See Note 12 to
the Consolidated Financial Statements - "Segment Information" - for the detailed
presentation of business segments.
IMPAIRMENTS OF LONG-LIVED ASSETS
Long-lived assets, including intangible assets subject to amortization, are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. Management
assesses the recoverability of the cost of the assets based on a review of
projected undiscounted cash flows. In the event an impairment loss is
identified, it is recognized based on the amount by which the carrying value
exceeds the estimated fair value of the long-lived asset. If an asset is held
for sale, management reviews its estimated fair value less cost to sell. Fair
value is determined using pertinent market information, including appraisals or
broker's estimates, and/or projected discounted cash flows.
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 amount 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.
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash, investments and trade
accounts receivable.
The Company maintains cash and cash equivalents and short-term investments
with various financial institutions. These financial institutions are located
throughout the country and the Company's policy is designed to limit exposure to
any one institution. The Company performs periodic evaluations of the relative
credit standing of those financial institutions that are considered in the
Company's investment strategy. Other than certain accounts receivable, the
Company does not require collateral on these financial instruments.
GUARANTEES
The Company presently guarantees (unsecured) the SunTrust Bank and BB&T
loans of Lynch Systems. As of December 31, 2005, there were no obligations to
SunTrust Bank or BB&T. The Company also presently guarantees (unsecured) the RBC
loan of Mtron/PTI. As of December 31, 2005, there were no obligations to the RBC
44
Centura Bank. The Company has guaranteed to First National Bank of Omaha the
payment and performance of Mtron's obligations under the Loan Agreement and
ancillary agreements and instruments and has guaranteed a Letter of Credit
issued to the First National Bank of Omaha on behalf of its subsidiary, Mtron
(see Note 4 to the Consolidated Financial Statements - "Notes Payable to Banks
and Long-term Debt"). These guarantees are subject only to the disclosure
requirements of the Financial Accounting Standards Board Interpretation No. 45
"Guarantors Accounting and Disclosure Requirements for Guarantors, Including
Indirect Guarantees of Indebtedness of Others". As of December 31, 2005, the
$650,000 Letter of Credit issued by Bank of America to The First National Bank
of Omaha was secured by a $650,000 deposit at Bank of America. (See "Restricted
Cash" included in Note 1 to the Consolidated Financial Statements.)
There are no other financial, performance, indirect guarantees or
indemnification agreements.
RECENT ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued SFAS No. 123 (Revised 2004), "Share-Based
Payment" ("SFAS 123-R"), which replaces SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123") and supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees." SFAS 123-R requires companies to
measure compensation costs for share-based payments to employees, including
stock options, at fair value and expense such compensation over the service
period beginning with the first interim or annual period after June 15, 2005.
The pro forma disclosures previously permitted under SFAS 123 will no longer be
an alternative to financial statement recognition. The Company is required to
adopt SFAS 123-R beginning January 1, 2006. Under SFAS 123-R, companies must
determine the appropriate fair value model to be used for valuing share-based
payments, the amortization method for compensation cost and the transition
method to be used at date of adoption. The transition methods include
prospective and retroactive adoption options. Since the Company currently has no
unvested stock options outstanding, the impact of adopting SFAS 123-R will have
no current effect on the Company's financial results.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an
amendment of Accounting Research Bulletin No. 43, Chapter 4". The amendments
made by SFAS No. 151 clarify that abnormal amounts of idle facility expense,
freight handling costs and waste materials (spoilage) should be recognized as
current period charges and require the allocation of fixed production overheads
to inventory based on the normal capacity of the production facilities. SFAS No.
151 is the result of a broader effort by the FASB to improve the comparability
of cross-border financial reporting by working with the International Accounting
Standards Board toward development of a single set of high-quality accounting
standards. The guidance is effective for inventory costs incurred during fiscal
years beginning after June 15, 2005. The adoption of SFAS No. 151 is not
expected to have a material effect on our consolidated financial position or
results of operations.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections - a Replacement of APB Opinion No. 20 and FASB No. 3." SFAS No. 154
applies to all voluntary changes in accounting principles and requires
retrospective application to prior periods' financial statements of changes in
accounting principles, unless it is impracticable. SFAS No. 154 requires that a
change in depreciation, amortization, or depletion method for long lived,
nonfinancial assets be accounted for as a change of estimate affected by a
change in accounting principles. SFAS No. 154 also carries forward without
change the guidance in APB Opinion No. 20 with respect to accounting for changes
in accounting estimates, changes in the reporting unit and correction of an
error in previously issued financial statements. We are required to adopt SFAS
No. 154 for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. The adoption of SFAS No. 154 is not expected
to have a material effect on our consolidated financial position or results of
operations.
2. ACQUISITIONS
On October 15, 2004, the Company acquired, through its wholly-owned
subsidiary, Mtron, 100% of the common stock of PTI. The acquisition was
effective September 30, 2004. PTI manufactures and markets high-end oscillators,
crystals, resonators and filters used in electronic and communications systems.
The purchase price was approximately $8,736,000 (before deducting cash acquired,
and before adding acquisition costs and transaction fees). The Company funded
the purchase price by (a) new notes payable and long-term debt of $6,936,000 and
45
(b) proceeds of $1,800,000 received from the sale of Lynch Stock to Venator
Merchant Fund ("Venator"), which is controlled by the Company's Chairman, Marc
Gabelli.
The following is the allocation of the purchase price to the estimated fair
value of assets acquired and liabilities assumed for the PTI acquisition. The
allocation is based on management's estimates, including the valuation of the
fixed and intangible assets by independent third-party appraisers.
(IN THOUSANDS)
ASSETS:
Cash............................................................ $ 1,389
Accounts receivable............................................. 1,565
Inventories..................................................... 2,485
Prepaid expenses and other current assets....................... 853
Property and equipment.......................................... 4,871
Intangible assets............................................... 688
Other assets.................................................... 54
-------------
Total assets acquired........................................... 11,905
-------------
LIABILITIES:
-----------
Accounts payable................................................ 556
Accrued expenses................................................ 1,468
Debt assumed by the Company..................................... 1,145
-------------
Total liabilities assumed....................................... 3,169
-------------
Net assets acquired............................................. $ 8,736
=============
The fair market value of net assets acquired in the PTI acquisition
exceeded the purchase price, resulting in negative goodwill of approximately
$4,800,000. In accordance with Statement of Financial Accounting Standards No.
141 "Accounting for Business Combinations", this negative goodwill was allocated
back to PTI's non-current assets, resulting in a write-down in the fair market
value initially assigned to property and equipment and intangible assets. The
adjusted intangible assets of $688,000 consist of customer relationships, trade
name and funded technologies, and were determined to have definite lives that
range from two to ten years.
3. INVENTORIES
Inventories are stated at the lower of cost or market value. Inventories
valued using the last-in, first-out (LIFO) method comprised approximately 52%
and 47% of consolidated inventories at December 31, 2005 and 2004, respectively.
The balance of inventories at December 31, 2005 and 2004 are valued using the
first-in-first-out (FIFO) method.
DECEMBER 31,
------------------------
2005 2004
---------- --------
(IN THOUSANDS)
Raw materials and supplies..................... $ 2,817 $ 2,308
Work in progress............................... 2,232 3,763
Finished goods................................. 1,996 1,781
----------- -----------
Total....................................... $ 7,045 $ 7,852
=========== ===========
Current cost exceeded the LIFO value of inventories by $1,075,000 and
$1,110,000 at December 31, 2005 and 2004, respectively.
46
4. NOTES PAYABLE TO BANKS AND LONG-TERM DEBT
Notes payable to banks and long-term debt consists of:
DECEMBER 31,
----------------------
2005 2004
---- ----
Notes payable: (IN THOUSANDS)
Mtron bank revolving loan (First National Bank of Omaha) at variable interest rates
(greater of prime or 4.5%; 7.25% at December 31, 2005), due May 2006 $ 2,082 $ 3,557
Lynch Systems working capital revolving loan (BB&T) at variable interest rates,
(One Month LIBOR + 2.75%), due October 2006 756 --
Lynch Systems working capital revolving loan (SunTrust) at variable interest
rates, (LIBOR + 2%) -- 2,000
---------- ----------
$ 2,838 $ 5,557
========== ==========
Long-term debt:
Lynch Systems term loan (SunTrust) at a fixed interest rate of 6.5% at December
31, 2005, due March 2006 $ 378 $ 427
Mtron term loan (RBC) due October 2010. The Company entered into a five-year
interest rate swap to hedge the variable interest rate volatility. Under the
terms of the interest rate swap the variable interest Term Loan will be
essentially converted to a 7.51% fixed rate loan. 3,030 --
Mtron term loan (First National Bank of Omaha) at variable interest rates
(greater of prime plus 50 basis points or 4.5%; 7.75% at December 31, 2005),
due October 2007 1,612 1,943
Mtron commercial bank term loan at variable interest rates (7.75% at December 31,
2005), due April 2007 456 686
Yankton Area Progressive Growth loan, repaid in 2005 - 50
South Dakota Board of Economic Development at a fixed rate of 3%, due December
2007 262 273
Yankton Areawide Business Council loan at a fixed interest rate of 5.5%, due
November 2007 74 83
Mtron bridge loan (First National Bank of Omaha), repaid in 2005 - 3,000
Rice University Promissory Note at a fixed interest rate of 4.5%, due August 2009 275 345
Smythe Estate Promissory Note at a fixed interest rate of 4.5% due August 2009 159 197
---------- ----------
6,246 7,004
Current maturities (1,215) (3,842)
---------- ----------
$ 5,031 $ 3,162
========== ==========
Lynch Systems and Mtron/PTI maintain their own short-term line of credit
facilities. In general, the credit facilities are secured by property, plant and
equipment, inventory, receivables and common stock of certain subsidiaries and
contain certain covenants restricting distributions to the Company. The Lynch
Systems credit facility includes an unsecured parent Company guarantee.
Mtron/PTI's credit facility includes an unsecured parent Company guarantee and
is supported by a $650,000 Letter of Credit that is secured by a $650,000
deposit at Bank of America.
The Company is in compliance with all financial covenants at December 31,
2005.
On June 30, 2005, Mtron/PTI renewed its credit agreement with First
National Bank of Omaha extending the due date to May 31, 2006. At December 31,
2005, Mtron/PTI's short-term credit facility totals $5,500,000, of which
$3,418,000 was available under the line of credit.
47
Effective October 6, 2005, Lynch Systems entered into a loan agreement (the
"BB&T Loan Agreement") with Branch Banking and Trust Company ("BB&T"). The BB&T
Loan Agreement provides for a line of credit in the maximum principal amount of
$3,500,000. At December 31, 2005, there were outstanding Letters of Credit of
$398,000 and $1,909,000 was available under the line of credit. This line of
credit replaces the working capital revolving loan that Lynch Systems had with
SunTrust Bank, which loan expired by its terms on September 30, 2005. Borrowings
under the BB&T Loan Agreement bear interest at the One Month LIBOR Rate plus
2.75% and accrued interest is payable on a monthly basis, with the principal
balance due to be paid on the first anniversary of the Loan Agreement.
The BB&T Loan Agreement contains a variety of affirmative and negative
covenants of types customary in an asset-based lending facility, including those
relating to reporting requirements, maintenance of records, properties and
corporate existence, compliance with laws, incurrence of other indebtedness and
liens, restrictions on certain payments and transactions and extraordinary
corporate events. The BB&T Loan Agreement also contains financial covenants
relating to maintenance of levels of minimal tangible net worth, a debt to worth
ratio, and restricting the amount of capital expenditures. In addition, the BB&T
Loan Agreement provides that the following will constitute events of default
thereunder, subject to certain grace periods: (i) payment defaults; (ii) failure
to meet reporting requirements; (iii) breach of other obligations under the BB&T
Loan Agreement; (iv) default with respect to other material indebtedness; (v)
final judgment for a material amount not discharged or stayed; and (vi)
bankruptcy or insolvency.
During 2005, the Company executed various amendments and extensions with
one of Lynch Systems' commercial lenders, SunTrust. As a result, certain
required repayments were made on amounts owed to SunTrust, and the expiring
working capital loan was not renewed. Additionally it was agreed that the
Company's remaining obligation to SunTrust, a $378,000 term note would be
payable on March 1, 2006. This amount was repaid in full in February 2006.
On September 30, 2005, Mtron/PTI entered into a Loan Agreement with RBC
Centura Bank ("RBC"). The Loan Agreement provides for a loan in the amount of
$3,040,000 (the "RBC Term Loan"), the proceeds of which were used to pay off the
$3,000,000 bridge loan with First National Bank of Omaha which had been due
October 2005. The RBC Term Loan bears interest at LIBOR Base Rate plus 2.75% and
is to be repaid in monthly installments based on a twenty year amortization,
with the then remaining principal balance to be paid on the fifth anniversary.
The RBC Term Loan is secured by a mortgage on PTI's premises. In connection with
this RBC Term Loan, Mtron/PTI entered into a five-year interest rate swap to
hedge the variable interest rate volatility. Under the terms of the interest
rate swap, the variable interest rate RBC Term Loan will be essentially
converted to a 7.51% fixed rate loan. The Company has designated this swap as a
cash flow hedge in accordance with FASB 133 "Accounting for Derivative
Instruments and Hedging Activities". The fair value of the interest rate swap at
December 31, 2005 is $1,563 which is included in other accrued liabilities on
the balance sheet. The charge is reflected within other comprehensive income,
net of tax.
In connection with the completion of the acquisition of PTI, on October 14,
2004, Mtron and PTI, each wholly-owned subsidiaries of Lynch Corporation,
entered into a Loan Agreement with First National Bank of Omaha. The Loan
Agreement provided for loans in the amounts of $2,000,000 (the "Term Loan") and
$3,000,000 (the "Bridge Loan"), together with a $5,500,000 Revolving Line of
Credit (the "Revolving Loan"). The Term Loan bears interest at the greater of
prime rate plus 50 basis points, or 4.5%, and is to be repaid in monthly
installments of $37,514, with the then remaining principal balance plus accrued
interest to be paid on the third anniversary of the Loan Agreement. The Bridge
Loan was repaid in 2005 from proceeds received from the RBC Term Loan. The
Revolving Loan was renewed on June 30, 2005 as previously discussed. The Loan
Agreement contains a variety of affirmative and negative covenants of types
customary in an asset-based lending facility. The Loan Agreement also contains
financial covenants relating to maintenance of levels of minimal tangible net
worth and working capital, and current, leverage and fixed charge ratios,
restricting the amount of capital expenditures.
On May 12, 2005, Venator Merchant Fund, L.P. ("Venator") made a loan to
Lynch Corporation in the amount of $700,000 due September 11, 2005 or within
seven days after demand by Venator. Venator is an investment limited partnership
controlled by Lynch's Chairman of the Board, Marc Gabelli. On September 8, 2005,
Lynch Corporation entered into a Letter Agreement extending the maturity date
48
this Note to November 10, 2005 or within seven days after demand by Venator. The
loan was approved by the Audit Committee of the Board of Directors of Lynch.
This loan was repaid in full in December, 2005, including interest of $30,000.
The Company has guaranteed a letter of credit issued to the First National
Bank of Omaha on behalf of its subsidiary, Mtron Industries, Inc. As of December
31, 2005, the $650,000 letter of credit issued by Bank of America to The First
National Bank of Omaha was secured by a $650,000 deposit at Bank of America. The
Company's outstanding letter of credit was reduced from $1,000,000 to $650,000
during 2005.
Both Mtron/PTI and Lynch Systems intend to renew the credit agreements that
expire on May 31 and October 1, 2006, respectively, with their incumbent
lenders.
Aggregate principal maturities of long-term debt for each of the next five
years are as follows: 2006 - $1,215,000; 2007 - $1,932,000; 2008 - $198,000;
2009 - $167,000; and $2,735,000 in 2010.
5. RELATED PARTY TRANSACTIONS
TRANSACTIONS WITH CERTAIN AFFILIATED PERSONS
On May 12, 2005, Venator Merchant Fund, L.P. ("Venator") made a loan to
Lynch Corporation in the amount of $700,000 due September 11, 2005 or within
seven days after demand by Venator. Venator is an investment limited partnership
controlled by Lynch's Chairman of the Board, Marc Gabelli. On September 8, 2005,
Lynch Corporation entered into a Letter Agreement extending the maturity date of
this Note to November 10, 2005 or within seven days after demand by Venator. The
loan was approved by the Audit Committee of the Board of Directors of Lynch.
This loan was repaid in full in December, 2005, including interest of $30,000.
Prior to the Company's move to Greenwich, Connecticut, the principal
executive offices were located in Providence, Rhode Island and shared with Avtek
Inc. ("Avtek") a private holding company which until November 27, 2002, was
co-owned by Mr. Papitto, the Company's former Chairman and Chief Executive
Officer, and Mr. Mario Gabelli, the Company's former Vice Chairman. During the
period August, 2001 though November 2004, Avtek and the Company have shared
certain occupancy and salary expenses of individuals who performed services for
both the Company and Avtek. The Company's paid share of such occupancy and
salary costs for 2004 was $433,625.
6. STOCK OPTION PLANS
On May 26, 2005, the Company's shareholders approved amendments to the 2001
Equity Incentive Plan to increase the total number of shares of the Company's
Common Stock available for issuance from 300,000 to 600,000 shares and to add
provisions that require terms and conditions of awards to comply with section
409A of the Internal Revenue Code of 1986. Also on May 26, 2005, the Company
granted options to purchase 120,000 shares of Company common stock to certain
employees and directors of the Company at $13.17 per share. These options were
vested in 2005, were anti-dilutive and have lives of five years. As of December
31, 2005, options to purchase 300,000 shares are outstanding and fully vested.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, which requires that the information be determined as if
the Company has accounted for its employee 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 rate of 5.3%; dividend yield of
0.0%; volatility factors of the expected market price of the Company's common
stock of .49 and weighted-average expected life of the option of 10 years. See
Note 1 to the Consolidated Financial Statements - "Basis of Presentation".
49
7. SHAREHOLDERS' EQUITY
In December 2005, the Company completed its rights offering. The fully
subscribed rights offering resulted in the issuance of 538,676 additional shares
of common stock for proceeds to the Company of approximately $3,655,000, net of
$250,000 in fees. The offering granted holders of the Company's common stock
transferable subscription rights to purchase shares of the Company's common
stock at a subscription price of $7.25 per share.
Under the terms of the offering, holders of the Company's common stock were
entitled to one transferable subscription right for each share of common stock
held on the record date, November 9, 2005. Every three such rights entitled the
shareholder to subscribe for one common share at a subscription price of $7.25
per share. The rights were transferable and contained an oversubscription
privilege.
The Board of Directors previously authorized the purchase of up to 50,000
shares of Common Stock. During 2005 the Company purchased 16,100 shares of
Common Stock at an average price of $9.67 per share. During 2004 the Company
purchased 2,400 shares of Common Stock at an average price of $13.38 per share.
There were no purchases in 2003.
Both Mtron and Lynch Systems have plans that provided certain former
shareholders with Stock Appreciation Rights (SAR's). These SAR's are fully
vested and expire at the earlier of certain defined events or 2008 to 2010.
These SAR's provide the participants a certain percentage, ranging from 1-5%, of
the increase in the defined value of Mtron and Lynch Systems, respectively.
Vested amounts are payable at the holder's option in cash or equivalent amount
of Mtron or Lynch Systems stock. Expense related to the SAR's was $18,000, $0
and $70,000, in 2005, 2004 and 2003 respectively. During the year ended December
31, 2004, the Company paid out the entire SAR liability that had been accrued at
December 31, 2003. There is SAR liability at December 31, 2005 of $18,000.
8. INCOME TAXES
The Company files consolidated federal income tax returns, which includes
all subsidiaries.
The Company has a $2,404,000 net operating loss ("NOL") carry-forward as of
December 31, 2005. This NOL expires through 2024 if not utilized prior to that
date. The Company has research and development credit carry-forwards of
approximately $357,000 at December 31, 2005 that can be used to reduce future
income tax liabilities and expire principally between 2020 and 2024. In
addition, the Company has foreign tax credit carry-forwards of approximately
$169,000 at December 31, 2005 that are available to reduce future U.S. income
tax liabilities subject to certain limitations. These foreign tax credit
carry-forwards expire at various times through 2015.
Deferred income taxes for 2005 and 2004 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
carry-forwards at December 31, 2005 and 2004 are as follows:
DECEMBER 31, 2005 DECEMBER 31, 2004
-------------------- ----------------------
DEFERRED TAX DEFERRED TAX
ASSET LIABILITY ASSET LIABILITY
-------- ----------- -------- -----------
(IN THOUSANDS)
Inventory reserve................................ $ 601 $ -- $ 730 $ --
Fixed assets..................................... -- 1,448 -- 1,729
Other reserves and accruals...................... 2,163 -- 1,509 --
Other............................................ -- 547 -- 253
Tax loss and other credit carry-forwards......... 1,554 -- 1,924 --
------- ------- ------- --------
Total deferred income taxes...................... 4,318 1,995 4,163 1,982
========
Valuation allowance.............................. (2,212) (2,070)
------- -------
$2,106 $2,093
======= =======
50
At December 31, 2005, the net deferred tax asset of $111,000 presented in
the Company's balance sheet is comprised of deferred tax assets of $2,106,000
offset by deferred tax liabilities of $1,995,000. At December 31, 2004, the net
deferred tax asset of $111,000 presented in the Company's balance sheet is
comprised of deferred tax assets of $2,093,000 offset by deferred tax
liabilities of $1,982,000. The carrying value of the Company's net deferred tax
asset at December 31, 2005 and December 31, 2004 of $111,000 is equal to the
amount of the Company's carry-forward alternative minimum tax ("AMT") at that
date. These AMT credits do not expire.
The provision (benefit) for income taxes from continuing operations is
summarized as follows:
2005 2004 2003
---- ---- ----
(IN THOUSANDS)
Current:
Federal.................................... $ (484) $ -- $(150)
State and local............................ 91 24 --
Foreign.................................... 184 82 73
------- ------ ------
Total Current................................. (209) 106 (77)
------- ------ ------
Deferred:
Federal.................................... -- -- 150
State and local............................ -- (6) --
------- ------ ------
Total Deferred................................ -- (6) 150
------- ------ ------
$ (209) $ 100 $ 73
======= ====== ======
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:
2005 2004 2003
-------- ---------- --------
(IN THOUSANDS)
Tax (benefit) at statutory rate................... $ 340 $ (1,097) $ 62
Foreign tax rate differential..................... (40) (87) (81)
State and local taxes, net of federal benefit..... 61 5 --
Foreign export sales benefit...................... (17) (66) (54)
Change in tax reserves............................ (484) -- --
Valuation allowance............................... (178) 1,245 139
Other............................................. 109 100 7
------- --------- ------
$ (209) $ 100 $ 73
======= ========= ======
The income tax benefit for the year period ended December 31, 2005 included
federal, as well as state, local, and foreign taxes offset by provisions made
for certain net operating loss carry-forwards that may not be fully realized.
The income tax benefit also includes a non-recurring reduction to an income tax
reserve of $716,000 in the third quarter 2005, which was originally provided for
during 2001. The tax reserve was increased in the fourth quarter of 2005 by a
net $232,000 provision for federal and state tax reserves identified in that
period.
Profit before income taxes from foreign operations was $1,169,000, $499,000
and $452,000 in 2005, 2004, and 2003 respectively. At December 31, 2005, U.S.
income taxes have been provided on approximately $2,430,000 of earnings of the
Company's foreign subsidiaries because these earnings are not considered to be
indefinitely reinvested.
Federal, state and foreign income tax payments were $202,000, $83,000 and
$261,000 for the years 2005, 2004 and 2003, respectively. Income tax recoveries
were $532,000 in 2003 for tax loss carry-backs.
The valuation allowance increased from $2,070,000 in 2004 to $2,212,000 at
December 31, 2005.
51
9. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Total comprehensive income was $1,196,000 in the year ended December 31,
2005, including "other" comprehensive loss of $88,000 for unrealized losses on
available for sale securities, $75,000 of currency translation associated with
PTI's foreign subsidiary, as well as $1,000, the fair value of the interest rate
swap at December 31, 2005, net of tax.
Total comprehensive loss was $2,768,000 in the year ended December 31,
2004, including "other" comprehensive income of $544,000 for unrealized gains on
available for sale securities and $14,000 of currency translation associated
with PTI's foreign subsidiary.
Total comprehensive income was $99,000 in the year ended December 31, 2003,
including "other" comprehensive loss of $11,000 for unrealized losses on
available for sale securities.
The components of accumulated other comprehensive income, net of related
tax, at December 31, 2005, 2004, and 2003 are as follows:
DECEMBER 31,
--------------------------------
2005 2004 2003
---------- ----------- --------
(IN THOUSANDS)
Balance beginning of year................................. $ 849 $ 291 $ 302
Foreign currency translation.............................. 75 14 --
Deferred loss on hedge contract........................... (1) -- --
Unrealized (loss ) gain on available for-sale securities.. (88) 544 (11)
--------- --------- --------
Accumulated other comprehensive income.................... $ 835 $ 849 $ 291
========= ========= ========
10. EMPLOYEE BENEFIT PLANS
The Company, through its operating subsidiaries, has several defined
contribution plans for eligible employees. The following table sets forth the
consolidated expenses for these plans:
DECEMBER 31,
--------------------------------
2005 2004 2003
--------- ----------- ---------
(IN THOUSANDS)
Defined contribution total................................ $ 187 $ 90 $ 48
======== ======== ========
Under the Lynch Systems and Mtron defined contribution plan, the Company
contributes up to a maximum of 62.5 percent of participants' contributions that
do not exceed $800 per participant in the plan year. The Company contribution
occurs at the end of the plan year and the participant is immediately vested in
the employers' contribution. Under the PTI defined contribution plan, the
Company contributes 50 percent of the first 6% of eligible compensation
contributed by participants.
11. 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 adverse effect on
the Company's financial condition or operations. The Company and/or one or more
of its subsidiaries are parties to the following additional legal proceedings:
IN RE: SPINNAKER COATING, INC., DEBTOR/PACE LOCAL 1-1069 V. SPINNAKER COATING,
INC., AND LYNCH CORPORATION, U.S. BANKRUPTCY COURT, DISTRICT OF MAINE, CHAPTER
52
11, ADV. PRO. NO. 02-2007, AND PACE LOCAL 1-1069 V. LYNCH CORPORATION AND LYNCH
SYSTEMS, INC. CUMBERLAND COUNTY SUPERIOR COURT, CV-2001-00352
On or about June 26, 2001, in anticipation of the July 15, 2001 closure of
Spinnaker's Westbrook, Maine facility, Plaintiff PACE Local 1-1069 ("PACE")
filed a three count complaint in Cumberland County Superior Court, CV-2001-00352
naming the following Defendants: Spinnaker Industries, Inc., Spinnaker Coating,
Inc., and Spinnaker Coating-Maine, Inc. (collectively, the "Spinnaker Entities")
and the Company. The complaint alleged that under Maine's Severance Pay Act both
the Spinnaker Entities and the Company would be liable to pay approximately
$1,166,000 severance pay under Maine's Severance Pay Act in connection with the
plant closure. Subsequently, the Spinnaker Entities filed for relief under
Chapter 11 of the Bankruptcy Code and the action proceeded against the Company
on the issue of whether the Company has liability to PACE's members under the
Maine Severance Pay Act.
In 2002, both PACE and the Company moved for summary judgment in the
action. On July 28, 2003, the Court issued an order denying the Company's
motion, finding that there remained a disputed issue of material fact regarding
one of the Company's primary defenses. The Court granted partial summary
judgment in favor of PACE to the extent that the Court found that the Company
was the Spinnaker Entities "parent corporation" and, therefore, the Company was
an "employer" subject to potential liability under Maine's Severance Pay Act.
On November 3, 2004, the Superior Court held that the Spinnaker Entities'
bankruptcy did not prevent the award of severance pay under the statute. The
Superior Court granted summary judgment to PACE on the second count of its
complaint based on its earlier ruling that the Company was the parent
corporation of the Spinnaker Entities. The Court also issued a separate order
that related to the calculation of damages, largely agreeing with the Company on
the appropriate method of calculating damages and awarded PACE $653,018
(subsequently modified to $656,020) in severance pay, which is approximately
one-half the amount claimed by PACE. The Superior Court rejected PACE's claim
for pre-judgment interest, but granted its request for attorney fees.
Both PACE and the Company appealed to the Maine Supreme Judicial Court. The
parties filed written briefs during April and May 2005 and made oral arguments
to the Supreme Court on September 13, 2005. On January 13, 2006, before the
Supreme Court issued its decision, the Company and PACE agreed to settle the
case. The settlement includes payment of a total of $800,000 to resolve the
claims of 67 workers who lost their jobs in 2001. The parties also withdrew
their respective appeals pending in the Supreme Court and, therefore, no
decision was ever issued by the Court.
QUI TAM LAWSUIT
The Company, Lynch Interactive and numerous other parties have been named
as defendants in a lawsuit originally brought under the so-called "qui tam"
provisions of the federal False Claims Act in the United States District Court
for the District of Columbia. The complaint was filed under seal in February
2001, and the seal was lifted at the initiative of one of the defendants in
January 2002. The Company was formally served with the complaint in July 2002.
The main allegation in the case is that the defendants participated in the
creation of "sham" bidding entities that allegedly defrauded the United States
Treasury by improperly participating in Federal Communications Commission
("FCC") spectrum auctions restricted to small businesses, as well as obtaining
"bidding credits" in other spectrum auctions allocated to "small" and "very
small" businesses. While the lawsuit seeks to recover an unspecified amount of
damages, which would be subject to mandatory trebling under the statute, a
report prepared for the relator (the private party who filed the action on
behalf of the United States) in February 2005 alleges damages of approximately
$91,000,000 in respect of "bidding credits", approximately $70,000,000 in
respect of government "financing" and approximately $206,000,000 in respect of
subsequent resales of licenses, in each case prior to trebling. The liability is
alleged to be joint and several. In September 2003, the court granted Lynch
Interactive's motion to transfer the action to the Southern District of New
York.
In September 2004, the court issued a ruling denying defendants' motion to
refer the issues in the action to the FCC. In December 2004, the defendants
filed a motion in the United States District Court in the District of Columbia
asking that court to compel the FCC to provide information subpoenaed by them to
enable them to conduct their defense. This motion was denied in May 2005, and
53
the defendants appealed. In February 2006, the defendants and the FCC reached an
agreement granting defendants discovery of certain documents and other
evidentiary materials. In November 2005, the court ruled that damages based on
profits from resales of licenses were not allowed under the False Claims Act.
Initially, in 2001, the Department of Justice notified the court that it
would not intervene in the case. However, in response to the judge's ruling in
November 2005 (described above), the DOJ recently, in March 2006, petitioned the
court to allow it to intervene. This petition is scheduled to be argued in April
2006. The case had been tentatively scheduled for trial in June 2006 but the
trial may be delayed due to the government's intervention and related issues.
The defendants believe that the action is without merit and that the relator's
damage computations are without basis, and they are defending the suit
vigorously. Under the separation agreement between the Company and Lynch
Interactive pursuant to which Lynch Interactive was spun-off to the Company's
shareholders on September 1, 1999, Lynch Interactive would be obligated to
indemnify the Company for any losses or damaged incurred by the Company as a
result of this action. Lynch Interactive has agreed in writing to defend the
case on the Company's behalf and to indemnify the Company for any losses it may
incur. Nevertheless, the Company cannot predict the ultimate outcome of the
litigation, nor can the Company predict the effect that the lawsuit or its
outcome will have on the Company's business or plan of operation.
RENT EXPENSE
Rent expense under operating leases was $291,000, $285,000 and $284,000 for
the years ended December 31, 2005, 2004 and 2003, respectively. The Company
leases certain property and equipment, including warehousing and sales and
distribution equipment, under operating leases that extend from one to five
years. Certain of these leases have renewal options and escalation provisions.
Future minimum rental payments under long-term non-cancelable operating
leases subsequent to December 31, 2005 are as follows:
(in thousands)
2006................................... $141
2007................................... 74
2008................................... 29
2009................................... 17
2010 and thereafter.................... 3
12. SEGMENT INFORMATION
The Company has two reportable business segments: 1) glass manufacturing
equipment business, which represents the operations of Lynch Systems, and 2)
frequency control devices (quartz crystals and oscillators) that represents
products manufactured and sold by Mtron/PTI. The Company's foreign operations in
Hong Kong and India exist under Mtron/PTI.
Operating profit (loss) is equal to revenues less operating expenses,
excluding investment income, interest expense, and income taxes. The Company
allocates a negligible portion of its general corporate expenses to its
operating segments. Such allocation was $500,000 in 2005, $350,000 in 2004 and
$175,000 in 2003. 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.
54
YEARS ENDED DECEMBER 31,
--------------------------------------
2005 2004 2003
------------ ----------- -----------
(IN THOUSANDS)
REVENUES
Glass manufacturing equipment - USA $ 1,992 $ 1,114 $ 3,677
Glass manufacturing equipment - Foreign 9,140 9,307 9,109
------------ ------------ -----------
Total glass manufacturing equipment 11,132 10,421 12,786
Frequency control devices - USA 19,078 12,096 7,282
Frequency control devices - Foreign 15,973 11,317 7,901
------------ ------------ -----------
Total frequency control devices 35,051 23,413 15,183
------------ ------------ -----------
Consolidated total revenues $ 46,183 $ 33,834 $ 27,969
============ ============ ===========
OPERATING PROFIT (LOSS)
Glass manufacturing equipment $ 684 $ (1,340) $ 822
Frequency control devices 2,306 1,012 (170)
------------ ------------ -----------
Total manufacturing 2,990 (328) 652
Unallocated corporate expense (1,812) (2,560) (1,484)
------------ ------------ -----------
Consolidated total operating profit (loss) $ 1,178 $ (2,888) $ (832)
INCOME (LOSS) BEFORE INCOME TAXES
Investment income $ 608 $ 15 $ 534
Interest expense (847) (360) (282)
Other income (expense) 62 7 763
------------ ------------ -----------
Consolidated income (loss) before income taxes $ 1,001 $ (3,266) $ 183
============ ============ ==========
CAPITAL EXPENDITURES
Glass manufacturing equipment $ 32 $ 97 $ 74
Frequency control devices 310 326 67
General corporate 1 17 --
------------ ------------ ----------
Consolidated total capital expenditures $ 343 $ 440 $ 141
============ ============ ==========
TOTAL ASSETS
Glass manufacturing equipment $ 8,096 $ 10,832 $ 12,207
Frequency control devices 17,589 17,417 7,860
General corporate 6,979 5,634 2,952
------------ ------------ ----------
Consolidated total assets $ 32,664 $ 33,883 $ 23,019
============ ============ ==========
13. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the
years ended December 31, 2005 and December 31, 2004:
2005 THREE MONTHS ENDED
-----------------------------------------
MAR. 31 JUNE 30 SEP. 30 DEC. 31
---------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues................................................ $ 10,595 $ 14,913 $ 10,745 $ 9,930
Gross profit............................................ 3,277 5,512 2,961 2,985
Operating profit (loss)................................. 227 2,001 (516) (534)
Net income (loss)....................................... 50 1,351 696 (887)
Basic and diluted earnings (loss) per share............. $ 0.03 $ 0.83 $ 0.43 $ (0.56)
55
2004 THREE MONTHS ENDED
--------------------------------------------
MAR. 31 JUNE 30 SEP. 30 DEC. 31
---------- --------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues................................................ $ 6,812 $ 6,736 $ 7,943 $ 12,343
Gross profit............................................ 1,512 1,986 1,526 3,026
Operating profit (loss)................................. (763) (467) (915) (743)
Net income (loss)....................................... (808) (560) (965) (993)
Basic and diluted earnings (loss) per share............. $ (0.54) $ (0.37) $ (0.65) $ (0.62)
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF
REGISTRANT LYNCH CORPORATION
CONDENSED BALANCE SHEET
(IN THOUSANDS)
DECEMBER 31,
2005 2004
------- -------
ASSETS
Current Assets
Cash and cash equivalents ...................................... $ 3,542 $ 415
Restricted cash ................................................ 650 1,125
Investments - marketable securities ............................ 2,738 3,609
Deferred income taxes .......................................... -- --
Other current assets ........................................... 38 153
------- -------
6,968 5,302
Net Property, Plant & Equipment ................................... 11 16
Other Assets (principally investment in and amounts due from wholly
owned subsidiaries) ............................................ 11,554 7,720
------- -------
Total Assets ...................................................... $18,533 $13,038
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities ............................................... $ 3,845 $ 3,045
Long Term Liabilities ............................................. -- --
Total Shareholders' Equity ........................................ 14,688 9,993
------- -------
Total Liabilities And Shareholders' Equity ........................ $18,533 $13,038
======= =======
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
56
LYNCH CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENT OF OPERATIONS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
---------------------------------
2005 2004 2003
--------- --------- ---------
Interest, dividends and gains on sale of marketable securities................ $ 592 $ 17 $ 523
Dividend from subsidiary...................................................... 32 22 486
Interest and other income from subsidiaries................................... 126 55 36
--------- --------- ---------
TOTAL INCOME.................................................................. 750 94 1,045
Costs and Expenses:
Unallocated corporate administrative expense.................................. 1,662 1,435 1,309
Commitments and contingencies................................................. 150 775 --
Interest expense.............................................................. 86 47 18
--------- --------- ---------
TOTAL COST AND EXPENSE........................................................ 1,898 2,257 1,327
--------- --------- ---------
LOSS BEFORE INCOME TAXES AND EQUITY IN NET INCOME (LOSS) OF SUBSIDIARIES...... (1,148) (2,163) (282)
Benefit for income taxes ..................................................... 716 -- 96
Equity in net income (loss) of subsidiaries................................... 1,642 (1,163) 296
--------- --------- ---------
NET INCOME (LOSS)............................................................. $ 1,210 $ (3,326) $ 110
========= ========= =========
57
LYNCH CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOW
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
----------------------------
2005 2004 2003
--------- ------- -------
CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES................... $ (483) $ (430) $ 193
--------- -------- --------
INVESTING ACTIVITIES:
Capital expenditures.............................................. (1) (17) --
Proceeds from sale of marketable securities....................... 1,348 -- 1,041
Payment of margin liability....................................... (1,236) (300) (454)
Purchase of available for-sale securities......................... -- (754) (1,565)
Dividend from subsidiaries........................................ -- 22 464
--------- -------- -------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES............... 111 (1,049) (514)
--------- -------- --------
FINANCING ACTIVITIES:
Loan to Subsidiary................................................ -- (1,800) --
Issuance of Common Stock, net of fees............................. 3,655 1,760 --
Purchase of Treasury Stock (156) (32) --
--------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES............... 3,499 (32) --
--------- -------- --------
TOTAL INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ 3,127 (1,551) (321)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.................... 415 1,966 2,287
--------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR.......................... $ 3,542 $ 415 $ 1,966
========= ======== ========
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 -- PURCHASE OF AVAILABLE FOR SALE SECURITIES
Proceeds from the sale of marketable securities totaled $1,348,000 and
$1,041,000 for the years ended December 31, 2005 and 2003, respectively.
Purchases of marketable securities were $754,000 and $1,565,000 for the years
ended December 31, 2004 and 2003, respectively. Payments on margin liabilities
were $1,236,000, $300,000 and $454,000 for the years ended December 31, 2005,
2004 and 2003, respectively.
NOTE C -- DIVIDENDS FROM SUBSIDIARIES
Dividends paid to Lynch Corporation from the Company's consolidated
subsidiaries were $0 in 2005, $22,000 in 2004 and $464,000 in 2003.
NOTE D -- LOANS TO SUBSIDIARIES
In 2004, the Company lent its subsidiary, Mtron, $1,800,000 to support its
banking relationship and to fund Mtron's acquisition of PTI.
58
NOTE E -- INCOME TAX RECOVERY
2003 cash provided by operations includes income tax recoveries of $532,000.
NOTE F -- SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR ADDITIONAL INFORMATION.
59
LYNCH CORPORATION AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
---------- ------------- ----------------------- -------------- -------------
ADDITIONS
------------------------
BALANCE AT CHARGED TO CHARGED TO
BEGINNING COSTS AND OTHER BALANCE AT
DEDUCTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS(A) END OF PERIOD
--------- -------------- ----------- ---------- ------------- -------------
Year ended December 31, 2005
Allowances...................... $ 92,000 $ 259,000 -- $ 26,000 $ 325,000
Year ended December 31, 2004
Allowances...................... $ 91,000 $ 14,000 -- $ 13,000 $ 92,000
Year ended December 31, 2003
Allowances...................... $ 91,000 $ 10,000 -- $ 10,000 $ 91,000
============== =========== ========== ============== ============
----------
(A) Uncollectible accounts receivable written off are net of recoveries.
60
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
------ -----------
3(a) Restated Articles of Incorporation of the Company (incorporated by
reference to Exhibit 3(a) to the Company's Form 10-K for the year ended
December 31, 2004).
(b) Articles of Amendment of the Articles of Incorporation of the Company
(incorporated by reference to Exhibit 3(b) to the Company's Form 10-K for
the year ended December 31, 2004).
(c) By-laws of the Company (incorporated by reference to Exhibit 3.1 to the
Company's Current Report on Form 8-K dated December 22, 2004).
10(a) Lynch Corporation 401(k) Savings Plan (incorporated by reference to
Exhibit 10(b) to the Company's Annual Report on Form 10-K for the period
ended December 31, 1995).
(b) Directors Stock Plan (incorporated by reference to Exhibit 10(o) to the
Company's Form 10-K for the year ended December 31, 1997).
(c) Lynch Corporation 2001 Equity Incentive Plan adopted December 10, 2001
(incorporated by reference to Exhibit 4 to the Company's Form 8-K filed
on December 29, 2005.
(d) Amended and Restated Credit Agreement by and between Lynch Systems, Inc.
and SunTrust Bank dated as of June 10, 2002 (incorporated by reference to
Exhibit 10(z) to the Company's Form 10-K for the year ended December 31,
2002).
(e) Unlimited Continuing Guaranty Agreement by Guarantor, Lynch Corporation,
dated June 10, 2002 (incorporated by reference to Exhibit 10(aa) to the
Company's Form 10-K for the year ended December 31, 2002).
(f) First Amendment and Waiver to Amended and Restated Credit Agreement
between Lynch Systems, Inc. and SunTrust Bank dated May 30, 2003
(incorporated by reference to Exhibit 10(ee) to the Company's Form 10-Q
for the period ending June 30, 2003).
(g) Term Loan Promissory Note between Lynch Systems, Inc. and SunTrust Bank
dated August 4, 2003 (incorporated by reference to Exhibit 10(ff) to the
Company's Form 10-Q for the period ending June 30, 2003).
(h) Second Amendment to Security Deed and Agreement dated August 4, 2003
between Lynch Systems, Inc. and SunTrust Bank (incorporated by reference
to Exhibit 10(gg) to the Company's Form 10-Q for the period ending June
30, 2003).
(i) Mortgage dated October 21, 2002 by Mortgagor, Mtron Industries, Inc., to
Mortgagee, Yankton Area Progressive Growth, Inc. (incorporated by
reference to Exhibit 10(hh) to the Company's Annual Report on Form 10-K
for the year ended December 31, 2003).
(j) Promissory Note between Mtron Industries, Inc. and Yankton Area
Progressive Growth, Inc., dated October 21, 2002 (incorporated by
reference to Exhibit 10(ii) to the Company's Annual Report on Form 10-K
for the year ended December 31, 2003).
(k) Standard Loan Agreement by and between Mtron Industries, Inc. and
Areawide Business Council, Inc., dated October 10, 2002 and Exhibits
thereto (incorporated by reference to Exhibit 10(jj) to the Company's
Annual Report on Form 10-K for the year ended December 31, 2003).
(l) Loan Agreement by and between Mtron Industries, Inc. and South Dakota
Board of Economic Development, dated December 19, 2002 (incorporated by
reference to Exhibit 10(kk) to the Company's Annual Report on Form 10-K
for the year ended December 31, 2003).
(m) Promissory Note between Mtron Industries, Inc. and South Dakota Board of
Economic Development, dated December 19, 2002 (incorporated by reference
to Exhibit 10(ll) to the Company's Annual Report on Form 10-K for the
year ended December 31, 2003).
(n) Employment Agreement by and between Mtron Industries, Inc. and South
Dakota Board of Economic Development, dated December 19, 2002
(incorporated by reference to Exhibit 10(mm) to the Company's Annual
Report on Form 10-K for the year ended December 31, 2003).
(o) Loan Agreement by and among Mtron Industries, Inc., Piezo Technology,
Inc. and First National Bank of Omaha (incorporated by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K dated October
20, 2004).
(p) Unconditional Guaranty for Payment and Performance with First National
Bank of Omaha (incorporated by reference to Exhibit 10.2 to the Company's
Current Report on Form 8-K dated October 20, 2004).
61
(q) Registration Rights Agreement by and between the Company and Venator
Merchant Fund, L.P. dated October 15, 2004 (incorporated by reference to
Exhibit 10.4 to the Company's Current Report on Form 8-K dated October
20, 2004).
(r) Form of Indemnification Agreement dated as of February 28, 2005 by and
between Lynch Corporation and its executive officers (incorporated herein
by reference to Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q filed on May 16, 2005).
(s) Promissory Note made by Lynch Corporation to Venator Merchant Fund, L.P.,
dated May 12, 2005 (incorporated herein by reference to Exhibit 10.1 the
Company's Current Report on Form 8-K filed on May 16, 2005).
(t) First Amendment to the Loan Agreement by and among M-Tron Industries,
Inc., Piezo Technology, Inc. and First National Bank of Omaha, dated May
31, 2005 (incorporated herein by reference to Exhibit 10.2 to the
Company's Current Report of on Form 8-K filed on July 6, 2005).
(u) Letter Agreement, dated September 8, 2005, by and between Lynch
Corporation and Venator Merchant Fund L.P. extending the maturity date of
the promissory note in favor of Venator Merchant Fund L.P. (incorporated
herein by reference to Exhibit 10.1 to the Company's Current Report on
Form 8-K filed on September 9, 2005).
(v) Loan Agreement, by and among M-Tron Industries, Inc., Piezo Technology,
Inc. and RBC Centura Bank, dated September 30, 2005 (incorporated herein
by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K
filed on October 4, 2005).
(w) Unconditional Guaranty for Payment by and between Lynch Corporation and
RBC Centura Bank, dated September 30, 2005 (incorporated herein by
reference to Exhibit 10.2 to the Company's Current Report on Form 8-K
filed on October 4, 2005).
(x) Loan Agreement, by and among Lynch Corporation, Lynch Systems and Branch
Bank and Trust Company, dated September 29, 2005, effective October 6,
2005 (incorporated herein by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K on October 11, 2005).
(y) Guaranty Agreement for Payment and Performance by and between Lynch
Corporation and Branch Bank and Trust Company, dated September 29, 2005,
effective October 6, 2005 (incorporated herein by reference to Exhibit
10.2 to the Company's Current Report on Form 8-K filed on October 11,
2005).
14 Amended and Restated Business Conduct Policy (incorporated by reference
to Exhibit 14 to the Company's Form 10-K for the year ended December 31,
2004).
21 Subsidiaries of the Company (incorporated by reference to Exhibit 21 to
the Company's Form 10-K for the year ended December 31, 2004).
23* Consent of Independent Registered Public Accounting Firm - Ernst & Young
LLP.
31(a)* Certification by Principal Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31(b)* Certification by Principal Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32(a)* Certification by Principal Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32(b)* Certification by Principal Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
----------
* Filed herewith.
The Exhibits listed above have been filed separately with the Securities
and Exchange Commission in conjunction with this Annual Report on Form 10-K or
have been incorporated by reference into this Annual Report on Form 10-K. Lynch
Corporation will furnish to each of its shareholders a copy of any such Exhibit
for a fee equal to Lynch Corporation's cost in furnishing such Exhibit. Requests
should be addressed to the Office of the Secretary, Lynch Corporation, 140
Greenwich Ave, 4th Floor, Greenwich, Connecticut 06830.
62
