UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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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, 2006
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
THE LGL GROUP, INC.
(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 Ave, 4th Fl, Greenwich, Connecticut 06830
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(Address of Principal Executive Offices) (Zip Code)
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
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Common Stock, $0.01 Par Value American Stock Exchange
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 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, 2006 of
$8.18 per share) was $12.4 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 29, 2007.
DOCUMENTS INCORPORATED BY REFERENCE: Certain portions of the Registrant's
definitive Proxy Statement for the 2007 Annual Meeting of Shareholders, which
will be filed with the Securities and Exchange Commission are incorporated by
reference in Part III of this Report.
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ITEM 1. BUSINESS
The LGL Group, Inc. (the "Company"), formerly Lynch Corporation,
incorporated in 1928 under the laws of the State of Indiana, is a multi-industry
holding company with subsidiaries engaged in manufacturing a broad range of
capital equipment and custom-designed electronic components. The Company's
executive offices are located at 140 Greenwich Ave, 4th Floor, Greenwich,
Connecticut 06830. The telephone number is (203) 622-1150.
The Company has two principal operating manufacturing subsidiaries,
MtronPTI, with operations in Orlando, Florida, Yankton, South Dakota, and Noida,
India and Lynch Systems, Inc. ("Lynch Systems"), with operations in Bainbridge,
Georgia.
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.
MTRONPTI
OVERVIEW
MtronPTI manufactures and markets 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, 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.
MtronPTI'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.
MtronPTI has more than 40 years of experience designing, manufacturing and
marketing crystal based frequency control products. Its customers rely on the
skills of MtronPTI's engineering and design team to help 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, MtronPTI 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 11 to the Company's Consolidated Financial Statements,
"Segment Information".
At December 31, 2006, MtronPTI net working capital was $5,218,000 compared
to $5,515,000 at December 31, 2005. At December 31, 2006, the Company had
current assets of $14,426,000 and current liabilities of $9,208,000. The ratio
of current assets to current liabilities was 1.57 to 1.0. At December 31, 2005,
the Company had current assets of $13,698,000 and current liabilities of
$8,183,000, and a current ratio of 1.67 to 1.00. The increase in working capital
is primarily due to the building up of inventory levels. The company is not
obligated to carry significant inventory balances to meet rapid delivery
requirements. MtronPTI typically receives estimated order details from its major
customers and tries to stock accordingly.
MTRONPTI'S OBJECTIVES
MtronPTI 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. MtronPTI
intends to grow by strong penetration of the timing and timing management
portion of the electronics industry. It plans to grow beyond a component company
to a company offering timing system design services and engineered timing
management products.
MtronPTI 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
MtronPTI's frequency control devices being designed into their products more
regularly.
MtronPTI has a long-standing relationship with offshore contract
manufacturers who have added capacity on its behalf. MtronPTI's near term
objective is to reduce the time it takes to manufacture its products, which will
result in better service to its customers.
MtronPTI 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.
MtronPTI believes that it can significantly enhance its business
opportunities by acquiring technology, product portfolios, new design
capabilities, and/or access to a portfolio of targeted customers. 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
MtronPTI'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 MtronPTI an entry to the timing modules
market. The September 2004 acquisition of PTI provided MtronPTI with its
families of very high precision oven-controlled crystal oscillators and its
electronic filter products.
MtronPTI designs and produces a wide range of packaged quartz crystals,
quartz crystal based oscillators and electronic filter products. 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 MtronPTI's product family offers the designers at
electronic equipment manufacturers a range of options as they create the needed
performance in their products.
Currently, MtronPTI'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.
2
MtronPTI'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, communications satellites,
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. MtronPTI's products are also
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.
MtronPTI'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
MtronPTI's operations are located in Yankton, South Dakota, Orlando,
Florida, India, and Hong Kong. MtronPTI has two facilities in Yankton which
contain approximately 51,000 square feet in the aggregate. MtronPTI owns one
building, approximately 76,000 square feet, on approximately 7 acres of land in
Orlando, which was purchased in connection with the acquisition of PTI. The
Company leases approximately 7,500 square feet of office and manufacturing space
in Delhi, India and approximately 1,500 square feet of office space in Hong
Kong.
Mtron has established long-term relationships with several contract
manufacturers in Asia. Approximately 15.9% of MtronPTI's revenues in 2006 were
attributable to one such contract manufacturer located in both Korea and China.
While MtronPTI does not have written long-term agreements with this contract
manufacturer, MtronPTI believes that it occasionally receives preferential
treatment on production scheduling matters. MtronPTI maintains a rigorous
quality control system and is an ISO 9001/2000 qualified manufacturer.
MtronPTI's Hong Kong subsidiary (M-tron 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, 2006, MtronPTI employed 32 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
$2,470,000, $2,408,000, and $1,089,000 in 2006, 2005, and 2004 respectively. As
has been the case in the past, MtronPTI expects to increase its spending on
research and development by about 30% in 2007.
CUSTOMERS
MtronPTI 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 2006, an electronics manufacturing company accounted for approximately
10.6% of Mtron/PTI's total revenues compared to 14% and 18% for MtronPTI's
largest customer in 2005 and 2004, respectively. No other customer accounted for
more than 10% of its 2006 revenues. Revenues from its ten largest customers
accounted for approximately 58.6% of revenues in 2006, compared to approximately
63% and 48% of revenues for 2005 and 2004, respectively.
3
SEASONALITY
No portion of Mtron's business is regarded as seasonal.
DOMESTIC REVENUES
MtronPTI's domestic revenues were $20,501,000 in 2006 or 49% of total
revenues compared with $19,078,000 and $12,096,000, or 54% and 52%, in 2005 and
2004, respectively.
INTERNATIONAL REVENUES
MtronPTI's international revenues were $21,048,000 in 2006, 51% of total
sales compared to $15,973,000, 46% of total sales and $11,317,000, 48% of total
sales, for 2005 and 2004, respectively. In 2006, as was the case in 2005, these
revenues were derived mainly from customers in China and Canada. In 2006, Mtron
also had significant sales to Thailand and Malaysia. MtronPTI 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.
RISKS ATTENDANT TO FOREIGN OPERATIONS
The company has a sales office in China which does significant amount of
business as a representative of the company selling its products and locally
purchased products. The Company has a production location in India which
performs basic assembly work on consigned materials received from MtronPTI.
Risks associated with doing business outside of the United States
especially China and India are: normal business risks, social instability, slow
conforming legal systems, environmental catastrophes, poor infrastructure,
information security technology issues, lack of distribution of power with
business entities leads to embezzlement, kickbacks, and other forms of fraud and
corruption. Other risks include sourcing risks: such as supply-chain and
business interruption issues; protection of intellectual property; recruitment,
development, and retention of talented employees; trends and concerns in mergers
and acquisitions; and the potential pitfalls of the Chinese insurance market.
BACKLOG
MtronPTI had backlog orders of $8,065,000 at December 31, 2006 compared to
$8,906,000 at December 31, 2005. MtronPTI's backlog may not be indicative of
future revenues, because of its customers' ability to cancel orders. MtronPTI
expects to fill all of its 2006 backlog in 2007.
RAW MATERIALS
Most raw materials used in the production of MtronPTI products are
available in adequate supply from a number of sources. The prices of these raw
materials are relatively stable. However, some raw materials including printed
circuit boards, quartz, and certain metals including steel, aluminum, silver,
gold, tantalum and palladium, are subject to greater supply fluctuations and
price volatility.
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 MtronPTI'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). MtronPTI 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. MtronPTI 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.
4
INTELLECTUAL PROPERTY
MtronPTI has no patents, trademarks or licenses that are considered to be
important to MtronPTI's business or operations. Rather, MtronPTI 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 glass forming
machinery for the consumer glass industries. Lynch Systems produces and installs
equipment that cuts and forms tableware such as glass tumblers, plates, cups,
saucers and pitchers as well as glass block, industrial lighting, commercial
optical glass and automobile lenses. Lynch Systems also produces replacement
parts for various types of packaging and glass container-making machines that
Lynch Systems does not manufacture.
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 11 to the Company's Consolidated Financial Statements,
"Segment Information".
At December 31, 2006, Lynch Systems net working capital was $1,574,000
compared to $3,174,000 at December 31, 2005. At December 31, 2006, the Company
had current assets of $3,715,000 and current liabilities of $2,141,000. The
ratio of current assets to current liabilities was 1.74 to 1.0 at December 31,
2006. At December 31, 2005, the Company had current assets of $6,737,000 and
current liabilities of $3,563,000, and a current ratio of 1.89 to 1.00. The
decrease in net working capital is primarily due to negative cash flow and
increases in bank debt.
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. It is Lynch Systems' intention to use this strength
to form closer partnerships with its customers to foster innovation in its glass
making machinery. Lynch Systems intends to also 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
machinery within its core competence, and also to seek new markets, such as
container ware, where its experience and proven success can be used 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 fully electronic press and blow high volume
machine and a new machine designed to produce press and blow glass articles with
an in-line modular concept. Long term planning indicates further development and
application of gob weight controls and inspection systems may play an important
role among consumer ware producers.
5
The Company has been approached by an investment group interested in
purchasing Lynch Systems. In this regard, the Company has hired a middle market
investment bank to investigate the offer and other value enhancing
opportunities. The hiring of the investment bank continues the process of
growing the business.
PRODUCTS AND MANUFACTURING
Lynch Systems' manufacturing 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.
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. 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, fire polishers 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 energy 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
Lynch Systems' research and development expense was $79,000 in 2006
compared to $97,000 and $104,000 in 2005, and 2004, respectively. Lynch Systems
expects to increase its spending on research and development by about 50% during
2007.
CUSTOMERS
Due to the nature of its products, Lynch Systems has historically had a
small number of customers. Its largest customer, which varies year to year,
accounted for 39% of revenue in 2006, compared with 46% and 36% of revenues for
2005 and 2004, respectively. Lynch Systems' sales to its ten largest customers
accounted for approximately 84% of its revenues in 2006 compared with 79% of its
revenues in 2005, and 80% in 2004.
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SEASONALITY
No portion of Lynch System's business is regarded as seasonal.
DOMESTIC REVENUES
Lynch Systems' domestic revenues were $1,422,000 in 2006, or 18.3% of
their total revenues, compared with $1,992,000 (17.9%) and $1,114,000 (10.7%)
for 2005 and 2004, respectively.
INTERNATIONAL REVENUES
Lynch Systems' international revenues were $6,329,000 in 2006 compared
with $9,140,000 and $9,307,000 for 2005 and 2004, respectively. This represents
approximately 82% of revenues in 2006, the same as in 2005, compared with 89% of
total revenues in 2004. International revenues in 2006 were derived mainly from
Brazil and China. 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 $1,853,000 at December 31, 2006,
compared to $4,954,000 at December 31, 2005. The $3,100,000 decrease in backlog
is due to much lower bookings in 2006 due to absence of CRT business and higher
energy costs. Most of Lynch Systems' December 31, 2006 backlog is scheduled to
be delivered in 2007. Lynch Systems includes as backlog 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, Turkey, China 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 remained steady in 2006 after increasing severely in 2004
and 2005. 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.
-----------------------------------
7
EMPLOYEES
As of December 31, 2006, the Company employed 386 people: 3 at Corporate
headquarters, 335 at Mtron, including 8 in Hong Kong and 9 in India, and 48 at
Lynch Systems, including 2 in Germany. None of its employees is represented by a
labor union and the Company considers its employee relations to be good.
ENVIRONMENTAL
The Company'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 the Company's operations that any future
regulations might require, or the cost of compliance that would be associated
with these regulations.
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.
CUSTOMERS
In 2006, the Company's two largest single customers accounted for
$4,400,000 and $3,493,000 in revenues, representing 8.9% and 7.1% of total
consolidated revenues of $49,300,000. In 2005, the two largest customers
accounted for 11.2% and 11.0% of total consolidated revenues, and in 2004, the
two largest customer s accounted for 12.2% and 10.9% of consolidated revenues,
respectively.
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 2007 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.
Name Officers and Positions Held Age
---- --------------------------- ---
Jeremiah M. Healy....... President and Chief Executive Officer, The LGL Group, Inc. (December 31, 2006 to present) 64
and Chief Financial Officer, The LGL Group, Inc. (September 2006 to March 20, 2007);
Chairman of the Audit Committee, Infocrossing Inc., an outsourcer of computer software;
Vice President and Chief Financial Officer, Ge-Ray Holdings Company Inc. (1989-2005), a
private manufacturer of knitted textiles.
8
Steve Pegg.............. Chief Financial Officer, The LGL Group, Inc. (March 20, 2007 to present); Chief Financial 48
Officer and Treasurer, Ultraviolet Devices, Inc. ("UVDI") (October 2004 to December 2006)
and President, Sparks Technology, a UVDI division, (June 2006-December 2006), UVDI is a
manufacturer and supplier of ultra violet and filtration products for air and water
treatment; Operations and Financial Consultant, Camil Farr (2001-2004), a manufacturer of
air filtration devices; Chief Financial Officer, Treasurer, Farr Company (1998-2001), an
air filtration device manufacturer.
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.
The LGL Group, Inc. has always held itself and its employees to the
highest standards of business conduct and ethical behavior in all of its
business dealings. The LGL Group's Code of Ethics is available on its website,
www.lglgroup.com.
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.
WHILE WE HAVE HAD NET INCOME IN THE PAST TWO YEARS, WE FACE UNCERTAINTY IN
OUR ABILITY TO SUSTAIN NET INCOME IN THE FUTURE.
While we had net income of $865,000 in 2006 and $1,210,000 in 2005, we had
suffered a net loss of $3,326,000 in 2004. We are uncertain whether we will be
able to sustain net income 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. While we do have substantial cash and cash
equivalents on hand, our failure to secure additional financing could have a
material adverse effect on our continued development or growth.
AS A HOLDING COMPANY, WE DEPEND ON THE OPERATIONS OF OUR SUBSIDIARIES TO
MEET OUR OBLIGATIONS.
We are a holding company that transacts 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.
9
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 45% OF OUR COMMON STOCK.
Our principal shareholders currently own in the aggregate
approximately 45% 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
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.
10
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 may 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 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;
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 security 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.
11
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.
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 global 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.
12
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.
MTRONPTI'S BACKLOG MAY NOT BE INDICATIVE OF FUTURE REVENUES AND MAY
ADVERSELY AFFECT OUR BUSINESS.
MtronPTI's backlog comprises orders that are subject to specific
production release orders under written contracts, oral and written orders from
customers with which MtronPTI has had long-standing relationships and written
purchase orders from sales representatives. MtronPTI'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 MtronPTI experienced in the most recent economic slowdown. As a
result, MtronPTI's backlog as of any particular date may not be representative
of actual revenues for any succeeding period.
MTRONPTI 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 MTRONPTI'S REVENUES.
In 2006, approximately 15.9% of MtronPTI's revenue was attributable to
finished products that were manufactured by an independent contract manufacturer
located in both Korea and China (10.2% in 2005). We expect this manufacturer to
account for a smaller but substantial portion of MtronPTI's revenues in 2007 and
a material portion of MtronPTI's revenues for the next several years. MtronPTI
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, MtronPTI would have to identify and qualify acceptable
replacement manufacturers or manufacture the products internally. Due to
specific product knowledge and process capability, MtronPTI 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, MtronPTI's relationship with this manufacturer, may adversely
affect MtronPTI's results of operations and our financial condition.
MTRONPTI 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.
MTRONPTI'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.
13
CONTINUED MARKET ACCEPTANCE OF MTRONPTI'S PACKAGED QUARTZ CRYSTALS,
OSCILLATOR MODULES AND ELECTRONIC FILTERS IS CRITICAL TO OUR SUCCESS, BECAUSE
FREQUENCY CONTROL DEVICES ACCOUNT FOR NEARLY ALL OF MTRONPTI'S REVENUES.
As was the case in 2005 and 2004, virtually all of MtronPTI's 2006
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 MtronPTI'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 MtronPTI's business and our financial condition.
MTRONPTI'S FUTURE RATE OF GROWTH IS HIGHLY DEPENDENT ON THE DEVELOPMENT
AND GROWTH OF THE MARKET FOR COMMUNICATIONS AND NETWORK EQUIPMENT.
In 2006, the majority of MtronPTI's revenues was to manufacturers of
communications and network infrastructure equipment, including indirect sales
through distributors and contract manufacturers. In 2007, MtronPTI expects a
smaller but significant portion of its revenues to be to manufacturers of
communications and network infrastructure equipment. MtronPTI 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 MtronPTI's
products. A slowdown in the manufacture and purchase of communications and
network infrastructure equipment could substantially reduce MtronPTI'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, MtronPTI may be unable to sustain its growth. In addition,
MtronPTI'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 MtronPTI'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 MTRONPTI'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, MtronPTI'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 MtronPTI's products, the prices that MtronPTI
can charge for them may be subject to greater competition.
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 MTRONPTI'S ENVIRONMENTAL LIABILITY AND COMPLIANCE
OBLIGATIONS MAY INCREASE COSTS AND DECREASE PROFITABILITY.
MtronPTI'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 MtronPTI's operations that any future
regulations might require, or the cost of compliance that would be associated
with these regulations.
14
SALES OF A SIGNIFICANT PORTION OF OUR PRODUCTS TO CUSTOMERS OUTSIDE OF THE
UNITED STATES SUBJECTS US TO BUSINESS, ECONOMIC AND POLITICAL RISKS.
Our 2006 export sales (primarily to China, Canada, and Brazil) accounted
for 55.5% of 2006 consolidated revenues, compared to 46% in 2005. 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, an 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' DEPENDENCE ON A FEW SIGNIFICANT CUSTOMERS EXPOSES IT TO
OPERATING RISKS.
Lynch Systems' sales to its ten largest customers accounted for
approximately 84% of its revenues in 2006 compared with and 79% of its revenues
in 2005. Lynch Systems' sales to its single largest customer accounted for
approximately 39% of its 2006 revenues, compared with 46% of its revenues in
2005. 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 HAS ADVERSELY AFFECTED LYNCH SYSTEM'S FINANCIAL PERFORMANCE.
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. In late 2005, the first machine was completed and
shipped. The installation of the machine had been delayed several times due to
the customer temporarily closing down its plant. The first machine has been
installed, however the customer has not paid. In 2006, the Company provided
additional reserves of $375,000, against the trade receivables outstanding from
this customer on the initial machine that was shipped in 2004, and at December
31, 2006, such receivables are fully reserved. With regard to the four other
machines, two were substantially complete and the Company continues to try and
identify buyers for these units. Despite their efforts, to date no formal
purchase commitments have been received and the company has provided a reserve
of $145,000 against the value of these machines ($723,000) at December 31, 2006.
The other two machines, which were much earlier in production, have been
disassembled and have been substantially used in the production of other
finished goods.
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 over the past several
years 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.
--------------------------------
15
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 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.LGLGROUP.COM.
--------------------------------
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
LGL Group'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, 2006, all such properties are subject to
security deeds relating to loans.
MtronPTI's operations are located in Yankton, South Dakota, Orlando,
Florida, India, and Hong Kong. MtronPTI has two separate facilities in Yankton
which contain approximately 51,000 square feet in the aggregate. One of these is
owned, the other leased. The Yankton manufacturing facility that is owned by
MtronPTI contains approximately 35,000 square feet is situated on approximately
15 acres of land and is subject to security deeds relating to loans. The Yankton
leased facility contains approximately 16,000 square feet. The lease expires
annually on September 30 and is renewable. MtronPTI owns one building,
approximately 76,000 square feet, on approximately 7 acres of land in Orlando,
which was purchased in connection with the acquisition of PTI. The Company
leases approximately 7,500 square feet of office and manufacturing space in
Delhi, India and approximately 1,500 square feet of office space in Hong Kong.
It is the Company's opinion that the facilities referred to above are in good
operating condition and suitable and adequate for present uses.
16
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. The
Company has no litigation pending at this time.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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, 2006 and December
31, 2005 are as follows:
Quarter Ended
--------------------------------------------------------------------------
2006 March 31, June 30, September 30, December 31,
---- --------- -------- ------------- ------------
High........................ $10.30 $9.10 $8.25 $8.73
Low......................... 6.79 7.21 7.06 7.00
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
At December 31, 2006, the Company's stock price was $7.00. At March 20,
2007, the Company had 1,475 shareholders of record.
PERFORMANCE GRAPH
The graph below compares the cumulative total shareholder return on the
Common Stock of the Corporation for the last five fiscal years ended December
31, 2006, with the cumulative total return over the same period (i) on the broad
market, as measured by the AMEX Market Value Index, and (ii) on a peer group, as
measured by a composite index based on the total returns earned on the stock of
the publicly traded companies included in the Media General Financial Services
database under the two Standard Industrial Classification (sic) codes within
which the Corporation conducts the bulk of its business operations: SIC Code
355, Special Industry Machinery; and SIC Code 367, Electronic Components
Accessories. The data presented in the graph assumes that $100 was invested in
the Corporation's Common Stock and in each of the indexes on December 31, 2001
and that all dividends were reinvested.
17
Fiscal Year Ending December 31,
2001 2002 2003 2004 2005 2006
THE LGL GROUP, INC. 100.00 43.06 58.06 80.56 45.83 38.89
AMEX MARKET INDEX 100.00 96.01 130.68 149.65 165.03 184.77
PEER GROUP (355, 367) 100.00 54.15 99.08 77.65 84.48 102.01
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 is expected to be
paid in 2007. 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 2006.
SALE OF UNREGISTERED SECURITIES
There were no sales of unregistered securities as defined under Securities
Exchange Act of 1934, during 2006.
18
ITEM 6. SELECTED FINANCIAL DATA
THE LGL GROUP, INC. 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)
-------------------------------------------------------------
2006 2005 2004 2003* 2002*
-------- -------- -------- -------- --------
Revenues .............................................. $ 49,300 $ 46,183 $ 33,834 $ 27,969 $ 26,386
Operating profit (loss) (b) ........................... (548) 1,178 (2,888) (832) 16,168
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 ...................... 639 1,001 (3,226) 183 15,996
Benefit (provision) for income taxes .................. 226 209 (100) (73) 1,967
Minority interests .................................... -- -- -- -- --
-------- -------- -------- -------- --------
Net income (loss) ..................................... $ 865 $ 1,210 $ (3,326) $ 110 $ 17,963
======== ======== ======== ======== ========
Per Common Share:(c)
Net income (loss):
Basic .......................................... $ .40 $ 0.73 $ (2.18) $ 0.07 $ 11.99
Diluted ........................................ .40 0.73 (2.18) 0.07 11.99
December 31, (a)
-------------------------------------------------------------
2006 2005 2004 2003* 2002*
-------- -------- -------- -------- --------
Cash, securities and short-term Investments .......... $ 7,039 $ 8,250 $ 6,189 $ 6,292 $ 6,847
Restricted cash(e) .................................... 96 650 1,125 1,125 1,125
Total assets(d) ....................................... 30,957 32,664 33,883 23,019 23,430
Long-term debt, exclusive of current portion ......... 3,100 5,031 3,162 833 1,089
Shareholders' equity (d) .............................. 16,707 14,688 9,993 11,033 10,934
NOTES:
* 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.
19
(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) See discussion of Restricted Cash in "Notes Payable and Long-Term Debt" in
Note 3 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
2006 COMPARED TO 2005
CONSOLIDATED REVENUES AND GROSS MARGIN
In year ended December 31, 2006, consolidated revenues increased by
$3,117,000, or 6.7%, to $49,300,000, from $46,183,000 in 2005, due to increased
sales at MtronPTI. Revenues at MtronPTI increased in 2006 by $6,498,000, or
18.5%, to $41,549,000 from $35,051,000 for 2005. The increase was primarily due
to improvements in the telecommunications market and the addition of several new
customers. The products most responsible for the volume improvements were
filters, oscillators, and resonators. Revenues at Lynch Systems decreased in
2006 by $3,381,000, or 30.4%, to $7,751,000 from $11,132,000 in 2005. This
decrease was primarily due to a $5,138,000 decrease in sales of CRT machines
somewhat offset by an increase in sales of glassware manufacturing machines.
The consolidated gross margin decreased $1,182,000 for the year ended
December 31, 2006 to $13,553,000 from $14,735,000 in 2005. Over the same period,
the consolidated gross margin as a percentage of revenues decreased to 27.5%
from 31.9% due primarily to declining gross margins at Lynch Systems. MtronPTI's
gross margin as a percentage of revenues for the year ended December 31, 2006
decreased slightly to 29.5% from 30.2% in 2005, due to a slight decrease in
manufacturing yields which increased cost of goods sold. Lynch Systems' gross
margin as a percentage of revenues for the year ended December 31, 2006
decreased by 20.4% to 16.9% from 37.3% in 2005. The decrease was primarily due
to the loss of sales of large CRT machines which carry higher gross margins.
Lynch Systems has undergone a shift in its business away from high margin CRT
machines to lower margin tableware products and repair parts business. Lynch
systems also reserved $145,000 against two of its finished machines built for an
Indonesian customer but never shipped due to non-payment for the initial
delivered machine.
OPERATING PROFIT (LOSS)
The consolidated operating loss for the year ended December 31, 2006 was
$548,000 compared to a $1,178,000 profit for 2005. This decrease of $1,726,000
is primarily due to decreased sales at Lynch Systems.
20
For the year ended December 31, 2006, MtronPTI had operating profit of
$3,072,000, an improvement of $766,000 over the operating profit of $2,306,000
in 2005. The operating profit improvement was primarily due to increased sales
of filters, oscillators, and resonators. For the year ended December 31, 2006,
Lynch Systems had operating loss of $1,898,000 compared with its operating
profit of $684,000 in 2005. The $2,582,000 decline in Lynch Systems operating
profit resulted primarily from the 30.4% decline in sales and 20.4% decline in
margin discussed in sales and gross margin section. Lynch also charged $375,000
to administrative expense in 2006 as a further allowance for bad debts to cover
its remaining receivable exposure with an Indonesian customer.
Unallocated corporate expenses were $1,722,000 during the year ended
December 31, 2006, a reduction of $60,000 from $1,662,000 incurred in 2005.
OTHER INCOME (EXPENSE), NET
Investment income for the year ended December 31, 2006 was $1,750,000
compared to $608,000 for year ended December 31, 2005. The increase of
$1,142,000 was due to the realization of more gains on more sales of marketable
securities.
Net interest expense declined by $277,000 to $570,000 for year ended
December 31, 2006, compared with $847,000 for the year ended December 31, 2005,
primarily due to a reduction in the level of debt outstanding during the year.
Other Income for the year ended December 31, 2006 was $7,000 compared with
other income for the comparable period in 2005 which was $62,000 primarily due
to a gain on the sale of a warehouse in Orlando, FL in the second quarter of
2005.
INCOME TAXES
The Company files consolidated federal income tax returns, which includes
all subsidiaries.
The income tax benefit for the year ended December 31, 2006 included a
reduction to an income tax reserve of $492,000 offset by provisions for foreign
taxes of $266,000. The income tax benefit for the year ended December 31, 2005
included a reduction to an income tax reserve of $484,000 offset by provisions
for foreign taxes of $184,000.
NET INCOME (LOSS)
Net income for the year ended December 31, 2006 was $865,000 compared with
net income for the year ended December 31, 2005 of $1,210,000. Basic and fully
diluted income per share for the year ended December 31, 2006 was $0.40 compared
with $0.73 for year ended December 31, 2005.
BACKLOG/NEW ORDERS
Total backlog of manufactured products at December 31, 2006 was
$9,918,000, a $3,942,000 decrease from the $13,860,000 backlog at December 31,
2005. MtronPTI had backlog orders of $8,065,000 at December 31, 2006 compared
with $8,906,000 at December 31, 2005. Lynch Systems had backlog orders of
$1,853,000 at December 31, 2006 compared with $4,954,000 at December 31, 2005.
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 MtronPTI 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.
21
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.
MtronPTI'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,
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 MtronPTI 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, MtronPTI 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.
Unallocated 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.
22
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 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.
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.
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.
MtronPTI 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.
INFLATION RISK
In the three most recent years, the Company as a whole has not been
significantly exposed to the impact of inflationary risk. Our principle raw
materials have been relatively stable. The Company generally has been able to
include cost increases in its pricing and therefore revenues and margins have
not been significantly impacted.
Most raw materials used in the production of MtronPTI products are
available in adequate supply from a number of sources. The prices of these raw
materials are relatively stable. However, some raw materials including printed
circuit boards, quartz, and certain metals including steel, aluminum, silver,
gold, tantalum and palladium, are subject to greater supply fluctuations and
price volatility.
Lynch Systems is in the industrial machinery market. The price of steel, a
major component of glass forming machinery, has remained relatively stable in
2006 after rising severely in 2004 and 2005. Lynch Systems has been required to
absorb a portion of that price increase with little ability to pass price
increases along. The dramatic increase in energy prices have roiled the
tableware market and have reduced demand.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and investments in marketable
securities at December 31, 2006 totaled $7,135,000 (including $96,000 of
restricted cash), a decrease of $1,765,000 over the prior year. At December 31,
2005, the Company had $8,900,000 in cash (including $650,000 of restricted cash)
cash equivalents, and investments. The unrestricted cash and cash equivalents
component decreased by $1,083,000, from $5,512,000 at December 31, 2005 to
$4,429,000 at December 31, 2006.
23
Cash used in operating activities was $1,855,000 in 2006, compared to
$2,283,000 of cash provided by operating activities in 2005. The year to year
change in operating cash flow of $4,138,000 was primarily due to an increase in
inventory of $1,861,000 and a decrease of $1,726,000 in operating income.
Investing activities provided $2,377,000 in cash to the Company primarily
comprised of $2,976,000 of proceeds from the sales of marketable securities.
Cash of $1,605,000 was used in financing activities mainly as a result of
$1,119,000 of long-term debt repayments and $582,000 of note repayments.
At December 31, 2006, the Company's net working capital was $12,463,000
compared to $11,925,000 at December 31, 2005. At December 31, 2006, the Company
had current assets of $23,613,000 and current liabilities of $11,150,000. The
ratio of current assets to current liabilities was 2.12 to 1.0. At December 31,
2005, the Company had current assets of $24,870,000 and current liabilities of
$12,945,000, and a current ratio of 1.92 to 1.00. The increase in net working
capital is primarily due to the building up of inventory levels.
The Company had a $6,744,000 of unused borrowing capacity under Lynch
Systems' and MtronPTI's revolving lines of credit at December 31, 2006, compared
to $5,327,000 at December 31, 2005. 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.
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. At December
31, 2005, MtronPTI's credit facility included an unsecured parent Company
guarantee which was supported by a $650,000 Letter of Credit that was secured by
a $650,000 deposit at Bank of America. As of October 7, 2006, the Company no
longer guarantees the Letter of Credit and the $650,000 deposit is no longer
restricted. The Lynch credit facility includes an unsecured parent Company
guarantee at December 31, 2005 and 2006.
At December 31, 2006, the Company had $2,256,000 in notes payable to
banks. At December 31, 2006, Mtron's short-term credit facility with First
National Bank of Omaha ("FNBO") is $5,500,000, under which there is a revolving
credit loan for $1,356,000. The Revolving Loan bears interest at the greater of
prime rate or 4.5%. On May 31, 2006, Mtron renewed its credit agreement with
FNBO extending the due date of its revolving loan to May 31, 2007.
The Company also had a working capital revolver at Lynch Systems that had
been entered into in October 2005 with Branch Banking and Trust Company
("BB& T"). The revolving loan had a $3,500,000 borrowing capacity, due January
29, 2007 and bore interest at the One Month LIBOR Rate plus 2.75%. At December
31, 2006, Lynch's borrowings on the line of credit were $900,000. The revolver
expired by its own terms in January 29, 2007. The line of credit borrowings plus
accrued interest, of $905,000, was repaid on February 13, 2007.
In 2007, the Company has established a new line of credit with Bank of
America which allows for $1,100,000 of borrowings. Borrowings on this new Lynch
Systems line bear interest at a rate of LIBOR plus 1.75%. The entire borrowing
capacity is collateralized by a $1,100,000 of restricted cash on deposit. There
are no covenants associated with this credit line.
On September 30, 2005, MtronPTI entered into a Loan Agreement with RBC
Centura Bank ("RBC"). The RBC Term Loan Agreement provided 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, MtronPTI 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. 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, 2006 is $22,000, $14,000 net of tax, and at December 31, 2005 was ($1,000).
The charge is reflected within other comprehensive income, net of tax.
24
All outstanding obligations under the RBC Term Loan Agreement are
collateralized by security interests in the assets of MtronPTI. 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. At December 31, 2006, the
Company was in compliance with these covenants.
On October 14, 2004, MtronPTI entered into a Loan Agreement with First
National Bank of Omaha. The FNBO Loan Agreement provides for loans in the
amounts of $2,000,000 (the "Term Loan") in addition to the $3,000,000 Bridge
Loan referred to above. The Term Loan bears interest at the greater of prime
rate plus 50 basis points, or 4.5%, and is 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, October 2007. Accrued
interest thereon was payable monthly and the principal amount thereof, together
with accrued interest.
In 2004, in connection with the acquisition of PTI, the Company provided
$1,800,000 of subordinated financing to MtronPTI and MtronPTI issued a
subordinated promissory note to the Company in such amount increasing the
subordinated total to $2,500,000. In October 2006, an additional $75,000 was
lent to Mtron to enable it to make an investment in marketable equity
securities.
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 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 2007. (See Note 3 to the Consolidated Financial Statements - "Notes
Payable to Banks and Long-term Debt" for restrictions on the company's assets).
At December 31, 2006, total debt of $7,383,000 was $1,701,000 less than
the total debt of $9,084,000 at December 31, 2005. The debt decreased at both
MtronPTI and Lynch Systems due to repayments of revolving debt and scheduled
payments on long-term debt. Debt outstanding at December 31, 2006 included
$3,601,000 of fixed rate debt at year-end average interest rate of 5%, and
variable rate debt of $3,782,000 at a year end average rate of 8.45% as a result
of the swap agreement which effectively converts the interest on the RBC loan
into a fixed payment. At December 31, 2006, the Company had $2,027,000 in
current maturities of long-term debt.
OFF-BALANCE SHEET ARRANGEMENTS
In December 2006, the Company entered into a cashless collar transaction
to protect itself against the volatility associated with the Company's
investment in marketable securities which are designated as available for sale
and accordingly, are marked to market. Under the terms of the collar, which
began on December 27, 2006 and had a March 27, 2007 expiration, the Company
hedged all of its marketable securities and received protection from market
fluctuations within a defined market price range. The fair value of this collar
at December 31, 2006 was de-minimis. On March 27, 2007, the Company allowed the
call to expire and exercised the put, thereby selling the stock at the option's
strike price.
AGGREGATE CONTRACTUAL OBLIGATIONS
Details of the Company's contractual obligations at December 31, 2006, for
short-term debt, long-term debt, leases, purchases and other long term
obligations are as follows (see Notes 3 and 10 to the Consolidated Financial
Statements):
25
Payments Due by Period - Including Interest
-----------------------------------------------------------------------------
(in thousands)
Contractual Obligations Total Less Than 1 Year 1 - 3 Years 3 - 5 Years More Than 5 Years
--------------------------- ---------- ---------------- ----------- ----------- -----------------
Short-term Debt $ 2,256 $ 2,256 $ -- $ -- $ --
Long-term Debt Obligations 5,127 2,027 3,101 -- --
Capital Lease Obligations -- -- -- -- --
Operating Lease Obligations $ 135 109 26 -- --
Purchase Obligations -- -- -- -- --
Other Long-term Liabilities -- -- -- -- --
---------- ---------- ---------- ---------- ----------
TOTAL $ 7,519 $ 4,392 $ 3,127 $ -- $ --
========== ========== ========== ========== ==========
CRITICAL ACCOUNTING POLICIES
The Company's significant accounting policies are described in Note 1 to
the Consolidated Financial Statements. 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
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.
26
INVENTORY VALUATION
Inventories are stated at the lower of cost or market value. At MtronPTI,
inventories are valued using the first-in-first-out (FIFO) method for 69.3% of
the inventory, and 30.7% is valued using last-in-first-out (LIFO). At Lynch,
100% of the inventory is valued at last-in-first-out (LIFO), with no inventory
valued using FIFO. Total consolidated gross inventories valued using LIFO
represent 49.2% of consolidated inventories at December 31, 2006 compared with
52% of consolidated inventories valued using LIFO at December 31, 2005. (The
balance of consolidated inventory at December 31, 2006 and 2005 are valued using
FIFO.) 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, 2006 and
2005, unbilled accounts receivable were $227,000 and $902,000, 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.
(in thousands)
Balance, January 1, 2006 $ 357
Warranties issued during the year 169
Settlements made during the year (193)
Changes in liabilities for pre-existing warranties during the year, including expirations (152)
-----
Balance, December 31, 2006 $ 181
=====
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, 2006 a
valuation allowance of $2,047,000 was recorded compared with a valuation
allowance of $2,212,000 recorded at December 31, 2005.
27
The carrying value of the Company's net deferred tax asset at December 31,
2006 is $111,000. At December 31, 2005 the carrying value of the Company's net
deferred tax asset was $111,000. This 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.
STOCK BASED COMPENSATION
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 123R, "Share-Based Payments ("SFAS No. 123-R") beginning January
1, 2006, using the modified prospective transition method. SFAS 123-R requires
the Company to measure the cost of employee services in exchange for an award of
equity instruments based on the grant-date fair value of the award and to
recognize cost over the requisite service period. Under the modified prospective
transition method, financial statements for periods prior to the date of
adoption are not adjusted for the change in accounting. However, the
compensation expense is recognized for (a) all share-based payment granted after
the effective date under SFAS 123R, and (b) all awards granted under SFAS 123 to
employees prior to the effective date that remain unvested on the effective
date. The Company recognizes compensation expense on fixed awards with pro rata
vesting on a straight-line basis over the vesting period.
Prior to January 1, 2006, the Company used the intrinsic value method to
account for stock-based employee compensation under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees."
RECENT ISSUED ACCOUNTING PRONOUNCEMENTS
In July 2006, the FASB issued Interpretation No. 48 "Accounting for
Uncertainty in Income Taxes - An interpretation of FASB Statement No. 109" ("FIN
48"). This Interpretation provides a comprehensive model for the financial
statement recognition, measurement, presentation and disclosure of uncertain tax
positions taken or expected to be taken in income tax returns. This statement is
effective for fiscal years beginning after December 15, 2006. The Company will
adopt this Interpretation in the first quarter of 2007. The cumulative effects,
if any, of applying FIN 48 will be recorded as an adjustment to retained
earnings. The Company is currently assessing the impact of this Interpretation
on its financial position and results of operations.
In September 2006, the FASB issued SFAS No. 157 "Fair Value Measurements".
This Statement replaces multiple existing definitions of fair value with a
single definition, establishes a consistent framework for measuring fair value,
and expands financial statement disclosures regarding fair value measurements.
This Statement applies only to fair value measurements that are already required
or permitted by other accounting standards and does not require any new fair
value measurements. SFAS 157 is effective for fiscal years beginning subsequent
to November 15, 2007. The Company will adopt this Statement in the first quarter
of 2008, and is currently evaluating the impact on its financial position and
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
($4,525,000 at December 31, 2006) and the amount the Company pays on its
variable rate debt. The Company's earnings and cash flows are also affected by
changes in interest rates as a result of making variable interest rate payments
on its debt. In order to minimize its interest rate risk, on September 30, 2005,
in connection with its $3,040,000 five-year, LIBOR plus 2.75% RBC Term Loan,
MtronPTI entered into a five-year interest rate swap with the notional amount
equal to the loan amount from which it will receive periodic payments at the
LIBOR Base Rate and will make periodic payments at a fixed rate. At December 31,
2006, the fixed rate is 7.51% comprised of the fixed pay rate of the swap of
6.59% plus the .92% differential between the variable rate of the loan, LIBOR
plus 2.75%, and the prime rate, the variable rate of the swap. 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.
28
In December 2006, the Company entered into a cashless collar transaction
to protect itself against the volatility associated with the Company's
marketable securities which are designated as available for sale and
accordingly, are marked to market. Under the terms of the collar, which began on
December 27, 2006 and expired March 27, 2007, the Company hedged all of its
marketable securities and received protection from market fluctuations within a
defined market price range. The fair value of this collar at December 31, 2006
was de-minimis.
There has been no significant change in market risk since December 31,
2006.
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 Principal Executive Officer/Principal Financial Officer has 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, Rule 13a-15 under the Securities Exchange
Act of 1934.
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.
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 2007 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 2007 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 2007 Annual Meeting of
Shareholders, which information is incorporated herein by reference.
29
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is included in the Company's
Proxy Statement for its 2007 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 2007 Annual Meeting of Shareholders, which information
is incorporated herein by reference.
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, 2006 and 2005
Consolidated Statements of Operations -- Years ended
December 31, 2006, 2005, and 2004
Consolidated Statements of Shareholders' Equity -- Years
ended December 31, 2006, 2005, and 2004
Consolidated Statements of Cash Flows -- Years ended
December 31, 2006, 2005, and 2004
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules as of December 31, 2006 and 2005
and for the three years ended December 31, 2006:
Schedule I -- Condensed Financial Information of Company
Schedule II -- Valuation and Qualifying Accounts
(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.
30
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)* Articles of Amendment of the Articles of Incorporation of the
Company.
(d) 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) The LGL Group, Inc. 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) The LGL Group, Inc. 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) 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).
(e) 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).
(f) 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).
(g) 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).
(h) 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).
(i) 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).
(j) 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).
31
(k) 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).
(l) 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).
(m) Form of Indemnification Agreement dated as of February 28,
2005 by and between The LGL Group, Inc. 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).
(n) 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).
(o) 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).
(p) 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).
(q) Unconditional Guaranty for Payment by and between The LGL
Group, Inc. 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).
(r) Second Amendment to the Loan Agreement, dated June 30, 2006,
by and among M-tron Industries, Inc., Piezo Technology, Inc.
and First National Bank of Omaha, and acknowledged and
guaranteed by The LGL Group, Inc. (incorporated herein by
reference to Exhibit 10.1 to the Company's Current Report on
Form 8-K filed on July 7, 2006).
(s) Employment Agreement, dated September 5, 2006, by and between
The LGL Group, Inc. and Jeremiah M. Healy (incorporated herein
by reference to Exhibit 10.1 to the Company's Current Report
on Form 8-K filed on September 7, 2006).
(t) Third Amendment to the Loan Agreement, dated October 3, 2006,
by and among M-tron Industries, Inc., Piezo Technology, Inc.
and First National Bank of Omaha, and acknowledged and
guaranteed by LGL Group, Inc. (incorporated herein by
reference to Exhibit 10.1 to the Company's Current Report on
Form 8-K filed on October 4, 2006).
32
(u) Employment Agreement, dated March 20, 2007, by and between The
LGL Group, Inc. and Steve Pegg (incorporated herein by
reference to Exhibit 10.1 to the Company's Current Report on
Form 8-K filed on March 20, 2007).
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. The
LGL Group, Inc. will furnish to each of its shareholders a copy of any such
Exhibit for a fee equal to The LGL Group, Inc.'s cost in furnishing such
Exhibit. Requests should be addressed to the Office of the Secretary, The LGL
Group, Inc., 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 Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE LGL GROUP, INC.
March 30, 2007 BY: /s/ Jeremiah M. Healy
----------------------------------
Jeremiah M. Healy
PRESIDENT, CHIEF 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
Registrant and in the capacities and on the dates indicated:
SIGNATURE CAPACITY DATE
----------------------------------- ------------------------------------------------- --------------
Principal Executive Officer,
Principal Financial Officer, Principal Accounting
March 30, 2007
/s/ Jeremiah M. Healy Officer
-----------------------------------
JEREMIAH M. HEALY
/s/ Marc J. Gabelli Chairman of the Board of Directors March 30, 2007
-----------------------------------
MARC J. GABELLI
/s/ E. Val Cerutti Director March 30, 2007
-----------------------------------
E. VAL CERUTTI
/s/ Peter J. Dapuzzo Director March 30, 2007
-----------------------------------
PETER J. DAPUZZO
/s/ Avrum Gray Director March 30, 2007
-----------------------------------
AVRUM GRAY
/s/ Patrick J. Guarino Director March 30, 2007
-----------------------------------
PATRICK J. GUARINO
/s/ Anthony Pustorino Director March 30, 2007
-----------------------------------
ANTHONY PUSTORINO
34
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
The LGL Group, Inc.
We have audited the accompanying consolidated balance sheets of The LGL Group,
Inc. (the "Company") as of December 31, 2006 and 2005, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 2006. Our audits also
included the financial statement schedules listed in Item 15(a)(2). 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 audits
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, 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The LGL Group,
Inc. at December 31, 2006 and 2005, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2006, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedules,
when considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 123(R)
(revised 2004), Share-Based Payment, effective January 1, 2006.
/s/ ERNST & YOUNG LLP
Providence, Rhode Island
March 29, 2007
35
THE LGL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
December 31,
---------------------------
2006 2005
---------- ----------
ASSETS
Current Assets:
Cash and cash equivalents ................................................................ $ 4,429 $ 5,512
Restricted cash (Note 1) ................................................................. 96 650
Investments - marketable securities (Note 1) ............................................. 2,610 2,738
Accounts receivable, net of allowances of $808 and $325, respectively (Note 1) ........... 6,976 7,451
Unbilled accounts receivable (Note 1) .................................................... 227 902
Inventories (Note 2) ..................................................................... 8,906 7,045
Prepaid expense .......................................................................... 369 461
---------- ----------
Total Current Assets .................................................................. 23,613 24,759
Property, Plant and Equipment
Land ..................................................................................... 855 855
Buildings and improvements ............................................................... 5,770 5,767
Machinery and equipment .................................................................. 15,358 14,606
---------- ----------
Total Property, Plant and Equipment ...................................................... 21,983 21,228
Less: Accumulated depreciation ........................................................... (15,218) (14,025)
---------- ----------
Net Property, Plant, and Equipment ....................................................... 6,765 7,203
Deferred Income Taxes ........................................................................ 111 111
Other assets ................................................................................ 468 591
---------- ----------
Total Assets .......................................................................... $ 30,957 $ 32,664
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable to banks ................................................................... $ 2,256 $ 2,838
Trade accounts payable ................................................................... 2,796 2,900
Accrued warranty expense ................................................................. 181 357
Accrued compensation expense ............................................................. 1,492 1,372
Accrued income taxes ..................................................................... 23 673
Accrued professional fees ................................................................ 562 574
Margin liability on marketable securities ................................................ -- 330
Other accrued expenses ................................................................... 1,352 1,312
Commitments and contingencies (Note 10) .................................................. -- 859
Customer advances ........................................................................ 461 515
Current maturities of long-term debt ..................................................... 2,027 1,215
---------- ----------
Total Current Liabilities ............................................................. 11,150 12,945
Long-term debt .............................................................................. 3,100 5,031
Total Liabilities ..................................................................... 14,250 17,976
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 22
Additional paid-in capital ............................................................... 21,081 21,053
Accumulated deficit ...................................................................... (5,711) (6,576)
Accumulated other comprehensive income (Note 8) .......................................... 1,961 835
Treasury stock, at cost, of 33,808 shares ............................................... (646) (646)
---------- ----------
Total Shareholders' Equity ............................................................ 16,707 14,688
---------- ----------
Total Liabilities and Shareholders' Equity ............................................ $ 30,957 $ 32,664
========== ==========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
36
THE LGL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Years Ended December 31,
-------------------------------------------
2006 2005 2004
----------- ----------- -----------
REVENUES $ 49,300 $ 46,183 $ 33,834
Costs and expenses:
Manufacturing cost of sales 35,747 31,448 25,784
Selling and administrative 14,101 13,407 10,163
Litigation provision (Note 10) -- 150 775
----------- ----------- -----------
OPERATING PROFIT (LOSS) (548) 1,178 (2,888)
Other income (expense):
Investment income 1,750 608 15
Interest expense (570) (847) (360)
Other income (expense) 7 62 7
----------- ----------- -----------
Total other income (expense) 1,187 (177) (338)
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 639 1,001 (3,226)
Benefit (Provision) for income taxes 226 209 (100)
----------- ----------- -----------
NET INCOME (LOSS) $ 865 $ 1,210 $ (3,326)
=========== =========== ===========
Weighted average number of shares used in basic, fully diluted EPS calculation 2,154,702 1,647,577 1,524,863
----------- ----------- -----------
Basic, fully diluted income (loss) per share $ 0.40 $ 0.73 $ (2.18)
=========== =========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
37
THE LGL GROUP, INC. 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
Comprehensive Income (Loss):
Net income for year -- -- -- 865 -- -- 865
Other comprehensive income -- -- -- -- 1,126 -- 1,126
----------
Comprehensive Income 1,991
Stock Based Compensation -- -- 28 -- -- -- 28
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 2006 2,154,702 $ 22 $ 21,081 $ (5,711) $ 1,961 $ (646) $ 16,707
========== ========== ========== ========== ========== ========== ==========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
38
THE LGL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Years Ended December 31,
--------------------------------------------
2006 2005 2004
---------- ---------- ----------
OPERATING ACTIVITIES
Net income (loss) $ 865 $ 1,210 $ (3,326)
Adjustments to reconcile net income (loss) to net cash provided by (used
in) operating activities:
Depreciation 1,193 1,398 980
Amortization of definite-lived intangible assets 96 111 187
(Gain) loss on disposal of fixed assets -- (69) 47
Gain realized on sale of marketable securities (1,750) (567) --
Lawsuit settlement provision -- 150 775
Stock based compensation 28 -- --
Deferred income taxes -- -- (6)
Changes in operating assets and liabilities:
Net Receivables 1,150 514 (1,505)
Inventories (1,861) 807 (456)
Accounts payable and accrued liabilities (836) 249 (198)
Other assets/liabilities (740) (1,520) 1,592
---------- ---------- ----------
Net cash provided by (used in) operating activities (1,855) 2,283 (1,910)
INVESTING ACTIVITIES
Capital expenditures (755) (343) (440)
Restricted cash 554 475 --
Acquisition, net of cash acquired -- -- (7,348)
Proceeds from sale of marketable securities 2,976 1,348 --
Proceeds from sale of fixed assets -- 307 --
Payment on margin liability on marketable securities (330) (1,236) (300)
Purchase of marketable securities (68) -- (754)
---------- ---------- ----------
Net cash provided by (used in) investing activities 2,377 551 (8,842)
FINANCING
Net (repayments) borrowings of notes payable (582) (2,719) 3,581
Repayment of long--term debt (1,119) (758) (972)
Proceeds from long--term debt -- -- 5,000
Issuance of common stock, net of fees -- 3,655 1,760
Purchase of treasury stock -- (156) (32)
Other 96 76 14
---------- ---------- ----------
Net cash provided by (used in) financing activities (1,605) 98 9,351
Increase (decrease) in cash and cash equivalents (1,083) 2,932 (1,401)
---------- ---------- ----------
Cash and cash equivalents at beginning of year 5,512 2,580 3,981
---------- ---------- ----------
Cash and cash equivalents at end of year $ 4,429 $ 5,512 $ 2,580
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest Paid $ 626 $ 772 $ 343
========== ========== ==========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
39
THE LGL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
1. ACCOUNTING AND REPORTING POLICIES
ORGANIZATION
The LGL Group, Inc. (the "Company") is a diversified holding company with
subsidiaries engaged in manufacturing primarily in the United States. The
Company has two principal operating subsidiaries Mtron/PTI and Lynch Systems,
Inc ("Lynch Systems"). Information on the Company's operations by segment and
geographic area is included in Note 12 -- "Segment Information".
As of December 31, 2006, the Subsidiaries of the Company are as follows:
Owned By LGL,
Group, Inc.
-------------
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 The LGL
Group, Inc. 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.
During 2006, the Company began disclosing foreign segment information by
country. For consistency, the 2005 and 2004 related amounts are also provided in
Note 11 to the Consolidated Financial Statements "Segment Information".
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, 2006, the Company had $4,429,000 of cash and cash
equivalents, not including restricted cash, compared with $5,512,000 at December
31, 2005. At December 31, 2006, $2,040,000 of this amount is invested in United
States Treasury money market funds for which affiliates of the Company serve as
investment managers to the respective funds. Interest earned on these funds is
at market rates. At December 31, 2005, $47,000 was invested with the affiliate
money manager.
40
RESTRICTED CASH
The Company's cash and cash equivalents at December 31, 2006 totaled
$4,525,000, including $96,000 of restricted cash. This restricted cash is held
against a Stand-by Letter of Credit that was issued to a customer against a
partially completed machine. At December 31, 2005, the Company had $6,162,000 in
cash and cash equivalents, including $650,000 of restricted cash. The restricted
cash had secured a Stand-By Letter of Credit that had been issued as collateral
for MtronPTI's loan with the Bank of Omaha. As of October 16, 2006, the stand-by
letter of credit was no longer in place and at October 19, 2006 the restriction
on the $650,000 on deposit was lifted. (See Note 3 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). First in first out
method is used in determining cost basis for the calculation of gain/loss of
securities sold. 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.
In December 2006, the Company entered into a cashless collar transaction
to protect itself against the volatility associated with the Company's
investment in marketable securities which are designated as available for sale
and accordingly, are marked to market. Under the terms of the collar, which
began on December 27, 2006 and had an expiration date of March 27, 2007, the
Company hedged all of its marketable securities and received protection from
market fluctuations within a defined market price range. The fair value of this
collar at December 31, 2006 was de-minimis. On March 27, 2007, the Company
allowed the call to expire and exercised the put, thereby selling the stock at
the option's strike price.
The following is a summary of marketable securities (investments) held by
the Company (in thousands) December 31, 2006:
Gross Gross
Unrealized Unrealized Estimated Fair
December 31, Cost Gains Losses Value
------------ ------ ---------- ---------- --------------
2006 $ 833 $1,777 -- $2,610
2005 $1,991 $ 747 -- $2,738
The Company had a margin liability against this investment of $330,000 at
December 31, 2005 which was settled in February 2006 upon disposition of the
related securities. At December 31, 2006, the Company has no margin liability
against its investments.
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.
41
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.
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.
INTANGIBLE ASSETS
Intangible assets are included in "other assets" and are recorded at cost
less accumulated amortization. Amortization is computed for financial reporting
purposes using the straight-line method over the estimated useful lives of the
assets, which range from 2 years to 10 years. The intangible assets of consist
of customer relationships, trade name and funded technologies.
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, 2006,
unbilled accounts receivable was $227,000 compared with unbilled accounts
receivable of $902,000 at December 31, 2005.
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.
42
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. The warranty expense at
December 31, 2006 is comprised of the following:
(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
Warranties issued during the year $169
Settlements made during the year ($193)
Changes in liabilities for pre-existing warranties
during the year, including expirations (152)
--------------
Balance, December 31, 2006 $181
===============
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to operations as incurred. Such
costs were $2,549,000 in 2006 compared with $2,505,000 and $1,193,000 in 2005
and 2004, respectively.
ADVERTISING EXPENSE
Advertising costs are charged to operations as incurred. Such costs were
$177,000 in 2006 compared with $181,000 and $183,000 in 2005 and 2004,
respectively.
STOCK BASED COMPENSATION AND EARNINGS PER SHARE
The Company adopted the provisions of Statement of Financial Accounting
Standards 123R, "Share-Based Payment" ("SFAS 123R"), beginning January 1, 2006,
using the modified prospective transition method. SFAS 123R requires the Company
to measure the cost of employee services in exchange for an award of equity
instruments based on the grant-date fair value of the award and to recognize
cost over the requisite service period. Under the modified prospective
transition method, financial statements for periods prior to the date of
adoption are not adjusted for the change in accounting. However, compensation
expense is recognized for (a) all share-based payments granted after the
effective date under SFAS 123R, and (b) all awards granted under SFAS 123 to
employees prior to the effective date that remain unvested on the effective
date. The Company recognizes compensation expense on fixed awards with pro rata
vesting on a straight-line basis over the vesting period.
Prior to January 1, 2006, the Company used the intrinsic value method to
account for stock-based employee compensation under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and therefore the
Company did not recognize compensation expense in association with options
granted at or above the market price of the Company's common stock at the date
of grant.
On May 2005, the Company granted options to purchase 120,000 shares of
common stock to certain employees and directors of the Company at $13.17 per
share. The vesting of these shares was accelerated to reduce the effects of the
adoption of SFAS 123R, which requires companies to recognize stock-based
compensation associated with stock options based on the fair value method. Had
the Company not taken this action, $300,000 of stock-based compensation charges
would have been recorded in the statement of operations through fiscal 2010
(approximately $68,000 in fiscal years 2006, 2007, 2008, 2009 and $28,000 for
the five months in fiscal 2010.)
43
The adoption of SFAS 123R did not have a material impact on the Company's
results of operations, cash flows and earnings per share for the year ended
December 31, 2006 due to the fact that all of the Company's outstanding stock
options were fully vested at December 31, 2005.
In September 2006, the Company issued restricted stock to two executives
which are being accounted for under SFAS No. 123 R. Total stock compensation
expense recognized by the Company for the year ended December 31, 2006
associated with this restricted stock was $28,000. The remaining unrecognized
compensation expense of $137,000 will be recognized rateably over the next 20
months.
The following table presents a reconciliation of reported net income
(loss) and per share information to pro forma net loss and per share information
that would have been reported if the fair value method had been used to account
for stock-based employee compensation in 2005 and 2004.
2005 2004
Net income (loss)-as reported $ 1,210 ($3,326)
Deduct: Total stock-based employee compensation expense
determined under fair value based methods for all awards, net
of related tax effects (340) (52)
---------------------
Net income (loss) pro forma $ 870 ($3,378)
=====================
Earnings (loss) per share:
Basic and diluted earnings (loss) - as reported $ 0.73 ($ 2.18)
Basic and diluted (loss) earnings - pro forma $ 0.52 ($ 2.22)
The fair value of each option is estimated on the date of the grant using
the Black-Scholes-Merton option-pricing model with the following weighted
average assumptions:
2005 2004
Dividend Yield 0.0% 0.0%
Expected volatility 49.0% 48.5%
Risk-free interest rate 3.0% 5.2%
Expected lives (years) 5.0 10.0
Weighted average fair value of options granted during the year $ 2.83 $ 9.74
Historical Company information was the primary basis for the expected
volatility assumption. Prior year grants were calculated using historical
volatility as the Company believes that the historical volatility over the life
of the option is more indicative of the options expected volatility in the
future. Based on past history of actual performance, a zero forfeiture rate has
been assumed.
The Company computes earnings per share in accordance with SFAS No. 128,
EARNINGS PER SHARE. Basic earnings per share is computed by dividing net income
by the weighted average number of common shares outstanding during the period.
Diluted earnings per share adjusts basic earnings per share for the effects of
stock options, restricted common stock, and other potentially dilutive financial
instruments, only in the periods in which the effects are dilutive.
The following securities have been excluded from the dilutive earnings per
share computation because the impact of the assumed exercise of stock options
and vesting of restricted stock would have been anti-dilutive:
44
2006 2005 2004
---------------------------------
Options to purchase common stock 275,000 300,000 180,000
Unvested restricted stock 20,000 0 0
------- ------- -------
Total 295,000 300,000 180,000
CONCENTRATION OF CREDIT RISK
In 2006, an electronics manufacturing company accounted for approximately
$4,400,000 of total revenue of $41,549,000, or 10.6% of MtronPTI's total
revenues, compared to approximately 14% and 18% for MtronPTI's largest customer
in 2005 and 2004, respectively. (No other customer accounted for more than 10%
of its 2006 revenues.) Sales to its ten largest customers accounted for
approximately 58.6% of revenues in 2006, compared to approximately 63% and 48%
of revenues for 2005 and 2004, respectively.
Lynch Systems' sales to its ten largest customers accounted for
approximately 84% of its revenues in 2006 compared with 79% of its revenues in
2005 and 80% in 2004. Lynch Systems' sales to its single largest customer
accounted for approximately 39% of its 2006 revenues, compared with 46% of its
revenues in 2005 and 36% in 2004. 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 2006, approximately 15.9% of MtronPTI'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 MtronPTI's revenues in 2006 and a material
portion of MtronPTI's revenues for the next several years. MtronPTI 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, MtronPTI would have to identify and qualify acceptable
replacement manufacturers or manufacture the products internally. Due to
specific product knowledge and process capability, MtronPTI 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, MtronPTI's relationship with this manufacturer, may adversely
affect MtronPTI'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 11 to
the Consolidated Financial Statements - "Segment Information" - for the detailed
presentation of the Company's 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.
45
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
At December 31, 2006, the Company guaranteed (unsecured) the BB& T loans of
Lynch Systems. The loan was paid off in February, 2007. The BB& T revolver was
replaced with a revolving loan with Bank of America. The Company guarantees this
loan which is secured by cash on deposit. The Company also guarantees
(unsecured) the RBC loan of MtronPTI. As of December 31, 2006, there are no
obligations to the RBC Centura Bank.
The Company had 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 had guaranteed a Letter of Credit issued to the
First National Bank of Omaha on behalf of MtronPTI (see Note 3 to the
Consolidated Financial Statements - "Notes Payable to Banks and Long-term Debt.)
As of October 2006, the Letter of Credit is no longer in place.
There is no other financial, performance, indirect guarantees or
indemnification agreement.
RECENT ISSUED ACCOUNTING PRONOUNCEMENTS
On January 1, 2006 the Company adopted revised Statement of Financial
Accounting Standards No. 123 ("SFAS No. 123-R"), "Share-Based Payments." SFAS
123-R requires companies to measure compensation costs for share-based payments
to employees, including stock options and restricted stock, at fair value and
expense such compensation over the service period. 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.
In July 2006, the FASB issued Interpretation No. 48 "Accounting for
Uncertainty in Income Taxes - An interpretation of FASB Statement No. 109" ("FIN
48"). This Interpretation provides a comprehensive model for the financial
statement recognition, measurement, presentation and disclosure of uncertain tax
positions taken or expected to be taken in income tax returns. This statement is
effective for fiscal years beginning after December 15, 2006. The Company will
adopt this Interpretation in the first quarter of 2007. The cumulative effects,
if any, of applying FIN 48 will be recorded as an adjustment to retained
earnings. The Company is currently assessing the impact of this Interpretation
on its financial position and results of operations.
In September 2006, the FASB issued SFAS No. 157 "Fair Value Measurements".
This Statement replaces multiple existing definitions of fair value with a
single definition, establishes a consistent framework for measuring fair value,
and expands financial statement disclosures regarding fair value measurements.
This Statement applies only to fair value measurements that are already required
or permitted by other accounting standards and does not require any new fair
value measurements. SFAS 157 is effective for fiscal years beginning subsequent
to November 15, 2007. The Company will adopt this Statement in the first quarter
of 2008, and is currently evaluating the impact on its financial position and
results of operations.
46
2. INVENTORIES
Inventories are stated at the lower of cost or market value. At MtronPTI,
inventories are valued using the first-in-first-out (FIFO) method for 69.3% of
the inventory and the remaining 30.7% is valued using last-in-first-out (LIFO).
At Lynch Systems, 100% of the inventory is valued at last-in-first-out (LIFO),
with no inventory valued using FIFO. Total consolidated inventories valued using
LIFO represent 49.2% of consolidated inventories at December 31, 2006 compared
with 50.8% of consolidated inventories valued using LIFO at December 31, 2005.
(The balance of consolidated inventory at December 31, 2006 and 2005 are valued
using FIFO.) If actual market conditions are more or less favorable than those
projected by management, adjustments may be required.
December 31,
--------------------
2006 2005
------ ------
(in thousands)
Raw materials and supplies ............. $3,016 $2,817
Work in progress ....................... 2,394 2,232
Finished goods ......................... 3,496 1,996
------ ------
Total .............................. $8,906 $7,045
====== ======
Current cost exceeded the LIFO value of inventories by $1,038,000 and
$1,075,000 at December 31, 2006 and 2005, respectively.
47
3. NOTES PAYABLE TO BANKS AND LONG-TERM DEBT
Notes payable to banks and long-term debt is comprised of:
December 31,
------------
2006 2005
---- ----
NOTES PAYABLE: (in thousands)
Mtron revolving loan (First National Bank of Omaha) at greater of prime or 4.5%
(which is 8.25% at December 31, 2006), due May 2007 $ 1,356 $ 2,082
Lynch Systems working capital revolving loan (BB& T) at One Month LIBOR + 2.75%,
(which is 8.07% at December 31, 2006), due January 29, 2007 900 756
------- -------
$ 2,256 $ 2,838
======= =======
LONG-TERM DEBT:
Lynch Systems term loan (SunTrust) at a fixed interest rate of 6.5% was repaid
in February 2006 -- $ 378
Mtron term loan (RBC) due October 2010. The note bears interest at LIBOR Base Rate plus
2.75%. Interest rate swap converts loan to a fixed rate, at 7.51% at December 31, 2006 2,964 3,030
Mtron term loan (First National Bank of Omaha) at greater of: prime plus 50 basis points or
4.5%; 8.75% at December 31, 2006, due October 2007 1,287 1,612
Mtron commercial bank term loan at variable interest rates (8.75% at December 31, 2006), due
April 2007 239 456
South Dakota Board of Economic Development at a fixed rate of 3%, due December 2007 250 262
Yankton Areawide Business Council loan at a fixed interest rate of 5.5%, due November 2007 65 74
Rice University Promissory Note at a fixed interest rate of 4.5%, due August 2009 203 275
Smythe Estate Promissory Note at a fixed interest rate of 4.5% due August 2009 119 159
------- -------
5,127 6,246
Current maturities (2,027) (1,215)
------- -------
Long Term Debt $ 3,100 $ 5,031
======= =======
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. At December
31, 2005, MtronPTI's credit facility included an unsecured parent Company
guarantee which was supported by a $650,000 Letter of Credit that was secured by
a $650,000 deposit at Bank of America. As of October 7, 2006, the Company no
longer guarantees the Letter of Credit and the $650,000 deposit is no longer
restricted. The Lynch credit facility includes an unsecured parent Company
guarantee at December 31, 2005 and 2006.
At December 31, 2006, the Company had $2,256,000 in notes payable to
banks. At December 31, 2006, Mtron's short-term credit facility with First
National Bank of Omaha ("FNBO") is $5,500,000, under which there is a revolving
credit loan for $1,356,000. The Revolving Loan bears interest at the greater of
prime rate or 4.5%. On May 31, 2006, Mtron renewed its credit agreement with
FNBO extending the due date of its revolving loan to May 31, 2007.
The Company also had a working capital revolver at Lynch Systems that had
been entered into in October 2005 with Branch Banking and Trust Company
("BB& T"). The revolving loan had a $3,500,000 borrowing capacity, due January
29, 2007 and bore interest at the One Month LIBOR Rate plus 2.75%. At December
31, 2006, Lynch's borrowings on the line of credit were $900,000. The revolver
expired by its own terms in January 29, 2007. The line of credit, borrowings,
plus accrued interest of $905,000 was repaid on February 13, 2007, and a new
line of credit has been established which allows for $1,100,000 of borrowings.
Borrowings on this new Lynch Systems line bear interest at a rate of LIBOR plus
1.75%. The entire borrowing capacity is collateralized by a $1,100,000 of
restricted cash on deposit.
48
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 Company was in compliance with these covenants at
December 31, 2006 except for the tangible net worth covenant for which the
Company received a waiver from BB& T.
The Company had a $6,744,000 of unused borrowing capacity under Lynch
Systems' and MtronPTI's revolving lines of credit at December 31, 2006, compared
to $5,327,000 at December 31, 2005.
At December 31, 2006, the Company had $2,027,000 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.
On September 30, 2005, MtronPTI entered into a Loan Agreement with RBC
Centura Bank ("RBC"). The RBC Term Loan Agreement provided 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, MtronPTI 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. 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, 2006 is $22,000, $14,000 net of tax, and is included in "other assets" on
the balance sheet and at December 31, 2005 was ($1,000) net of tax and was
included in "other liabilities" on the balance sheet. The value is reflected in
within other comprehensive income, net of tax.
All outstanding obligations under the RBC Term Loan Agreement are
collateralized by security interests in the assets of MtronPTI. 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. At December 31, 2006, the
Company was in compliance with these covenants.
On October 14, 2004, MtronPTI, entered into a Loan Agreement with First
National Bank of Omaha. The FNBO Loan Agreement provides for loans in the
amounts of $2,000,000 (the "Term Loan") in addition to the $3,000,000 Bridge
Loan referred to above. The Term Loan bears interest at the greater of prime
rate plus 50 basis points, or 4.5%, and is 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, October 2007. Accrued
interest thereon was payable monthly and the principal amount thereof, together
with accrued interest.
On October 14, 2004, in connection with the acquisition of PTI, the
Company provided $1,800,000 of subordinated financing to MtronPTI and MtronPTI
issued a subordinated promissory note to the Company in such amount increasing
the subordinated total to $2,500,000. In October 2006, an additional $75,000 was
lent to Mtron to enable it to make an investment in marketable equity
securities.
49
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 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 2007. (See Note 3 to the Consolidated Financial Statements - "Notes
Payable to Banks and Long-term Debts" - for restrictions on the company's
assets).
The debt decreased at both MtronPTI and Lynch Systems due to repayments of
revolving debt and scheduled payments on long-term debt. Debt outstanding at
December 31, 2006 included $3,601,000 of fixed rate debt at year-end average
interest rate of 5% (after considering the effect of the interest rate swap) and
variable rate debt of $3,782,000 at a year end average rate of 8.45%.
Aggregate principal maturities of long-term debt for each of the
next five years are as follows:
2007 - $2,027,000; 2008 - $204,000; 2009 - $170,000; and 2010 - $2,726,000.
4. RELATED PARTY TRANSACTIONS
At December 31, 2006, the Company had $4,429,000 of cash and cash
equivalents, not including restricted cash, compared with $5,512,000 at December
31, 2005. Of this amount, $2,040,000 is invested in United States Treasury money
market funds for which affiliates of the Company serve as investment managers to
the respective funds. At December 31, 2005, $47,000 was invested with the
affiliate money manager.
5. 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 fully vested in 2005, are anti-dilutive, and expire at the earlier
of May 25, 2010 or 90 days following the termination or resignation of
employment. Of these 120,000 options, at December 31, 2006, 95,000 remain
outstanding. Also outstanding at December 31, 2006, are 180,000 options granted
in 2001 to a former Chief Executive Officer at $17.50 per share. These options
are also anti-dilutive; they expire on October 1, 2009. Total options
outstanding at December 31, 2006, is 275,000 as summarized in the following
table:
--------------------------------------------------------------------------------
Weighted-Average
Remaining
Exercise Price Number Outstanding Contractual Life Number Exercisable
--------------------------------------------------------------------------------
$17.50 180,000 2.6 180,000
--------------------------------------------------------------------------------
$13.17 95,000 3.4 95,000
--------------------------------------------------------------------------------
Total 275,000 275,000
--------------------------------------------------------------------------------
50
The following table summarizes information about stock options outstanding
and exercisable at December 31, 2006:
Number of
Stock Weighted Average Weighted Average
Options Exercise price Years Remaining
------------------------------------------------------------------------------------------------
Oustanding at December 31, 2005 300,000 15.77 3.9
------------------------------------------------------------------------------------------------
Granted during 2006 - - -
------------------------------------------------------------------------------------------------
Exercised during 2006 - - -
------------------------------------------------------------------------------------------------
Forfeited during 2006 (25,000) 13.17 -
------------------------------------------------------------------------------------------------
Oustanding at December 31, 2006 275,000 16.01 2.9
------------------------------------------------------------------------------------------------
Exercisable at December 31, 2006 275,000 16.01 2.9
------------------------------------------------------------------------------------------------
Vested 275,000 16.01 2.9
------------------------------------------------------------------------------------------------
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-Merton option pricing model. See Note 1 to
the Consolidated Financial Statements - "Accounting and Reporting Policies -
Stock Based Compensation and Earnings Per Share".
In connection with the separation of the Company CEO on December 29, 2006,
his 75,000 options were forfeited 90 days thereafter, on March 29, 2007.
6. 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 stock purchases in 2006.
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.
Expense related to the SAR's was $27,400 in 2006, $18,000 in 2005, and $0 in
2004 (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, 2006 of $45,000 compared with $18,000 at December 31,
2005.
During the third quarter of 2006, the Company issued restricted stock to
two executives which are being accounted for under SFAS No. 123 R. Total stock
compensation expense recognized by the Company for the year ended December 31,
2006 associated with this restricted stock was $28,000, causing additional paid
in capital to increase by this amount.
51
7. INCOME TAXES
The Company files consolidated federal income tax returns, which includes
all subsidiaries.
The Company has a net operating loss ("NOL") carry-forward of $ 2,836,000 as of
December 31, 2006 compared with its net operating loss ("NOL") carry-forward of
$2,404,000 as of December 31, 2005. This NOL expires through 2026 if not
utilized prior to that date. The Company has research and development credit
carry-forwards of approximately $561,000 at December 31, 2006 (compared with
$357,000 at December 31, 2005) that can be used to reduce future income tax
liabilities and expire principally between 2020 and 2026. In addition, the
Company has foreign tax credit carry-forwards of approximately $210,000 at
December 31, 2006 compared with 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 2016.
Deferred income taxes for 2006 and 2005 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, 2006 and 2005 are as follows:
December 31, 2006 December 31, 2005
----------------------- ----------------------
Deferred Tax Deferred Tax
Asset Liability Asset Liability
-------- --------- ------- ---------
(in thousands)
Inventory reserve......................................... 661 $ 601 $ --
Fixed assets.............................................. 1,084 -- 1,448
Other reserves and accruals............................... 1,781 2,163 --
Other..................................................... 1,163 -- 547
Tax loss and other credit carry-forwards.................. 1,963 1,554 --
-------- ------- ------- -------
Total deferred income taxes............................... 4,405 2,247 4,318 1,995
======= =======
Valuation allowance....................................... (2,047) (2,212)
-------- -------
Cumulative temporary differences $2,358 $ 2,106
======== =======
At December 31, 2006 the net deferred tax asset of $111,000 presented in
the Company's balance sheet is comprised of deferred tax assets of $2,358,000
offset by deferred tax liabilities of $2,247,000. 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. The carrying value of the Company's net deferred tax
asset at December 31, 2006 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.
52
The provision (benefit) for income taxes from continuing operations is
summarized as follows:
2006 2005 2004
-------- -------- --------
(in thousands)
Current:
Federal ....... $ (492) $ (484) $ --
State and local -- 91 24
Foreign ....... 266 184 82
-------- -------- --------
Total Current .... (226) (209) 106
-------- -------- --------
Deferred:
Federal ....... -- -- --
State and local -- -- (6)
-------- -------- --------
Total Deferred ... -- -- (6)
-------- -------- --------
$ (226) $ (209) $ 100
======== ======== ========
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:
2006 2005 2004
------- ------- -------
(in thousands)
Tax (benefit) at statutory rate ............. $ 217 $ 340 $(1,097)
Permanent Differences ....................... 91 98 6
Foreign tax rate differential ............... (73) (40) (87)
State and local taxes, net of federal benefit 12 61 5
Foreign export sales benefit ................ (12) (17) (66)
Change in tax reserves ...................... (492) (484) --
Valuation allowance ......................... 6 (178) 1,245
Other ....................................... 25 11 94
------- ------- -------
$ (226) $ (209) $ 100
======= ======= =======
The income tax benefit for the period ended December 31, 2006 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 $492,000 in the third quarter 2006, which was originally provided for
during 2005.
The income tax benefit for the 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 provision for federal and state tax reserves identified in that period.
Profit before income taxes from foreign operations was $2,096,000,
$1,169,000, and $499,000 in 2006, 2005, and 2004 respectively. At December 31,
2006, U.S. income taxes have been provided on approximately $3,424,000 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 $335,000, $202,000 and
$83,000, for the years 2006, 2005 and 2004, respectively.
The valuation allowance decreased from $2,212,000 in 2005 to $ 2,047,000
at December 31, 2006.
53
8. 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.
For the year ended December 31, 2006, total comprehensive income was
$1,991,000, comprised of Other Comprehensive Income of $1,126,000, plus net
income of $865,000, for the year ended December 31, 2006. Other Comprehensive
Income included $1,030,000 from unrealized gains on available for sale
securities, $82,000 of currency translation gain associated with MtronPTI's
foreign subsidiary, and $14,000, the fair value of the interest rate swap, net
of tax.
Total comprehensive income was $1,196,000 in the year ended December 31,
2005, including other comprehensive loss of $88,000 on available for sale
securities, $75,000 of currency translation associated with MtronPTI's foreign
subsidiary, and $1,000, the fair value of the interest rate swap, net of tax,
and net income of $1, 210,000.
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 MtronPTI's foreign subsidiary.
The components of accumulated other comprehensive income, net of related
tax, at December 31, 2006, 2005, and 2004 are as follows:
December 31,
-------------------------------
2006 2005 2004
------ ------ ------
(in thousands)
Balance beginning of year .............................. $ 835 $ 849 $ 291
Foreign currency translation ........................... 82 75 14
Deferred gain/(loss) on hedge contract ................. 14 (1) --
Unrealized (loss ) gain on available for-sale securities 1,030 (88) 544
------ ------ ------
Accumulated other comprehensive income ................. $1,961 $ 835 $ 849
====== ====== ======
9. 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,
------------------------
2006 2005 2004
---- ---- ----
(in thousands)
Defined contribution total $175 $187 $ 90
==== ==== ====
Under the Lynch Systems and MtronPTI defined contribution plans, 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. The Company is in the process
of merging its two 401K plans.
54
10. COMMITMENTS AND CONTINGENCIES
In the normal course of business, subsidiaries of the Company are
defendants in certain product liability, worker claims and other litigation. The
following matters have been resolved; the Company has no litigation pending at
this time.
IN RE: SPINNAKER COATING, INC., DEBTOR/PACE LOCAL 1-1069 V. SPINNAKER COATING,
INC., AND THE LGL GROUP, INC., U.S. BANKRUPTCY COURT, DISTRICT OF MAINE, CHAPTER
11, ADV. PRO. NO. 02-2007, AND PACE LOCAL 1-1069 V. THE LGL GROUP, INC. 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.
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 Superior Court issued its decision, the Company and PACE agreed to
settle the case. The settlement included payment of a total of $800,000 to
resolve the claims of 67 workers who lost their jobs in 2001. This amount
included $677,000 in severance and $123,000 in interest. The settlement was paid
in full in March 2006. 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 were 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 main allegation in the case was 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. In May 2006, a tentative
settlement was reached pursuant to which the defendants agreed to pay the
government $130 million, plus approximately $8.7 million to relator's counsel as
legal fees and expenses. In July 2006, the definitive settlement agreements with
the government and the relator were signed and approved by the federal judge
hearing the case, and the case was dismissed with prejudice in August 2006. In
entering into the settlement agreements, the Company admitted no liability and
the conduct giving rise to the case is expressly excluded as a basis for any
future administrative proceedings by the FCC.
For a historical chronology of the case, please refer to the Company's
prior SEC filings.
55
RENT EXPENSE
Rent expense under operating leases was $197,000, $291,000, and $285,000
for the years ended December 31, 2006, 2005, and 2004, 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.
Future minimum rental payments under long-term non-cancellable operating
leases subsequent to December 31, 2006 are as follows:
(in thousands)
2007 .............. 63
2008 .............. 19
2009 .............. 4
2010 and thereafter 3
11. 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 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 $300,000 in 2006, $500,000 in 2005, and
$350,000 in 2004. 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.
56
Years Ended December 31,
--------------------------------------
2006 2005 2004
-------- -------- --------
(in thousands)
REVENUES
Glass manufacturing equipment - USA $ 1,422 $ 1,992 $ 1,114
Glass manufacturing equipment - Foreign 6,329 9,140 9,307
-------- -------- --------
Total glass manufacturing equipment 7,751 11,132 10,421
Frequency control devices - USA 20,501 19,078 12,096
Frequency control devices - Foreign 21,048 15,973 11,317
-------- -------- --------
Total frequency control devices 41,549 35,051 23,413
-------- -------- --------
Consolidated total revenues $ 49,300 $ 46,183 $ 33,834
======== ======== ========
OPERATING PROFIT (LOSS)
Glass manufacturing equipment $ (1,898) $ 684 $ (1,340)
Frequency control devices 3,072 2,306 1,012
-------- -------- --------
Total manufacturing 1,174 2,990 (328)
Unallocated corporate expense (1,722) (1,812) (2,560)
-------- -------- --------
Consolidated total operating profit (loss) (548) $ 1,178 $ (2,888)
======== ======== ========
INCOME (LOSS) BEFORE INCOME TAXES
Investment income $ 1,750 $ 608 $ 15
Interest expense (570) (847) (360)
Other income (expense) 7 62 7
-------- -------- --------
Consolidated income (loss) before income taxes $ 1,187 $ 1,001 $ (3,266)
======== ======== ========
CAPITAL EXPENDITURES
Glass manufacturing equipment $ 18 $ 32 $ 97
Frequency control devices 737 310 326
General corporate -- 1 17
-------- -------- --------
Consolidated total capital expenditures $ 755 $ 343 $ 440
======== ======== ========
TOTAL ASSETS
Glass manufacturing equipment $ 6,050 $ 8,096 $ 10,832
Frequency control devices 21,699 17,589 17,417
General corporate 3,208 6,979 5,634
-------- -------- --------
Consolidated total assets $ 30,957 $ 32,664 $ 33,883
======== ======== ========
57
For years ended December 31, 2006, 2005, and 2004, significant foreign
revenues (10% or more of foreign sales) were as follows:
Years Ended - December 31,
2006 2005 2004
GLASS MANUFACTURING EQUIPMENT -
SIGNIFICANT FOREIGN REVENUES
Brazil $ 3,080 $ 260 $ 27
China 827 42 2,618
Indonesia -- 1,110 3,811
All other foreign countries 2,422 2,462 2,851
-----------------------------------------------------
Total foreign revenues $ 6,329 $ 9,140 $ 9,307
Years Ended - December 31,
2006 2005 2004
FREQUENCY CONTROL DEVICES - SIGNIFICANT
FOREIGN REVENUES
China $ 4,250 $ 3,203 $ 1,783
Canada 3,683 3,218 2,901
Malaysia 2,262 686 463
Thailand 2,114 1,084 34
Mexico 1,543 2,216 1,415
All other foreign countries 7,196 5,566 4,721
-----------------------------------------------------
Total foreign revenues $ 21,048 $ 15,973 $ 11,317
"All other foreign countries" include countries which individually
comprise less than 10% of total foreign revenues for each segment. If a country
had significant foreign revenues in any one of the three years presented, the
sales to that country are shown for the other years presented even if it is
under the 10% threshold.
12. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the
years ended December 31, 2006 and December 31, 2005:
2006 Three Months Ended
--------------------------------------------------
Mar. 31 June 30 Sep. 30 Dec. 31
------- ------- ------- -------
(in thousands, except per share amounts)
Revenues........................................................ $ 12,091 $ 13,146 $ 13,038 $ 11,025
Gross profit.................................................... 3,547 4,114 3,463 2,430
Operating profit (loss)......................................... 386 458 (29) (1,363)
Net income (loss)............................................... 366 499 903 (903)
Basic and diluted earnings (loss) per share..................... $ 0.17 $ 0.23 $ 0.42 $ (0.42)
58
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)
59
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF
REGISTRANT THE LGL GROUP, INC.
CONDENSED BALANCE SHEET
(IN THOUSANDS)
December 31,
2006 2005
---------- ----------
ASSETS
Current Assets
Cash and cash equivalents ........................................... $ 3,906 $ 3,542
Restricted cash ..................................................... -- 650
Investments - marketable securities ................................. 2,550 2,738
Deferred income taxes ............................................... -- --
Other current assets ................................................ 70 38
---------- ----------
6,526 6,968
Net Property, Plant & Equipment ......................................... 5 11
Other Assets (principally investment in and amounts due from wholly owned
subsidiaries) ....................................................... 10,804 11,554
---------- ----------
Total Assets ............................................................ $ 17,335 18,533
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities ..................................................... $ 628 $ 3,845
Long Term Liabilities ................................................... -- --
Total Shareholders' Equity .............................................. 16,707 14,688
---------- ----------
Total Liabilities And Shareholders' Equity .............................. $ 17,335 $ 18,533
========== ==========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
60
THE LGL GROUP, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENT OF OPERATIONS
(IN THOUSANDS)
Years Ended December 31,
--------------------------------------------
2006 2005 2004
---------- ---------- ----------
Interest, dividends and gains on sale of marketable securities ......... $ 1,878 $ 592 $ 17
Dividend from subsidiary ............................................... (32) 32 22
Interest and other income from subsidiaries ............................ 126 126 55
---------- ---------- ----------
TOTAL INCOME ........................................................... 1,972 750 94
Costs and Expenses:
Unallocated corporate administrative expense ........................... 1,673 1,662 1,435
Commitments and contingencies .......................................... -- 150 775
Interest expense ....................................................... -- 86 47
---------- ---------- ----------
TOTAL COST AND EXPENSE ................................................. 1,673 1,898 2,257
---------- ---------- ----------
LOSS BEFORE INCOME TAXES AND EQUITY IN NET INCOME (LOSS) OF SUBSIDIARIES 299 (1,148) (2,163)
Benefit for income taxes ............................................... 233 716 --
Equity in net income (loss) of subsidiaries ............................ 332 1,642 (1,163)
---------- ---------- ----------
NET INCOME (LOSS) ...................................................... $ 865 $ 1,210 $ (3,326)
========== ========== ==========
61
THE LGL GROUP, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOW
(IN THOUSANDS)
Year Ended December 31,
--------------------------------------------
2006 2005 2004
---------- ---------- ----------
CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES ...... $ (2,207) $ (483) $ (430)
---------- ---------- ----------
INVESTING ACTIVITIES:
Capital expenditures ................................. -- (1) (17)
Proceeds from sale of marketable securities .......... 2,976 1,348 --
Payment of margin liability .......................... (330) (1,236) (300)
Purchase of available for-sale securities ............ -- -- (754)
Dividend from subsidiaries ........................... -- -- 22
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES .. $ 2,646 111 (1,049)
---------- ---------- ----------
FINANCING ACTIVITIES:
Loan to Subsidiary ................................... (75) -- (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 .. (75) 3,499 (32)
---------- ---------- ----------
TOTAL INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 364 3,127 (1,551)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ....... 3,542 415 1,966
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR ............. $ 3,906 $ 3,542 $ 415
========== ========== ==========
62
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 $2,976,000 and
$1,348,000 for the years ended December 31, 2006 and 2005, respectively.
Purchases of marketable securities were $68,000 for the year ended December 31,
2006, there were no purchases in 2005, and purchases of marketable securities
were $754,000 for the year ended December 31, 2004. Payments on margin
liabilities were $330,000, $1,236,000 and $300,000 for the years ended December
31, 2006, 2005 and 2004. There were no margin liabilities at December 31, 2006.
NOTE C -- DIVIDENDS FROM SUBSIDIARIES
The Company's consolidated subsidiaries paid no dividends in 2006, or
2005, and paid $22,000 in 2004 to the parent company, LGL Group, Inc.
NOTE D -- LOANS TO SUBSIDIARIES
In 2004, the Company lent its subsidiary, Mtron, $1,800,000 to support its
banking relationships and to fund Mtron's acquisition of PTI. In 2006, the
Company lent Mtron $75,000 to make investments in marketable equity securities.
NOTE E -- SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR ADDITIONAL
INFORMATION.
63
THE LGL GROUP, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004
Column A Column B Column C Column D Column E
-------- ---------- ----------------------------- ------------- --------------
Additions
-----------------------------
Balance at Charged
Beginning to Costs Charged to Balance at End
Deduction Of Period and Expenses Other Accounts Deductions(A) of Period
---------------------------- ---------- ------------ -------------- ------------- --------------
Year ended December 31, 2006
Allowances ............. $ 325,000 $ 573,000 -- $ 77,000 $ 808,000
========== ========== ========== ========== ==========
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
========== ========== ========== ========== ==========
----------
(A) Uncollectible accounts receivable written off are net of recoveries.
64
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)* Articles of Amendment of the Articles of Incorporation of the
Company.
(d) 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) The LGL Group, Inc. 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) The LGL Group, Inc. 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) 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).
(e) 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).
(f) 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).
(g) 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).
(h) 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).
(i) 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).
(j) 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).
65
(k) 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).
(l) 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).
(m) Form of Indemnification Agreement dated as of February 28,
2005 by and between The LGL Group, Inc. 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).
(n) 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).
(o) 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).
(p) 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).
(q) Unconditional Guaranty for Payment by and between The LGL
Group, Inc. 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).
(r) Second Amendment to the Loan Agreement, dated June 30, 2006,
by and among M-tron Industries, Inc., Piezo Technology, Inc.
and First National Bank of Omaha, and acknowledged and
guaranteed by The LGL Group, Inc. (incorporated herein by
reference to Exhibit 10.1 to the Company's Current Report on
Form 8-K filed on July 7, 2006).
(s) Employment Agreement, dated September 5, 2006, by and between
The LGL Group, Inc. and Jeremiah M. Healy (incorporated herein
by reference to Exhibit 10.1 to the Company's Current Report
on Form 8-K filed on September 7, 2006).
(t) Third Amendment to the Loan Agreement, dated October 3, 2006,
by and among M-tron Industries, Inc., Piezo Technology, Inc.
and First National Bank of Omaha, and acknowledged and
guaranteed by LGL Group, Inc. (incorporated herein by
reference to Exhibit 10.1 to the Company's Current Report on
Form 8-K filed on October 4, 2006).
66
(u) Employment Agreement, dated March 20, 2007, by and between The
LGL Group, Inc. and Steve Pegg (incorporated herein by
reference to Exhibit 10.1 to the Company's Current Report on
Form 8-K filed on March 20, 2007).
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. The
LGL Group, Inc. will furnish to each of its shareholders a copy of any such
Exhibit for a fee equal to The LGL Group, Inc.'s cost in furnishing such
Exhibit. Requests should be addressed to the Office of the Secretary, The LGL
Group, Inc., 140 Greenwich Ave, 4th Floor, Greenwich, Connecticut 06830.
67
