UNITED STATES
SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2006
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Or
| | TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------ ------------
Commission File No. 1-106
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THE LGL GROUP, INC.
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(Exact name of Registrant as Specified in Its Charter)
Indiana 38-1799862
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(State or Other Jurisdiction of I.R.S. Employer
Incorporation or Organization) Identification No.)
140 Greenwich Avenue, 4th Floor, Greenwich, CT 06830
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(Address of principal executive offices) (Zip Code)
(203) 622-1150
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Registrant's telephone number, including area code
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(Former address, changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No | |
Indicate by check mark whether the registrant is 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.
.........
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 Exchange Act).
Yes | | No |X|
Indicate the number of shares outstanding of each of the Registrant's classes of
Common Stock, as of the latest practical date.
Class Outstanding at August 11, 2006
----------------------------- ------------------------------
Common Stock, $0.01 par value 2,154,702
1
INDEX
THE LGL GROUP, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets:.........................................3
- June 30, 2006
- December 31, 2005
Consolidated Statements of Operations:...............................4
- Three months ended June 30, 2006 and 2005
- Six months ended June 30, 2006 and 2005
Consolidated Statements of Cash Flows:...............................5
- Six months ended June 30, 2006 and 2005
Notes to Condensed Consolidated Financial Statements:................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations...............................................15
Item 3. Quantitative and Qualitative Disclosure About Market Risk...........21
Item 4. Controls and Procedures.............................................21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................22
Item 4. Submission of Matters to a Vote of Security Holders.................22
Item 6. Exhibits ...........................................................23
2
PART 1 -- FINANCIAL INFORMATION -
ITEM 1 -- FINANCIAL STATEMENTS
THE LGL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -- UNAUDITED
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
June 30, December 31,
2006 2005(A)
----------- ------------
ASSETS
Current Assets
Cash and cash equivalents .................................................. $ 2,840 $ 5,512
Restricted cash (Note D) ................................................... 650 650
Investments - marketable securities (Note E) ............................... 2,930 2,738
Accounts receivable, less allowances of $715 and $325, respectively ........ 7,232 7,451
Unbilled accounts receivable (Note H) ...................................... 2,675 902
Inventories (Note F) ....................................................... 8,828 7,045
Deferred income taxes ...................................................... 112 111
Prepaid expense and other current assets ................................... 556 461
-------- --------
Total Current Assets ................................................... 25,823 24,870
Property, Plant and Equipment
Land ....................................................................... 855 855
Buildings and improvements ................................................. 5,770 5,767
Machinery and equipment .................................................... 14,940 14,606
-------- --------
21,565 21,228
Less: accumulated depreciation ............................................. (14,615) (14,025)
-------- --------
6,950 7,203
Other assets ............................................................... 547 591
-------- --------
Total Assets ............................................................ $ 33,320 $ 32,664
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable to bank (Note G) ............................................. $ 3,118 $ 2,838
Trade accounts payable ..................................................... 3,500 2,900
Accrued warranty expense (Note H) .......................................... 232 357
Accrued compensation expense ............................................... 1,567 1,372
Accrued income taxes ....................................................... 127 673
Accrued professional fees .................................................. 292 574
Margin liability on marketable securities .................................. -- 330
Other accrued expenses ..................................................... 661 1,312
Commitments and contingencies (Note L) ..................................... -- 859
Customer advances .......................................................... 1,463 515
Current maturities of long-term debt (Note G) .............................. 854 1,215
-------- --------
Total Current Liabilities ............................................... 11,814 12,945
Long-term debt (Note G) ........................................................ 4,638 5,031
-------- --------
Total Liabilities ....................................................... 16,452 17,976
Shareholders' Equity
Common stock, $0.01 par value - 10,000,000 shares authorized; 2,188,510
shares issued; 2,154,702 shares outstanding ............................... 22 22
Additional paid-in capital ................................................. 21,053 21,053
Accumulated deficit ........................................................ (5,116) (6,576)
Accumulated other comprehensive income (Note J) ............................ 1,555 835
Treasury stock, at cost, 33,808 shares ..................................... (646) (646)
-------- --------
Total Shareholders' Equity .............................................. 16,868 14,688
-------- --------
Total Liabilities and Shareholders' Equity .............................. $ 33,320 $ 32,664
======== ========
(A) The Balance Sheet at December 31, 2005 has been derived from the audited financial statements at that date, but does
not include all of the information and footnotes required by accounting principles generally accepted in the United
States for complete financial statements.
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
PART I -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
THE LGL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS -- UNAUDITED
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
REVENUES ................................ $ 13,146 $ 14,913 $ 25,237 $ 25,508
Cost and expenses:
Manufacturing cost of sales ........... 9,032 9,401 17,576 16,719
Selling and administrative ............ 3,656 3,511 6,817 6,561
----------- ----------- ----------- -----------
OPERATING PROFIT ........................ 458 2,001 844 2,228
Other income (expense):
Investment income ..................... 283 7 518 17
Interest expense ...................... (179) (208) (342) (393)
Other income (expense) ................ -- 77 (8) 80
----------- ----------- ----------- -----------
104 (124) 168 (296)
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES .............. 562 1,877 1,012 1,932
Provision for income taxes .............. (63) (526) (147) (531)
----------- ----------- ----------- -----------
NET INCOME .............................. $ 499 $ 1,351 $ 865 $ 1,401
=========== =========== =========== ===========
Weighted average shares outstanding ..... 2,154,702 1,630,539 2,154,702 1,631,333
----------- ----------- ----------- -----------
BASIC AND DILUTED INCOME PER SHARE: ..... $ 0.23 $ 0.83 $ 0.40 $ 0.86
=========== =========== =========== ===========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
PART I -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
THE LGL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- UNAUDITED
(IN THOUSANDS)
Six Months Ended
June 30,
---------------------
2006 2005
-------- --------
OPERATING ACTIVITIES
Net income ..................................................................... $ 865 $ 1,401
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation ................................................................... 590 640
Provision for doubtful accounts receivable ..................................... 390 --
Amortization of definite-lived intangible assets ............................... 55 44
Gain realized on sale of marketable securities ................................. (462) --
Gain on sale of fixed assets ................................................... -- (69)
Changes in operating assets and liabilities:
Receivables .................................................................. (1,944) (4,045)
Inventories .................................................................. (1,783) 960
Accounts payable and accrued liabilities ..................................... (809) 882
Commitments and contingencies ................................................ (859) (14)
Other assets/liabilities ..................................................... 841 (715)
------- -------
Net cash used in operating activities .......................................... (3,116) (916)
------- -------
INVESTING ACTIVITIES
Capital expenditures ........................................................... (337) (191)
Restricted cash ................................................................ -- 125
Proceeds from sale of marketable securities .................................... 903 --
Proceeds from sale of fixed assets ............................................. -- 307
Net repayment of margin liability on marketable securities ..................... (330) --
------- -------
Cash provided by investing activities .......................................... 236 241
------- -------
FINANCING ACTIVITIES
Net borrowings (repayments)of notes payable .................................... 280 (371)
Repayment of long-term debt .................................................... (754) (438)
Purchase of treasury stock ..................................................... -- (63)
Other .......................................................................... 682 --
------- -------
Net cash provided by (used in) financing activities ............................ 208 (832)
------- -------
Decrease in cash and cash equivalents .......................................... (2,672) (1,513)
Cash and cash equivalents at beginning of period ............................... 5,512 2,580
------- -------
Cash and cash equivalents at end of period ..................................... $ 2,840 $ 1,067
======= =======
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A. SUBSIDIARIES OF THE REGISTRANT
As of June 30, 2006, the Subsidiaries of the Registrant are as follows:
Owned by LGL
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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%
The LGL Group, Inc. (the "Company") has two reportable business segments
operating through three principal subsidiaries, M-tron Industries, Inc.
("Mtron"), Piezo Technology, Inc. ("PTI") and Lynch Systems, Inc. ("Lynch
Systems"). The combined operations of Mtron and PTI are referred to herein as
"Mtron/PTI."
B. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six month period ended June
30, 2006 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2006.
The balance sheet at December 31, 2005 hasbeen derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Registrant Company and Subsidiaries Annual
Report on Form 10-K for the year ended December 31, 2005.
Certain amounts in 2005 have been reclassified to conform to 2006
classifications.
C. 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
No. 123-R impacts the Company's accounting for its stock option plan. Because
all of the Company's stock options were fully vested at December 31, 2005 and
there were no new options issued through the second quarter of 2006, there was
no impact on the Company's 2006 financial statements from the adoption of this
standard.
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.
6
D. RESTRICTED CASH
At June 30, 2006 and December 31, 2005, the Company had $650,000 of
Restricted Cash that secures a Letter of Credit issued by Bank of America to the
First National Bank of Omaha as collateral for its Mtron subsidiary's loans.
E. INVESTMENTS
The following is a summary of marketable securities (investments) held by
the Company (IN THOUSANDS):
Gross Gross Estimated
Unrealized Unrealized Fair
Equity Securities Cost Gains Losses Value
----------------- ---- ----- ------ -----
June 30, 2006 $1,550 $1,380 -- $2,930
December 31, 2005 $1,991 $ 747 -- $2,738
The Company had a margin liability against this investment of $330,000 at
December 31, 2005 which must be settled upon the disposition of the related
securities whose fair value is based on quoted market prices. The Company paid
off the margin liability in January 2006. The Company has designated these
investments as available for sale pursuant to SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities".
FAIR VALUE OF FINANCIAL INSTRUMENTS - INTEREST RATE SWAP HEDGING
The Company has an interest rate swap agreement to reduce the interest
exposure on the $2,998,000 RBC Term Loan that is described in Note G. This
agreement eliminates the variability of cash flows in the interest payments for
100% of the total variable-rate term loan effectively changing the Company's
exposure from a variable interest rate to a fixed interest rate.
The Company has designated the agreement as a cash flow hedge. The critical
terms of the swap and the term loan coincide (notional amount, interest rate
reset dates, maturity/expiration date and underlying index) and the hedge is
expected to exactly offset changes in expected cash flows due to fluctuations in
the LIBOR Base Rate over the term of the loan. Accordingly, this swap qualifies
for the short-cut method and therefore changes in the fair value of the swap
will be recorded directly in the other comprehensive income. The fair value of
the interest rate swap at June 30, 2006 is $52,000 which is included in other
current assets on the balance sheet with the offset reflected within other
comprehensive income.
F. INVENTORIES
Inventories are stated at the lower of cost or market value. At June 30,
2006, inventories were valued by two methods: last-in, first-out ("LIFO") - 51%,
and first-in, first-out ("FIFO") - 49%. At December 31, 2005, inventories were
valued by the same two methods: LIFO - 52%, and FIFO - 48%.
June 30, December 31,
2006 2005
--------- -------
(in thousands)
Raw materials $2,936 $2,817
Work in process 2,847 2,232
Finished goods 3,044 1,996
------ ------
Total Inventories $8,828 $7,045
====== ======
Current costs exceed LIFO value of inventories by $1,159,000 and $1,075,000
at June 30, 2006 and December 31, 2005, respectively.
7
G. NOTES PAYABLE TO BANKS AND LONG-TERM DEBT
Notes payable to banks and long-term debt consists of:
June 30, December 31,
2006 2005
-------- ------------
Notes Payable: (in thousands)
Mtron bank revolving loan (First National Bank of Omaha) at variable interest
rates (greater of prime or 4.5%; 8.25% at June 30, 2006 and 7.25% at
December 31, 2005), due May 2007 $ 1,862 $ 2,082
Lynch Systems working capital revolving loan (BB&T) at variable interest rates
(One Month LIBOR + 2.75%; 8.08% at June 30, 2006 and 7.06% at
December 31, 2005), due October 2006 1,256 756
------- -------
$ 3,118 $ 2,838
======= =======
Long-term debt:
Lynch Systems term loan (SunTrust), repaid in February 2006 $ -- $ 378
Mtron term loan (RBC) due October 2010. The Company entered into a five-year
interest rate swap to hedge the variable interest rate volatility. Under
the terms of the interest rate swap the variable interest Term Loan will be
essentially converted to a 7.51% fixed rate loan 2,998 3,030
Mtron term loan (First National Bank of Omaha) at variable interest rates
(greater of prime plus 50 basis points or 4.5%; 8.75% at June 30, 2006 and 7.75%
at December 31, 2005), due October 2007 1,450 1,612
Mtron commercial bank term loan at variable interest rates (8.5% at June 30,
2006 and 7.75% at December 31, 2005), due April 2007 339 456
South Dakota Board of Economic Development at a fixed rate of 3.0%, due
December 2007 256 262
Yankton Areawide Business Council loan at a fixed interest rate of 5.5%, due
November 2007 69 74
Rice University Promissory Note at a fixed interest rate of 4.5%, due August
2009 241 275
Smythe Estate Promissory Note at a fixed interest rate of 4.5% due August 2009 139 159
------- -------
5,492 6,246
Current maturities (854) (1,215)
------- -------
$ 4,638 $ 5,031
======= =======
Lynch Systems and Mtron/PTI maintain their own short-term line of credit facilities. In general, the credit
facilities are secured by property, plant and equipment, inventory, receivables and common stock of certain
subsidiaries and contain certain covenants restricting distributions to the parent company. The Lynch Systems
credit facility includes an unsecured parent company guarantee. Mtron/PTI's credit facility includes an unsecured
parent Company guarantee and is supported by a $650,000 Letter of Credit that is secured by a $650,000 deposit at
Bank of America and is classified as restricted cash on the balance sheet.
The Company was in compliance with all financial covenants at June 30, 2006.
On June 30, 2006, Mtron/PTI renewed its credit agreement with First National Bank of Omaha extending the
due date to May 31, 2007. At June 30, 2006, Mtron/PTI's revolving loan provides for a line of
credit in the maximum principal amount of $5,500,000, of which $3,638,000 was available under the line of
credit.
Effective October 6, 2005, Lynch Systems entered into a loan agreement (the "BB&T Loan Agreement") with
Branch Banking and Trust Company ("BB&T"). The BB&T Loan Agreement provides for a line of credit in the
maximum principal amount of $3,500,000. At June 30, 2006, there were no outstanding Letters of Credit and
$2,244,000 was available under the line of credit. This line of credit replaces the working capital revolving
loan that Lynch Systems had with SunTrust Bank, which loan expired by its terms on September 30, 2005.
Borrowings under the BB&T Loan Agreement bear interest at the One Month LIBOR Rate plus 2.75% and accrued
8
interest is payable on a monthly basis, with the principal balance due to
be paid on the first anniversary of the Loan Agreement.
The BB&T Loan Agreement contains a variety of affirmative and negative
covenants of types customary in an asset-based lending facility, including those
relating to reporting requirements, maintenance of records, properties and
corporate existence, compliance with laws, incurrence of other indebtedness and
liens, restrictions on certain payments and transactions and extraordinary
corporate events. The BB&T Loan Agreement also contains financial covenants
relating to maintenance of levels of minimal tangible net worth, a debt to worth
ratio, and restricting the amount of capital expenditures. In addition, the
BB&T Loan Agreement provides that the following will constitute events of
default thereunder, subject to certain grace periods: (i) payment defaults; (ii)
failure to meet reporting requirements; (iii) breach of other obligations under
the BB&T Loan Agreement; (iv) default with respect to other material
indebtedness; (v) final judgment for a material amount not discharged or stayed;
and (vi) bankruptcy or insolvency.
During 2005, the Company executed various amendments and extensions with
one of Lynch Systems' commercial lenders, SunTrust. As a result, certain
required repayments were made on amounts owed to SunTrust, and the expiring
working capital loan was not renewed. Additionally, it was agreed that the
Company's remaining obligation to SunTrust, a $378,000 term note would be
payable on March 1, 2006. This amount was repaid in full in February 2006.
On September 30, 2005, Mtron/PTI entered into a Loan Agreement with RBC
Centura Bank ("RBC"). The Loan Agreement provides for a loan in the amount of
$3,040,000 (the "RBC Term Loan"), the proceeds of which were used to pay off the
$3,000,000 bridge loan with First National Bank of Omaha which had been due
October 2005. The RBC Term Loan bears interest at LIBOR Base Rate plus 2.75% and
is to be repaid in monthly installments based on a twenty year amortization,
with the then remaining principal balance to be paid on the fifth anniversary.
The RBC Term Loan is secured by a mortgage on PTI's premises. In connection with
this RBC Term Loan, Mtron/PTI entered into a five-year interest rate swap to
hedge the variable interest rate volatility. Under the terms of the interest
rate swap, the variable interest rate RBC Term Loan will be essentially
converted to a 7.51% fixed rate loan. The Company has designated this swap as a
cash flow hedge in accordance with FASB 133 "Accounting for Derivative
Instruments and Hedging Activities". The fair value of the interest rate swap at
June 30, 2006 is $52,000 which is included in other current assets on the
balance sheet with the offset reflected within other comprehensive income.
In connection with the completion of the acquisition of PTI, on October 14,
2004, Mtron and PTI, each wholly-owned subsidiaries of The LGL Group, Inc.,
entered into a Loan Agreement with First National Bank of Omaha. The Loan
Agreement provided for loans in the amounts of $2,000,000 (the "Term Loan") and
$3,000,000 (the "Bridge Loan"), together with a $5,500,000 Revolving Line of
Credit (the "Revolving Loan"). The Term Loan bears interest at the greater of
prime rate plus 50 basis points, or 4.5%, and is to be repaid in monthly
installments of $37,514, with the then remaining principal balance plus accrued
interest to be paid on the third anniversary of the Loan Agreement. The Bridge
Loan was repaid in 2005 from proceeds received from the RBC Term Loan. The
Revolving Loan was renewed on June 30, 2006 as previously discussed. The Loan
Agreement contains a variety of affirmative and negative covenants of types
customary in an asset-based lending facility. The Loan Agreement also contains
financial covenants relating to maintenance of levels of minimal tangible net
worth and working capital, and current, leverage and fixed charge ratios,
restricting the amount of capital expenditures.
The Company has guaranteed a letter of credit issued to the First National
Bank of Omaha on behalf of its subsidiary, Mtron Industries, Inc. As of June 30,
2006, the $650,000 letter of credit issued by Bank of America to The First
National Bank of Omaha was secured by a $650,000 deposit at Bank of America and
is classified as restricted cash on the balance sheet.
9
H. LONG-TERM CONTRACTS AND WARRANTY EXPENSE
Lynch Systems, a 100% wholly-owned subsidiary of the Company, is engaged in
the manufacture and marketing of glass-forming machines and specialized
manufacturing machines. Certain sales contracts require an advance payment
(usually 30% of the contract price) which is accounted for as a customer
advance. The contractual sales prices are paid either (i) as the manufacturing
process reaches specified levels of completion or (ii) based on the shipment
date or (iii) negotiated terms of sale. Guarantees by letter of credit from a
qualifying financial institution are required for most sales contracts. Because
of the specialized nature of these machines and the period of time needed to
complete production and shipping, Lynch Systems accounts for these contracts
using the percentage-of-completion accounting method as costs are incurred
compared to total estimated project costs (cost-to-cost basis). At June 30, 2006
and December 31, 2005, unbilled accounts receivable were $2,675,000 and
$902,000, respectively.
Lynch Systems provides a full warranty to world-wide customers who acquire
machines. The warranty covers both parts and labor and normally covers a period
of one year to thirteen months. Based upon experience, the warranty accrual is
based upon three to five percent of the selling price of the machine. The
Company periodically assesses the adequacy of the reserve and adjusts the
amounts as necessary.
(in thousands)
Balance, December 31, 2005 $ 357
Warranties issued during the period 133
Settlements made during the period (258)
-----
Balance, June 30, 2006 $ 232
=====
I. EARNINGS PER SHARE AND STOCKHOLDERS' EQUITY
The Company's basic and diluted earnings per share are equivalent, as the
Company has no dilutive securities.
Prior to January 1, 2006, the Company accounted for 2001 Equity Incentive
Plan ("the Plan") under the recognition and measurement principles of APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations. No stock-based employee compensation cost was reflected in net
income, as all options granted under those plans had an exercise price equal to
the market value of the underlying common stock on the date of grant. The
Company has provided pro forma disclosures of the compensation expense
determined under the fair value provisions of SFAS No. 123R, "Accounting for
Stock-Based Compensation."
On May 26, 2005, the Company's shareholders approved amendments to the Plan
to increase the total number of shares of the Company's Common Stock available
for issuance from 300,000 to 600,000 shares and to add provisions that require
terms and conditions of awards to comply with section 409A of the Internal
Revenue Code of 1986. Also on May 26, 2005, the Company granted options to
purchase 120,000 shares of Company common stock to certain employees and
directors of the Company at $13.17 per share. These options were anti-dilutive
and have lives of up to ten years. As of June 30, 2006 and December 31, 2005,
options to purchase 300,000 shares are outstanding and fully vested.
For purposes of pro forma disclosures under SFAS No. 123R, the estimated
fair value of the options is amortized to expense over the options' vesting
period. The Company's pro forma information follows:
Three Months Six Months
Ended Ended
June 30, 2005
(in thousands, except per share
amounts)
-------------------------------
Net income as reported $ 1,351 $ 1,401
Deduct: Total stock based employee compensation expense determined under fair
value based method for all awards, net of related tax effect (222) (222)
------- -------
Pro-forma net income $ 1,129 $ 1,179
======= =======
Basic & diluted income per share:
As reported $ 0.83 $ 0.86
Pro forma $ 0.69 $ 0.72
The net income as reported in each period did not include any stock-based
compensation.
10
J. ACCUMULATED OTHER COMPREHENSIVE INCOME
Total comprehensive income was $436,000 and $1,585,000 in the three and six months ended June 30, 2006, respectively,
compared to total comprehensive income of $1,175,000 and $1,668,000 in the three and six months ended June 30, 2005,
respectively.
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2006 2005 2006 2005
------ ------ ------ ------
Net income as reported $ 499 $ 1,351 $ 865 $ 1,401
Foreign currency translation 24 13 36 34
Deferred gain on hedge contract 5 -- 52 --
Unrealized (loss) gain on available for sale securities (92) (189) $ 632 233
------- ------- ------- -------
Total comprehensive income $ 436 $ 1,175 $ 1,585 $ 1,668
======= ======= ======= =======
The components of accumulated other comprehensive income, net of related tax, at June 30 , 2006, December 31,
2005, and June 30, 2005 are as follows:
June 30, December 31, June 30,
2006 2005 2005
-------------- -------------- --------------
Balance beginning of period $ 835 $ 849 $ 849
Foreign currency translation 36 75 34
Deferred gain (loss) on hedge contract 52 (1) --
Unrealized gain on available for-sale securities 632 (88) 233
------ ------ ------
Accumulated other comprehensive income $1,555 $ 835 $1,116
====== ====== ======
K. SEGMENT INFORMATION
The Company has two reportable business segments: 1) glass manufacturing equipment business, which represents
the operations of Lynch Systems, and 2) frequency control devices (quartz crystals and oscillators) which
represents products manufactured and sold by Mtron/PTI. The Company's foreign operations in Hong Kong and India are
under the control of Mtron/PTI.
Operating profit (loss) is equal to revenues less operating expenses, excluding investment income, interest
expense, and income taxes. The Company allocates a negligible portion of its general corporate expenses to its
operating segments. Such allocation was $125,000 in the three months ending June 30, 2006 and 2005, respectively.
Identifiable assets of each industry segment are the assets used by the segment in its operations excluding general
corporate assets. General corporate assets are principally cash and cash equivalents, short-term investments and
certain other investments and receivables.
11
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
2006 2005 2006 2005
-------------- ------------ -------------- ------------
REVENUES
Glass manufacturing equipment - USA $ 385 $ 616 $ 915 $ 1,066
Glass manufacturing equipment - Foreign 2,187 5,448 4,000 7,209
-------- -------- -------- --------
Total Glass manufacturing equipment 2,572 6,064 4,915 8,275
Frequency control devices - USA $ 4,981 $ 4,896 $ 9,871 $ 9,750
Frequency control devices - Foreign 5,593 3,953 10,451 7,483
-------- -------- -------- --------
Total Frequency control devices 10,574 8,849 20,322 17,233
-------- -------- -------- --------
Consolidated total revenues $ 13,146 $ 14,913 $ 25,237 $ 25,508
======== ======== ======== ========
OPERATING PROFIT (LOSS)
Glass manufacturing equipment $ (351) $ 1,774 $ (611) $ 1,848
Frequency control devices 1,127 638 2,102 1,217
-------- -------- -------- --------
Total manufacturing 776 2,412 1,491 3,065
Unallocated Corporate expense (318) (411) (647) (837)
-------- -------- -------- --------
Consolidated total operating profit $ 458 $ 2,001 $ 844 $ 2,228
======== ======== ======== ========
OTHER PROFIT (LOSS)
Investment income $ 283 $ 7 $ 518 $ 17
Interest expense (179) (208) (342) (393)
Other income (expense) -- 77 (8) 80
-------- -------- -------- --------
Consolidated total profit before taxes $ 562 $ 1,877 $ 1012 $ 1,932
======== ======== ======== ========
CAPITAL EXPENDITURES
Glass manufacturing equipment $ 14 $ 8 $ 14 $ 20
Frequency control devices 270 152 323 170
General Corporate -- -- -- 1
-------- -------- -------- --------
Consolidated total capital expenditures $ 284 $ 160 $ 337 $ 191
======== ======== ======== ========
TOTAL ASSETS
Glass manufacturing equipment $ 9,062 $ 12,109
Frequency control devices 21,822 17,100
General Corporate 2,436 5,308
-------- --------
Consolidated total assets $ 33,320 $ 34,517
======== ========
For the three months ended June 30, 2006 and 2005, significant foreign revenues to specific countries
were as follows:
12
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
2006 2005 2006 2005
-------------- ------------ -------------- ------------
GLASS MANUFACTURING EQUIPMENT - FOREIGN REVENUES
Brazil $1,070 $ 14 $1,693 $ 16
Democratic Republic of the Congo -- 385 385 385
China 312 3,757 509 4,426
Pakistan 120 -- 306 --
Indonesia 45 418 109 1,001
All other foreign countries 640 874 998 1,381
------ ------ ------ ------
Total foreign revenues 2,187 $5,448 $4,000 $7,209
====== ====== ====== ======
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
2006 2005 2006 2005
-------------- ------------ -------------- ------------
FREQUENCY CONTROL DEVICES - FOREIGN REVENUES
China $ 1,067 $ 901 $ 2,066 $ 1,430
Canada 1,144 842 2,150 1,704
Thailand 654 180 1,184 319
Mexico 377 648 644 1,125
All other foreign countries 2,351 1,382 4,407 2,905
------- ------- ------- -------
Total foreign revenues $ 5,593 $ 3,953 $10,451 $ 7,483
======= ======= ======= =======
All other foreign countries includes countries with less than 10% of total foreign revenues for each segment.
13
L. COMMITMENTS AND CONTINGENCIES
In the normal course of business, subsidiaries of the Company are
defendants in certain product liability, worker claims and other litigation in
which the amounts being sought may exceed insurance coverage levels. The
resolution of these matters is not expected to have a material adverse effect on
the Company's financial condition or operations. In addition, the Company and/or
one or more of its subsidiaries are parties to the following additional legal
proceedings:
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 is that the
defendants participated in the creation of "sham" bidding entities that
allegedly defrauded the United States Treasury by improperly participating in
Federal Communications Commission ("FCC") spectrum auctions restricted to small
businesses, as well as obtaining "bidding credits" in other spectrum auctions
allocated to "small" and "very small" businesses. 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 June 2006, the defendants reached a tentative
agreement allocating the above-mentioned settlement amounts among themselves;
however, the Company did not have to make any payments under such allocations.
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.
M. INCOME TAXES
The Company files consolidated federal income tax returns, which includes
all subsidiaries. The Company has a $2,404,000 net operating loss ("NOL")
carry-forward as of December 31, 2005. This NOL expires through 2024 if not
utilized prior to that date.
N. GUARANTEES
The Company presently guarantees (unsecured) the SunTrust Bank loans of its
subsidiary, Lynch Systems. The Company presently guarantees (unsecured) the
First National Bank of Omaha loans of its subsidiary, Mtron, and has guaranteed
a Letter of Credit issued to the First National Bank of Omaha on behalf of its
subsidiary, Mtron (see Note G - "Notes Payable to Banks and Long-term Debt"). As
of June 30, 2006, the $650,000 Letter of Credit issued by Bank of America to The
First National Bank of Omaha was secured by a $650,000 deposit at Bank of
America. (See Note E - "Restricted Cash".)
There were no other financial, performance, indirect guarantees or
indemnification agreements.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The Company has identified the accounting policies listed below that we
believe are most critical to our financial condition and results of operations,
and that require management's most difficult, subjective and complex judgments
in estimating the effect of inherent uncertainties. This section should be read
in conjunction with Note 1 to the Consolidated Financial Statements, included in
the Company's Annual Report on Form 10-K for the year ended December 31, 2005,
which includes other significant accounting policies.
ACCOUNTS RECEIVABLE
Accounts receivable on a consolidated basis consists principally of amounts
due from both domestic and foreign customers. Credit is extended based on an
evaluation of the customer's financial condition and collateral is not generally
required except at Lynch Systems. In relation to export sales, the Company
requires letters of credit supporting a significant portion of the sales price
prior to production to limit exposure to credit risk. Certain subsidiaries and
business segments have credit sales to industries that are subject to cyclical
economic changes. The Company maintains an allowance for doubtful accounts at a
level that management believes is sufficient to cover potential credit losses.
We maintain allowances for doubtful accounts for estimated losses resulting
from the inability of our clients to make required payments. We base our
estimates on our historical collection experience, current trends, credit policy
and relationship of our accounts receivable and revenues. In determining these
estimates, we examine historical write-offs of our receivables and review each
client's account to identify any specific customer collection issues. If the
financial condition of our customers was to deteriorate, resulting in an
impairment of their ability to make payment, additional allowances may be
required. Our failure to estimate accurately the losses for doubtful accounts
and ensure that payments are received on a timely basis could have a material
adverse effect on our business, financial condition, and results of operations.
INVENTORY VALUATION
Inventories are stated at the lower of cost or market value. Inventories
valued using the last-in, first-out (LIFO) method comprised approximately 51% of
consolidated inventories at June 30, 2006 and 52% at December 31, 2005,
respectively. The balance of inventories are valued using the first-in-first-out
(FIFO) method. If actual market conditions are more or less favorable than those
projected by management, including the demand for our products, changes in
technology, internal labor costs and the costs of materials, adjustments may be
required.
REVENUE RECOGNITION AND ACCOUNTING FOR LONG-TERM CONTRACTS
Revenues, with the exception of certain long-term contracts discussed
below, are recognized upon shipment when title passes. Shipping costs are
included in manufacturing cost of sales.
Lynch Systems, a 100% owned subsidiary of the Company, is engaged in the
manufacture and marketing of glass-forming machines and specialized
manufacturing machines. Certain sales contracts require an advance payment
(usually 30% of the contract price) which is accounted for as a customer
advance. The contractual sales prices are paid either (i) as the manufacturing
process reaches specified levels of completion; or (ii) based on the shipment
date; or (iii) negotiated terms of sale. Guarantees by Letter of Credit from a
qualifying financial institution are required for most sales contracts. Because
of the specialized nature of these machines and the period of time needed to
complete production and shipping, Lynch Systems accounts for these contracts
using the percentage-of-completion accounting method as costs are incurred
compared to total estimated project costs (cost-to-cost basis). At June 30,
2006, and December 31, 2005, unbilled accounts receivable were $2,675,000 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.
These estimates include current customer contract specifications, related
engineering requirements and the achievement of project milestones. Financial
management maintains contact with project managers to discuss the status of the
15
projects and, for fixed-price engagements, financial management is updated on
the budgeted costs and required resources to complete the project. These budgets
are then used to calculate revenue recognition and to estimate the anticipated
income or loss on the project. In the past, we have occasionally been required
to commit unanticipated additional resources to complete projects, which have
resulted in lower than anticipated profitability or losses on those contracts.
Favorable changes in estimates result in additional profit recognition, while
unfavorable changes in estimates result in the reversal of previously recognized
earnings to the extent of the error of the estimate. We may experience similar
situations in the future. Provisions for estimated losses on contracts are made
during the period in which such losses become probable and can be reasonably
estimated. To date, such losses have not been significant.
WARRANTY EXPENSE
Lynch Systems provides a full warranty to world-wide customers who acquire
machines. The warranty covers both parts and labor and normally covers a period
of one year or thirteen months. Based upon experience, the warranty accrual is
based upon three to five percent of the selling price of the machine. The
Company periodically assesses the adequacy of the reserve and adjusts the
amounts as necessary.
RESULTS OF OPERATIONS
SECOND QUARTER
THREE MONTHS ENDED JUNE 30, 2006 COMPARED TO JUNE 30, 2005
CONSOLIDATED REVENUES AND GROSS MARGIN
Consolidated revenues for the second quarter 2006 decreased $1.8 million,
or 12%, to $13.1 million from $14.9 million for the comparable period in 2005.
Revenues at MtronPTI increased by $1.7 million, or 20%, to $10.6 million for the
second quarter 2006 from $8.8 million for the comparable period in 2005. The
increase was primarily due to the increase in the foreign market. Revenues at
Lynch Systems decreased by $3.5 million, or 58%, to $2.6 million for the second
quarter 2006 from $6.1 million for the comparable period in 2005 due to a lack
of sales of CRT machines. In 2005, the Company recorded significant revenues due
to the sales of CRT machines.
The consolidated gross margin as a percentage of revenues for the second
quarter decreased to 31%, compared to 37% for the comparable period in 2005.
MtronPTI's gross margin as a percentage of revenues for the second quarter
increased to 33% from 29% for the comparable period in 2006. The contribution
from PTI, combined with selective price increases and operational efficiencies
resulted in the improved gross margin rates. Lynch Systems' gross margin as a
percentage of revenues for the second quarter decreased to 24%, from 49% for the
comparable period in 2005 due to a lack of sales of higher margin CRT machines.
OPERATING PROFIT (LOSS)
Operating profit decreased $1.5 million, to $0.5 million for the second
quarter 2006 from $2.0 million for the comparable period in 2005. Operating
profit at MtronPTI increased $0.5 million, or 77%, to $1.1 million for the
second quarter 2006 from $0.6 million for the comparable period in 2005.
Operating profit at Lynch Systems decreased $2.2 million to a $0.4 million loss
for the second quarter 2006 from a $1.8 million profit for the comparable period
in 2005. Corporate expenses decreased $0.1 million to $0.3 million for the
second quarter 2006 from $0.4 million for the comparable period in 2005.
16
OTHER INCOME (EXPENSE), NET
Investment income increased $0.3 million to $0.3 million for the second
quarter 2006 from the comparable period in 2005 due to gains on sales of
marketable securities. Interest expense for the second quarter 2006 was $0.2
million, the same as the comparable period in 2005.
INCOME TAXES
The Company files consolidated federal income tax returns, which includes
all subsidiaries. The income tax provision for the three month period ended June
30, 2006 included federal, state and foreign taxes.
NET INCOME
Net income for the second quarter 2006 was $0.5 million compared to $1.4
million in the comparable period in 2005. As a result, fully diluted income per
share for the second quarter 2006 was $0.23 compared to $0.83 per share for the
comparable period in 2005.
SIX MONTHS ENDED JUNE 30, 2006 COMPARED TO JUNE 30, 2005
CONSOLIDATED REVENUES AND GROSS MARGIN
Consolidated revenues for the six month period ending June 30, 2006
decreased $0.3 million, or 1%, to $25.2 million from $25.5 million for the
comparable period in 2005. Revenues at MtronPTI increased by $3.1 million, or
18%, to $20.3 million for the six month period ending June 30, 2006 from $17.2
million for the comparable period in 2005. The increase was primarily due to a
strengthening of the foreign market. Revenues at Lynch Systems decreased by $3.4
million, or 41%, to $4.9 million for the six month period ending June 30, 2006
from $8.3 million for the comparable period in 2005 due to a lack of sales of
CRT machines.
The consolidated gross margin as a percentage of revenues for the six month
period ending June 30, 2006 decreased to 30%, compared to 35% for the comparable
period in 2005. MtronPTI's gross margin as a percentage of revenues for the six
month period ending June 30, 2005 increased to 32% from 29% for the comparable
period in 2005. The contribution from PTI, combined with selective price
increases, increases its revenues and operational efficiencies resulted in the
improved gross margin. Lynch Systems' gross margin as a percentage of revenues
for the six month period ending June 30, 2006 decreased to 24% from 45% for the
comparable period in 2005.
OPERATING PROFIT (LOSS)
Operating profit decreased $1.4 million, to $0.8 million for the six month
period ended June 30, 2006 from an operating profit of $2.2 million for the
comparable period in 2005. Operating profit at MtronPTI increased $0.8 million
to $2.1 million for the six month period ended June 30, 2006 from $1.3 million
for the comparable period in 2005. Operating profit at Lynch Systems decreased
$2.6 million to a loss of $0.6 million for the six month period ended June 30,
2006 from $1.8 million for the comparable period in 2005. Corporate expenses
decreased $0.2 million to $0.6 million for the six month period ending June 30,
2006 from $0.8 million for the comparable period in 2005.
OTHER INCOME (EXPENSE), NET
Investment income increased $0.5 million to $0.5 million for the six month
period ended June 30, 2006 from the comparable period in 2005 due to realized
gain on sales of marketable securities. Interest expense decreased to $0.3
million for the six month period ended June 30, 2006 from $0.4 million for the
comparable period in 2005 due to a decrease in the total debt level, partially
offset by an increase in interest rates.
17
INCOME TAXES
The Company files consolidated federal income tax returns, which includes
all subsidiaries. The income tax provision for the six month period ended June
30, 2006 included federal, state and foreign taxes.
NET INCOME
Net income for the six months ended June 30, 2006 was $0.9 million compared
to $1.4 million in the comparable period in 2005. As a result, fully diluted
income per share for the six month period ended June 30, 2006 was $0.40 per
share compared to $0.86 per share for the comparable period in 2005.
BACKLOG/ NEW ORDERS
Total backlog of manufactured products at June 30, 2006 was $16.2 million,
a $2.3 million increase compared to the backlog at December 31, 2005, and $3.3
million more than the backlog at June 30, 2005.
MtronPTI had backlog orders of $9.6 million at June 30, 2006, which was a
$0.7 million increase from December 31, 2005 and a $2.0 million increase from
June 30, 2005. Lynch Systems has backlog orders of $6.6 million at June 30,
2006, compared to $5.0 million at December 2005 and $5.3 million at June
30,2005.
FINANCIAL CONDITION
The Company's cash, cash equivalents and investments in marketable
securities at June 30, 2006 was $6.4 million (including $650,000 of restricted
cash in both periods) as compared to $8.9 million at December 31, 2005. In
addition, the Company had a borrowing capacity of $5.9 million under Lynch
Systems' and Mtron/PTI's revolving lines of credit at June 30, 2006, as compared
to $5.3 million at December 31, 2005.
At June 30, 2006, the Company's net working capital was $14.0 million as
compared to $11.9 million at December 31, 2005. At June 30, 2006, the Company
had current assets of $25.8 million and current liabilities of $11.8 million. At
December 31, 2005, the Company had current assets of $24.9 million and current
liabilities of $12.9 million. The ratio of current assets to current liabilities
was 2.19 to 1.00 at June 30, 2006, compared to 1.92 to 1.00 at December 31,
2005. The increase in net working capital was primarily due to realized and
unrealized gains on marketable securities.
Cash used in operating activities was $3.1 million for the six months ended
June 30, 2006, compared to cash used in operating activities of $0.9 million for
the six months ended June 30, 2005. The year to year unfavorable change in
operating cash flow of $2.2 million was primarily due to payments relating to a
litigation settlement in the first quarter 2006 and net changes in receivables
and inventories. The Company and United Steel workers of America Local 1069,
formerly known as PACE Local 1-1069 reached a settlement of their severance pay
litigation, which arose out of the July 2001 closure of the Spinnaker-Maine
manufacturing plant in Westbrook, Maine. The settlement includes payment of a
total of $800,000 to resolve the claims of 67 workers who lost their jobs in
2001. Capital expenditures were $337,000 in the six months ended June 30, 2006,
compared to $191,000 for the comparable period in 2005.
At June 30, 2006, the Company had $3.1 million in notes payable to banks
consisting of a revolving credit loan at Mtron/PTI for $1.9 million due in May,
2007 and a working capital revolver at Lynch Systems for $1.3 million due in
October, 2006. The Company intends to renew these facilities with the existing
banks, however, there can be no assurances the existing facilities will be
renewed. At June 30, 2006, the Company also had $854,000 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.
18
At June 30, 2006, total debt of $8.8 million was $0.3 million less than the
total debt at December 31, 2005 of $9.1 million. The debt decreased at both
Mtron/PTI and Lynch Systems due to repayments of revolving debt, repayment of
the SunTrust term loan and scheduled payments on long term debt.
The Company is in compliance with all financial covenants at June 30, 2006.
In connection with the completion of the acquisition of PTI, on October 14,
2004, Mtron and PTI, each wholly-owned subsidiaries of the Company, entered into
a Loan Agreement with First National Bank of Omaha. The Loan Agreement provided
for loans in the amounts of $2,000,000 (the "Term Loan") and $3,000,000 (the
"Bridge Loan"), together with a $5,500,000 Revolving Line of Credit (the
"Revolving Loan"). The Term Loan bears interest at the greater of prime rate
plus 50 basis points, or 4.5%, and is to be repaid in monthly installments of
$37,514, with the then remaining principal balance plus accrued interest to be
paid on the third anniversary of the Loan Agreement. The Bridge Loan was repaid
in 2005 from proceeds received from the RBC Term Loan. The Revolving Loan was
renewed on June 30, 2005 as previously discussed. The Loan Agreement contains a
variety of affirmative and negative covenants of types customary in an
asset-based lending facility. The Loan Agreement also contains financial
covenants relating to maintenance of levels of minimal tangible net worth and
working capital, and current, leverage and fixed charge ratios, restricting the
amount of capital expenditures.
The Company has guaranteed a letter of credit issued to the First National
Bank of Omaha on behalf of its subsidiary, Mtron. As of June 30, 2006, the
$650,000 letter of credit issued by Bank of America to The First National Bank
of Omaha was secured by a $650,000 deposit at Bank of America. As of June 30,
2006, the Company has a total of $2,500,000 of subordinated promissory notes
issued from Mtron/PTI.
On June 30, 2006, Mtron/PTI renewed its credit agreement with First
National Bank of Omaha extending the due date to May 31, 2007. At June 30, 2006,
Mtron/PTI's short-term credit facility provides for a line of credit in the
maximum principal amount of $5,500,000, of which $3,638,000 was available under
the line of credit.
During 2005, the Company executed various amendments and extensions with
one of Lynch Systems' commercial lenders, SunTrust. As a result, certain
required repayments were made on amounts owed to SunTrust, and the expiring
working capital loan was not renewed. Additionally it was agreed that the
Company's remaining obligation to SunTrust, a $378,000 term note would be
payable on March 1, 2006. This amount was repaid in full in February 2006.
On September 30, 2005, Mtron/PTI entered into a Loan Agreement with RBC
Centura Bank ("RBC"). The Loan Agreement provides for a loan in the amount of
$3,040,000 (the "RBC Term Loan"), the proceeds of which were used to pay off the
$3,000,000 bridge loan with First National Bank of Omaha which had been due
October 2005. The RBC Term Loan bears interest at LIBOR Base Rate plus 2.75% and
is to be repaid in monthly installments based on a twenty year amortization,
with the then remaining principal balance to be paid on the fifth anniversary.
The RBC Term Loan is secured by a mortgage on PTI's premises. In connection with
this RBC Term Loan, Mtron/PTI entered into a five-year interest rate swap to
hedge the variable interest rate volatility. Under the terms of the interest
rate swap, the variable interest rate RBC Term Loan will be essentially
converted to a 7.51% fixed rate loan. The Company has designated this swap as a
cash flow hedge in accordance with FASB 133 "Accounting for Derivative
Instruments and Hedging Activities". The fair value of the interest rate swap at
June 30, 2006 is $52,000 which is included in other current assets on the
balance sheet with the offset reflected within other comprehensive income, net
of tax.
Effective October 6, 2005, Lynch Systems entered into a loan agreement (the
"BB&T Loan Agreement") with Branch Banking and Trust Company ("BB&T"). The BB&T
Loan Agreement provides for a line of credit in the maximum principal amount of
$3,500,000. At June 30, 2006 there were no outstanding Letters of Credit and
$2,244,000 was available under the line of credit. This line of credit replaces
the working capital revolving loan that Lynch Systems had with SunTrust Bank,
which loan expired by its terms on September 30, 2005. Borrowings under the BB&T
Loan Agreement bear interest at the One Month LIBOR Rate plus 2.75% and accrued
interest is payable on a monthly basis, with the principal balance due to be
paid on the first anniversary of the Loan Agreement.
19
The BB&T Loan Agreement contains a variety of affirmative and negative
covenants of types customary in an asset-based lending facility, including those
relating to reporting requirements, maintenance of records, properties and
corporate existence, compliance with laws, incurrence of other indebtedness and
liens, restrictions on certain payments and transactions and extraordinary
corporate events. The BB&T Loan Agreement also contains financial covenants
relating to maintenance of levels of minimal tangible net worth, a debt to worth
ratio, and restricting the amount of capital expenditures. In addition, the BB&T
Loan Agreement provides that the following will constitute events of default
thereunder, subject to certain grace periods: (i) payment defaults; (ii) failure
to meet reporting requirements; (iii) breach of other obligations under the BB&T
Loan Agreement; (iv) default with respect to other material indebtedness; (v)
final judgment for a material amount not discharged or stayed; and (vi)
bankruptcy or insolvency.
The Board of Directors has adopted a policy of not paying cash dividends, a
policy which is reviewed annually. This policy takes into account the long-term
growth objectives of the Company, especially in its acquisition program,
shareholders' desire for capital appreciation of their holdings and the current
tax law disincentives for corporate dividend distributions. Accordingly, no cash
dividends have been paid since January 30, 1989 and none are expected to be paid
in 2006. (See Note G to the Condensed Consolidated Financial Statements - "Notes
Payable to Banks and Long-term Debts" - for restrictions on the company's
assets).
ACCOUNTING PRONOUNCEMENTS
On January 1, 2006 the Company adopted SFAS No. 123-R, "Share-Based
Payments." SFAS No. 123-R impacts the Company's accounting for its stock option
plan. Because all of the Company's stock options were fully vested at December
31, 2005 and there were no new options issued in the first quarter of 2006,
there was no impact on the Company's 2006 financial statements from the adoption
of this standard.
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. 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.
OFF-BALANCE SHEET ARRANGEMENTS
Aside from the Company's stand-by Letter of Credit in the amount of
$650,000, the Company does not have any off-balance sheet arrangements.
RISK FACTORS
Certain subsidiaries and business segments of the Company sell to
industries that are subject to cyclical economic changes. Any downturns in the
economic environment would have a financial impact on the Company and its
consolidated subsidiaries and may cause the reported financial information
herein not to be indicative of future operating results, financial condition or
cash flows.
Future activities and operating results may be adversely affected by
fluctuating demand for capital goods such as large glass presses, delay in the
recovery of demand for components used by telecommunications infrastructure
manufacturers, disruption of foreign economies and the inability to renew or
obtain new financing for expiring loans.
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
20
any one institution. The Company performs periodic evaluations of the relative
credit standing of those financial institutions that are considered in the
Company's investment strategy. Other than certain accounts receivable, the
Company does not require collateral on these financial instruments. In relation
to export sales, the Company requires Letters of Credit supporting a significant
portion of the sales price prior to production to limit exposure to credit risk.
The Company maintains an allowance for doubtful accounts at a level that
management believes is sufficient to cover potential credit losses.
For a complete list of risk factors, see the Company's Annual Report on
Form 10-K for the year ended December 31, 2005.
FORWARD LOOKING INFORMATION
Included in this Management Discussion and Analysis of Financial Condition
and Results of Operations are certain forward looking financial and other
information, including without limitation matters relating to "Risks". It should
be recognized that such information are projections, estimates or forecasts
based on various assumptions, including without limitation, meeting its
assumptions regarding expected operating performance and other matters
specifically set forth, as well as the expected performance of the economy as it
impacts the Company's businesses, government and regulatory actions and
approvals, and tax consequences, and the risk factors and cautionary statements
set forth in reports filed by the Company with the Securities and Exchange
Commission. As a result, such information is subject to uncertainties, risks and
inaccuracies, which could be material.
The Registrant makes available, free of charge, its Annual Report on Form
10-K, Quarterly Reports on Form 10-Q, and current reports, if any, on Form 8-K.
The Registrant also makes this information available on its website, whose
internet address is WWW.LGLGROUP.COM.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to market risk relating to changes in the general
level of U.S. interest rates. Changes in interest rates affect the amounts of
interest earned on the Company's cash and cash equivalents and restricted cash
(approximately $3.5 million at June 30, 2006). The Company generally finances
the debt portion of the acquisition of long-term assets with fixed and variable
rate, long-term debt. The Company does not use derivative financial instruments
for trading or speculative purposes. Management does not foresee any significant
changes in the strategies used to manage interest rate risk in the near future,
although the strategies may be reevaluated as market conditions dictate. There
has been no significant change in market risk since December 31, 2005.
As the Company's international sales are in U.S. Dollars, there is no
associated monetary risk.
At June 30, 2006, $7,905,000 of the Company's debt bears interest at
variable rates. Accordingly, the Company's earnings and cash flows are affected
by changes in interest rates. In October 2005, in connection with the RBC Term
Loan, Mtron/PTI entered into a five-year interest rate swap from which it will
receive periodic payments at the LIBOR Base Rate and make periodic payments at a
fixed rate of 7.51% with monthly settlement and rate reset dates, effectively
reducing the variable rate debt to $4,907,000.
ITEM 4. CONTROLS AND PROCEDURES
The principal executive officer and principal financial officer have
concluded that the Company's disclosure controls and procedures were effective
as of the end of the period covered by this report based on the evaluation of
these controls and procedures required by Exchange Act Rule 13a-15.
There has been no changes in the Registrant's internal control over
financial reporting that occurred during the Registrant's last fiscal quarter
that has materially affected, or is reasonably likely to materially affect, the
Registrant's internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 is that the
defendants participated in the creation of "sham" bidding entities that
allegedly defrauded the United States Treasury by improperly participating in
Federal Communications Commission ("FCC") spectrum auctions restricted to small
businesses, as well as obtaining "bidding credits" in other spectrum auctions
allocated to "small" and "very small" businesses. 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 June 2006, the defendants reached a tentative
agreement allocating the above-mentioned settlement amounts among themselves;
however, the Company did not have to make any payments under such allocations.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders of the Registrant held on June 20,
2006:
The following persons were elected as Directors with the following votes:
Name Total Votes for Director Total Votes Withheld From
Director
Marc Gabelli 1,799,088 13,147
E. Val Cerutti 1,800,456 11,779
John C. Ferrara 1,805,789 6,446
Avrum Gray 1,795,355 16,880
Anthony R. Pustorino 1,800,441 11,794
The approval of the amendment to the Company's Restated Articles of
Incorporation to change the Company's name from "Lynch Corporation" to "The LGL
Group, Inc." was approved with the following votes:
FOR 1,784,054
AGAINST 13,126
ABSTAIN 15,055
The ratification of the appointment of Ernst & Young LLP as independent
auditors was approved with the following votes:
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FOR 1,807,848
AGAINST 1,859
ABSTAIN 2,528
ITEM 6. EXHIBITS
Exhibits filed herewith:
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* Certification by Principal Executive Officer and Principal Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The LGL Group, Inc.
(Registrant)
August 14, 2006 By: /s/ Roger J. Dexter
--------------------------------
Roger J. Dexter
Principal Financial Officer
EXHIBIT INDEX
Exhibit
No. Description
-------- -----------
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* Certification by Principal Executive Officer and 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 Quarterly Report on
Form 10-Q or have been incorporated by reference into this Quarterly Report on
Form 10-Q. Upon request, the Company. will furnish to each of its shareholders a
copy of any such Exhibit. Requests should be addressed to the Office of the
Secretary, The LGL Group, Inc., 140 Greenwich Avenue, 4th Floor, Greenwich CT
06830.
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