SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2005
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File No. 1-106
LYNCH CORPORATION
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Indiana 38-1799862
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(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification No.)
140 Greenwich Avenue, 4th Floor, Greenwich, CT 06830
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(Address of principal executive offices) (Zip Code)
(203) 622-1150
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Registrant's telephone number, including area code
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(Former address, changed since last report)
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No |X|
Indicate the number of shares outstanding of each of the Registrant's classes of
Common Stock, as of the latest practical date.
CLASS Outstanding At June 30, 2005
------------------------------- -------------------------------
Common Stock, $0.01 par value 1,624,926
1
INDEX
LYNCH CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION...............................................3
Item 1. Financial Statements (Unaudited)....................................3
Consolidated Balance Sheets:........................................3
- June 30, 2005..................................................3
- December 31, 2004..............................................3
Consolidated Statements of Operations:..............................5
- Three months ended June, 30, 2005 and 2004.....................5
- Six months ended June 30, 2005 and 2004........................5
Consolidated Statements of Cash Flows:..............................6
- Six months ended June 30, 2005 and 2004........................6
Notes to Condensed Consolidated Financial Statements:...............7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations...............................................15
Item 3. Quantitative and Qualitative Disclosure About Market Risk...........23
Item 4. Controls and Procedures.............................................23
PART II. OTHER INFORMATION...................................................24
Item 1. Legal Proceedings...................................................24
Item 2. Issuer Purchase of Its Equity Securities............................25
Item 4. Submission of Matters to a Vote of Security Holders.................26
Item 6. Exhibits and Reports on Form 8-K....................................26
2
PART 1 -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
LYNCH CORPORATION AND SUBSIDIARIES
----------------------------------
CONSOLIDATED BALANCE SHEETS -- UNAUDITED
----------------------------------------
(In Thousands, Except Share Amounts)
June 30, December 31,
2005 2004 (A)
----------- ----------
ASSETS
Current Assets
Cash and cash equivalents..................................................... $ 1,067 $ 2,580
Restricted cash (Note E)...................................................... 1,000 1,125
Investments - marketable securities (Note F).................................. 3,842 3,609
Accounts receivable, less allowance for doubtful accounts of $91 and $92,
respectively.................... 9,392 6,360
Unbilled accounts receivable.................................................. 3,520 2,507
Inventories (Note G).......................................................... 6,892 7,852
Deferred income taxes......................................................... 413 111
Prepaid expense............................................................... 536 626
----------- ----------
Total Current Assets...................................................... 26,662 24,770
Property, Plant and Equipment
Land.......................................................................... 800 871
Buildings and improvements.................................................... 5,606 5,811
Machinery and equipment....................................................... 14,224 14,443
----------- ----------
20,630 21,125
Less: accumulated depreciation................................................ (13,274) (12,669)
----------- ----------
7,356 8,456
Other assets.................................................................. 599 657
----------- ----------
Total Assets.............................................................. $ 34,617 $ 33,883
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable (Note H)........................................................ $ 5,186 $ 5,557
Trade accounts payable........................................................ 3,334 2,667
Accrued warranty expense (Note I)............................................. 450 466
Accrued compensation expense.................................................. 1,170 1,101
Accrued income taxes.......................................................... 1,314 966
Accrued professional fees..................................................... 352 534
Margin liability on marketable securities..................................... 1,565 1,566
Other accrued expenses........................................................ 1,149 1,139
Commitments and contingencies (Note M)........................................ 761 775
Customer advances............................................................. 1,172 2,115
Current maturities of long-term debt (Note H)................................. 4,153 3,842
----------- ----------
Total Current Liabilities................................................. 20,606 20,728
Long-term debt (Note H)......................................................... 2,413 3,162
----------- ----------
Total Liabilities......................................................... 23,019 23,890
Shareholders' Equity
Common stock, $0.01 par value - 10,000,000 shares authorized; 1,649,834
shares issued; 1,624,926 shares outstanding................................. 16 16
Additional paid-in capital.................................................... 17,404 17,404
Accumulated deficit........................................................... (6,385) (7,786)
Accumulated other comprehensive income (Note K)............................... 1,116 849
Treasury stock, at cost, of 24,908 and 17,708 shares, respectively............ (553) (490)
----------- ----------
Total Shareholders' Equity................................................ 11,598 9,993
----------- ----------
Total Liabilities and Shareholders' Equity................................ $ 34,617 $ 33,883
=========== ==========
3
(A) The Balance Sheet at December 31, 2004 has been derived from the audited
financial statements at that date, but does not include all of the information
and footnotes required by accounting principles generally accepted in the United
States for complete financial statements.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
PART I -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
LYNCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS -- UNAUDITED
(In Thousands, Except Share Amounts)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ ------------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
SALES AND REVENUES ..................................... $ 14,913 $ 6,736 $ 25,508 $ 13,548
Cost and expenses:
Manufacturing cost of sales .......................... 9,401 4,750 16,719 10,050
Selling and administrative ........................... 3,511 2,028 6,561 4,303
Lawsuit settlement provision (Note M) ................ -- 425 -- 425
----------- ----------- ----------- -----------
OPERATING PROFIT (LOSS) ................................ 2,001 (467) 2,228 (1,230)
Other income (expense):
Investment income .................................... 7 4 17 8
Interest expense ..................................... (208) (62) (393) (113)
Other income ......................................... 77 (5) 80 22
----------- ----------- ----------- -----------
(124) (63) (296) (83)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES ...................... 1,877 (530) 1,932 (1,313)
Provision for income taxes ............................. (526) (30) (531) (55)
----------- ----------- ----------- -----------
NET INCOME (LOSS) ...................................... $ 1,351 $ (560) $ 1,401 $ (1,368)
=========== =========== =========== ===========
Weighted average shares outstanding .................... 1,630,539 1,495,500 1,631,333 1,496,300
----------- ----------- ----------- -----------
BASIC AND DILUTED INCOME (LOSS) PER
SHARE: ............................................... $ 0.83 $ (0.37) $ 0.86 $ (0.91)
=========== =========== =========== ===========
o Effective September 30, 2004, the Company acquired, through its
subsidiary M-tron Industries, Inc., 100% of the common stock of Piezo
Technology, Inc. (See Note D to the Condensed Consolidated Financial
Statements.) The three month and six month results for the period
ending June 30, 2004 do not include Piezo Technology, Inc.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
PART I -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
LYNCH CORPORATION AND SUBSIDIARIES
----------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS -- UNAUDITED
-------------------------------------------------
(In Thousands)
Six Months Ended
June 30,
-----------------------
2005 2004
---------- ----------
OPERATING ACTIVITIES
Net income (loss)............................................................... $ 1,401 $ (1,368)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation.................................................................... 640 428
Amortization of definite-lived intangible assets................................ 44 123
Gain on sale of fixed assets.................................................... (69) -
Lawsuit settlement provision (Note M) - 425
Changes in operating assets and liabilities:
Receivables................................................................... (4,045) 2,094
Inventories................................................................... 960 (1,104)
Accounts payable and accrued liabilities...................................... 882 (98)
Other assets/liabilities...................................................... (729) 3
---------- ----------
Net cash provided by operating activities....................................... (916) 503
---------- ----------
INVESTING ACTIVITIES
Capital expenditures............................................................ (191) (184)
Restricted cash................................................................. 125 -
Purchase of marketable securities............................................... - (754)
Proceeds from sale if fixed assets.............................................. 307 -
Payment on margin liability on marketable securities............................ - (300)
---------- ----------
Cash provided by (used in) investing activities................................. 241 (1,238)
---------- ----------
FINANCING ACTIVITIES
Net repayments of notes payable................................................. (371) (97)
Repayment of long-term debt..................................................... (438) (62)
Other........................................................................... 34 -
Purchase of treasury stock...................................................... (63) (32)
---------- ----------
Net cash used in financing activities........................................... (832) (191)
---------- ----------
(Decrease) increase in cash and cash equivalents................................ (1,513) (926)
Cash and cash equivalents at beginning of period................................ 2,580 3,981
---------- ----------
Cash and cash equivalents at end of period...................................... $ 1,067 $ 3,055
========== ==========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A. SUBSIDIARIES OF THE REGISTRANT
As of June 30, 2005, the Subsidiaries of the Registrant 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%
B. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month and six month period ended
June 30, 2005 are not necessarily indicative of the results that may be expected
for the year ended December 31, 2005.
The balance sheet at December 31, 2004 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Registrant Company and Subsidiaries Annual
Report on Form 10-K for the year ended December 31, 2004.
C. ADOPTION OF ACCOUNTING PRONOUNCEMENTS
On December 14, 2004, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 123 (revised
2004), "Share Based Payment" ("SFAS 123R"), which is a revision of SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123R supersedes APB
Opinion No. 25, "Accounting for Stock Issued to Employees", and amends SFAS No.
95 "Statement of Cash Flows". Generally, the approach in SFAS 123R is similar to
the approach described in SFAS 123. However, SFAS 123R requires all share-based
payments to employees, including grants to employee stock options, to be
recognized in the income statement based on their fair values. Pro-forma
disclosure is no longer an alternative.
On April 14, 2005, the Securities and Exchange Commission announced that it
would provide for a phased-in implementation process for SFAS No. 123R. This
ruling effectively delayed the Company's adoption of the standard until the
first quarter of 2006. The Company will continue to evaluate the provisions of
SFAS No. 123R to determine its impact on its financial condition and results of
operations.
In November 2004, the FASB issued SFAS No. 151, "INVENTORY COSTS - AN
AMENDMENT OF ARB NO. 43". SFAS No. 151 is effective for inventory costs incurred
during fiscal years beginning after June 15, 2005. This Statement amends the
guidance in ARB No. 43, Chapter 4, "INVENTORY PRICING", to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage). This Statement requires that those items
be recognized as current-period charges regardless of whether they meet the
criterion of "so abnormal". In addition, this Statement requires that allocation
of fixed production overheads to the costs of conversion be based on the normal
capacity of the production facilities. The adoption of this standard is not
expected to have a material impact on the Company's overall financial position
or results of operations.
D. ACQUISITION
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
(b) proceeds of $1,800,000 received from the sale of Lynch Stock to Venator
Merchant Fund ("Venator"), which is controlled by the Company's Chairman, Marc
Gabelli.
7
The following is a revised allocation of the purchase price to the
estimated fair value of assets acquired and liabilities assumed for the PTI
acquisition. The allocation is based on management's estimates, including the
valuation of the fixed and intangible assets by independent third-party
appraisers.
(in thousands)
ASSETS:
-------
Cash.......................................................$ 1,389
Accounts receivable........................................ 1,565
Inventories................................................ 2,485
Prepaid expenses and other current assets.................. 853
Property and equipment..................................... 4,454
Intangible assets.......................................... 627
Other assets............................................... 356
--------
Total assets acquired......................................$ 11,729
========
LIABILITIES:
Accounts payable...........................................$ 556
Accrued expenses........................................... 1,292
Debt assumed by the Company................................ 1,145
Total liabilities assumed.................................. 2,993
--------
Net Assets acquired........................................$ 8,736
========
Although the Company is in the process of finalizing the purchase price
accounting and related income tax implications, during the second quarter of
2005, certain adjustments totaling approximately $400,000 were made to the
acquired property and equipment.
The fair market value of net assets acquired in the PTI acquisition
exceeded the purchase price, resulting in negative goodwill of approximately
$4.4 million. 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 $627,000 consist of customer relationships, trade
name and funded technologies, and were determined to have definite lives that
range from two to ten years.
E. RESTRICTED CASH
At June 30, 2005 and December 31, 2004, the Company had $1.0 million and
$1.1 million, respectively, of Restricted Cash that secures a Letter of Credit
issued by Bank of America to the First National Bank of Omaha as collateral for
its M-tron subsidiary's loans.
F. INVESTMENTS
The following is a summary of marketable securities (investments) held by
the Company (in thousands):
Gross Gross Estimated
Unrealized Unrealized Fair
Equity Securities Cost Gains Losses Value
--------------------------------- ------- ---------- ---------- ---------
June 30, 2005.................... $ 2,774 $ 1,068 -- $ 3,842
December 31, 2004................ $ 2,774 $ 835 -- $ 3,609
8
The Company has a margin liability against this investment of $1,565,000 at
June 30, 2005 and of $1,566,000 at December 31, 2004 which must be settled upon
the disposition of the related securities whose fair value is based on quoted
market prices. The Company has designated these investments as available for
sale pursuant to Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities".
G. INVENTORIES
Inventories are stated at the lower of cost or market value. At June 30,
2005, inventories were valued by two methods: last-in, first-out (LIFO) 52%, and
first-in, first-out (FIFO) 48%. At December 31, 2004, inventories were valued by
the same two methods: LIFO - 47%, and FIFO - 53%.
June 30, December 31,
2005 2004
-----------------------
(in thousands)
Raw materials................... $ 2,624 $ 2,308
Work in process................. 2,659 3,763
Finished goods.................. 1,609 1,781
-------- -------
Total Inventories............. $ 6,892 $ 7,852
======== =======
Current costs exceed LIFO value of inventories by $851,000 and $1,110,000
at June 30, 2005 and December 31, 2004, respectively.
H. INDEBTEDNESS
Lynch Systems and MtronPTI 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.
MtronPTI's credit facility includes an unsecured parent Company guarantee and is
supported by a $1.0 million Letter of Credit that is secured by a $1.0 million
deposit at Bank of America (see Note E - "Restricted Cash").
On June 30, 2005, MtronPTI renewed its credit agreement with First National
Bank of Omaha extending the due date to May 31, 2006. MtronPTI's short-term
credit facility totals $5.5 million, of which $2.8 million was available for
future borrowings. MtronPTI's $3.0 million bridge loan from First National Bank
of Omaha is scheduled to mature on October 14, 2005. MtronPTI is in discussions
to refinance this bridge loan, however, there can be no assurances that it will
be able to do so.
On June 29, 2005, Lynch Systems entered into an extension agreement with
SunTrust Bank to extend the due date of its credit agreement until August 31,
2005. Lynch Systems $7.0 million short-term credit facility was reduced to a
$4.3 million credit facility in accordance with the extension agreement, of
which $200,000 was available for letters of credit. Lynch Systems is currently
seeking to obtain new financing, however, there can be no assurances that such
financing will be available.
On May 12, 2005, Venator Merchant Fund, L.P. 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. The loan was approved
by the Audit Committee of the Board of Directors of Lynch. JUNE 30, DECEMBER 31,
9
June 30, December 31,
-------- ------------
2005 2004
---- ----
(in thousands)
Notes payable:
Mtron bank revolving loan at variable interest rates (greater of prime or 4.5%;
6.25% at June 30, 2005), due May, 2006 $ 2,730 $ 3,557
Lynch Systems working capital revolving loan at variable interest rates, (LIBOR
+ 2%; 5.11% at June 30, 2005), due August, 2005 1,756 2,000
Venator promissory note at a fixed interest rate of 6%, due September 11, 2005 700 --
------- -------
$ 5,186 $ 5,557
======= =======
Long-term debt consists of:
June 30, December 31,
-------- ------------
2005 2004
---- ----
(in thousands)
Long-term debt:
Mtron commercial bank term loan at variable interest rates (6.50% at June 30,
2005), due April, 2007 $ 563 $ 686
Yankton Area Progressive Growth loan at 0% interest -- 50
South Dakota Board of Economic Development at a fixed rate of 3%, due
December, 2007 268 273
Yankton Areawide Business Council loan at a fixed interest rate of 5.5%, due
November, 2007 78 83
Lynch Systems term loan at a fixed interest rate of 5.5%, due August, 2005 403 427
Mtron bridge loan at variable interest rates (greater of prime or 4.5%; 6.25% at
June 30, 2005), due October, 2005 3,000 3,000
Mtron term loan at variable interest rates (greater of prime plus 50 basis points
or 4.5%; 6.75% at June 30, 2005), due October, 2007 1,760 1,943
Rice University Promissory Note at a fixed interest rate of 4.5%, due August,
2009 309 345
Smythe Estate Promissory Note at a fixed interest rate of 4.5% due August, 2009 185 197
------- -------
6,566 7,004
Current maturities (4,153) (3,842)
------- -------
$ 2,413 $ 3,162
======= =======
I. LONG-TERM CONTRACTS AND WARRANTY EXPENSE
Lynch Systems, a 100% wholly-owned subsidiary of the Company, is engaged in
the manufacture and marketing of glass-forming machines and specialized
manufacturing machines. Certain sales contracts require an advance payment
(usually 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 or (iii) negotiated terms of sale. 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 June 30, 2005
and December 31, 2004, unbilled accounts receivable were $3.5 million and $2.5
million, respectively.
Lynch Systems provides a full warranty to world-wide customers who acquire
machines. The warranty covers both parts and labor and normally covers a period
of one year or thirteen months. Based upon experience, the warranty accrual is
based upon three to five percent of the selling price of the machine. The
Company periodically assesses the adequacy of the reserve and adjusts the
amounts as necessary.
10
(in thousands)
Balance, December 31, 2004..................................................................$ 466
Warranties issued during the period......................................................... 170
Settlements made during the period.......................................................... (186)
Changes in liabilities for pre-existing warranties during the period, including
expirations................................................................................ --
------
Balance, June 30, 2005......................................................................$ 450
======
J. EARNINGS PER SHARE AND STOCKHOLDERS' EQUITY
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
anti-dilutive and have lives of up to ten years. As of June 30, 2005, 300,000
options are outstanding and fully vested.
The Company accounts for the 2001 Equity Incentive 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 or above 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" as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2005 2004 2005 2004
--------- --------- ---------- ---------
(in thousands, except share amounts)
Net income (loss) as reported ................................. $ 1,351 $ (560) $ 1,401 $(1,368)
Deduct: Total stock based employee compensation
expense determined under fair value based method for
all awards, net of related tax effect ....................... (222) (38) (222) (77)
------- ------- ------- -------
Pro-forma net income (loss) ................................... $ 1,129 $ (598) $ 1,179 $(1,445)
======= ======= ======= =======
Basic & diluted income (loss) per share:
As reported ................................................... $ 0.83 $ (0.37) $ 0.86 $ (0.91)
Pro forma ..................................................... $ 0.69 $ (0.40) $ 0.72 $ (0.97)
The net income (loss) as reported in each period did not include any stock-based compensation.
11
K. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Total comprehensive income was $1,175,000 in the three months ended June
30, 2005, compared to a total comprehensive loss of $835,000 in the three months
ended June 30, 2004. Included in total comprehensive income (loss) were losses
on available for sale securities of $189,000 and $275,000 in the three months
ended June 30, 2005 and 2004, respectively.
Total comprehensive income was $1,668,000 in the six months ended June 30,
2005, compared to a total comprehensive loss of $1,057,000 in the six months
ended June 30, 2004. Included in total comprehensive income (loss) were gains on
available for sale securities of $233,000 and $311,000 in the six months ended
June 30, 2005 and 2004, respectively.
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2005 2004 2005 2004
------- ------- ------- -------
Net income (loss) as reported ........................................... $ 1,351 $ (560) $ 1,401 $(1,368)
Foreign currency translation ............................................ 13 -- 34 --
Unrealized (loss) gain on available for sale securities ................. (189) (275) 233 311
------- ------- ------- -------
Total comprehensive income (loss) ....................................... $ 1,175 $ (835) $ 1,668 $(1,057)
======= ======= ======= =======
The components of accumulated other comprehensive income, net of related tax, at
June 30, 2005 and December 31, 2004, and June 30, 2004 are as follows:
June 30, December 31, June 30,
2005 2004 2004
--------- -------- ---------
Balance beginning of period.............................. $ 849 $ 291 $ 291
Foreign currency translation............................. 34 14 --
Unrealized gain on available for-sale securities......... 233 544 311
--------- -------- ---------
Accumulated other comprehensive income................... $ 1,116 $ 849 $ 602
========= ======== =========
L. 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) which represents
products manufactured and sold by MtronPTI. The Company's foreign operations in
Hong Kong and India exist under MtronPTI.
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 $125,000 and $87,500 in the three months
ending June 30, 2005 and 2004, respectively and $250,000 and $175,000 in the six
months ending June 30, 2005 and 2004, respectively. Identifiable assets of each
industry segment are the assets used by the segment in its operations excluding
general corporate assets. General corporate assets are principally cash and cash
equivalents, short-term investments and certain other investments and
receivables.
12
Three Months Six Months
Ended June 30, Ended June 30,
--------------------- ---------------------
2005 2004 2005 2004
---- ---- ---- ----
REVENUES
Glass manufacturing equipment - USA $ 616 $ 181 $ 1,066 $ 333
Glass manufacturing equipment - Foreign 5,448 970 7,209 3,117
-------- -------- -------- --------
Total Glass manufacturing equipment 6,064 1,151 8,275 3,450
Frequency control devices - USA 4,837 2,052 9,691 4,189
Frequency control devices - Foreign 4,012 3,533 7,542 5,909
-------- -------- -------- --------
Total Frequency control devices 8,849 5,858 17,233 10,098
-------- -------- -------- --------
Consolidated total revenues $ 14,913 $ 6,736 $ 25,508 $ 13,548
======== ======== ======== ========
OPERATING PROFIT (LOSS)
Glass manufacturing equipment $ 1,774 $ (130) $ 1,848 $ (522)
Frequency control devices 638 407 1,217 469
-------- -------- -------- --------
Total manufacturing 2,412 277 3,065 (53)
Unallocated Corporate expense (411) (744) (837) (1,177)
-------- -------- -------- --------
Consolidated total operating profit (loss) $ 2,001 $ (467) $ 2,228 $ (1,230)
======== ======== ======== ========
OTHER PROFIT (LOSS)
Investment income $ 7 $ 4 $ 17 $ 8
Interest expense (208) (62) (393) (113)
Other income (expense) 77 (5) 80 22
-------- -------- -------- --------
Consolidated total profit (loss) before taxes $ 1,877 $ (530) $ 1,832 $ (1,313)
======== ======== ======== ========
CAPITAL EXPENDITURES
Glass manufacturing equipment $ 8 $ 10 $ 20 $ 13
Frequency control devices 152 105 170 171
General Corporate -- -- 1 --
-------- -------- -------- --------
Consolidated total capital expenditures $ 160 $ 115 $ 191 $ 184
======== ======== ======== ========
TOTAL ASSETS
Glass manufacturing equipment $ 12,109 $ 9,902
Frequency control devices 17,100 9,018
General Corporate 5,308 2,878
-------- ---------
Consolidated total assets $ 34,517 $ 21,798
======== =========
M. 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. In addition, the Company and/or
one or more of its subsidiaries are parties to the following additional legal
proceedings:
13
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, PACE LOCAL 1-1069 V. LYNCH CORPORATION AND LYNCH
SYSTEMS, INC. CUMBERLAND COUNTY SUPERIOR COURT, CV-2001-00352; AND MAINE SUPREME
JUDICIAL COURT, LAW DOCKET NO. CUM-04-682
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 Court held that the Spinnaker Entities' bankruptcy
did not prevent the award of severance pay under the statute. The 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 Court rejected PACE's claim for pre-judgment interest, but granted
its request for attorney fees.
Both PACE and the Company have appealed to the Maine Supreme Judicial
Court. The Company filed its brief on April 4, 2005. PACE filed its brief on May
18, 2005. Lynch filed its Reply Brief on June 9, 2005. The Maine Supreme Court
has not yet scheduled oral argument. Management does not believe that the
resolution of this case will have a material adverse effect on the Company's
consolidated financial condition and operations.
QUI TAM LAWSUIT
The Company, Lynch Interactive and numerous other parties have been named
as 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 complaint was filed under seal with the court in
February, 2001, and the seal was lifted 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 (a private individual who filed the action on behalf of the United
States) in 2005 alleges damages of approximately $91 million in respect of
bidding credits, approximately $70 million in respect of government loans and
approximately $206 million in respect of subsequent resales of licenses, in each
case prior to trebling.
In September, 2003, the Court granted Lynch Interactive's motion to
transfer the action to the Southern District of New York and 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 for the District of Columbia to compel the FCC to
provide information subpoenaed by them in order to conduct their defense. This
motion was denied in May, 2005 and the defendants are considering appropriate
14
responses. In the mean-time, discovery is substantially complete and the
preparation and filing of dispositive motions has begun.
The U. S. Department of Justice has notified the Court that it declined to
intervene in the case. The Defendants strongly believe that the action is
completely without merit and that the relator's damage computation is without
basis, and are vigorously defending it. 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. Lynch Interactive has retained legal counsel to
defend the claim on behalf of the Company and Lynch Interactive, at the expense
of Lynch Interactive and certain other defendants. 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.
N. INCOME TAXES
The Company files consolidated federal income tax returns. The Company has
approximately $2,400,000 net operating loss ("NOL") carry-forward as of June 30,
2005. This NOL expires in 2026 if not utilized prior to that date.
O. GUARANTEES
The Company presently guarantees (unsecured) the SunTrust Bank loans of its
subsidiary, Lynch Systems. The Company presently guarantees (unsecured) the
First National Bank of Omaha loans of its subsidiary, MtronPTI, and has
guaranteed a Letter of Credit issued to the First National Bank of Omaha on
behalf of its subsidiary, MtronPTI (see Note H - "Indebtedness Debt"). As of
June 30, 2005, the $1,000,000 Letter of Credit issued by Bank of America to The
First National Bank of Omaha was secured by a $1,000,000 deposit at Bank of
America. (See Note E - "Restricted Cash", also see "subsequent events".)
There were no other financial, performance, indirect guarantees or
indemnification agreements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
CRITICAL ACCOUNTING POLICIES
The Company has identified the accounting policies listed below that we
believe are most critical to our financial condition and results of operations,
and that require management's most difficult, subjective and complex judgments
in estimating the effect of inherent uncertainties. This section should be read
in conjunction with Note 1 to the Consolidated Financial Statements, included in
the Company's Annual Report on Form 10-K for the year ended December 31, 2004,
which includes other significant accounting policies.
ACCOUNTS RECEIVABLE
Accounts receivable on a consolidated basis consists 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 subsidiaries and
business segments have credit sales 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.
15
We maintain 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 was 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 June 30, 2005 and December 31, 2004,
respectively. The balance of inventories are valued using the first-in-first-out
(FIFO) method. If actual market conditions are more or less favorable than those
projected by management, including the demand for our products, changes in
technology, internal labor costs and the costs of materials, 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, a 100% owned subsidiary of the Company, is engaged in the
manufacture and marketing of glass-forming machines and specialized
manufacturing machines. Certain sales contracts require an advance payment
(usually 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; or (iii) negotiated terms of sale. 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 June 30,
2005, and December 31, 2004, unbilled accounts receivable were $3.5 and $2.5
million 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.
These estimates include current customer contract specifications, related
engineering requirements and the achievement of project milestones. 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.
Favorable changes in estimates result in additional profit recognition, while
unfavorable changes in estimates result in the reversal of previously recognized
earnings to the extent of the error of the estimate. 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 world-wide customers who acquire
machines. The warranty covers both parts and labor and normally covers a period
of one year or thirteen months. Based upon experience, the warranty accrual is
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.
16
(in thousands)
Balance, December 31, 2004.............................................................. $ 466
Warranties issued during the period..................................................... 170
Settlements made during the period...................................................... (186)
Changes in liabilities for pre-existing warranties during the period, including
expirations........................................................................... -
-----------
Balance, June 30, 2005.................................................................. $ 450
==========
RESULTS OF OPERATIONS
SECOND QUARTER
THREE MONTHS ENDED JUNE 30, 2005 COMPARED TO JUNE 30, 2004
CONSOLIDATED REVENUES AND GROSS MARGIN
Consolidated revenues for the second quarter 2005 increased $8.2 million,
or 121%, to $14.9 million from $6.7 million for the comparable period in 2004.
The increase came from both MtronPTI, including the contribution of the PTI
acquisition, and Lynch Systems.
Revenues at MtronPTI increased by $3.2 million, or 57%, to $8.8 million for
the second quarter 2005 from $5.6 million for the comparable period in 2004. The
increase was primarily due to the contribution of the PTI acquisition, which was
acquired effective September 30, 2004.
Revenues at Lynch Systems increased by $4.9 million, or 408%, to $6.1
million for the second quarter 2005 from $1.2 million for the comparable period
in 2004. Approximately $4.2 million of the increase was related to the sales of
large CRT machines.
The consolidated gross margin as a percentage of revenues for the second
quarter increased to 37.0%, compared to 29.5% for the comparable period in 2004.
Both MtronPTI and Lynch Systems experienced higher margins as compared to 2004.
MtronPTI's gross margin as a percentage of revenues for the second quarter,
increased to 29.1% from 26.4% for the comparable period 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 second
quarter, increased to 48.5% from 44.4% for the comparable period in 2004. The
margin improvement was primarily due to higher margin sales of CRT machines in
the second quarter of 2005.
OPERATING PROFIT (LOSS)
Operating profit increased $2.5 million, to $2.0 million for the second
quarter 2005 from an operating loss of $467,000 for the comparable period in
2004.
Operating profit at MtronPTI increased $231,000, or 57%, to $638,000 for
the second quarter 2005 from $407,000 for the comparable period in 2004. The
operating profit improvement was primarily due to the significant sales 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.
Operating profit at Lynch Systems increased $1.8 million to $1.7 million
for the second quarter 2005 from a $130,000 loss for the comparable period in
2004. The operating profit improvement resulted from higher gross margins and
lower operating expenses.
17
Corporate expenses decreased $333,000 to $411,000 for the second quarter
2005 from $744,000 for the comparable period in 2004. In the second quarter of
2004, the Company recorded a $425,000 lawsuit settlement provision.
OTHER INCOME (EXPENSE), NET
Investment income increased $3,000 to $7,000 for the second quarter 2005
from $4,000 for the comparable period in 2004.
Interest expense increased $146,000 to $208,000 for the second quarter 2005
from $62,000 for the comparable period in 2004, primarily due to increase in
debt resulting from the acquisition of PTI and borrowings at Lynch Systems.
Other income increased $82,000 to $77,000 for the second quarter 2005 from
a loss of $5,000 for the comparable period in 2004, primarily due to a gain on
sale of a warehouse in Orlando.
INCOME TAXES
The Company files consolidated federal income tax returns, which includes
all subsidiaries.
The income tax provision for the three month period ended June 30, 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.
NET INCOME (LOSS)
Net income for the second quarter 2005 was $1.4 million compared to a net
loss of $560,000 in the comparable period in 2004. As a result, fully diluted
income per share for the second quarter 2005 was $0.83 compared to a loss of
$0.37 per share for the comparable period in 2004.
SIX MONTHS ENDED JUNE 30, 2005 COMPARED TO JUNE 30, 2004
CONSOLIDATED REVENUES AND GROSS MARGIN
Consolidated revenues for the six month period ending June 30, 2005
increased $12.0 million, or 88%, to $25.5 million from $13.5 million for the
comparable period in 2004. The significant increase came from both MtronPTI,
including the contribution of the PTI acquisition, and Lynch Systems.
Revenues at MtronPTI increased by $7.1 million, or 70%, to $17.2 million
for the six month period ending June 30, 2005 from $10.1 million for the
comparable period in 2004. The increase was primarily due to the contribution of
the PTI acquisition, which was acquired effective September 30, 2004.
Revenues at Lynch Systems increased by $4.8 million, or 137%, to $8.3
million for the six month period ending June 30, 2005 from $3.5 million for the
comparable period in 2004. The increase was primarily due to sales of large CRT
machines in 2005.
The consolidated gross margin as a percentage of revenues for the six month
period ending June 30, 2005 increased to 34.5%, compared to 25.8% for the
comparable period in 2004. Both MtronPTI and Lynch Systems experienced higher
margins as compared to 2004.
MtronPTI's gross margin as a percentage of revenues for the six month
period ending June 30, 2005 increased to 29.4% from 25.0% for the comparable
period in 2004. The contribution from PTI, combined with selective price
increases and operational efficiencies resulted in the improved gross margin
rates.
18
Lynch Systems' gross margin as a percentage of revenues for the six month
period ending June 30, 2005 increased to 44.9% from 28.1% for the comparable
period in 2004. The increase was primarily due to sales of large CRT machines,
which carry higher gross margins, in the second quarter of 2005.
OPERATING PROFIT (LOSS)
Operating profit increased $3.4 million, to $2.2 million for the six month
period ended June 30, 2005 from an operating loss of $1.2 million for the
comparable period in 2004.
Operating profit at MtronPTI increased $748,000 to $1.2 million for the six
month period ended June 30, 2005 from $469,000 for the comparable period in
2004. The operating profit improvement was primarily due to the significant
sales 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.
Operating profit at Lynch Systems increased $2.3 million to $1.8 million
for the six month period ended June 30, 2005 from a $522,000 operating loss for
the comparable period in 2004. The operating profit improvement resulted from
higher gross margins and lower operating expenses.
Corporate expenses decreased $340,000, to $837,000 for the six month period
ending June 30, 2005 from $1.2 million for the comparable period in 2004. In
2004, the Company recorded a $425,000 lawsuit settlement provision.
OTHER INCOME (EXPENSE), NET
Investment income increased $9,000 to $17,000 for the six month period
ended June 30, 2005 from $8,000 for the comparable period in 2004.
Interest expense increased $280,000 to $393,000 for the six month period
ended June 30, 2005 from $113,000 for the comparable period in 2004 primarily
due to increase in debt resulting from acquisition of PTI and borrowing at Lynch
Systems.
Other income increased $58,000 to $80,000 for the six month period ended
June 30, 2005 from $22,000 for the comparable period in 2004 primarily due to a
gain on the sale of warehouse in Orlando.
INCOME TAXES
The Company files consolidated federal income tax returns, which includes
all subsidiaries.
The income tax provision for the six month period ended June 30, 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.
NET INCOME (LOSS)
Net income for the six months ended June 30, 2005 was $1.4 million compared
to a net loss of $1.4 million in the comparable period in 2004. As a result,
fully diluted income per share for the six month period ended June 30, 2005 was
$0.86 compared to a loss of $0.91 per share for the comparable period in 2004.
BACKLOG/NEW ORDERS
Total backlog of manufactured products at June 30, 2005 was $12.9 million,
a $4.7 million decline over the backlog at December 31, 2004, and $0.7 million
more than the backlog at June 30, 2004.
MtronPTI had backlog orders of $7.6 million at June 30, 2005 which is
consistent with the backlog at December 31, 2004 and represents an increase over
the $3.3 million of backlog at June 30, 2004. Backlog increased from June 30,
2004 primarily due to the addition of backlog attributable to PTI, which was
acquired effective September 30, 2004.
19
Lynch Systems had backlog orders of $5.3 million at June 30, 2005 compared
to $9.9 million at December 31, 2004 and $8.8 million at June 30, 2004. Backlog
decreased from December 2004 due to sales of large CRT machines in the second
quarter of 2005. At June 30, 2005, the backlog of CRT machines is approximately
$0.8 million and the related revenue is expected to be recognized in the third
quarter of 2005.
FINANCIAL CONDITION
At June 30, 2005, the Company had current assets of $26.7 million and
current liabilities of $20.6 million. At June 30, 2005, working capital was $6.1
million, compared to $4.0 million at December 31, 2004 and $7.4 million at June
30, 2004. The ratio of current assets to current liabilities was 1.30 to 1.00 at
June 30, 2005; 1.19 to 1.00 at December 31, 2004; and 1.71 to 1.00 ratio at June
30, 2004.
Cash used in operating activities was approximately $0.9 million in the six
months ended June 30, 2005, compared to cash provided by operating activities of
approximately $0.5 million in the six months ended June 30, 2004. The year to
year unfavorable change in operating cash flow of $1.4 million was primarily due
to an increase in accounts receivable. Capital expenditures were $191,000 in the
six months ended June 30, 2005, compared to $184,000 in the six months ended
June 30, 2004.
At June 30, 2005, the Company's total cash, cash equivalents and
investments in marketable securities (before margin liability) was $5.9 million
(including $1.0 million of restricted cash).
Total debt of $11.8 million at June 30, 2005 was $0.8 million less than the
amount outstanding at December 31, 2004 and $8.2 million more than the debt at
June 30, 2004. Debt outstanding at June 30, 2005 included $1.9 million of fixed
rate debt at an average interest rate of 5.1%, and $9.8 million of variable rate
debt at an average interest rate of 6.2%.
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 $7.0 million short-term credit facility was reduced to $4.3
million 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. At June 30, 2005, there were outstanding Letters of Credit of
$2,323,000 and borrowings of $1,756,000 under the working capital line and
$403,000 under the term loan. These loans include an unsecured parent company
guarantee. Under the terms of extension agreement Lynch Systems cannot make any
cash distributions to the parent company. In order to meet the on-going working
capital and capital expenditure requirements, Lynch Systems will need to obtain
new financing. Lynch Systems is currently seeking to obtain new financing,
however, there can be no assurance that such financing will be available.
In connection with the completion of the acquisition of PTI, on October 14,
2004, M-tron 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"). On June 30, 2005, MtronPTI renewed its Revolving
Loan with First National Bank of Omaha extending the due date to May 31, 2006.
At June 30, 2005, the Company had $2.8 million available for future borrowings
under the Revolving Loan. The Revolving Loan bears interest at the greater of
prime rate or 4.5%. 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, is
payable on the first anniversary of the Loan Agreement.
All outstanding obligations under the Loan Agreement are collateralized by
security interests in the assets of M-tron and PTI, as well as by a mortgage on
20
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.
Pursuant to an Unconditional Guaranty for Payment and Performance, the
Company has guaranteed to First National Bank of Omaha the payment and
performance of its subsidiaries' obligations under the Loan Agreement and
ancillary agreements and instruments. The Company has guaranteed a Letter of
Credit issued to the First National Bank of Omaha on behalf of its subsidiary,
MtronPTI. As of June 30, 2005, the $1,000,000 Letter of Credit issued by Bank of
America to The First National Bank of Omaha was secured by a $1,000,000 deposit
at Bank of America.
On May 12, 2005, Venator Merchant Fund, L.P. 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. The loan was approved
by the Audit Committee of the Board of Directors of Lynch. The Company does not
have any revolving credit facilities at the parent company level.
ADOPTION OF ACCOUNTING PRONOUNCEMENTS
On December 14, 2004, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 123 (revised
2004), "State Based Payment" ("SFAS 123R"), which is a revision of SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123R supersedes APB
Opinion No. 25, "Accounting for Stock Issued to Employees", and amends SFAS No.
95 "Statement of Cash Flows". Generally, the approach in SFAS 123R is similar to
the approach described in SFAS 123. However, SFAS 123R requires all share-based
payments to employees, including grants to employee stock options, to be
recognized in the income statement based on their fair values. Pro-forma
disclosure is no longer an alternative.
On April 14, 2005, the Securities and Exchange Commission announced that it
would provide for a phased-in implementation process for SFAS No. 123R. This
ruling effectively delayed the Company's adoption of the standard until the
first quarter of 2006. The Company will continue to evaluate the provisions of
SFAS No. 123R to determine its impact on its financial condition and results of
operations.
OFF-BALANCE SHEET ARRANGEMENTS
Aside from the Company's stand-by Letter of Credit in the amount of
$1,000,000, the Company does not have any off-balance sheet arrangements.
AGGREGATE CONTRACTUAL OBLIGATIONS
Details of the Company's contractual obligations for short-term debt,
long-term debt, leases, purchases and other long term obligations as of June 30,
2005 are as follows:
Payments Due by Period - Including Interest (In Thousands)
----------------------------------------------------------------
Less Than 1 - 3 3 - 5 More Than
Contractual Obligations Total 1 Year Years Years 5 Years
-------------------------------------------------------------- ---------- ----------- ----------- ---------- -----------
Short-term Debt (Revolving Credit) ........................... $ 5,390 $ 5,390 -- -- --
Long-term Debt Obligations ................................... 6,887 4,348 2,509 30 --
Capital Lease Obligations .................................... -- -- -- -- --
Operating Lease Obligations .................................. 268 176 82 10 --
Purchase Obligations ......................................... -- -- -- -- --
Other Long-term Liabilities Reflected on
the Registrant's Balance Sheet under
GAAP ....................................................... -- -- -- -- --
TOTAL ...................................................... $12,545 $ 9,914 $ 2,591 $ 40 --
======= ======= ======= ======= =======
21
MARKET RISK
The Company is exposed to market risk relating to changes in the general
level of U.S. interest rates. Changes in interest rates affect the amounts of
interest earned on the Company's cash equivalents and short-term investments
(approximately $2.1 million at June 30, 2005). The Company generally finances
the debt portion of the acquisition of long-term assets with fixed 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, 2004.
Since the Company's international sales are in U.S. Dollars, there is no
monetary risk.
At June 30, 2005, approximately $9.8 million 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. Assuming the current level of
borrowings for variable rate debt, and assuming a two percentage point increase
in the 2005 average interest rate under these borrowings, it is estimated that
the Company's interest expense would change by approximately $0.2 million. In
the event of an adverse change in interest rates, management would take actions
to further mitigate its exposure.
SUBSEQUENT EVENTS
On July 1, 2005, Lynch Corporation filed a Registration Statement with the
Securities and Exchange Commission in connection with a proposed rights offering
to its existing shareholders.
The proposed rights offering consists of transferable rights to subscribe
to Lynch common stock. Lynch would issue one subscription right for each share
of common stock held on the record date. Every three such rights will entitle
the shareholder to subscribe for one common share.
Each right will also carry with it an oversubscription privilege to
subscribe for additional common shares that are not purchased by other holders
of rights. The rights will not be exercisable until the registration statement
is declared effective. The record date and exercise price will be set at the
time of effectiveness at a discount to market determined by the Lynch Board of
Directors. Subscription rights in the proposed offering will be issued only to
shareholders on the record date.
After the SEC declares effective the Registration Statement, a subscription
certificate, together with a prospectus containing details of the rights
offering, will be mailed to shareholders. It is expected that the rights
offering will remain open for 30 days, subject to extension for up to 15 days.
No fractional shares will be issued, and Lynch will round up to the nearest
whole number the number of shares its shareholders may purchase.
The purpose of this offering is to provide for our ongoing operating needs.
The proceeds will be used for working capital, general corporate purposes and
acquisitions, although the Company has not identified any specific acquisitions
at this time.
The foregoing is not an offering, which can be made only by means of the
prospectus. A registration statement relating to these securities has been filed
with the U.S. Securities and Exchange Commission but has not yet become
effective. These securities may not be sold nor may offers to buy be accepted
prior to the time the registration statement becomes effective. This disclosure
shall not constitute an offer to sell or the solicitation of an offer to buy nor
shall there be any sale of these securities in any state in which such offer,
solicitation or sale would be unlawful prior to registration or qualification
under the securities laws of any such state.
RISK FACTORS
Certain subsidiaries and business segments of the Company sell to
industries that are subject to cyclical economic changes. Any downturns in the
economic environment would have a financial impact on the Company and its
consolidated subsidiaries and may cause the reported financial information
herein not to be indicative of future operating results, financial condition or
cash flows.
Future activities and operating results may be adversely affected by
fluctuating demand for capital goods such as large glass presses, delay in the
recovery of demand for components used by telecommunications infrastructure
manufacturers, disruption of foreign economies and the inability to renew or
obtain new financing for expiring loans.
22
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. 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.
The Company maintains an allowance for doubtful accounts at a level that
management believes is sufficient to cover potential credit losses.
For a complete list of risk factors, see the Company's Annual Report on
Form 10-K for the year ended December 31, 2004.
FORWARD LOOKING INFORMATION
Included in this Management Discussion and Analysis of Financial Condition
and Results of Operations are certain forward looking financial and other
information, including without limitation matters relating to "Risks". It should
be recognized that such information are projections, estimates or forecasts
based on various assumptions, including without limitation, meeting its
assumptions regarding expected operating performance and other matters
specifically set forth, as well as the expected performance of the economy as it
impacts the Company's businesses, government and regulatory actions and
approvals, and tax consequences, and the risk factors and cautionary statements
set forth in reports filed by the Company with the Securities and Exchange
Commission. As a result, such information is subject to uncertainties, risks and
inaccuracies, which could be material.
The Registrant 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 Registrant also makes this information available on its website, whose
internet address is WWW.LYNCHCORP.COM.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
See "Market Risk" under Item 2 above.
ITEM 4. CONTROLS AND PROCEDURES
The principal 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 has been no changes in the Registrant's internal control over
financial reporting that occurred during the Registrant's last fiscal quarter
that has materially affected, or is reasonably likely to materially affect, the
Registrant's internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. 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
11, ADV. PRO. NO. 02-2007, PACE LOCAL 1-1069 V. LYNCH CORPORATION AND LYNCH
SYSTEMS, INC. CUMBERLAND COUNTY SUPERIOR COURT, CV-2001-00352; AND MAINE SUPREME
JUDICIAL COURT, LAW DOCKET NO. CUM-04-682
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 Court held that the Spinnaker Entities' bankruptcy
did not prevent the award of severance pay under the statute. The 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 Court rejected PACE's claim for pre-judgment interest, but granted
its request for attorney fees.
Both PACE and the Company have appealed to the Maine Supreme Judicial
Court. The Company filed its brief on April 4, 2005. PACE filed its brief on May
18, 2005. Lynch filed its Reply Brief on June 9, 2005. The Maine Supreme Court
has not yet scheduled oral argument. Management does not believe that the
resolution of this case will have a material adverse effect on the Company's
consolidated financial condition and operations.
QUI TAM LAWSUIT
The Company, Lynch Interactive and numerous other parties have been named
as 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 complaint was filed under seal with the court in
February, 2001, and the seal was lifted 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 (a private individual who filed the action on behalf of the United
States) in 2005 alleges damages of approximately $91 million in respect of
bidding credits, approximately $70 million in respect of government loans and
approximately $206 million in respect of subsequent resales of licenses, in each
case prior to trebling.
24
In September, 2003, the Court granted Lynch Interactive's motion to
transfer the action to the Southern District of New York and 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 for the District of Columbia to compel the FCC to
provide information subpoenaed by them in order to conduct their defense. This
motion was denied in May, 2005 and the defendants are considering appropriate
responses. In the mean-time, discovery is substantially complete and the
preparation and filing of dispositive motions has begun.
The U. S. Department of Justice has notified the Court that it declined to
intervene in the case. The Defendants strongly believe that the action is
completely without merit and that the relator's damage computation is without
basis, and are vigorously defending it. 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. Lynch Interactive has retained legal counsel to
defend the claim on behalf of the Company and Lynch Interactive, at the expense
of Lynch Interactive and certain other defendants. 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 2. ISSUER PURCHASE OF ITS EQUITY SECURITIES
Maximum Number (Or
Total Number of Approximate Dollar
Shares Purchased as Value) of Shares
Part of Publicly That May Yet be
Total Number of Average Price Paid Announced Plans or Purchased Under the
Period Shares Purchased Per Share Programs Plans or Programs
----------------------------------- ------------------ ----------------------- ------------------------ ------------------------
April 1, 2005 -
April 30, 2005 .................... -- -- -- 47,600 Shares
May 1, 2005 -
May 31, 2005 ...................... 1,200 $ 8.6225 1,200 46,400 Shares
June 1, 2005 -
June 30, 2005 ..................... 6,000 $ 8.7738 6,000 40,400 Shares
------------------ ----------------------- ------------------------ ------------------------
Total ............ 7,200 $ 8.7486 7,200 40,400 Shares
================== ======================= ======================== =========================
On February 4, 2004, Lynch announced that on January 23, 2004, the Board of
Directors authorized the repurchase of up to 50,000 shares of the Company's
outstanding common stock. The timing of the buy-back and the exact number of
shares purchased will depend on market conditions; this program does not have an
expiration date. The Company will buy back shares through both public and
private channels at prices believed to be appropriate and in the best interest
of shareholders.
As of June 30, 2005, the Company has repurchased 9,600 shares in the amount
of $94,995, at an average price of $9.8953 per share and 40,400 shares remain
available for purchase under this program.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders of the Registrant held on May 26,
2005:
The following persons were elected as Directors with the following votes:
NAME VOTES FOR VOTES WITHHELD
-------------------- ---------- --------------
E. Val Cerutti 1,453,178 71,046
Marc Gabelli 1,456,578 67,646
John C. Ferrara 1,456,198 68,026
Avrum Gray 1,453,073 71,151
Anthony R. Pustorino 1,449,692 74,532
The Amendments to 2001 Equity Incentive Plan were approved with the
following votes:
VOTES FOR VOTES AGAINST
--------- --------------
620,822 170,805
ITEM 6. EXHIBITS
Exhibits filed herewith:
31.1 Certification of Principal Executive Officer pursuant to Rule
13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as
amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certificate of Principal Financial Officer pursuant to Rule
13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as
amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32 Certification of Principal Executive Officer and Principal
Financial Officer pursuant to Rule 13a-14(b) or 15d-14(b) of the
Securities Act of 1934, as amended, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
Pursuant to the requirements of the Securities and 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
(Registrant)
August 11, 2005 By: /s/ Eugene Hynes
----------------------------
Eugene Hynes
Principal Financial Officer
EXHIBIT INDEX
Exhibit
No. Description
--- -----------
31.1 Certification of Principal Executive Officer pursuant to Rule
13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as
amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
31.2 Certificate of Principal Financial Officer pursuant to Rule 13a-14(a)
or 15d-14(a) of the Securities Exchange Act of 1934, as amended, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32 Section 1350 Certifications of Registrant's principal executive and
principal financial officers required by Exchange Act Rule 13a-14(b).
The Exhibits listed above have been filed separately with the Securities
and Exchange Commission in conjunction with this Quarterly Report on Form 10-Q
or have been incorporated by reference into this Quarterly Report on Form 10-Q.
Upon request, Lynch Corporation will furnish to each of its shareholders a copy
of any such Exhibit. Requests should be addressed to the Office of the
Secretary, Lynch Corporation, 140 Greenwich Avenue, 4th Floor, Greenwich CT
06830.
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