LGL GROUP INC - Annual Report: 2007 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
_________________
FORM
10-K
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ý
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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FOR THE
FISCAL YEAR ENDED: DECEMBER 31,
2007
OR
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¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
transition period from _________________ to ______________________
COMMISSION
FILE NUMBER: 1-106
THE
LGL GROUP, INC.
(Exact
name of Registrant as Specified in Its Charter)
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Delaware
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38-1799862
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(State
or Other Jurisdiction of
Incorporation
or Organization)
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(I.R.S.
Employer
Identification
No.)
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2525
Shader Rd., Orlando, Florida
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32804
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(Address
of Principal Executive Offices)
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(Zip
Code)
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REGISTRANT’S
TELEPHONE NUMBER, INCLUDING AREA CODE: (407)
298-2000
SECURITIES
REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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TITLE
OF EACH CLASS
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NAME
OF EACH EXCHANGE ON WHICH REGISTERED
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Common
Stock, $0.01 Par Value
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American
Stock Exchange
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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
ý
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 ý
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 ¨ No ý
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
10-K. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See definition of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
accelerated filer ¨ Accelerated
filer ¨
Non-accelerated
filer ¨ Smaller
reporting company ý
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes ¨ No ý
The
aggregate market value of the registrant’s 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 last business day of the registrant’s most
recently completed second fiscal quarter ($12.80), was $7,286,886. Solely for
the purpose of this calculation, shares held by directors and executive officers
of the registrant have been excluded. Such exclusion 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 2,171,709 as
of May 5, 2008.
The LGL Group, Inc.
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ANNUAL REPORT ON FORM 10-K
For the fiscal year ended
December 31, 2007
EXPLANATORY
NOTE
In this
Form 10-K, we are restating our consolidated balance sheet as of
December 31, 2006, and the related consolidated statements of operations,
stockholders’ equity and cash flows for the year ended December 31, 2006,
including the applicable notes. We have also included in this report restated
unaudited consolidated financial information for each of the four quarters of
2006 and the first two quarters of 2007, as well as summary information for the
third quarter of 2007.
We do not
plan to file an amendment to our Annual Report on Form 10-K for the year ended
December 31, 2006, nor do we plan to file amendments to our Quarterly
Reports on Form 10-Q for the quarterly periods ended March 31, June 30 and
September 30, 2006 and March 31 and June 30, 2007. Thus, you should
not rely on any of the previously filed annual or quarterly reports relating to
the foregoing periods. They are superseded by this report.
For more
detailed information about the restatement, please see Note 2, “Restatement
of Consolidated Financial Statements” in the accompanying consolidated financial
statements.
In
addition, management has determined that we had material weaknesses in our
internal control over financial reporting as of December 31, 2007. As described
in more detail in Item 9A(T) of this Annual Report, we have identified the
causes of these material weaknesses and are implementing measures designed to
remedy them.
PART I
Forward
Looking Statements
Information included or
incorporated by reference in this Annual Report on Form 10-K may contain
forward-looking statements. This information may involve known and unknown
risks, uncertainties and other factors that may cause our actual results,
performance or achievements to be materially different than the future results,
performance or achievements expressed or implied by any forward-looking
statements. Forward-looking statements, which involve assumptions and describe
our future plans, strategies and expectations, are generally identifiable by use
of the words “may,” “should,” “expect,” “anticipate,” “estimate,” “believe,”
“intend” or “project” or the negative of these words or other variations on
these words or comparable terminology.
This
Annual Report on Form 10-K contains forward-looking statements, including
statements regarding, among other things, (a) our projected sales and
profitability, (b) our growth strategies, (c) anticipated trends in our
industry, (d) our future financing plans and (e) our anticipated needs for
working capital. These statements may be found under “Management’s Discussion
and Analysis of Financial Condition and Results of Operation” and “Business,” as
well as in this Annual Report generally. Actual events or results may differ
materially from those discussed in forward-looking statements as a result of
various factors, including, without limitation, the risks outlined under “Risk
Factors” and matters described in this Annual Report generally. In light of
these risks and uncertainties, there can be no assurance that the
forward-looking statements contained in this Annual Report will in fact be
accurate.
Item
1. Business
The LGL
Group, Inc. (the “Company”), formerly Lynch Corporation, incorporated in 1928
under the laws of the State of Indiana and reincorporated under the laws of the
State of Delaware in 2007, is a holding company with subsidiaries engaged in
manufacturing custom-designed highly engineered electronic
components. The Company’s executive offices are located at 2525
Shader Rd., Orlando, Florida 32804. The Company’s telephone number is
(407) 298-2000.
The
Company operates through its principal subsidiary, M-tron Industries, Inc.,
which includes the operations of M-tron Industries, Ltd. (“Mtron”) and Piezo
Technology, Inc. (“PTI”). The combined operations of Mtron and PTI are referred
to herein as “MtronPTI.” MtronPTI has operations in Orlando, Florida,
Yankton, South Dakota and Noida, India. In addition, MtronPTI has a
sales office in Hong Kong. During 2007, the Company sold the
operating assets of Lynch Systems, Inc. (“Lynch Systems”), a subsidiary of the
Company, to an unrelated third party.
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 term, the Company includes subsidiary corporations.
MtronPTI
Overview
MtronPTI
manufactures and markets custom designed highly-engineered 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, earth
orbiting satellites, medical devices, instrumentation, industrial devices and
global positioning systems.
MtronPTI’s
frequency control devices consist of packaged quartz crystals, crystal
oscillators and electronic filters. Its products produce an
electrical signal that has the following attributes:
· accuracy
-- the frequency of the signal does not change significantly over a period of
time;
· stability
-- the frequency of the signal does not vary significantly when the product is
subjected to a range of operating environments; and
· 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.
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
(“OEM”) 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.
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
and Operations
MtronPTI’s
operations are located in Orlando, Florida, Yankton, South Dakota, and Noida,
India. In addition, MtronPTI has a sales office in Hong
Kong. MtronPTI owns one building, approximately 71,000 square feet,
on approximately seven acres of land in Orlando, which was acquired when it
purchased PTI. MtronPTI owns a facility of approximately 28,000
square feet on approximately 11 acres of land and leases an approximately 16,000
square foot facility in Yankton. The Company leases
approximately 13,000 square feet of office and manufacturing space in Noida 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 15.7% of MtronPTI’s revenues in 2007 was
attributable to one such contract manufacturer located in both Korea and
China. 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, 2007, MtronPTI employed 33 engineers and technicians, primarily in
South Dakota and Florida, who devote most of their time to research and
development. Research and development expense was approximately
$2,757,000 and $2,501,000 in 2007 and 2006, respectively.
Customers
MtronPTI
markets and sells its frequency control devices primarily to:
· OEMs
of communications, networking, military, avionics, instrumentation and medical
equipment;
· contract
manufacturers for OEMs; and;
· distributors
who sell to OEMs and contract manufacturers.
In 2007,
MtronPTI’s largest customer, an electronics manufacturing company, accounted for
approximately 12.2% of MtronPTI’s total revenues, compared to 10.6% for
MtronPTI’s largest customer in 2006. Revenues from MtronPTI’s 10
largest customers accounted for approximately 64.7% of revenues in 2007,
compared to approximately 58.6% of revenues for 2006.
In 2007,
the Company’s two largest customers accounted for 24.3% of total consolidated
revenues, from continuing operations. In 2006, the two largest
customers accounted for 19.0% of total consolidated revenues, from continuing
operations.
Seasonality
MtronPTI’s
business is not seasonal.
Domestic
Revenues
MtronPTI’s
domestic revenues from continuing operations were $17,187,000 in 2007 or 43% of
total revenues, compared with $20,501,000, or 49% in 2006.
International
Revenues
MtronPTI’s
international revenues from continuing operations were $22,349,000 in 2007, 57%
of total sales, compared to $21,048,000, 51% of total sales for
2006. In 2007, these revenues were mainly derived from customers in
China and Malaysia, and in addition, significant sales in Canada, Thailand and
Mexico. In 2006, these revenues were derived mainly from customers in
China and Canada, in addition to significant sales in Thailand and
Malaysia. MtronPTI avoids significant currency exchange risk by
transacting and settling substantially all international sales in United States
dollars.
Risks
Attendant to Foreign Operations
See Part
I, Item 1.A, “Risk Factors,” “Our significant international operations and sales
to customers outside of the United States subject us to certain business,
economic and political risks,” for a discussion of the risks attendant to our
foreign operations.
Backlog
MtronPTI
had backlog orders of $10,865,000 at December 31, 2007, compared to $8,065,000
at December 31, 2006. 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 2007 backlog in
2008.
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 MtronPTI’s 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.
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.
Employees
As of
December 31, 2007, the Company employed 303 people: 2 within Corporate
headquarters and 301 within MtronPTI, including 113 in South Dakota, 169 in
Florida, 11 in Hong Kong, and 8 in India. None of its employees is
represented by a labor union and the Company considers its employee relations to
be good.
Environmental
The
Company’s continuing 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.
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. Fair value
is determined using pertinent market information, including appraisals, and/or
projected discounted cash flows.
Sale
of Assets of Lynch Systems
On June
19, 2007, in accordance with the Purchase Agreement dated May 17, 2007, as
amended (the “Purchase Agreement”), by and between Lynch Systems and Olivotto
Glass Technologies S.p.A. (“Olivotto”), Lynch Systems completed the sale of
certain of its assets to Lynch Technologies, LLC (the “Buyer”), the assignee of
Olivotto’s rights and obligations under the Purchase Agreement (the “Asset
Sale”).
The
assets sold under the Purchase Agreement included certain accounts receivable,
inventory, machinery and equipment. The Buyer also assumed certain liabilities
of Lynch Systems, including accounts payable, customer deposits and accrued
warranties. After deduction of the amount of the liabilities assumed, $601,074,
from the value of the assets sold, $1,455,000, and taking into account the
Buyer’s partial funding of a severance payment to employees, $118,000, Lynch
Systems received a net cash payment in the amount of $972,000. The
Asset Sale resulted in a loss of approximately $982,000.
Discontinued
Operations
Revenue
generated by the operations of Lynch Systems, now classified as Discontinued
Operations, was $2,534,000 for 2007 and $7,751,000 for 2006, and the loss from
discontinued operations was ($1,999,000) for 2007 and ($1,990,000) for
2006.
Assets
Being Marketed for Sale
The
assets retained by Lynch Systems include the land, buildings and some equipment
formerly used in its operations. The Company intends to sell the
land, buildings and equipment, which are classified as held and used in
accordance with Statement of Financial Accounting Standards (“SFAS”)
No. 144,
“Accounting for the Impairment or Disposal of Long Lived Assets” ("SFAS
No. 144").
Item 1A. Risk Factors.
You
should carefully consider the risks described below before making a decision to
invest in our common stock. If any of these risks actually occurs,
our business financial condition, results of operations, or prospects could be
materially adversely affected. This could cause the trading price of
our common stock to decline and a loss of all or part of your
investment. 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.
Risks
Related to Our Business and Industry
We
had operating losses in 2007 and are uncertain as to our ability to return to
profitability.
We had an
operating loss from continuing operations of ($1,713,000) in 2007 compared with
an operating profit of $1,354,000 in 2006. We are uncertain when or
if we will generate sufficient revenues to return to operating
profitability.
If
we are unable to secure necessary financing, we may not be able to fund our
operations or strategic growth.
In order
to achieve our strategic business objectives, we may be required to seek
additional financing. We may be unable to renew our existing credit
facilities or obtain new financing on acceptable terms, or at
all. Under certain of our existing credit facilities, we are required
to obtain the lenders’ consent for most additional debt financing and to comply
with other covenants, including specific financial ratios. For
example, we may require further capital to continue to develop our technology
and infrastructure and for working capital purposes. In addition,
future acquisitions would likely require additional equity and/or debt
financing. Our failure to secure additional financing could have a
material adverse effect on our continued development or growth.
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 our operating
subsidiaries. Our primary assets are the shares of our operating
subsidiaries. Our ability to meet our operating requirements and to
make other payments depends on the surplus and earnings of our subsidiaries and
their ability to pay dividends or to advance or repay funds. Payments
of dividends and advances and repayments of inter-company debt by our
subsidiaries are restricted by our credit agreements.
We
are dependent on a single line of business.
We are
currently dedicated to manufacturing and marketing custom designed highly
engineered electronic components that are used primarily to control the
frequency or timing of signals in electronic circuits, and we do not offer any
other products. Given our reliance on this single line of business,
unfavorable market conditions affecting that line of business would likely have
a disproportionate impact on us in comparison with certain competitors, who have
more diversified operations and multiple lines of business. Should
this line of business fail to generate sufficient sales to support ongoing
operations, there can be no assurance that we will be able to develop alternate
business lines.
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:
· 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;
· possible
adverse effects on our operating results during the integration
process;
· substantial
acquisition related expenses, which would reduce our net income in future
years;
· the
loss of key employees and customers as a result of changes in management;
and
· 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, policies and
procedures, and this may lead to operational inefficiencies.
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
business is cyclical. A decline in demand in the electronic component
industry 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 industry 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 could lead to a
decline. If a slowdown occurs, it may continue and may become more
pronounced.
Our
market is highly competitive, and we may lose business to larger and
better-financed competitors.
Our
market is 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. Within the industry in which
we compete, competition has 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.
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.
We
found material weaknesses in our internal control over financial reporting and
concluded that our disclosure controls and procedures and our internal control
over financial reporting were not effective as of December 31,
2007.
As
disclosed in Part II, Item 9A(T), “Controls and Procedures,” of this Annual
Report on Form 10-K, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures and our internal control
over financial reporting were not effective as of December 31,
2007. Our failure to successfully implement our plans to remediate
the material weaknesses discovered could cause us to fail to meet our reporting
obligations, to produce timely and reliable financial information, and to
effectively prevent fraud. Additionally, such failures could cause
investors to lose confidence in our reported financial information, which could
have a negative impact on our financial condition and stock price.
Compliance
with changing corporate governance and public disclosure regulations may result
in additional expenses.
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 Securities and Exchange Commission regulations
and American Stock Exchange rules, requires a substantial amount of management
attention and financial and other resources. We intend to continue to
invest all reasonably necessary resources to comply with evolving standards,
which may result in increased general and administrative expenses and divert
management from revenue-generating activities.
MtronPTI’s
backlog may not be indicative of future revenues.
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 2007,
approximately 15.7% of MtronPTI’s revenue was attributable to finished products
that were manufactured by an independent contract manufacturer located in both
Korea and China (15.9% in 2006). We expect this manufacturer to
account for a smaller but substantial portion of MtronPTI’s revenues in 2008 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 we 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 with environmental regulations including Restriction of Hazardous
Substances (“RoHS”) and Waste Electrical and Electronic Equipment (“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.
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 2006, virtually all of MtronPTI’s 2007 revenues from continuing
operations 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 2007,
the majority of MtronPTI’s revenues were derived from sales to manufacturers of
communications and network infrastructure equipment, including indirect sales
through distributors and contract manufacturers. In 2008, MtronPTI
expects a smaller but significant portion of its revenues to be derived from
sales to these manufacturers. 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.
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 OEMs 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 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 disadvantage MtronPTI in negotiating
contractual terms. These terms 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.
Our
significant international operations and sales to customers outside of the
United States subject us to certain business, economic and political
risks.
We have
significant office and manufacturing space in Noida,
India. Additionally, our 2007 export sales (primarily to China, and
Malaysia) accounted for 56.5% of 2007 consolidated revenues from continuing
operations, compared to 50.7% in 2006, and we anticipate that sales to customers
located outside of the United States will continue to be a significant part of
our revenues for the foreseeable future. Our international operations
and sales to customers outside of the United States subject our operating
results and financial condition to certain business, economic, political,
health, regulatory and other risks, including:
· political
and economic instability in countries in which our products are manufactured and
sold;
· expropriation
or the imposition of government controls;
· sanctions
or restrictions on trade imposed by the United States government;
· export
license requirements;
· trade
restrictions;
· currency
controls or fluctuations in exchange rates;
· high
levels of inflation or deflation;
· greater
difficulty in collecting our accounts receivable and longer payment
cycles;
· changes
in labor conditions and difficulties in staffing and managing our international
operations; and
· limitations
on insurance coverage against geopolitical risks, natural disasters and business
operations.
Additionally,
to date, very few of our international revenue and cost obligations have been
denominated in foreign currencies. As a result, changes in the value
of the United States dollar relative to foreign currencies may affect our
competitiveness 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.
Future
changes in MtronPTI’s product warranty obligations being driven by customer
demands within the market may increase our costs and decrease
profitability.
There is
a growing trend within the market place among some of MtronPTI’s larger
customers that MtronPTI provide increasing levels of warranty guarantees in
addition to those previously provided. Some of these guarantees would
require MtronPTI to pay substantial financial penalties if the customer executes
the warranty provision. These additional warranties may result in
additional production costs to MtronPTI and place it at a disadvantage in
comparison to its competitors if not agreed to while negotiating contractual
terms and may result in terms that are not in the best interest of
MtronPTI.
Risks
Related to Our Common Stock
There
is a limited market for our common stock. Our share price is likely
to be highly volatile and could drop unexpectedly.
There is
a limited public market for our common stock, and we cannot assure you that an
active trading market will develop. As a result of low trading volume
in our common stock, 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:
· changes
in financial estimates or investment recommendations by securities analysts
relating to our common stock;
· loss
of a major customer;
· announcements
by us or our competitors of significant contracts, acquisitions, strategic
partnerships, joint ventures or capital commitments; and
· 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 stock or may issue negative
reports, and this may have a negative impact on the market price of our common
stock.
We cannot
assure you that security analysts will initiate coverage and publish research
reports on us. It is difficult for companies with smaller market
capitalization, such as us, to attract independent financial analysts who will
cover our common stock. If securities analysts do not, this lack of
research coverage may adversely affect the market price of our common
stock.
Our
officers, directors and principal stockholders have significant voting power and
may vote their shares in a manner that is not in the best interest of other
stockholders.
Our
officers, directors and principal stockholders control approximately 53% of the
voting power represented by our outstanding shares of common stock as of May 5,
2008. If these stockholders act together, they may be able to exert
significant control over our management and affairs requiring stockholder
approval, including approval of significant corporate transactions. This
concentration of ownership may have the effect of delaying or preventing a
change in control and might adversely affect the market price of our common
stock. This concentration of ownership may not be in the best interests of all
our stockholders.
We
do not anticipate paying cash dividends on our common stock 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 stock. 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
stock in the foreseeable future.
Provisions
of our charter documents and Delaware corporate law may prevent or delay a
change of control and limit the market price of our common stock.
Provisions
of our certificate of incorporation and by-laws, as well as provisions of the
General Corporation Law of the State of Delaware (“DGCL”), may discourage, delay
or prevent a merger, acquisition or other change in control of the Company, even
if such a change in control would be beneficial to our
stockholders. These provisions may also prevent or frustrate attempts
by our stockholders to replace or remove our management. These
provisions include those:
· prohibiting
our stockholders from fixing the number of our directors; and
· requiring
advance notice for stockholders proposals and nominations.
We are
subject to certain provisions of the DGCL that limit business combination
transactions with an “interested stockholder,” as defined by the DGCL, during
the first three years of their ownership, absent approval of our board of
directors. These provisions and other similar provisions make it more
difficult for stockholders 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 stock.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
LGL
Group’s principal executive offices are located in Orlando, Florida within
MtronPTI’s operating facility.
MtronPTI’s
operations are located in Orlando, Florida, Yankton, South Dakota, and Noida,
India. MtronPTI also has a sales office in Hong
Kong. MtronPTI owns one building in Orlando containing approximately
71,000 square feet, on approximately seven acres of land. MtronPTI
has two separate facilities in Yankton, which contain approximately 44,000
square feet in the aggregate. One of these is owned, the other
leased. The Yankton manufacturing facility that is owned by MtronPTI
contains approximately 28,000 square feet, is situated on approximately 11 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. The Company leases approximately 13,000 square
feet of office and manufacturing space in Noida 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.
The
Company also owns six buildings located in Bainbridge, Georgia that were
formerly used in connection with the operations of Lynch Systems. The
Company is actively marketing these buildings for sale.
Item 3. Legal Proceedings.
In the
normal course of business, the Company and its subsidiaries may become
defendants in certain product liability, worker claims and other
litigation. The Company and its subsidiaries have no litigation
pending at this time.
Item 4. Submission of Matters to a Vote of Security
Holders.
None.
PART
II
Item 5. Market for the Registrant’s Common Equity,
Related Stockholder Matters and Issuer Purchases of Equity
Securities.
Market
for Common Equity
Our
common stock is traded on the American Stock Exchange under the symbol “LGL.” At
May 5, 2008, the Company had 692 holders of record of our common
stock. The market price highs and lows in consolidated trading of the
Common Stock during the fiscal years ended December 31, 2007 and 2006 are as
follows:
|
Quarter
Ended
|
||||||||||||||||
|
2007
|
March
31,
|
June
30,
|
September
30,
|
December
31,
|
||||||||||||
|
High
|
$ | 10.32 | $ | 15.20 | $ | 13.00 | $ | 10.90 | ||||||||
|
Low
|
7.00 | 9.40 | 10.20 | 6.16 | ||||||||||||
|
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 | ||||||||||||
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,
stockholders’ 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
2008. Substantially all of the subsidiaries’ assets are restricted
under the Company’s current credit agreements, which limit the subsidiaries’
ability to pay dividends.
Equity
Compensation Plan Information
The
following table provides information as of December 31, 2007 about our common
stock that may be issued upon the exercise of options, warrants and rights under
all of our existing equity compensation plans (including individual
arrangements):
|
Plan
Category
|
Number
of securities to be issued upon exercise of outstanding options, warrants
and rights
(a)
|
Weighted-average
exercise price of outstanding options, warrants and rights
(b)
|
Number
of
securities
remaining available for future issuance under equity compensation plans
(excluding securities reflected in
column
(a))
(c)
|
||||||||||
|
Equity
compensation plans approved by security holders
|
|||||||||||||
|
2001
Equity Incentive Plan
|
200,000 |
$
|
17.07 | 371,982 | |||||||||
|
Equity
compensation plans not approved by security holders
|
-- | -- | -- | ||||||||||
|
Total
|
200,000 |
$
|
17.07 | 371,982 | |||||||||
Sale
of Unregistered Securities
None.
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 consolidated 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) (b)
|
||||||||||||||||||||
|
2007
|
2006
(Restated)(c)
|
2005
(Restated)(c)
|
2004
(Restated)(c)
|
2003
|
||||||||||||||||
|
Revenues
from continuing operations
|
$ | 39,536 | $ | 41,549 | $ | 35,051 | $ | 23,413 | $ | 15,183 | ||||||||||
|
Operating
profit (loss) from continuing
operations
(d)
|
(1,713 | ) | 1,354 | 508 | (1,543 | ) | (1,654 | ) | ||||||||||||
|
Gain
on release of customer related contingency
|
-- | -- | -- | -- | 728 | |||||||||||||||
|
Income
(loss) from continuing operations before income taxes and minority
interests
|
(420 | ) | 2,720 | 537 | (1,783 | ) | (1,348 | ) | ||||||||||||
|
Gain
(loss) on sale of assets from discontinued operations and subsidiary
stock
|
(982 | ) | -- | -- | -- | 35 | ||||||||||||||
|
Income
(loss) from discontinued operations
|
(1,017 | ) | (1,990 | ) | 551 | (1,422 | ) | 1,496 | ||||||||||||
|
Benefit
(provision) for income taxes
|
(135 | ) | 226 | 209 | (100 | ) | (73 | ) | ||||||||||||
|
Net
income (loss)
|
$ | (2,554 | ) | $ | 956 | $ | 1,297 | $ | (3,305 | ) | $ | 110 | ||||||||
|
Per
Common Share:(e)
|
||||||||||||||||||||
|
Basic
and diluted income (loss) per common share from continuing
operations
|
$ | (0.26 | ) | $ | 1.37 | $ | 0.45 | $ | (1.24 | ) | $ | 0.93 | ||||||||
|
Basic
and diluted income (loss) per common share from discontinued
operations
|
(0.93 | ) | (0.92 | ) | 0.33 | (0.93 | ) | 0.07 | ||||||||||||
|
Basic
and diluted net income (loss) per common share
|
(1.19 | ) | 0.44 | 0.79 | (2.17 | ) | 1.00 | |||||||||||||
|
December
31, (a) (b)
|
||||||||||||||||||||
|
2007
|
2006
(Restated)(c)
|
2005
(Restated)(c)
|
2004
(Restated)(c)
|
2003
|
||||||||||||||||
|
Cash,
securities and short-term investments
|
$ | 5,281 | $ | 7,039 | $ | 8,250 | $ | 6,189 | $ | 6,292 | ||||||||||
|
Restricted
cash (f)
|
-- | 96 | 650 | 1,125 | 1,125 | |||||||||||||||
|
Total
assets
|
22,876 | 30,985 | 32,683 | 33,891 | 23,019 | |||||||||||||||
|
Long-term
debt, exclusive of current portion
|
4,035 | 3,100 | 5,031 | 2,784 | 406 | |||||||||||||||
|
Shareholders'
equity (g)
|
12,369 | 16,735 | 14,707 | 10,001 | 11,033 | |||||||||||||||
Notes:
|
(a)
|
The
data presented includes results of the business acquired from PTI, from
September 30, 2004, the effective date of its
acquisition.
|
|
(b)
|
The
data presented for continuing operations excludes the results of
operations of Lynch Systems, Inc. as its operating assets were sold during
2007. The operational results from Lynch Systems, Inc. are
classified as discontinued operations.
|
|
(c)
|
The
data presented includes the effects of a restatement as discussed in Note
2 to the Consolidated Financial Statements. The effect was an increase to
net income of $91,000, $87,000 and $21,000 for the years ended December
31, 2006, 2005 and 2004,
respectively.
|
|
(d)
|
Operating
profit (loss) is revenues less operating expenses, which excludes
investment income, interest expense, gain on sale of land, other income,
minority interests and taxes. Included are asset impairment and
restructuring charges and the gain on
deconsolidation.
|
|
(e)
|
Based
on weighted average number of shares of common stock
outstanding.
|
|
(f)
|
See
discussion of Restricted Cash in Note 1 to the Consolidated Financial
Statements.
|
|
(g)
|
No
cash dividends have been declared over the
period.
|
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. The historical discussions
and analysis herein relate to the continuing operations of the Company as of
December 31, 2007 and do not include discussions of operations that have been
discontinued.
Results
of Operations
2007
Compared to 2006
Consolidated
Revenues and Gross Margin from Continuing Operations
In the
year ended December 31, 2007, consolidated revenues from continuing operations
decreased by $2,013,000, or 4.8%, to $39,536,000, from $41,549,000 in 2006, due
to business declines at three of the Company’s largest customers in the telecom
and military/avionics markets. The decreases were due to a
combination of reduced business levels and selling price reductions required to
meet competitive pressures. The Company also discontinued sales to
its second largest distributor due to the distributor’s
bankruptcy. The Company has continuing discussions with the successor
company of the distributor, but has yet to reach a suitable agreement to resume
business with the successor company.
In the
year ended December 31, 2007, consolidated gross margin from continuing
operations as a percentage of revenues decreased to 25.7% from 29.5% for 2006.
The reduction in gross margin reflects selling price reductions, increases in
material costs and continuing yield losses and rework costs at MtronPTI's
Orlando facility. These problems were compounded by lower revenue, so
the operations overhead also increased as a percentage of revenue.
Operating
Profit (Loss)
The
operating profit (loss) from continuing operations of ($1,713,000) for 2007 is a
reduction of $3,067,000 from $1,354,000 operating profit in 2006. This decline
was caused by a $2,079,000 reduction in gross margin primarily by lower sales
volume and higher material and yield loss costs in Orlando. Selling and
administrative expenses from continuing operations in 2007 increased by $83,000
from $10,898,000 in 2006 to $10,981,000 in 2007. This increase was due primarily
to an increase in product development expenses and an increase in corporate
costs. The product development expense was driven by an increase in engineering
personnel and a decrease in billing for a government sponsored program. The
corporate expense increase was the result of increased stock compensation costs.
In addition, the decline is due to an impairment charge of $905,000 recognized
in connection with Lynch Systems’ assets.
During
the Company’s 2007 annual review of financial results and application of
financial controls, management identified that an impairment of certain assets
of one of its subsidiaries, Lynch Systems, existed as of June 2007 primarily
triggered by the Company’s sale of Lynch Systems. The Company
determined that there were impairment indicators in place as of June 2007 based
upon criteria defined within SFAS No. 144 and that the carrying value of the
identified asset group exceeded its estimated fair value as of June 30,
2007. Accordingly, an impairment loss of $905,000, which represented
the difference in carrying value of the Lynch Systems’ land and building and
building improvements and the asset groups’ estimated fair value, was
recorded.
Other
Income (Expense), Net
Investment
income from continuing operations for the year ended December 31, 2007 was
$1,526,000 compared to $1,752,000 for 2006. The decrease of $226,000
was due to fewer marketable securities sold resulting in reduced gains on sale
of marketable securities in 2007.
Interest
expense from continuing operations declined by $159,000 to $306,000 for the year
ended December 31, 2007, compared with $465,000 for 2006, primarily due to a
reduction in the level of debt outstanding during the year.
Gain on
the sale of land for the year ended December 31, 2007 was $88,000 primarily due
to a gain on the sale of land adjacent to our Orlando location that was not in
use by the Company.
Income
Taxes
The
Company files consolidated federal income tax returns, which includes all
subsidiaries.
The
income tax expense for the year ended December 31, 2007 included provisions for
foreign taxes totaling $135,000. 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.
Net
Income (Loss)
Net
(loss) for the year ended December 31, 2007 was ($2,554,000) compared with net
income for the year ended December 31, 2006 of $956,000. Basic and
diluted income (loss) per share for the year ended December 31, 2007 was ($1.19)
compared with $0.44 for year ended December 31, 2006. Basic and
diluted income (loss) per share from continuing operations for the year ended
December 31, 2007 was ($0.26) compared with $1.37 for year ended December 31,
2006. Basic and diluted loss per share from discontinued operations
for the year ended December 31, 2007 was ($0.93) compared with ($0.92) for year
ended December 31, 2006.
Backlog/New
Orders
Total
backlog of manufactured products at December 31, 2007 was $10,865,000, a
$2,800,000 increase from the $8,065,000 backlog at December 31,
2006. Backlog orders do not necessarily represent future guaranteed
orders from customers. Customers may cancel or change their orders with little
or no penalties.
Sale
of Select Assets and Liabilities of Subsidiary and Discontinued
Operations
In June
2007, the Company finalized its sale of certain assets and liabilities of Lynch
Systems to a third party. The assets sold included certain accounts
receivable, inventory, machinery and equipment. The Buyer also assumed certain
liabilities of Lynch Systems, including accounts payable, customer deposits and
accrued warranties. The result of the sale transaction was a loss of
$982,000. Lynch Systems retained certain assets including the land, buildings
and some equipment used in its operations and certain accounts receivable
balances. The Company intends to sell the land, buildings and remaining
equipment, which are classified as held and used in accordance with SFAS No.
144.
Revenue
generated by the operations of Lynch Systems, now classified as Discontinued
Operations, was $2,534,000 for 2007 and $7,751,000 for 2006, and the loss was
($1,999,000) for 2007 and ($1,990,000) for 2006.
Assets
Being Marketed for Sale
During
2007, the Company decided to sell selected assets of its subsidiary, Lynch
Systems. These assets are included within the respective balances in
property, plant and equipment in the consolidated balance sheet and they are
considered held and used in accordance with SFAS No. 144.
Inflation
Risk
In the
two most recent years, the Company has had some exposures to the impact of
inflationary risk. The Company generally has been able to include
some cost increases in its pricing but revenues and margins have been adversely
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.
Liquidity
And Capital Resources
The
Company’s cash, cash equivalents and investments in marketable securities at
December 31, 2007 totaled $5,281,000, a decrease of $1,854,000 over the prior
year. At December 31, 2006, the Company had $7,135,000 in cash
(including $96,000 of restricted cash), cash equivalents, and
investments. The unrestricted cash and cash equivalents component
increased by $804,000, from $4,429,000 at December 31, 2006 to $5,233,000 at
December 31, 2007.
Cash used
in operating activities from continuing operations was $993,000 in 2007,
compared to $2,574,000 of cash used in operating activities in
2006. The year to year change in operating cash flow from continuing
operations of $1,581,000 was primarily due to a decrease in inventory of
$924,000 in 2007 compared to an increase in inventory of $1,560,000 in 2006 as
well as 2006 having payments made related to commitments and contingencies for
settled legal actions of $859,000.
Investing
activities from continuing operations provided $2,085,000 in cash during 2007 to
the Company primarily comprised of $2,292,000 of proceeds from the sales of
marketable securities.
Cash of
$994,000 was used in financing activities from continuing operations during 2007
mainly as a result of $1,116,000 of long-term debt repayments and $321,000 of
note repayments, offset by $443,000 in new borrowings.
At
December 31, 2007, the Company’s consolidated working capital was $10,758,000
compared to $12,615,000 at December 31, 2006. At December 31, 2007,
the Company had consolidated current assets from continuing operations of
$17,225,000 and consolidated current liabilities from continuing operations of
$6,241,000. The ratio of consolidated current assets to consolidated
current liabilities was 2.66 to 1.0. At December 31, 2006, the
Company had consolidated current assets from continuing operations of
$19,977,000 and consolidated current liabilities from continuing operations of
$8,839,000, and a current ratio of 1.67 to 1.00. The decrease in
consolidated working capital is primarily due to the sales of Lynch Systems and
the Company’s marketable securities, offset by payments made on long-term
debt.
MtronPTI
maintains its own short-term line credit facility. In general, the
credit facility is collateralized by property, plant and equipment, inventory,
receivables and common stock of certain subsidiaries and contain certain
covenants restricting distributions to the Company as well as various financial
covenant restrictions.
At
December 31, 2007, 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 $1,035,000. The Revolving Loan bears interest at 30-day LIBOR
plus 2.1% (6.92% at December 31, 2007). On June 30, 2007, Mtron
amended its credit agreement with FNBO which adjusted the interest rate and has
a due date for its revolving loan principal amount of June 30, 2008 with
interest only payments due monthly.
The
Company had $4,465,000 of unused borrowing capacity under its revolving line of
credit at December 31, 2007, compared to $6,744,000 at December 31, 2006. 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 next year. The
decrease in the available borrowing capacity is due to the line of credit
previously associated with Lynch Systems no longer being available due to the
sale of Lynch Systems.
On
October 14, 2004, MtronPTI, entered into a Loan Agreement with
FNBO. The FNBO Loan Agreement provided for a loan in the amount of
$2,000,000 (the “Term Loan”). The FNBO Term Loan has been
subsequently amended, with the most recent amendment date January 24,
2008. Under the recent amendment, the Term Loan was for $1,409,848
and bears interest at 30-day LIBOR plus 2.1% and is repaid in monthly
installments, with the then remaining principal balance plus accrued unpaid
interest to be paid on January 24, 2013. In January 2008, the Company
entered into an interest rate swap agreement with FNBO fixing the interest rate
at 5.60% through the life of the Term Loan amendment.
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 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, 2007 is ($80,000) and is included in ”other
accrued expenses” on the consolidated balance sheet and $14,000 at
December 31, 2006 and is included in “other assets” on the consolidated balance
sheet. The value is reflected in other comprehensive income (loss),
net of any tax effect.
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, 2007, the Company had $419,000 in current maturities of long-term
debt.
Debt
outstanding at December 31, 2007 included $3,024,000 of fixed rate debt at
year-end weighted average interest rate of 7.38% (after considering the effect
of the interest rate swap) and variable rate debt of $2,465,000 at a year end
average rate of 7.10%.
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,
stockholders’ 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 2008.
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.
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, value of stock based
compensation, 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. 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 customer’s account to
identify any specific customer collection issues. If the financial
condition of our customers were to deteriorate, resulting in an impairment of
their ability to make payment, additional allowances may be
required. Our failure to estimate accurately the losses for doubtful
accounts and ensure that payments are received on a timely basis could have a
material adverse effect on our business, financial condition, and results of
operations.
Inventory
Valuation
Inventories
are stated at the lower of cost or market value. At MtronPTI,
inventories are valued using the first-in-first-out (FIFO) method for 70.5% of
the inventory, and 29.5% is valued using last-in-first-out (LIFO). The Company
reduces the value of its inventory to market value when the value is believed to
be less than the cost of the item.
Revenue
Recognition
Revenues
are recognized upon shipment when title passes. Shipping costs are
included in manufacturing cost of sales. The Company believes that recognizing
revenue at time of shipment is appropriate because the Company’s sales policies
meet the four criteria of SEC’s Staff Accounting Bulletin No. 104, which
are: (i) persuasive evidence that an arrangement exists, (ii) delivery
has occurred, (iii) the seller’s price to the buyer is fixed and
determinable, and (iv) collectibility is reasonably assured.
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 considered more likely
than not. As of December 31, 2007 a valuation allowance of $3,504,000
was recorded compared with a valuation allowance of $1,376,000 recorded at
December 31, 2006. The increase of $2,128,000 is due to the
continuing losses recognized by the Company.
The
carrying value of the Company’s net deferred tax asset at December 31, 2007 and
2006 is $111,000. This is equal to the amount of the Company’s
carry-forward alternative minimum tax (“AMT”) at such dates.
The
calculation of tax assets and 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.
Effective
January 1, 2007, the Company adopted the provisions of FASB Interpretation
(“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes—an
Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies
the accounting for uncertainty in income taxes recognized in an enterprise's
financial statements in accordance with SFAS 109. The Interpretation
prescribes a recognition and measurement method for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. The Interpretation also provides guidance on recognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. We consider many factors when evaluating
and estimating our tax positions and tax benefits, which may require periodic
adjustments and which may not accurately forecast actual
outcomes. Based on a review of our tax positions, the Company was not
required to record a liability for unrecognized tax benefits as a result of
adopting FIN 48 on January 1, 2007. Further, there has been no change
during the year ended December 31, 2007. Accordingly, we have not
accrued any interest and penalties through December 31, 2007.
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 service period.
The
Company estimates the fair value of stock-based compensation on the grant date
using the Black-Scholes-Merton option-pricing model. The Black-Scholes-Merton
option-pricing model requires subjective assumptions, including future stock
price volatility and expected time to exercise, which greatly affect the
calculated values. There is no expected dividend
rate. Historical Company information was the primary basis for the
expected volatility assumption. Prior years 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. The risk-free interest rate is
based on the U.S. Treasury zero-coupon rates with a remaining term equal to the
expected term of the option. SFAS 123-R also requires forfeitures to be
estimated at the time of grant and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates. Based on past
history of actual performance, a zero forfeiture rate has been
assumed.
Recent Issued Accounting
Pronouncements
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standard (“SFAS”) No. 157, “Fair Value
Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework
for measuring fair value in accordance with generally accepted accounting
principles and expands disclosures about fair value measurements. This statement
is effective for fiscal years beginning after November 15, 2007 and interim
periods within those years. However, on November 14, 2007, the FASB
provided a one-year deferral of the implementation for other nonfinancial assets
and liabilities. The standard is not expected to have a material impact on the
Company’s consolidated financial statements.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities—including an amendment of FASB
Statement No. 115” (“SFAS 159”). SFAS 159 permits entities to elect to
measure eligible financial instruments at fair value. An entity shall report
unrealized gains and losses on items for which the fair value option has been
elected in earnings at each subsequent reporting date, and recognize upfront
costs and fees related to those items in earnings as incurred and not deferred.
This statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007. The provisions of this standard will be
effective for the Company’s 2008 fiscal year. The standard is not expected to
have a material impact on the Company’s consolidated financial
statements.
In
December 2007, the FASB issued SFAS No. 141(R), “Business
Combinations” (“SFAS 141(R)”). SFAS 141(R) expands the definition of
transactions and events that qualify as business combinations; requires that the
acquired assets and liabilities, including contingencies, be recorded at the
fair value determined on the acquisition date and changes thereafter reflected
in earnings, not goodwill; changes the recognition and timing for restructuring
costs; and requires acquisition costs to be expensed as incurred. Adoption of
SFAS 141(R) is required for combinations occurring in fiscal years
beginning after December 15, 2008. Early adoption and retroactive
application of SFAS 141(R) to fiscal years preceding the effective date are
not permitted.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interest
in Consolidated Financial Statements” (“SFAS 160”). SFAS 160 re-characterizes
minority interests in consolidated subsidiaries as non-controlling interests and
requires the classification of minority interests as a component of equity.
Under SFAS 160, a change in control will be measured at fair value, with any
gain or loss recognized in earnings. The effective date for SFAS 160 is for
annual periods beginning on or after December 15, 2008. Early adoption and
retroactive application of SFAS 160 to fiscal years preceding the effective date
are not permitted. We currently do not have significant minority interests in
our consolidated subsidiaries.
In March
2008, the FASB issued Statement of Financial Accounting Standards No. 161
“Disclosures about Derivative Instruments and Hedging Activities” (“SFAS 161”).
This new standard enhances disclosure requirements for derivative instruments in
order to provide users of financial statements with an enhanced understanding of
(i) how and why an entity uses derivative instruments, (ii) how
derivative instruments and related hedged items are accounted for under
Financial Accounting Standards No. 133 “Accounting for Derivative
Instruments and Hedging Activities” and its related
interpretations and (iii) how derivative instruments and related hedged
items affect an entity’s financial position, financial performance and cash
flows. SFAS 161 is to be applied prospectively for the first annual reporting
period beginning on or after November 15, 2008. The Company is currently
assessing the impact of the adoption of SFAS No. 161 on its consolidated
financial statements.
Item 7A. Quantitative and Qualitative Disclosure About
Market Risk.
Not
applicable.
Item 8. Financial Statements And Supplementary
Data.
Our
consolidated financial statements and the related notes to the financial
statements called for by this item appear under Item 15 of this annual report on
Form 10-K beginning on page 38.
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure.
None.
Item 9A(T). Controls and Procedures.
Evaluation
of our Disclosure Controls and Procedures
Under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we evaluated the effectiveness of
the design and operation of our disclosure controls and procedures (as defined
under Exchange Act Rule 13a-15(e)) as of December 31, 2007. Based on this
evaluation, management has concluded that as of December 31, 2007, such
disclosure controls and procedures were not effective.
The
Company did not effectively communicate and implement the Company’s compliance
program. Specifically, internal controls were not properly identified,
communicated and implemented by the responsible personnel across the Company in
a timely manner. As a result, the Company had operating deficiencies primarily
due to undocumented evidence of the review and approval of key internal
controls. Our risk oversight function lacked enterprise-wide direction and
coordination with senior management in rolling out the Company’s compliance
program.
Management’s
Report on Internal Controls Over Financial Reporting
Management
is responsible for establishing and maintaining adequate internal control over
financial reporting. Under the supervision and with the participation
of management, including our Chief Executive Officer and Chief Financial
Officer, management assessed the effectiveness of internal control over
financial reporting as of December 31, 2007 based on the guidance for smaller
companies in using the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) Internal
Controls – Integrated Framework as it relates to the effectiveness of
internal control over financial reporting. Based on that assessment,
management has concluded that the Company’s internal controls over financial
reporting were not effective as of December 31, 2007 to provide reasonable
assurance regarding the reliability of its financial reporting and the
preparation of its financial statements for external purposes in accordance with
United States generally accepted accounting principles. As a result of its
assessment of our internal control over financial reporting, management
identified the material weaknesses discussed below.
Material
weaknesses were found in the following areas:
|
·
|
Inadequate Entity-Level
Controls - The Company did not effectively communicate and
implement the Company’s compliance program. Specifically, key internal
controls were not identified, communicated and implemented by the
responsible personnel across the Company in a timely manner. As a result,
the Company had operating deficiencies primarily due to undocumented
evidence of the review and approval of key internal
controls.
|
|
·
|
Enterprise-Wide Risk Oversight
- Our risk oversight function lacked enterprise-wide direction and
coordination with senior management in rolling out the Company’s
compliance program.
|
|
·
|
Financial Statement Close and
Reporting Process - We had inadequate procedures and personnel to
reasonably ensure that accurate, reliable quarterly financial statements
were prepared and reviewed on a timely
basis.
|
|
·
|
Inventory Controls –
The Company did not have documented evidence of the review and approval of
key internal controls related to the following sub
processes:
|
|
|
o
|
Inventory
Valuation
|
|
|
o
|
Inventory
Receiving
|
|
|
o
|
Inventory
Obsolescence
|
|
·
|
Information Technology
Company-Level Internal Controls - We did not maintain effective
internal control over financial reporting related to information
technology applications and infrastructure. Specifically, we identified
material weaknesses relating to our information technology company-level
controls concerning:
|
|
|
o
|
System
and Program Change Management
|
|
|
o
|
Logical
Access to Programs and Data
|
This
Annual Report does not include an attestation report of our independent
registered public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by our
independent registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management’s report in this Annual Report.
Plans
for Remediation of Material Weaknesses
Management
is currently addressing each of the material weaknesses in internal controls,
and is committed to remediating them as soon as possible. Management will devote
significant time and resources to the remediation effort. Management’s
remediation plans include the following:
|
·
|
Financial Management -
We have hired a new Chief Financial Officer and a new Corporate
Controller who have accounting, internal control and financial reporting
expertise. In addition, management has hired external consultants to
assist in the review of our internal control over financial
reporting.
|
|
·
|
Review of Internal Controls
- Management has engaged external consultants to assist in
reviewing our internal controls with the intent of improving the design
and operating effectiveness of controls and
processes.
|
|
·
|
Development of Compliance
Program - Management is in the process of hiring external
consultants to assist in the development and implementation of a
compliance program specific to our
needs.
|
|
·
|
Improving Information
Technology Company-Level Internal Controls – We are developing
mitigating controls to offset material weaknesses in system and program
change management, and system access to be implemented with our current
ERP system. We are also developing and implementing a new
ERP strategy solution. We need to perform the following steps, which we
expect to take approximately 12
months:
|
|
|
o
|
Current
state analysis of our systems from an internal control and business needs
perspective.
|
|
|
o
|
Select
an ERP solution, incorporating required re-engineering processes and
controls.
|
|
|
o
|
Data
conversion and implementation
testing.
|
Changes
in Internal Control Over Financial Reporting
There
were no significant changes in our internal control over financial reporting
that occurred during the last fiscal quarter that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.
Item 9B. Other Information.
Not
applicable.
PART III
Item
10. Directors and Executive Officers and Corporate
Governance.
The
following table sets forth information regarding the members of our Board of
Directors and our executive officers.
Our Board
of Directors currently consists of ten members, all of whom are Independent
Directors under the listing standards of the American Stock Exchange (the
“AMEX”) and applicable SEC rules. Pursuant to our Certificate of
Incorporation, each of our Directors is elected annually by our stockholders to
serve until the next annual meeting or until his or her successor is duly
elected and qualifies. Our By-Laws provide that our Board of
Directors shall consist of no fewer than five and no more than 13
members.
Biographical
summaries of the members of our Board of Directors and our executive officers as
of May 5, 2008 are set forth below. All such information regarding
our Board of Directors has been furnished to the Company by the individual
Directors.
Directors
|
Name
|
Age
|
Served
as Director From
|
Offices
and Positions Held With the Company, Business Experience and Principal
Occupation For Last Five Years, and Directorships in Public Corporations
and Investment Companies
|
|||
|
Marc
Gabelli
|
40
|
2003
|
Chairman
of the Company (September 2004 to present); Managing Director (1996 to
2004) and President (2004 to present), GGCP, Inc., a private corporation
that makes investments for its own account and is the parent company of
GAMCO Investors, Inc., a NYSE listed provider of financial advisory
services; President of Gemini Capital Management LLC; President of the
general partner of Venator Merchant Fund, LP.
|
|||
|
Timothy
Foufas
|
39
|
2007
|
Vice
Chairman of the Company (August 2007 to Present); Managing Partner, Plato
Foufas & Co. (2005 to present), a financial
services company; President, Levalon Properties
(2007 to present), a real estate property management company; Senior Vice
President, Bayshore Management Co. (2005 to 2006); Director of
Investments, Liam Ventures (2000 to 2005), a private equity investment
firm.
|
|||
|
E.
Val Cerutti
|
67
|
1990
|
Business
Consultant (1992 to present); Consulting Vice Chairman (2006 to
present) and President and Chief Operating Officer (1975 to 1992), Stella
D’Oro Biscuit Co., Inc., producer of bakery products; Director or Trustee
of four registered investment companies included within the Gabelli Funds
Mutual Fund Complex (1990 to present); Director, Approach, Inc. (1999 to
2005), a private company providing computer consulting services; former
Chairman of Board of Trustees, Fordham Preparatory
School.
|
|||
|
Peter
DaPuzzo
|
67
|
2006
|
Retired;
Senior Managing Director, Cantor Fitzgerald LP (2002 to 2005);
Co-President, Institutional Equity Division 2002-2005; President,
Institutional Equity Division 1998-2002; Senior Managing Director
1993-1998. Former Chairman, National Organization of Investment
Professionals, an industry group of senior managers from institutional
investors and broker-dealers. Former Chairman of Securities Industry
Association [SIA] Trading Committee. Former Chairman of Securities Traders
Association [STA]; Advisor to Board of Directors for The Shelter for the
Homeless Stamford, Connecticut;. Member of the National Italian American
Foundation; Member of the Greenwich
Roundtable.
|
|
Avrum
Gray
|
72
|
1999
|
Chairman
and Chief Executive Officer, G-Bar Limited Partnership and affiliates
(1982 to present), proprietary computer based derivative arbitrage trading
companies; Chairman of the Board, Lynch Systems, Inc., (1997 to 2001);
Director, Nashua Corp. (2001 to present), a NASDAQ listed manufacturer of
paper products and labels; Director, SL Industries, Inc. (2001 to
present), an AMEX listed manufacturer of power and data quality equipment
and systems; Director, Material Sciences Corporation (2003 to present), a
NYSE listed provider of material-based solutions for electronic,
acoustical, thermal and coated metal applications; Director, Lynch
Interactive Corporation (2006), an operator of independent telephone
companies and television stations; member, Illinois Institute of
Technology Financial Markets and Trading Advisory Board; former member,
Illinois Institute of Technology Board of Overseers MBA
Program; former Chairman, Chicago Presidents Organization; Board of
Trustees, Spertus Institute (former Chairman of the Board), Trustee
Lyric Opera of Chicago; former Presidential Appointee to The
U.S. Dept. of Commerce ISAC 16.
|
|||
|
Patrick
J. Guarino
|
65
|
2006
|
Business
Consultant (2005 to present); Managing Partner of Independent Board
Advisory Services, LLC (2002 to 2005) a corporate governance consulting
firm; Retired Executive Vice President, Ultramar Diamond Shamrock
Corporation (1996 to 2000), a NYSE, Fortune 200, international petroleum
refining and marketing company; Senior Vice President and General Counsel,
Ultramar Corporation (1992 to 1996) a NYSE, Fortune 200, international
petroleum and marketing company; Senior Vice President and General Counsel
of Ultramar PLC, (1986 to 1992), a London Stock Exchange listed
international, integrated oil company.
|
|||
|
Jeremiah
Healy
|
65
|
2008
|
Former
President and Chief Executive Officer, the LGL Group, Inc. (December 2006
to December 24, 2007) 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 to 2005), a
private manufacturer of knitted textiles.
|
|||
|
Kuni
Nakamura
|
39
|
2007
|
President,
Advanced Polymer, Inc. (1990 to present), a privately held chemical
manufacturer and distributor.
|
|||
|
Anthony
R. Pustorino, CPA
|
82
|
2002
|
Audit
Committee Chairman of the Company; Retired; Professor Emeritus, Pace
University (2001 to present); Professor of Accounting, Pace
University (1965 to 2001); former Assistant Chairman,
Accounting Department, Pace University; President and Shareholder,
Pustorino, Puglisi & Co., P.C., CPAs (1961 to 1989);
Instructor,
Fordham University (1961-1965);
Assistant Controller, Olivetti-Underwood Corporation (1957 to 1961); CPA,
Peat, Marwick, Mitchell & Co., CPAs (1953 to
1957); former Chairman, Board of Directors, New York
State Board for Public
Accountancy; former Chairman, CPA Examination
Review Board of National Association of
State Boards of Accountancy; former member, Council
of American
Institute of Certified Public
Accountants; former Vice President, Treasurer,
Director and member, Executive Committee
of New
York State Society of Certified Public
Accountants; current Director and
Audit Committee Chairman of various investment companies within the
Gabelli Mutual Funds Complex.
|
|
Javier
Romero
|
34
|
2007
|
Managing
Director of GSF Capital (2007 topresent)Head of Corporate Finance &
Strategy practice (2000 to 2007), Arthur D. Little, consulting firm;
International consultant for the World Bank in Washington DC (1999 to
2000); attorney, Arthur Andersen Law Firm, based in Spain and specializing
in corporate law (1996 to 1998).
|
|
Executive
Officers
|
||||
|
Name
|
Age
|
Offices
and Positions Held With the Company, Business Experience and Principal
Occupation For Last Five Years
|
||
|
Robert
Zylstra
|
60
|
President
and Chief Executive Officer, The LGL Group, Inc. (December 24, 2007 to
present); Senior Vice President of Operations of The LGL Group, Inc.
(September 2006 to present); President, Chief Executive Officer and
Chairman of the Board of Directors of The LGL Group, Inc.’s subsidiary,
M-tron Industries, Ltd. (January 2000 to present); President and Chairman
of the Board of The LGL Group, Inc.’s subsidiary, Piezo Technology, Inc.
(October 2004 to present); and Chairman of the Board of the LGL Group,
Inc.’s subsidiary, Piezo Technology India Private Ltd. (October 2004 to
present).
|
||
|
Harold
D. Castle
|
60
|
Chief
Financial Officer, The LGL Group, Inc. (December 24, 2007 to present);
financial and accounting consultant (August 2004 to December 2007); Chief
Financial Officer of Shook, Hardy & Bacon, L.L.P (March 2002 to March
2003); Director - Capgemeni Ernst & Young Consulting, May 2000 to
September 2001; Director - Ernst & Young, L.L.P., November 1993 to May
2000.
|
||
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities and Exchange Act of 1934, as amended, requires the
Company's directors, executive officers and holders of more than 10% of the
Company's Common Stock to file with the SEC and the AMEX initial reports of
ownership and reports of changes in the ownership of Common Stock and other
equity securities of the Company. Such persons are required to
furnish the Company with copies of all Section 16(a) filings.
Based
solely upon a review of the copies of the forms furnished to the Company, the
Company believes that its officers and directors complied with all applicable
filing requirements during the 2007 fiscal year except as set forth
below:
On April
27, 2007, Peter J. DaPuzzo filed a Statement of Changes in Beneficial Ownership
of Securities on Form 4 covering a series of transactions that occurred on March
27, and April 5, 2007.
On May
25, 2007, Peter J. DaPuzzo filed a Statement of Changes in Beneficial Ownership
of Securities on Form 4 covering a series of transactions that occurred on May
22, and 23, 2007.
On May
29, 2007, Patrick J. Guarino filed a Statement of Changes in Beneficial
Ownership of Securities on Form 4 covering a series of transactions that
occurred on April 4, 2007.
On
January 4, 2008, E. Val Cerutti filed a Statement of Changes in Beneficial
Ownership of Securities on Form 4 covering one transaction that occurred on
December 31, 2007.
On
January 4, 2008, Peter J. DaPuzzo filed a Statement of Changes in Beneficial
Ownership of Securities on Form 4 covering one transaction that occurred on
December 31, 2007.
On
January 7, 2008, Javier Romero filed a Statement of Changes in Beneficial
Ownership of Securities on Form 4 covering one transaction that occurred on
December 31, 2007.
On
January 14, 2008, Marc Gabelli filed a Statement of Changes in Beneficial
Ownership of Securities on Form 4 covering one transaction that occurred on
December 31, 2007 and one transaction that occurred on January 10,
2008.
Code
of Ethics
The
Company has adopted a code of ethics as part of its Amended and Restated
Business Conduct Policy, which applies to all employees of the Company,
including its principal executive, financial and accounting
officers. The Company’s Code of Ethics for Senior Executive Personnel
is available on its website, www.lglgroup.com.
Audit
Committee
The
members of our Audit Committee are Messrs. Pustorino, Cerutti, DaPuzzo, Gray and
Healy. The Board of Directors has determined that all audit committee
members are financially literate and independent under the current listing
standards of the AMEX. Mr. Pustorino serves as Chairman of our Audit
Committee, and the Board of Directors has determined that he qualifies as the
Audit Committee financial expert, as defined under the Securities Exchange Act
of 1934, as amended, and is independent as defined by the rules of
AMEX.
Item 11. Executive Compensation.
Summary
Compensation Table
The
following table sets forth information with respect to compensation earned by
the named executive officers:
|
Name
and Principal Position
|
Year
|
Salary
|
Bonus
|
Stock
Awards
|
Option
Awards
|
Nonqualified
Deferred Compensation Earnings
|
All
Other Compensation
|
Total
|
|
($)
|
($)
|
($)
|
($)
|
($)
|
($)
|
($)
|
||
|
Robert
Zylstra (1)
Chief
Executive Officer
|
2007
2006
|
186,500
183,750
|
154,554
154,554
|
–
82,500(2)
|
–
–
|
–
164,000
(3)
|
–
–
|
341,054
584,804
|
|
Harold
D. Castle (4)
Chief
Financial Officer
|
2007
|
2,615
|
–
|
–
|
–
|
–
|
–
|
2,615
|
|
Jeremiah
Healy (5)
|
2007
2006
|
185,000
60,280
|
–
–
|
–
82,500(6)
|
–
–
|
–
–
|
–
–
|
185,000
142,780
|
|
Steven
Pegg (7)
|
2007
|
133,950
|
–
|
77,200(8)
|
–
|
–
|
–
|
211,150
|
|
(1)
|
Mr.
Zylstra has served as the Company’s Chief Executive Officer since December
24, 2007. Mr. Zylstra was elected as Senior Vice President of
Operations of the Company as of September 5, 2006. Mr.
Zylstra’s salary is paid by M-tron Industries, Inc., a subsidiary of the
Company, where he has served as the President and Chief Executive Officer
since January 24, 2000.
|
|
(2)
|
On
September 5, 2006, the Company granted Mr. Zylstra 10,000 shares of
restricted stock under the Company’s 2001 Equity Incentive
Plan. Mr. Zylstra currently exercises full voting rights with
respect to such restricted stock, which shall vest as
follows: 5,000 shares on September 5, 2007 and 1,250 shares on
each of December 5, 2007, March 5, 2008, June 5, 2008 and September 5,
2008.
|
|
(3)
|
Mr.
Zylstra has an agreement entitling him to 3% of the increase in the
economic value of the Company from January 1, 2000 through the end of the
last fiscal quarter next preceding termination of his
employment. For additional information regarding Mr. Zylstra’s
potential payments upon termination, please see “Potential Payments Upon
Termination or Change in Control”
below.
|
|
(4)
|
Mr.
Castle has served as the Company’s Chief Financial Officer since December
24, 2007.
|
|
(5)
|
Mr.
Healy served as the Company's Chief Executive Officer from January 1, 2007
to December 24, 2007. Mr. Healy also served as the Company's
Chief Financial Officer from September 5, 2006 to March 19,
2007. Mr. Healy has served on the Company’s Board of Directors
since December 24, 2007.
|
|
(6)
|
On
September 5, 2006, the Company granted Mr. Healy 10,000 shares of
restricted stock under the Company's 2001 Equity Incentive
Plan. Mr. Healy exercised full voting rights with respect to
such shares of restricted stock, which were set to vest as follows: 5,000
shares on September 5, 2007 and 1,250 shares on each of December 5, 2007,
March 5, 2008, June 5, 2008 and September 5, 2008. When Mr.
Healy resigned from his positions with the Company on December 24, 2007,
he forfeited the 3,750 shares that had not yet
vested.
|
|
(7)
|
Mr.
Pegg served as the Company's Chief Financial Officer from March 30, 2007
to December 24, 2007.
|
|
(8)
|
On
March 20, 2007, the Company granted Mr. Pegg 10,000 shares of restricted
stock under the Company’s 2001 Equity Incentive Plan. Mr. Pegg
exercised full voting rights with respect to such shares of restricted
stock, which were set to vest as follows: 5,000 shares on March 20, 2008
and 1,250 shares on each of June 20, 2008, September 20, 2008, December
20, 2008 and March 20, 2009. When Mr. Pegg resigned from his
positions with the Company on December 24, 2007, he forfeited all 10,000,
none of which had vested.
|
Employment
Agreements
Harold
D. Castle
Effective
December 17, 2007, the Company entered into an employment agreement with Mr.
Castle to serve as the Company's Chief Financial Officer (the “Castle Employment
Agreement”). Under the Castle Employment Agreement, Mr. Castle is to
receive a salary of $136,000 per annum and is eligible to receive a
discretionary bonus of at least 30% of his base salary and participate in the
Company's incentive plans.
Jeremiah
Healy
Effective
September 5, 2006, the Company entered into an employment agreement with Mr.
Healy to serve as the Company's Chief Financial Officer (the “Healy Employment
Agreement”). Under the Healy Employment Agreement, Mr. Healy received
a salary of $185,000 per annum and was eligible to receive a discretionary
annual bonus of $50,000. In addition, upon commencement of his
employment, Mr. Healy received a one-time grant of 10,000 shares of restricted
common stock pursuant to the Company's 2001 Equity Incentive Plan.
Steven
Pegg
Effective
March 20, 2007, the Company entered into an employment agreement with Mr. Pegg
to serve as the Company's Chief Financial Officer (the “Pegg Employment
Agreement”). Under the Pegg Employment Agreement, Mr. Pegg received a
salary of $175,000 per annum and was eligible to participate in the Company's
executive benefit and compensation plans. In addition, upon
commencement of his employment, Mr. Pegg received a one-time grant of 10,000
shares of restricted common stock pursuant to the Company's 2001 Equity
Incentive Plan.
Outstanding
Equity Awards at Fiscal Year-End
The
following table presents information regarding unexercised options, stock that
has not vested and equity incentive plan awards for each named executive officer
as of the end of the fiscal year ended December 31, 2007:
|
Name
|
Stock
Awards
|
|
|
Number
of Shares or Units of Stock That Have Not Vested
(#)
|
Market
Value of Shares or Units of Stock That Have Not Vested
($)
|
|
|
Robert
Zylstra
|
3,750(1)
|
25,500
|
|
Harold
D. Castle
|
--
|
--
|
|
Jeremiah
Healy
|
--
|
--
|
|
Steven
Pegg
|
--
|
--
|
|
(1)
|
On
September 5, 2006, the Company granted Mr. Zylstra 10,000 shares of
restricted stock under the Company’s 2001 Equity Incentive
Plan. Mr. Zylstra currently exercises full voting rights with
respect to such restricted stock, which shall vest as follows: 5,000
shares on September 5, 2007 and 1,250 shares on each of December 5, 2007,
March 5, 2008, June 5, 2008 and September 5,
2008.
|
Potential
Payments Upon Termination or Change In Control
On
January 7, 1999, MtronPTI entered into an Employment Agreement with Mr. Zylstra
to serve as MtronPTI’s President and Chief Executive Officer (the “Zylstra
Agreement”). The Zylstra Agreement entitles Mr. Zylstra to 3% of the
increase in the economic value of MtronPTI from January 1, 2000 through the end
of the last fiscal quarter next preceding termination of his employment (the
“Valuation Date”). The economic value of MtronPTI at January 1, 2000
is deemed to be 7.5 times the Earnings Before Interest, Taxes, Depreciation and
Amortization (“EBITDA”) (plus cash and marketable securities and minus debt) of
MtronPTI for the year ended December 31, 1999, and the economic value of
MtronPTI at the Valuation Date will be deemed to be 7.5 times the EBITDA (plus
cash and marketable securities and minus debt) of MtronPTI for the 12 months
ended on the Valuation Date. At MtronPTI’s option, the amount of the
benefit shall be payable either (i) in cash in three equal installments payable
on the first, second and third anniversary dates of the termination of Mr.
Zylstra’s employment (any such deferred payments shall bear interest at an
annual rate equal to 8%, which interest shall be payable in arrears on each said
anniversary date), or (ii) in the Company’s common stock, valued at the average
closing market price thereof for the 10 trading days on which the Company’s
common stock traded prior to the date of the payment. Any sale by the
Company of all or substantially all of its assets, in each case other than to an
affiliate of the Company, will be deemed to be a termination of Mr. Zylstra’s
employment effective as of the date of such event.
DIRECTOR
COMPENSATION
The
following table sets forth information with respect to compensation earned by or
awarded to each Director of the Company who is not a named executive officer and
who served on the Board of Directors during the fiscal year ended December 31,
2007:
|
Name
|
Fees
Earned or
Paid
in Cash
|
Stock
Awards
|
Total
|
|
($)
|
($)
|
($)
|
|
|
Marc
Gabelli
|
100,000(1)
|
–
|
100,000(1)
|
|
Peter
DaPuzzo
|
37,750
|
10,003(4)
|
47,753
|
|
Timothy
Foufas(2)
|
23,500
|
10,003(4)
|
33,503
|
|
E.
Val Cerutti
|
36,500
|
10,003(4)
|
46,503
|
|
Avrum
Gray
|
38,750
|
10,003(4)
|
48,753
|
|
Patrick
J. Guarino
|
33,250
|
10,003(4)
|
43,253
|
|
Jeremiah
Healy(3)
|
–
|
–
|
–
|
|
Kuni
Nakamura(2)
|
23,500
|
10,003(4)
|
33,503
|
|
Anthony
R. Pustorino, CPA
|
40,250
|
10,003(4)
|
50,253
|
|
Javier
Romero(2)
|
21,500
|
10,003(4)
|
31,503
|
|
(1)
|
Mr.
Gabelli has elected to defer the payment of his annual fee to a later
date.
|
|
(2)
|
Elected
effective April 3, 2007; paid for the second, third and fourth quarters of
the fiscal year ended December 31,
2007.
|
|
(3)
|
Elected
effective December 24, 2007; no fees were earned nor paid and no awards
were granted during the fiscal year ended December 31,
2007.
|
|
(4)
|
On
December 31, 2007, eight members of the Board of Directors were granted
1,471 shares each of restricted common stock under the Company’s 2001
Equity Incentive Plan.
|
Director
Compensation Arrangements
A
director who is an employee of the Company is not compensated for services as a
member of the Board of Directors or any committee thereof. In 2007,
Directors who were not employees received (i) a cash retainer of $5,000 per
quarter; (ii) a fee of $2,000 for each meeting of the Board of Directors
attended in person or telephonically that had a duration of at least one hour
during January through September, 2007, (iii) a fee of $1,000 for each meeting
of the Board of Directors attended in person or telephonically during October
through December 2007; (iv) a fee of $1,500 for each audit Committee meeting
attended in person or telephonically that had a duration of at least one hour;
and (v) a fee of $750 for each Compensation Committee, Audit Committee or
Nominating Committee meeting attended in person. The Audit Committee
Chairman received an additional $4,000 annual cash retainer and the Nominating
Committee Chairman and Compensation Committee Chairman received additional
$2,000 annual retainers. On August 28, 2007, the Audit Committee
Chairman fee was changed to $3,000; the Compensation Committee Chairman fee was
changed to $2,000, and the Nominating Committee Chairman fee was changed to
$1,000. In 2007, Marc Gabelli, the Chairman of the Board of
Directors, was entitled to receive a $100,000 annual fee, payable in equal
quarterly installments, but Mr. Gabelli elected to defer payment of his annual
fee for 2007 to a later date.
For
fiscal 2008, as 50% of their base compensation, Directors will receive grants of
restricted common stock in an amount of $10,000 (the number of such shares
determined by dividing $10,000 by the closing price of the Company’s common
stock on the grant date), such shares to vest ratably at the end of each
quarterly period during fiscal 2008. Each Director will exercise full
voting rights with respect to such shares as of the grant date. Once
vested, such shares will not be transferable until the earliest to occur of
Director’s resignation from the Board of Directors or any other termination of
the Director’s membership thereon, or a change of control, as defined in the
2001 Equity Incentive Plan. Pursuant to this arrangement, on December
31, 2007, eight members of the Board of Directors were granted 1,471 shares each
of restricted common stock under the Company’s 2001 Equity Incentive
Plan.
Item 12. Security
Ownership Of Certain Beneficial Owners
and Management and Related Stockholder Matters.
The
following table sets forth information regarding the number of shares of our
common stock beneficially owned on May 5, 2008, by:
|
|
·
|
each
person who is known by us to beneficially own 5% or more of our common
stock;
|
|
|
·
|
each
of our directors and named executive officers;
and
|
|
|
·
|
all
of our directors and executive officers, as a
group.
|
Except as
otherwise set forth below, the address of each of the persons listed below is:
The LGL Group, Inc., 2525 Shader Road, Orlando, FL 32804. Unless
otherwise indicated, the common stock beneficially owned by a holder includes
shares owned by a spouse, minor children and relatives sharing the same home, as
well as entities owned or controlled by the named person, and also includes
shares subject to options to purchase our common stock exercisable within 60
days after May 5, 2008. Except as otherwise indicated, the
shareholders listed in the table have sole voting and investment power with
respect to their shares.
|
Name
and Address of Beneficial Owner
|
Common
Stock
Beneficially Owned (1)
|
|||||||
|
Shares
|
%
|
|||||||
|
5%
or Greater Stockholders:
|
||||||||
|
Mario
J. Gabelli(2)
|
366,874 | 16.9 | ||||||
|
Bulldog
Investors, Phillip Goldstein and Andrew Dakos(3)
|
188,299 | 8.7 | ||||||
|
Directors
and Executive Officers:
|
||||||||
|
Marc
Gabelli
|
539,354 | (4) | 24.7 | |||||
|
Robert
R. Zylstra
|
10,400 | (5) | * | |||||
|
Harold
D. Castle
|
– | – | ||||||
|
E.
Val Cerutti
|
2,916 | (6) | * | |||||
|
Peter
DaPuzzo
|
10,071 | (7) | * | |||||
|
Timothy
Foufas
|
2,471 | (7) | * | |||||
|
Avrum
Gray
|
14,856 | (8) | * | |||||
|
Patrick
J. Guarino
|
3,471 | (7) | * | |||||
|
Jeremiah
M. Healy
|
7,500 | (9) | * | |||||
|
Kuni
Nakamura
|
2,471 | (10) | * | |||||
|
Anthony
R. Pustorino
|
4,475 | (7) | * | |||||
|
Javier
Romero
|
1,471 | (7) | * | |||||
|
All
executive officers and directors as a group (12 persons)(11)
|
599,456 | 27.4 | ||||||
____________
* Less
than 1% of outstanding shares.
|
(1)
|
The
applicable percentage of ownership for each beneficial owner is based on
2,171,709 shares of Common Stock outstanding as of May 5,
2008. Shares of Common Stock issuable upon exercise of options,
warrants or other rights beneficially owned that are exercisable within 60
days are deemed outstanding for the purpose of computing the percentage
ownership of the person holding such securities and rights and all
executive officers and directors as a
group.
|
|
(2)
|
Includes
(i) 244,396 shares of Common Stock owned directly by Mario J.
Gabelli (including 8,903 held for the benefit of Mario J.
Gabelli under the Lynch Interactive Corporation 401(k) Savings Plan); (ii)
1,203 shares owned by a charitable foundation of which Mario J. Gabelli is
a trustee; (iii) 96,756 shares owned by a limited partnership in which
Mario J. Gabelli is the general partner and has an approximate 5%
interest; and (iv) 24,519 shares owned by Lynch Interactive Corporation,
of which Mario J. Gabelli is Chairman and the
beneficial officer of approximately 24% of the outstanding
common stock. Mario J. Gabelli disclaims beneficial ownership
of the shares owned by such charitable foundation, by Lynch Interactive
Corporation and by such limited partnership, except to the extent of his
5% interest in such limited partnership. Mr. Gabelli’s business
address is 401 Theodore Fremd Ave., Rye, New York
10580-1430.
|
|
(3)
|
Based
solely on information contained in a report on Schedule 13D/A filed with
the SEC on June 5, 2007 by Bulldog Investors, Phillip Goldstein and Andrew
Dakos. Mr. Goldstein and Mr. Dakos are
investment advisors and principals of Bulldog
Investors. The address of Bulldog Investors and Mr. Goldstein
is 60 Heritage Drive, Pleasantville, NY 10570. The address of
Mr. Dakos is Park 80 West, Plaza Two, Saddle Brook, NJ
07663.
|
|
(4)
|
Includes
(i) 12,475 shares of Common Stock owned directly by Marc Gabelli and (ii)
506,879 shares beneficially owned by Venator Fund and Venator Global,
LLC (“Venator Global”) and 20,000 shares issuable upon the
exercise of options held by Marc Gabelli at a $13.173 per share exercise
price. Venator Global, which is the sole general partner of
Venator Fund, is deemed to have beneficial ownership of the securities
owned beneficially by Venator Fund. Marc Gabelli is the
President of Venator Global.
|
|
(5)
|
Includes
(i) 10,000 shares of restricted stock granted under the Company's 2001
Equity Incentive Plan and (ii) 400 shares jointly owned with Mr. Zylstra's
wife, with whom he shares voting and investment
power.
|
|
(6)
|
Includes
1,471 shares of restricted stock granted under the Company's 2001 Equity
Incentive Plan and 1,445 shares jointly owned with Mr. Cerutti’s wife,
with whom he shares voting and investment
power.
|
|
(7)
|
Includes
1,471 shares of restricted stock granted under the Company's 2001 Equity
Incentive Plan.
|
|
(8)
|
Includes
(i) 6,585 shares owned by Mr. Gray (including 1,471 shares of restricted
stock granted under the Company's 2001 Equity Incentive Plan); (ii) 751
shares owned by a partnership of which Mr. Gray is the general partner;
(iii) 2,407 shares owned by a partnership of which Mr. Gray is one of the
general partners; (iv) 2,105 shares owned by Mr. Gray's wife; and (v)
3,008 shares owned by a partnership of which Mr. Gray's wife is one of the
general partners.
|
|
(9)
|
Includes
1,250 shares of restricted stock granted under the Company's 2001 Equity
Incentive Plan.
|
|
(10)
|
Includes
1,471 shares of restricted stock granted under the Company's 2001 Equity
Incentive Plan and 1,000 shares jointly owned with Mr. Nakamura’s wife,
with whom he shares voting and investment
power.
|
|
(11)
|
Consists
of 579,456 shares of our common stock and 20,000 shares of our common
stock issuable upon exercise of stock
options.
|
Equity
Compensation Plan Information
See Part
II, Item 5, “Equity Compensation Plan Information,” for information regarding
the Company’s equity compensation plans.
Item 13. Certain
Relationships and Related Transactions, and Director Independence.
Transactions
With Related Persons
None.
Director
Independence
As
required under AMEX rules, a majority of the members of a listed company’s Board
of Directors must qualify as “independent,” as affirmatively determined by the
Board of Directors. The Board of Directors of the Company has
determined that all of the Directors are independent within the meaning of AMEX
rules.
Additionally,
AMEX rules require that each listed company’s Board of Directors must have an
audit committee of at least three members, each of whom must qualify as
“independent” within the meaning of AMEX rules applicable to audit committee
members. The Company’s Audit Committee currently has five members,
Messrs. Pustorino (Chairman), Cerutti, DaPuzzo, Gray and Healy and the Board of
Directors has determined that all audit committee members are “independent”
within the meaning of the AMEX rules applicable to audit committee
members.
Item 14. Principal Accounting Fees and
Services.
In July
2007, the Company changed its independent registered public accounting firm from
Ernst & Young LLP to J.H. Cohn LLP. During 2007, Ernst &
Young LLP reviewed the Company’s financial statements included in the Company’s
quarterly report on Form 10-Q for the quarter ended March 31,
2007. Starting with the second quarter ended June 30, 2007, J.H. Cohn
LLP reviewed the Company’s financial statements included in the Company’s
quarterly reports on Form 10-Q. In addition, J.H. Cohn LLP audited the
consolidated financial statements of the Company for the year ended December 31,
2007 and has reported the results of its audit to the Audit Committee of the
Board of Directors.
Audit
Fees
The
aggregate audit fees billed and reasonably expected to be billed for the fiscal
year ended December 31, 2007 by J.H. Cohn LLP totaled $575,000. The
aggregate audit fees billed for each of the last two fiscal years by Ernst &
Young LLP were $47,250 for 2007 and $436,800 for 2006. Audit fees
include services relating to auditing the Company’s annual financial statements,
reviewing the financial statements included in the Company’s quarterly reports
on Form 10-Q and certain accounting consultations.
Audit-Related
Fees
The
aggregate audit-related fees billed for the fiscal year ended December 31, 2007
by J.H. Cohn LLP was $0. The aggregate audit related fees billed for
each of the last two fiscal years by Ernst & Young LLP totaled $35,700 for
2007 and $24,000 for 2006. Audit related fees include services
relating to employee benefit plans.
Tax
Fees
The
aggregate tax fees billed for each of the last two fiscal years by J.H. Cohn LLP
was $0. The aggregate tax fees billed for each of the last two fiscal
years by Ernst & Young LLP totaled $12,175 for 2007 and $25,000 for
2006. Tax fees include services performed relating to tax compliance
and customs services.
All
Other Fees
The
Company was not billed for any other services by J.H. Cohn LLP during
2007. The Company was not billed for any other services by Ernst
& Young LLP during 2007 or 2006.
Pre-Approval
Policies and Procedures
The Audit Committee policy
and procedures for the pre-approval of audit and non-audit services rendered by
our independent auditors are reflected in the Audit Committee
Charter. The Audit Committee Charter provides that the Audit
Committee shall pre-approve all audit and non-audit services provided by the
independent auditors and shall not engage the
independent auditors to perform the specific non-audit services proscribed by
law or regulation. The Audit Committee may delegate pre-approval
authority to a member of the Audit Committee. The decisions of any
Committee member to whom pre-approval authority is delegated must be presented
to the full Committee at its next scheduled meeting.
The Audit
Committee determined that the rendering of the services other than audit
services by J.H. Cohn LLP and Ernst & Young LLP is compatible with
maintaining J.H. Cohn LLP’s and Ernst & Young LLP's
independence.
All
audit-related and tax services performed by our independent auditors were
pre-approved by the Audit Committee.
PART IV
Item
15. Exhibits and Financial Statement Schedules
(a) The
following documents are filed as part of this annual report on Form
10-K:
|
(1) Financial
Statements:
|
Page
No.
|
|
Reports
of Independent Registered Public Accounting Firms
|
42
|
|
Consolidated
Balance Sheets at December 31, 2007 and 2006 (Restated)
|
44
|
|
Consolidated
Statements of Operations -- Years ended December 31, 2007 and 2006
(Restated)
|
45
|
|
Consolidated
Statements of Shareholders’ Equity -- Years ended December 31, 2007 and
2006 (Restated)
|
46
|
|
Consolidated
Statements of Cash Flows -- Years ended December 31, 2007 and 2006
(Restated)
|
47
|
|
Notes
to Consolidated Financial Statements
|
49
|
| (2) Exhibits |
38
|
All other
schedules not included with this additional financial data are not applicable or
the required information is included in the financial statements or notes
thereto, and therefore have been omitted.
EXHIBIT
INDEX
|
Exhibit
No
|
Description
|
|
|
3 (a)
|
Certificate
of Incorporation of The LGL Group, Inc. (incorporated by reference to
Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on August
31, 2007).
|
|
|
(b)
|
The
LGL Group, Inc. By-Laws (incorporated by reference to Exhibit 3.2 to the
Company’s Current Report on Form 8-K filed on August 31,
2007).
|
|
|
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)*
|
Employment
Agreement, dated January 7, 1999, by and between M-tron Industries, Inc.
and Robert R. Zylstra.
|
|
|
(d)
|
The
LGL Group, Inc. 2001 Equity Incentive Plan adopted December 10, 2001
(incorporated by reference to Exhibit 4 to the Company’s Form S-8
Registration Statement filed on December 29, 2005.
|
|
|
(e)
|
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).
|
|
(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)
|
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).
|
|
|
(h)
|
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).
|
|
|
(i)
|
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).
|
|
|
(j)
|
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).
|
|
|
(k)
|
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).
|
|
|
(l)
|
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).
|
|
|
(m)
|
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).
|
|
|
(n)
|
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).
|
|
|
(o)
|
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).
|
|
|
(p)
|
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).
|
|
|
(q)*
|
Form
of Indemnification Agreement by and between The LGL Group, Inc. and its
executive officers and directors.
|
|
|
(r)
|
Asset
Purchase Agreement, dated May 17, 2007, by and between Lynch Systems, Inc.
and Olivotto Glass Technologies, S.P.A. (incorporated by reference to
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 25,
2007).
|
|
|
(s)
|
First
Amendment to Asset Purchase Agreement, dated as of May 22, 2007, by and
between Lynch Systems, Inc. and Olivotto Glass Technologies, S.P.A.
(incorporated by reference to Exhibit 10.2 to the Company’s Current Report
on Form 8-K filed on May 25, 2007).
|
|
(t)
|
Second
Amendment to Asset Purchase Agreement, dated as of May 31, 2007, by and
between Lynch Systems, Inc. and Olivotto Glass Technologies, S.P.A.
(incorporated by reference to Exhibit 10.2 to the Company’s Current Report
on Form 8-K filed on June 25, 2007).
|
|
|
(u)
|
Employment
Agreement, dated December 24, 2007, by and between The LGL Group, Inc. and
Harold D. Castle (incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed on December 28,
2007).
|
|
|
(v)*
|
Form
of Restricted Stock Agreement by and between The LGL Group, Inc. and each
of its Directors.
|
|
|
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).
|
|
|
23.1*
|
Consent
of Independent Registered Public Accounting Firm – J.H. Cohn
LLP.
|
|
|
23.2*
|
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 stockholders 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., 2525 Shader Rd. Orlando, Florida
32804.
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.
|
|||
|
May
13, 2008
|
BY:
|
/s/
Robert Zylstra
|
|
|
Robert
Zylstra
|
|||
|
President
and Chief Executive Officer
(Principal
Executive Officer)
|
|||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated:
|
SIGNATURE
|
CAPACITY
|
DATE
|
||
| /s/ Harold D. Castle |
Chief
Financial Officer
|
May
13, 2008
|
||
|
HAROLD
D. CASTLE
|
(Principal
Financial Officer and Principal Accounting Officer)
|
|||
|
Chairman
of the Board of Directors
|
May
13, 2008
|
|||
|
MARC
J. GABELLI
|
||||
| /s/ Timothy Foufas |
Vice-Chairman
of the
|
May
13, 2008
|
||
|
TIMOTHY
FOUFAS
|
Board
of Directors
|
|||
| /s/ E. Val Cerutti |
Director
|
May
13, 2008
|
||
|
E.
VAL CERUTTI
|
||||
| /s/ Peter J. Dapuzzo |
Director
|
May
13, 2008
|
||
|
PETER
J. DAPUZZO
|
||||
| /s/ Avrum Gray |
Director
|
May
13, 2008
|
||
|
AVRUM
GRAY
|
||||
| /s/ Patrick J. Guarino |
Director
|
May
13, 2008
|
||
|
PATRICK
J. GUARINO
|
||||
| /s/ Jeremiah M. Healy |
Director
|
May
13, 2008
|
||
|
JEREMIAH
M. HEALY
|
||||
| /s/ Kuni Nakamura |
Director
|
May
13, 2008
|
||
|
KUNI
NAKAMURA
|
||||
| /s/ Anthony Pustorino |
Director
|
May
13, 2008
|
||
|
ANTHONY
PUSTORINO
|
||||
| /s/ Javier Romero |
Director
|
May
13, 2008
|
||
|
JAVIER
ROMERO
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board
of Directors and Shareholders
The LGL
Group, Inc.
We have
audited the accompanying consolidated balance sheet of The LGL Group, Inc. and
subsidiaries as of December 31, 2007, and the related consolidated statements of
operations, shareholders’ equity, and cash flows for the year then
ended. These consolidated financial statements are the responsibility
of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audit.
We
conducted our audit 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. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of The LGL Group,
Inc. and subsidiaries at December 31, 2007, and their consolidated results of
operations and cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States of America.
/s/ J.H.
Cohn LLP
Roseland,
New Jersey
May 12,
2008
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board
of Directors and Shareholders
The
LGL Group, Inc.
We have
audited the accompanying consolidated balance sheet of The LGL Group, Inc. (the
“Company”) as of December 31, 2006, and the related consolidated statements of
operations, shareholders’ equity, and cash flows for the year then
ended. These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. We were
not engaged to perform an audit of the Company’s internal control over financial
reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides
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 the consolidated results of its operations and its cash
flows for the year then ended, in conformity with U.S. generally accepted
accounting principles.
As
discussed in Note 2 to the consolidated financial statements, the Company
restated certain amounts previously reported as of and for the year ended
December 31, 2006.
/s/ Ernst
& Young LLP
Providence,
Rhode Island
March 29,
2007, except for Notes 2 and 13,
as to
which the date is May 7, 2008
THE
LGL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(In
Thousands, Except Share Amounts)
|
December
31,
|
||||||||
|
Assets
|
2007
|
2006
(Restated)
|
||||||
|
Current
Assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 5,233 | $ | 4,429 | ||||
|
Restricted
cash (Note 1)
|
-- | 96 | ||||||
|
Investments
- marketable securities (Note 1)
|
48 | 2,610 | ||||||
|
Accounts
receivable, net of allowances of $415 and $132, respectively (Note
1)
|
6,382 | 6,472 | ||||||
|
Inventories
(Note 3)
|
5,181 | 6,105 | ||||||
|
Prepaid
expense and other assets
|
381 | 265 | ||||||
|
Assets
of Discontinued Operations
|
5 | 3,788 | ||||||
|
Total
Current Assets
|
17,230 | 23,765 | ||||||
|
Property,
Plant and Equipment (Note 1)
|
||||||||
|
Land
|
698 | 855 | ||||||
|
Buildings
and improvements
|
5,020 | 5,770 | ||||||
|
Machinery
and equipment
|
12,541 | 12,010 | ||||||
|
Total
Property, Plant and Equipment
|
18,259 | 18,635 | ||||||
|
Less:
Accumulated depreciation
|
(13,196 | ) | (12,034 | ) | ||||
|
Net
Property, Plant, and Equipment
|
5,063 | 6,601 | ||||||
|
Deferred
Income Taxes (Notes 1 and 8)
|
111 | 111 | ||||||
|
Other
assets
|
472 | 508 | ||||||
|
Total
Assets
|
$ | 22,876 | $ | 30,985 | ||||
|
Liabilities
And Shareholders' Equity
|
||||||||
|
Current
Liabilities:
|
||||||||
|
Note
payable to bank (Note 4)
|
$ | 1,035 | $ | 1,356 | ||||
|
Trade
accounts payable
|
2,535 | 2,515 | ||||||
|
Accrued
compensation expense
|
1,481 | 1,943 | ||||||
|
Accrued
professional fees
|
51 | 385 | ||||||
|
Other
accrued expenses
|
720 | 613 | ||||||
|
Current
maturities of long-term debt (Note 4)
|
419 | 2,027 | ||||||
|
Liabilities
of Discontinued Operations
|
231 | 2,311 | ||||||
|
Total
Current Liabilities
|
6,472 | 11,150 | ||||||
|
Long-term
debt (Note 4)
|
4,035 | 3,100 | ||||||
|
Total
Liabilities
|
10,507 | 14,250 | ||||||
|
Commitments
and Contingencies
|
||||||||
|
Shareholders'
Equity
|
||||||||
|
Common
stock, $0.01 par value -- 10,000,000 shares authorized; 2,188,510 shares
issued for 2007 and 2006; 2,167,202 and 2,154,702 shares outstanding for
2007 and 2006, respectively
|
22 | 22 | ||||||
|
Additional
paid-in capital
|
20,921 | 21,081 | ||||||
|
Accumulated
deficit
|
(8,066 | ) | (5,512 | ) | ||||
|
Accumulated
other comprehensive income (loss) (Note 9)
|
(101 | ) | 1,790 | |||||
|
Treasury
stock, at cost, of 21,308 and 33,808 shares, respectively
|
(407 | ) | (646 | ) | ||||
|
Total
Shareholders' Equity
|
12,369 | 16,735 | ||||||
|
Total
Liabilities and Shareholders' Equity
|
$ | 22,876 | $ | 30,985 | ||||
SEE
ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE
LGL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In
Thousands, Except Share Amounts)
|
Years
Ended December 31
|
||||||||
|
2007
|
2006
(Restated)
|
|||||||
|
Revenues
|
$ | 39,536 | $ | 41,549 | ||||
|
Costs
and expenses:
|
||||||||
|
Manufacturing
cost of sales
|
29,363 | 29,297 | ||||||
|
Selling
and administrative
|
10,981 | 10,898 | ||||||
|
Impairment
loss on Lynch Systems’ assets
|
905 | -- | ||||||
|
Operating
Profit (Loss)
|
(1,713 | ) | 1,354 | |||||
|
Other
income (expense):
|
||||||||
|
Investment
income
|
1,526 | 1,752 | ||||||
|
Interest
expense
|
(306 | ) | (465 | ) | ||||
|
Gain
on sale of land
|
88 | -- | ||||||
|
Other
income
|
(15 | ) | 79 | |||||
|
Total
other income
|
1,293 | 1,366 | ||||||
|
Income
(Loss) From Continuing Operations Before Income Taxes
|
(420 | ) | 2,720 | |||||
|
Benefit
(provision) for income taxes
|
(135 | ) | 226 | |||||
|
Income
(Loss) from Continuing Operations
|
(555 | ) | 2,946 | |||||
|
Discontinued
Operations (Note 13):
|
||||||||
|
Loss
from discontinued operations
|
(1,017 | ) | (1,990 | ) | ||||
|
Loss
on sale of Lynch Systems
|
(982 | ) | -- | |||||
|
Loss
from discontinued operations
|
(1,999 | ) | (1,990 | ) | ||||
|
Net
Income (Loss)
|
$ | (2,554 | ) | $ | 956 | |||
|
Weighted
average number of shares used in basic and diluted EPS
calculation
|
2,158,120 | 2,154,702 | ||||||
|
Basic
and diluted income (loss) per common share from continuing
operations
|
$ | (0.26 | ) | $ | 1.37 | |||
|
Basic
and diluted loss per common share from discontinued
operations
|
$ | (0.92 | ) | $ | (0.93 | ) | ||
|
Basic
and diluted net income (loss) per common share
|
$ | (1.18 | ) | $ | 0.44 | |||
SEE
ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE
LGL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
(In
Thousands, Except Share Data)
(Restated
for 2006 and 2005)
|
Shares
of
Common
Stock
Outstanding
|
Common
Stock
|
Additional
Paid-In
Capital
|
Accumulated
Deficit
|
Accumulated
Other Comprehensive Income (Loss)
|
Treasury
Stock
|
Total
|
||||||||||||||||
|
Balance
at December 31, 2005, as previously reported
|
2,154,702
|
$
|
22
|
$
|
21,053
|
$
|
(6,576
|
)
|
$
|
835
|
$
|
(646
|
)
|
$
|
14,688
|
|||||||
|
Correction
of errors in prior periods (Note 2)
|
--
|
--
|
--
|
108
|
(89
|
)
|
--
|
19
|
||||||||||||||
|
Balance
at December 31, 2005, as restated
|
2,154,702
|
22
|
21,053
|
(6,468
|
)
|
746
|
(646
|
)
|
14,707
|
|||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||
|
Net
income for year
|
--
|
--
|
--
|
956
|
--
|
--
|
956
|
|||||||||||||||
|
Other
comprehensive income
|
--
|
--
|
--
|
--
|
1,044
|
--
|
1,044
|
|||||||||||||||
|
Comprehensive
income
|
|
2,000
|
||||||||||||||||||||
|
Stock
based compensation
|
--
|
--
|
28
|
--
|
--
|
--
|
28
|
|||||||||||||||
|
Balance
at December 31, 2006, as restated
|
2,154,702
|
22
|
21,081
|
(5,512
|
)
|
1,790
|
(646
|
)
|
16,735
|
|||||||||||||
|
Comprehensive
loss:
|
||||||||||||||||||||||
|
Net
loss for year
|
|
--
|
--
|
|
(2,554
|
) |
--
|
--
|
|
(2,554
|
) | |||||||||||
|
Other
comprehensive loss
|
|
--
|
--
|
--
|
|
(1,891
|
)
|
(1,891
|
) | |||||||||||||
|
Comprehensive
loss
|
|
|
(4,445
|
)
|
||||||||||||||||||
|
Stock
based compensation
|
|
--
|
79
|
--
|
--
|
--
|
79
|
|||||||||||||||
|
Issuance
of treasury shares for vested restricted stock
|
12,500
|
--
|
(239
|
)
|
--
|
--
|
239
|
--
|
||||||||||||||
|
Balance
at December 31, 2007
|
2,167,202
|
$
|
22
|
$
|
20,921
|
$
|
(8,066
|
)
|
$
|
(101
|
)
|
$
|
(407
|
)
|
$
|
12,369
|
||||||
SEE
ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE
LGL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
Thousands)
|
Years
Ended December 31,
|
||||||||
|
2007
|
2006
(Restated)
|
|||||||
|
Operating
Activities
|
||||||||
|
Net
income (loss)
|
$ | (2,554 | ) | $ | 956 | |||
|
Adjustments
to reconcile net income (loss) to net cash used in continuing operating
activities:
|
||||||||
|
Loss
on sale of Lynch Systems
|
982 | -- | ||||||
|
Impairment
loss on Lynch Systems’ assets
|
905 | -- | ||||||
|
Depreciation
|
1,045 | 1,065 | ||||||
|
Amortization
of finite-lived intangible assets
|
60 | 96 | ||||||
|
Gain
on sale of land
|
(88 | ) | -- | |||||
|
Loss
on disposal of fixed assets
|
7 | -- | ||||||
|
Gains
realized on sale of marketable securities
|
(1,526 | ) | (1,750 | ) | ||||
|
Stock
based compensation
|
79 | 28 | ||||||
|
Changes
in operating assets and liabilities:
|
||||||||
|
Receivables
|
90 | (113 | ) | |||||
|
Inventories
|
924 | (1,560 | ) | |||||
|
Accounts
payable and accrued liabilities
|
(758 | ) | (539 | ) | ||||
|
Other
assets/liabilities
|
(159 | ) | (757 | ) | ||||
|
Cash
used in continuing operations
|
(993 | ) | (2,574 | ) | ||||
|
Cash
provided by discontinued operations
|
634 | 801 | ||||||
|
Net
cash used in operating activities
|
(359 | ) | (1,773 | ) | ||||
|
Investing
Activities
|
||||||||
|
Capital
expenditures
|
(474 | ) | (737 | ) | ||||
|
Restricted
cash
|
96 | 554 | ||||||
|
Proceeds
from sale of marketable securities
|
2,292 | 2,976 | ||||||
|
Proceeds
from sale of land
|
171 | -- | ||||||
|
Payment
on margin liability on marketable securities
|
-- | (330 | ) | |||||
|
Purchase
of marketable securities
|
-- | (68 | ) | |||||
|
Cash
provided by continuing operations
|
2,085 | 2,395 | ||||||
|
Cash
provided by (used in) discontinued operations
|
972 | (18 | ) | |||||
|
Net
cash provided by investing activities
|
3,057 | 2,377 | ||||||
|
Financing
Activities
|
||||||||
|
Net
repayments of notes payable
|
(321 | ) | (726 | ) | ||||
|
Repayment
of long-term debt
|
(1,116 | ) | (1,119 | ) | ||||
|
Proceeds
from long-term debt
|
443 | -- | ||||||
|
Other
|
-- | 14 | ||||||
|
Cash
used in continuing operations
|
(994 | ) | (1,831 | ) | ||||
|
Cash
(used in) provided by discontinued operations
|
(900 | ) | 144 | |||||
|
Net
cash used in financing activities
|
(1,894 | ) | (1,687 | ) | ||||
|
Increase
(decrease) in cash and cash equivalents
|
804 | (1,083 | ) | |||||
|
Cash
and cash equivalents at beginning of year
|
4,429 | 5,512 | ||||||
|
Cash
and cash equivalents at end of year
|
$ | 5,233 | $ | 4,429 | ||||
|
Years
Ended December 31,
|
||||||||
|
2007
|
2006
(Restated)
|
|||||||
|
Supplemental Disclosure Of Cash
Flow Information:
|
||||||||
|
Taxes
Paid
|
$ | 281 | $ | 335 | ||||
|
Interest
Paid
|
$ | 494 | $ | 626 | ||||
|
Non-cash
Financing Transactions:
|
||||||||
|
Issuance
of treasury shares for vested restricted stock
|
$ | 239 | $ | -- |
SEE
ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE
LGL GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1. Accounting
And Reporting Policies
Organization
The LGL
Group, Inc. (the “Company”), formerly Lynch Corporation, incorporated in 1928
under the laws of the State of Indiana and reincorporated under the laws of the
State of Delaware in 2007, is a holding company with subsidiaries engaged in
manufacturing custom-designed highly engineered electronic
components. Information on the Company’s operations by segment and
geographic area is included in Note 12 -- “Segment Information”.
As of
December 31, 2007, the Subsidiaries of the Company are as follows:
|
Owned
By The
LGL
Group, Inc.
|
||||
|
M-tron
Industries, Inc.
|
100.0 | % | ||
|
M-tron
Industries, Ltd.
|
100.0 | % | ||
|
Piezo
Technology, Inc.
|
100.0 | % | ||
|
Piezo
Technology India Private Ltd.
|
99.9 | % | ||
|
Lynch
Systems, Inc.
|
100.0 | % | ||
The
Company operates through its principal subsidiary, M-tron Industries, Inc.,
which includes the operations of M-tron Industries, Ltd. (“Mtron”) and Piezo
Technology, Inc. (“PTI”). The combined operations of Mtron and PTI are referred
to herein as “MtronPTI.” MtronPTI has operations in Orlando, Florida,
Yankton, South Dakota and Noida, India. In addition, MtronPTI has a
sales office in Hong Kong. During 2007, the Company sold the
operating assets of Lynch Systems, Inc. (“Lynch Systems”), a subsidiary of the
Company, to an unrelated third party.
On June
19, 2007, in accordance with the Purchase Agreement dated May 17, 2007, as
amended, (the "Purchase Agreement") by and between Lynch Systems and Olivotto
Glass Technologies S.p.A. ("Olivotto"), Lynch Systems completed the sale of
certain of its assets to Lynch Technologies, LLC (the "Buyer"), the assignee of
Olivotto's rights and obligations under the Purchase Agreement (see
Note 13).
Principles
Of Consolidation
The
consolidated financial statements include the accounts of the Company and
entities in which it has 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. As a
result of the sale of select assets of Lynch Systems in 2007, certain
reclassifications of assets, liabilities, revenues, costs, and expenses have
been made to the prior period financial statements to conform to the 2007
financial statement presentation. Specifically, we have reclassified
the results of operations of Lynch Systems for all periods presented to
Discontinued Operations within the Statement of Operations. In
addition, we have reclassified the assets and liabilities sold relating to Lynch
Systems’ operations to Assets of Discontinued Operations and Liabilities of
Discontinued Operations, respectively. We have also reclassified
$40,000 from other assets, current to other assets, non-current.
Cash
And Cash Equivalents
Cash and
cash equivalents consist of highly liquid investments with a maturity of less
than three months when purchased.
Restricted
Cash
At
December 31, 2006, the Company had $96,000 of restricted cash.
Investments
Investments
in marketable equity securities are classified as available for sale and are
recorded at fair value, 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. 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 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. 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) at December 31:
|
December 31,
|
Cost
|
Gross
Unrealized
Gain
(Loss)
|
Estimated
Fair
Value
|
|||||||||
|
2007
|
$ | 71 | $ | (23 | ) | $ | 48 | |||||
|
2006
|
$ | 834 | $ | 1,776 | $ | 2,610 | ||||||
At
December 31, 2007 and 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. In relation to export sales, the Company requires letters
of credit supporting a significant portion of the sales price prior to
production to limit exposure to credit risk. Certain credit sales are
made to industries that are subject to cyclical economic changes. The
Company maintains an allowance for doubtful accounts at a level that management
believes is sufficient to cover potential credit losses.
The
Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its clients to make required
payments. Estimates are based on historical collection experience,
current trends, credit policy and relationship between accounts receivable and
revenues. In determining these estimates, the Company examines
historical write-offs of its receivables and reviews each client’s account to
identify any specific customer collection issues. If the financial
condition of its customers were to deteriorate, resulting in an impairment of
their ability to make payment, additional allowances may be
required. The Company’s failure to accurately estimate the losses for
doubtful accounts and ensure that payments are received on a timely basis could
have a material adverse effect on its business, financial condition, and results
of operations.
Property,
Plant And Equipment, Net
Property,
plant and equipment are recorded at cost less accumulated depreciation and
include expenditures for additions and major
improvements. Maintenance and repairs are charged to operations as
incurred. Depreciation is computed for financial reporting purposes
using the straight-line method over the estimated useful lives of the assets,
which range from 5 years to 35 years for buildings and improvements, and for 3
to 10 years for other fixed assets. 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.
Depreciation
expense from continuing operations was $1,045,000 for 2007 and $1,065,000 for
2006. Depreciation expense from discontinued operations was $52,000
for 2007 and $123,000 for 2006.
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
consist principally of customer relationships, trade name and funded
technologies. The net carrying value of these intangible assets are
$472,000 and $508,000 as of December 31, 2007 and 2006,
respectively.
Discontinued
Operations
Discontinued
operations is defined in Statement of Financial Accounting Standards (“SFAS”)
No. 144,
“Accounting for the Impairment or Disposal of Long Lived Assets” ("SFAS
No. 144") as a component of an entity that has either been disposed
of or is deemed to be held for sale if both the operations and cash flows of the
component have been or will be eliminated from ongoing operations as a result of
the disposal transaction and the entity will not have any significant continuing
involvement in the operations of the component after the disposal
transaction.
Revenue
Recognition
Revenues
are recognized upon shipment when title passes. Shipping costs are
included in manufacturing cost of sales. The Company believes that recognizing
revenue at time of shipment is appropriate because the Company’s sales policies
meet the four criteria of SEC’s Staff Accounting Bulletin No. 104, which
are: (i) persuasive evidence that an arrangement exists, (ii) delivery
has occurred, (iii) the seller’s price to the buyer is fixed and
determinable, and (iv) collectibility is reasonably assured.
Research
And Development Costs
Research
and development costs are charged to operations as incurred. Such
costs were $2,757,000 in 2007 compared with $2,501,000 in 2006, and are included
within selling and administrative expenses.
Advertising
Expense
Advertising
costs are charged to operations as incurred. Such costs were $78,000
in 2007, compared with $47,000 in 2006.
Stock
Based Compensation
The
Company adopted the provisions of SFAS123R, “Share-Based Payment” (“SFAS
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, compensation expense is
recognized for (a) all share-based payments granted after the effective date
under SFAS 123-R, 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 service period.
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 123-R, 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 and 2009 and $28,000 for the five months in fiscal
2010.).
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 is
being accounted for under SFAS No. 123-R. Total stock
compensation expense recognized by the Company for the year ended December 31,
2007 associated with this restricted stock was $79,000 and for the year ended
December 31, 2006 was $28,000. The remaining unrecognized
compensation expense of $28,000 will be recognized in 2008.
On March
20, 2007, the Company granted 10,000 restricted shares to an executive
officer. This officer subsequently resigned prior to December 31,
2007 without vesting in any shares. On December 31, 2007, the Board
of Directors granted restricted shares to eight of its members at 1,471 shares
each. No expense was recognized in 2007 for this grant. On
January 22, 2008, the Board of Directors granted 1,250 restricted shares to one
of its members. All of these shares are to vest ratably over 2008 at the end of
each respective quarter. The unrecognized compensation expense of
$90,000 will be recognized over the next 12 months.
The
following table summarizes information about restricted share grants outstanding
and exercisable at December 31, 2007 and 2006 as well as activity during the
years then ended:
|
Number
of Stock Grants
|
Weighted
Average Grant Value
|
Weighted
Average Years Remaining
|
||||||||||
|
Outstanding
non-vested at December 31, 2005
|
-- | $ | -- | -- | ||||||||
|
Granted
during 2006
|
20,000 | 8.25 | 2.0 | |||||||||
|
Vested
during 2006
|
-- | -- | -- | |||||||||
|
Forfeited
or expired during 2006
|
-- | -- | -- | |||||||||
|
Outstanding
non-vested at December 31, 2006
|
20,000 | 8.25 | 1.8 | |||||||||
|
Granted
during 2007
|
21,768 | 7.22 | 1.5 | |||||||||
|
Vested
during 2007
|
(12,500 | ) | 8.25 | -- | ||||||||
|
Forfeited
or expired during 2007
|
(13,750 | ) | 7.86 | -- | ||||||||
|
Outstanding
non-vested at December 31, 2007
|
15,518 | $ | 7.15 | 0.9 | ||||||||
The
Company estimates the fair value of stock based compensation on the date of
grant using the Black-Scholes-Merton option-pricing model for stock option
grants. The Black-Scholes-Merton option-pricing model requires
subjective assumptions, including future stock price volatility and expected
time to exercise, which greatly affect the calculated values. There
is no expected dividend rate. Historical Company information was the
primary basis for the expected volatility assumption. Prior years
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. The risk-free interest
rate is based on the U.S. Treasury zero-coupon rates with a remaining term equal
to the expected term of the option. SFAS 123-R also requires forfeitures to be
estimated at the time of grant and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates. Based on past
history of actual performance, a zero forfeiture rate has been
assumed.
Earnings
(Loss) Per Share
The
Company computes earnings (loss) per share in accordance with SFAS
No. 128, “Earnings Per Share.” Basic earnings (loss) per
share is computed by dividing net income (loss) 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 diluted earnings (loss) per
share computation because the impact of the assumed exercise of stock options
and vesting of restricted stock would have been anti-dilutive:
|
2007
|
2006
|
|||||||
|
Options
to purchase common stock
|
200,000 | 275,000 | ||||||
|
Unvested
restricted stock
|
15,518 | 20,000 | ||||||
|
Total
|
215,518 | 295,000 | ||||||
Income
Taxes
The
Company is subject to U.S. federal, various state and international income
taxes. The Company is generally no longer subject to income tax examinations by
U.S. federal, state and international tax authorities for years before
2001.
Deferred
income tax balances reflect the effects of temporary differences between the
carrying amounts of assets and liabilities and their tax bases and are stated at
enacted tax rates expected to be in effect when taxes are actually paid or
recovered. At December 31, 2007, our deferred tax assets, net of deferred
tax liabilities and valuation allowance, were $111,000. The majority of our NOLs
begin to expire in 2023 and thereafter.
SFAS
No. 109, “Accounting for Income Taxes” (“SFAS 109”), requires that deferred tax
assets be evaluated for future realization and reduced by a valuation allowance
to the extent we believe a portion more likely than not will not be realized. We
consider many factors when assessing the likelihood of future realization of our
deferred tax assets, including our recent cumulative earnings experience and
expectations of future taxable income by taxing jurisdiction, the carry-forward
periods available to us for tax reporting purposes, and other relevant
factors.
Effective
January 1, 2007, we adopted the provisions of FASB Interpretation (“FIN”)
No. 48, “Accounting for Uncertainty in Income Taxes—an Interpretation of
FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies
the accounting for uncertainty in income taxes recognized in an enterprise's
financial statements in accordance with SFAS 109. The Interpretation
prescribes a recognition and measurement method for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. The Interpretation also provides guidance on recognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. We consider many factors when evaluating
and estimating our tax positions and tax benefits, which may require periodic
adjustments and which may not accurately forecast actual outcomes.
Based on
a review of our tax positions, the Company was not required to record a
liability for unrecognized tax benefits as a result of adopting FIN 48 on
January 1, 2007. Further, there has been no change during the year
ended December 31, 2007. Accordingly, we have not accrued any
interest and penalties through the year ended December 31, 2007.
Concentration
of Risk
In 2007,
two separate electronics manufacturing companies accounted for approximately
$9,589,000 of revenue, or 24.3% of MtronPTI’s total revenues from continuing
operations, compared to approximately 10.6% for MtronPTI’s largest customer in
2006. (No other customers accounted for more than 10% of its 2007
revenues from continuing operations.) Sales to its ten largest customers
accounted for approximately 64.7% of revenues from continuing operations in
2007, compared to approximately 58.6% of revenues from continuing operations for
2006.
In 2007,
approximately 15.7% of MtronPTI’s revenue was attributable to finished products
that were manufactured by an independent contract manufacturer located in both
Korea and China compared to 15.9% for 2006. We expect this
manufacturer to account for a smaller but substantial portion of MtronPTI’s
revenues in 2008 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 SFAS No. 131,
“Disclosures about Segments of an Enterprise and Related Information” (“SFAS
131”). SFAS 131 requires companies to report financial and
descriptive information for each operating segment based on management’s
internal organizational decision-making structure. See Note 12 to the
Consolidated Financial Statements - “Segment Information” - for the detailed
presentation of the Company’s business segment.
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. 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. 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.
In June
2007, the Company determined that certain assets of its subsidiary, Lynch
Systems, were impaired based upon the criteria in SFAS No. 144 and recognized an
impairment loss of $905,000, which represented the difference in carrying value
of the Lynch Systems’ land and building and building improvements and their
estimated fair value.
Financial
Instruments
Cash and
cash equivalents, restricted cash, trade accounts receivable, short-term
borrowings, and trade accounts payable 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 line of credit
approximates fair value, as the obligation bears 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, cash equivalents, 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 believes that these
financial institutions are of high credit standing.
The
Company has also entered into an interest rate swap in relation to one of its
long-term debt agreements for which it has accounted for this swap as a cash
flow hedge (see Note 4).
Foreign
Currency Translation
The
assets and liabilities of international operations are remeasured at the
exchange rates in effect at the balance sheet date for monetary assets and
liabilities and at historical rates for non-monetary assets and liabilities,
with the related remeasurement gains or losses reported within the Consolidated
Statement of Operations. The results of international operations are remeasured
at the monthly average exchange rates. The Company’s foreign subsidiaries and
respective operations’ functional currency is the U.S. dollar. The
Company has determined this based upon the majority of transactions with
customers as well as inter-company transactions and parental support being based
in U.S. dollars.
Guarantees
At
December 31, 2007, the Company guaranteed (unsecured) the RBC loan of
MtronPTI. As of December 31, 2007, the outstanding balance under this
loan was $2,894,000.
There are
no other financial, performance, indirect guarantees or indemnification
agreements.
Recently
Issued Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair
value, establishes a framework for measuring fair value in accordance with
generally accepted accounting principles and expands disclosures about fair
value measurements. This statement is effective for fiscal years beginning after
November 15, 2007 and interim periods within those years. However, on
November 14, 2007, the FASB provided a one-year deferral of the
implementation for other nonfinancial assets and liabilities. The standard is
not expected to have a material impact on the Company’s consolidated financial
statements.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities—including an amendment of FASB
Statement No. 115” (“SFAS 159”). SFAS 159 permits entities to elect to
measure eligible financial instruments at fair value. An entity shall report
unrealized gains and losses on items for which the fair value option has been
elected in earnings at each subsequent reporting date, and recognize upfront
costs and fees related to those items in earnings as incurred and not deferred.
This statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007. The provisions of this standard will be
effective for the Company’s 2008 fiscal year. The standard is not expected to
have a material impact on the Company’s consolidated financial
statements.
In
December 2007, the FASB issued SFAS No. 141(R), “Business
Combinations” (“SFAS 141(R)”). SFAS 141(R) expands the definition of
transactions and events that qualify as business combinations; requires that the
acquired assets and liabilities, including contingencies, be recorded at the
fair value determined on the acquisition date and changes thereafter reflected
in earnings, not goodwill; changes the recognition and timing for restructuring
costs; and requires acquisition costs to be expensed as incurred. Adoption of
SFAS 141(R) is required for combinations occurring in fiscal years
beginning after December 15, 2008. Early adoption and retroactive
application of SFAS 141(R) to fiscal years preceding the effective date are
not permitted.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interest
in Consolidated Financial Statements” (“SFAS 160”). SFAS 160 re-characterizes
minority interests in consolidated subsidiaries as non-controlling interests and
requires the classification of minority interests as a component of equity.
Under SFAS 160, a change in control will be measured at fair value, with any
gain or loss recognized in earnings. The effective date for SFAS 160 is for
annual periods beginning on or after December 15, 2008. Early adoption and
retroactive application of SFAS 160 to fiscal years preceding the effective date
are not permitted. We currently do not have significant minority interests in
our consolidated subsidiaries.
In March
2008, the FASB issued Statement of Financial Accounting Standards No. 161
“Disclosures about Derivative Instruments and Hedging Activities” (“SFAS 161”).
This new standard enhances disclosure requirements for derivative instruments in
order to provide users of financial statements with an enhanced understanding of
(i) how and why an entity uses derivative instruments, (ii) how
derivative instruments and related hedged items are accounted for under
Financial Accounting Standards No. 133 “Accounting for Derivative
Instruments and Hedging Activities” and its related
interpretations and (iii) how derivative instruments and related hedged
items affect an entity’s financial position, financial performance and cash
flows. SFAS 161 is to be applied prospectively for the first annual reporting
period beginning on or after November 15, 2008. The Company is currently
assessing the impact of the adoption of SFAS No. 161 on its consolidated
financial statements.
|
2.
|
Restatement
of Consolidated Financial Statements (Unaudited as to Quarterly
Amounts)
|
The
Company’s management determined that it had improperly assessed the functional
currency of one of its foreign subsidiaries. Upon subsequent review,
the Company determined that the foreign subsidiary’s functional currency was the
Company’s reporting currency and any net effects from the remeasurement process
should be recorded within the Consolidated Statements of
Operations. The Company has since corrected the error in its
determination of its foreign subsidiary’s functional currency.
The
Company’s management also identified errors in the Company’s previously reported
depreciation expense for fiscal year 2006, as well as years prior to 2006, and
the first two quarters of 2007. As a result of an error in the
depreciation computation, the Company had incorrectly recognized too much
depreciation expense during each respective period during fiscal 2006 and the
first two quarters of 2007.
In
addition, during the Company’s 2007 annual review of financial results and
application of financial controls, management identified that an impairment of
certain assets of one of its subsidiaries, Lynch Systems, existed as of June
2007 primarily triggered by the Company’s sale of Lynch Systems. The
Company determined that there were impairment indicators in place as of June
2007 based upon criteria defined within SFAS 144 and that the carrying value of
the identified asset group exceeded its estimated fair value as of June 30,
2007. In error, the Company did not record an impairment of the Lynch
Systems’ assets. Accordingly, an impairment loss of $905,000, which
represented the difference in carrying value of the Lynch Systems’ land and
building and building improvements and the asset groups’ estimated fair value,
has now been recorded in June 2007.
As
discussed above, the accounting treatments that had been originally afforded to
certain transactions were in error and that certain accounting errors had been
made during the first two quarters of 2007, fiscal year 2006 as well as years
prior to 2006. Accordingly, accumulated deficit as previously
reported as of December 31, 2005 has been restated and reduced by approximately
$108,000, consisting of $89,000 related to foreign currency remeasurement gains
and $19,000 related to depreciation expense corrections.
There is
no difference between the gross adjustments arising out of the restatement
described above and the net effect of such adjustments after
taxes. The Company, during all restated reporting periods, maintained
a full valuation allowance against its net deferred tax assets. Thus,
any incremental change in income tax expense/benefit arising out of the
restatement would be offset by a commensurate change in the Company’s valuation
allowance against its deferred tax assets.
The
effect on the fiscal year ended December 31, 2006 was to recognize a net $91,000
increase in income, which is comprised of $86,000 included within other income
(expense) related to foreign currency remeasurement gains, and $5,000 as a
reduction to manufacturing cost of sales, related to a reduction in depreciation
expense. For fiscal 2006, the net effect of the foreign currency
remeasurement and depreciation expense adjustments on basic and diluted net
income per common share was an increase of $0.04. The net effect of
the foreign currency remeasurement and depreciation expense adjustments on basic
and diluted income per common share from continuing operations was an increase
of $0.04.
Consolidated
Balance Sheet Adjustments
The
following is a summary of the adjustments to our previously issued consolidated
balance sheet as of December 31, 2006 and subsequent reconciliation of certain
prior year amounts in the accompanying consolidated financial statements that
have been reclassified to conform to the current year presentation (in
thousands, except share amounts):
|
As
Reported
|
Adjustments
|
Restated
|
Reclassifications
|
Restated
and Reclassified
|
||||||||||||||||
|
Assets
|
||||||||||||||||||||
|
Current
Assets:
|
||||||||||||||||||||
|
Cash
and cash equivalents
|
$ | 4,429 | $ | -- | $ | 4,429 | $ | -- | $ | 4,429 | ||||||||||
|
Restricted
cash
|
96 | -- | 96 | -- | 96 | |||||||||||||||
|
Investments
- marketable securities
|
2,610 | -- | 2,610 | -- | 2,610 | |||||||||||||||
|
Accounts
receivable, net of allowance of $808 ($132 reclassified)
|
6,976 | -- | 6,976 | (504 | ) | 6,472 | ||||||||||||||
|
Unbilled
accounts receivable
|
227 | -- | 227 | (227 | ) | -- | ||||||||||||||
|
Inventories
|
8,906 | -- | 8,906 | (2,801 | ) | 6,105 | ||||||||||||||
|
Prepaid
expense and other assets
|
369 | -- | 369 | (104 | ) | 265 | ||||||||||||||
|
Assets
of Discontinued Operations
|
-- | -- | -- | 3,788 | 3,788 | |||||||||||||||
|
Total
Current Assets
|
23,613 | -- | 23,613 | 152 | 23,765 | |||||||||||||||
|
Property,
Plant and Equipment
|
||||||||||||||||||||
|
Land
|
855 | -- | 855 | -- | 855 | |||||||||||||||
|
Buildings
and improvements
|
5,770 | -- | 5,770 | -- | 5,770 | |||||||||||||||
|
Machinery
and equipment
|
15,358 | 4 | 15,362 | (3,352 | ) | 12,010 | ||||||||||||||
|
Total
Property, Plant and Equipment
|
21,983 | 4 | 21,987 | (3,352 | ) | 18,635 | ||||||||||||||
|
Less:
Accumulated depreciation
|
(15,218 | ) | 24 | (15,194 | ) | 3,160 | (12,034 | ) | ||||||||||||
|
Net
Property, Plant, and Equipment
|
6,765 | 28 | 6,793 | (192 | ) | 6,601 | ||||||||||||||
|
Deferred
Income Taxes
|
111 | -- | 111 | -- | 111 | |||||||||||||||
|
Other
assets
|
468 | -- | 468 | 40 | 508 | |||||||||||||||
|
Total
Assets
|
$ | 30,957 | $ | 28 | $ | 30,985 | $ | -- | $ | 30,985 | ||||||||||
|
Liabilities
And Shareholders' Equity
|
||||||||||||||||||||
|
Current
Liabilities:
|
||||||||||||||||||||
|
Notes
payable to bank
|
$ | 2,256 | $ | -- | $ | 2,256 | $ | (900 | ) | $ | 1,356 | |||||||||
|
Trade
accounts payable
|
2,796 | -- | 2,796 | (281 | ) | 2,515 | ||||||||||||||
|
Accrued
warranty expense
|
181 | -- | 181 | (181 | ) | -- | ||||||||||||||
|
Accrued
compensation expense
|
1,492 | -- | 1,492 | 451 | 1,943 | |||||||||||||||
|
Accrued
professional fees
|
562 | -- | 562 | (177 | ) | 385 | ||||||||||||||
|
Accrued
income taxes
|
23 | -- | 23 | (23 | ) | -- | ||||||||||||||
|
Other
accrued expenses
|
1,352 | -- | 1,352 | (739 | ) | 613 | ||||||||||||||
|
Customer
advances
|
461 | -- | 461 | (461 | ) | -- | ||||||||||||||
|
Current
maturities of long-term debt
|
2,027 | -- | 2,027 | -- | 2,027 | |||||||||||||||
|
Liabilities
of Discontinued Operations
|
-- | -- | -- | 2,311 | 2,311 | |||||||||||||||
|
Total
Current Liabilities
|
11,150 | -- | 11,150 | -- | 11,150 | |||||||||||||||
|
Long-term
debt
|
3,100 | -- | 3,100 | -- | 3,100 | |||||||||||||||
|
Total
Liabilities
|
14,250 | -- | 14,250 | -- | 14,250 | |||||||||||||||
|
As
Reported
|
Adjustments
|
Restated
|
Reclassifications
|
Restated
and Reclassified
|
||||||||||||||||
|
Commitments
and Contingencies
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
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 | -- | 22 | |||||||||||||||
|
Additional
paid-in capital
|
21,081 | -- | 21,081 | -- | 21,081 | |||||||||||||||
|
Accumulated
deficit
|
(5,711 | ) | 199 | (5,512 | ) | -- | (5,512 | ) | ||||||||||||
|
Accumulated
other comprehensive income
|
1,961 | (171 | ) | 1,790 | -- | 1,790 | ||||||||||||||
|
Treasury
stock, at cost, of 33,808 shares
|
(646 | ) | -- | (646 | ) | -- | (646 | ) | ||||||||||||
|
Total
Shareholders' Equity
|
16,707 | 28 | 16,735 | -- | 16,735 | |||||||||||||||
|
Total
Liabilities and Shareholders' Equity
|
$ | 30,957 | $ | 28 | $ | 30,985 | $ | -- | $ | 30,985 |
Consolidated
Statement of Operations Adjustments
The
following is a summary of the adjustments to our previously issued consolidated
statement of operations for the year ended December 31, 2006 and subsequent
reconciliation of certain prior year amounts in the accompanying consolidated
financial statements that have been reclassified to conform to the current year
presentation (in thousands, except share amounts):
|
As
Reported
|
Adjustments
|
Restated
|
Reclassifications
|
Restated
and Reclassified
|
||||||||||||||||
|
Revenues
|
$ | 49,300 | $ | -- | $ | 49,300 | $ | (7,751 | ) | $ | 41,549 | |||||||||
|
Costs
and expenses:
|
||||||||||||||||||||
|
Manufacturing
cost of sales
|
35,747 | (5 | ) | 35,742 | (6,445 | ) | 29,297 | |||||||||||||
|
Selling
and administrative
|
14,101 | -- | 14,101 | (3,203 | ) | 10,898 | ||||||||||||||
|
Operating
Profit (Loss)
|
(548 | ) | 5 | (543 | ) | 1,897 | 1,354 | |||||||||||||
|
Other
income (expense):
|
||||||||||||||||||||
|
Investment
income
|
1,750 | -- | 1,750 | 2 | 1,752 | |||||||||||||||
|
Interest
expense
|
(570 | ) | -- | (570 | ) | 105 | (465 | ) | ||||||||||||
|
Other
income
|
7 | 86 | 93 | (14 | ) | 79 | ||||||||||||||
|
Total
other income
|
1,187 | 86 | 1,273 | 93 | 1,366 | |||||||||||||||
|
Income
From Continuing Operations Before Income Taxes
|
639 | 91 | 730 | 1,990 | 2,720 | |||||||||||||||
|
Benefit
for income taxes
|
226 | -- | 226 | -- | 226 | |||||||||||||||
|
Income
from Continuing Operations
|
865 | 91 | 956 | 1,990 | 2,946 | |||||||||||||||
|
Discontinued
Operations:
|
||||||||||||||||||||
|
Loss
from discontinued operations
|
-- | -- | -- | (1,990 | ) | (1,990 | ) | |||||||||||||
|
Net
Income
|
$ | 865 | $ | 91 | $ | 956 | $ | -- | $ | 956 | ||||||||||
|
As
Reported
|
Adjustments
|
Restated
|
Reclassifications
|
Restated
and Reclassified
|
||||||||||||||||
|
Weighted
average number of shares used in basic and diluted EPS
calculation
|
2,154,702 | 2,154,702 | 2,154,702 | 2,154,702 | 2,154,702 | |||||||||||||||
|
Basic
and diluted income per common share from continuing
operations
|
N/A | N/A | N/A | $ | 1.37 | $ | 1.37 | |||||||||||||
|
Basic
and diluted loss per common share from discontinued
operations
|
N/A | N/A | N/A | $ | (0.93 | ) | $ | (0.93 | ) | |||||||||||
|
Basic
and diluted net income per common share
|
$ | 0.40 | $ | 0.04 | $ | 0.44 | N/A | $ | 0.44 |
Consolidated
Statement of Cash Flows Adjustments
The
following is a summary of the adjustments to our previously issued consolidated
statement of cash flows for the year ended December 31, 2006 and subsequent
reconciliation of certain prior year amounts in the accompanying consolidated
financial statements that have been reclassified to conform to the current year
presentation (in thousands, except share amounts):
|
As
Reported
|
Adjustments
|
Restated
|
Reclassifications
|
Restated
and Reclassified
|
||||||||||||||||
|
Operating
Activities
|
||||||||||||||||||||
|
Net
income
|
$ | 865 | $ | 91 | $ | 956 | $ | -- | $ | 956 | ||||||||||
|
Adjustments
to reconcile net income to net cash used in continuing operating
activities:
|
||||||||||||||||||||
|
Depreciation
|
1,193 | (5 | ) | 1,188 | (123 | ) | 1,065 | |||||||||||||
|
Amortization
of finite-lived intangible assets
|
96 | -- | 96 | -- | 96 | |||||||||||||||
|
Gains
realized on sale of marketable securities
|
(1,750 | ) | -- | (1,750 | ) | -- | (1,750 | ) | ||||||||||||
|
Stock
based compensation
|
28 | -- | 28 | -- | 28 | |||||||||||||||
|
Changes
in operating assets and liabilities:
|
||||||||||||||||||||
|
Receivables
|
1,150 | -- | 1,150 | (1,263 | ) | (113 | ) | |||||||||||||
|
Inventories
|
(1,861 | ) | -- | (1,861 | ) | 301 | (1,560 | ) | ||||||||||||
|
Accounts
payable and accrued liabilities
|
(836 | ) | -- | (836 | ) | 297 | (539 | ) | ||||||||||||
|
Other
assets/liabilities
|
(740 | ) | (4 | ) | (744 | ) | (13 | ) | (757 | ) | ||||||||||
|
Cash
used in continuing operations
|
(1,855 | ) | 82 | (1,773 | ) | (801 | ) | (2,574 | ) | |||||||||||
|
Cash
provided by discontinued operations
|
-- | -- | -- | 801 | 801 | |||||||||||||||
|
Net
cash used in operating activities
|
(1,855 | ) | 82 | (1,773 | ) | -- | (1,773 | ) | ||||||||||||
|
As
Reported
|
Adjustments
|
Restated
|
Reclassifications
|
Restated
and Reclassified
|
||||||||||||||||
|
Investing
Activities
|
||||||||||||||||||||
|
Capital
expenditures
|
(755 | ) | -- | (755 | ) | 18 | (737 | ) | ||||||||||||
|
Restricted
cash
|
554 | -- | 554 | -- | 554 | |||||||||||||||
|
Proceeds
from sale of marketable securities
|
2,976 | -- | 2,976 | -- | 2,976 | |||||||||||||||
|
Payment
on margin liability on marketable securities
|
(330 | ) | -- | (330 | ) | -- | (330 | ) | ||||||||||||
|
Purchase
of marketable securities
|
(68 | ) | -- | (68 | ) | -- | (68 | ) | ||||||||||||
|
Cash
provided by continuing operations
|
2,377 | -- | 2,377 | 18 | 2,395 | |||||||||||||||
|
Cash
used in discontinued operations
|
-- | -- | -- | (18 | ) | (18 | ) | |||||||||||||
|
Net
cash provided by investing activities
|
2,377 | -- | 2,377 | -- | 2,377 | |||||||||||||||
|
Financing
Activities
|
||||||||||||||||||||
|
Net
repayments of notes payable
|
(582 | ) | -- | (582 | ) | (144 | ) | (726 | ) | |||||||||||
|
Repayment
of long-term debt
|
(1,119 | ) | -- | (1,119 | ) | -- | (1,119 | ) | ||||||||||||
|
Other
|
96 | (82 | ) | 14 | -- | 14 | ||||||||||||||
|
Cash
used in continuing operations
|
(1,605 | ) | (82 | ) | (1,687 | ) | (144 | ) | (1,831 | ) | ||||||||||
|
Cash
provided by discontinued operations
|
-- | -- | -- | 144 | 144 | |||||||||||||||
|
Net
cash used in financing activities
|
(1,605 | ) | (82 | ) | (1,687 | ) | -- | (1,687 | ) | |||||||||||
|
Decrease
in cash and cash equivalents
|
(1,083 | ) | -- | (1,083 | ) | -- | (1,083 | ) | ||||||||||||
|
Cash
and cash equivalents at beginning of year
|
5,512 | -- | 5,512 | -- | 5,512 | |||||||||||||||
|
Cash
and cash equivalents at end of year
|
$ | 4,429 | $ | -- | $ | 4,429 | $ | -- | $ | 4,429 | ||||||||||
|
Supplemental Disclosure Of Cash
Flow Information:
|
||||||||||||||||||||
|
Taxes
Paid
|
$ | 335 | $ | -- | $ | 335 | $ | -- | $ | 335 | ||||||||||
|
Interest
Paid
|
$ | 626 | $ | -- | $ | 626 | $ | -- | $ | 626 |
The
following tables present unaudited financial information for the first two
quarters of 2007, as well as summary balance sheet information for the third
quarter of 2007 and the four quarters of 2006, consistent with Article 10 of
Regulation S-X. As a result, the quarterly data presented herein does not agree
to previously issued quarterly financial statements in our previously filed
Forms 10Q.
The
effect on the three months ended March 31, 2007 was to recognize a net $174,000
increase in income, which is comprised of $173,000 in income related to foreign
currency remeasurement gains and $1,000 as a reduction to manufacturing cost of
sales, related to a reduction in depreciation expense. For the three
months ended March 31, 2007, the net effect of the foreign currency
remeasurement and depreciation expense adjustments on basic and diluted net
income per common share was an increase of $0.08.
The
effect on the three months ended June 30, 2007 was to recognize a net $1,077,000
increase in total net loss, which is comprised of $905,000 impairment loss on
Lynch Systems’ assets, $173,000 in expense related to foreign currency
remeasurement losses and $1,000 as a reduction to manufacturing cost of sales,
related to a reduction in depreciation expense. For the three months
ended June 30, 2007, the net effect of the foreign currency remeasurement and
depreciation expense adjustments on basic and diluted net loss per common share
was an increase of $0.08. The net effect of the foreign currency
remeasurement and depreciation expense adjustments on the basic and diluted loss
per common share from continuing operations was an increase of
$0.08. In addition, the Company incorrectly classified the net
carrying value of select Lynch Systems asset as Assets Held for Sale. This net
carrying value of $1,521,000 is reclassified in the tables below.
The
effect on the three months ended March 31, 2006 was to recognize a net $16,000
increase in income, which is comprised of $14,000 in income related to foreign
currency remeasurement gains and $2,000 as a reduction to manufacturing cost of
sales, related to a reduction in depreciation expense. For the three
months ended March 31, 2006, the net effect of the foreign currency
remeasurement and depreciation expense adjustments on basic and diluted net
income per common share was an increase of $0.01.
The
effect on the three months ended June 30, 2006 was to recognize a net $21,000
increase in income, which is comprised of $19,000 in income related to foreign
currency remeasurement gains and $2,000 as a reduction to manufacturing cost of
sales, related to a reduction in depreciation expense. For the three
months ended June 30, 2006, the net effect of the foreign currency remeasurement
and depreciation expense adjustments on basic and diluted net income per common
share was an increase of $0.01.
The
effect on the three months ended September 30, 2006 was to recognize a net
$31,000 decrease in income, which is comprised of $31,000 in expense related to
foreign currency remeasurement losses. For the three months ended
September 30, 2006, the net effect of the foreign currency remeasurement
adjustment on basic and diluted net income per common share was a decrease of
$0.01.
The
effect on the three months ended December 31, 2006 was to recognize a net
$85,000 reduction in net loss, which is comprised of $84,000 in income related
to foreign currency remeasurement gains and $1,000 as a reduction to
manufacturing cost of sales, related to a reduction in depreciation
expense. For the three months ended December 31, 2006, the net effect
of the foreign currency remeasurement and depreciation expense adjustments on
basic and diluted net loss per common share was a decrease of
$0.04.
The
Company believes that all necessary adjustments have been included in the
amounts stated below to present fairly the following quarterly results when read
in conjunction with the financial statements included elsewhere in this
report. Results of operations for a particular quarter are not
necessarily indicative of results of operations for a full fiscal
year.
The
following table presents a reconciliation of the effects of adjustments made to
the Company’s previously reported quarterly condensed consolidated balance
sheets for the first two quarters of 2007 (in thousands, except share
amounts):
|
March
31, 2007 (Unaudited)
|
June
30, 2007 (Unaudited)
|
|||||||||||||||||||||||
|
As
Reported
|
Adjustments
|
As
Restated
|
As
Reported
|
Adjustments
|
As
Restated
|
|||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||
|
Current
Assets:
|
||||||||||||||||||||||||
|
Cash
and cash equivalents
|
$ | 4,662 | $ | -- | $ | 4,662 | $ | 5,640 | $ | -- | $ | 5,640 | ||||||||||||
|
Restricted
cash
|
1,196 | -- | 1,196 | 77 | -- | 77 | ||||||||||||||||||
|
Investments
- marketable securities
|
55 | -- | 55 | 53 | -- | 53 | ||||||||||||||||||
|
Accounts
receivable, net of allowances of $1,111 and $429,
respectively
|
6,531 | -- | 6,531 | 6,369 | -- | 6,369 | ||||||||||||||||||
|
Unbilled
accounts receivable
|
227 | -- | 227 | -- | -- | -- | ||||||||||||||||||
|
Due
from Olivotto
|
-- | -- | -- | 250 | -- | 250 | ||||||||||||||||||
|
Inventories
|
8,012 | -- | 8,012 | 5,172 | -- | 5,172 | ||||||||||||||||||
|
Prepaid
expense and other assets
|
497 | -- | 497 | 300 | -- | 300 | ||||||||||||||||||
|
Assets
Held for Sale
|
-- | -- | -- | 1,521 | (1,521 | ) | -- | |||||||||||||||||
|
Assets
of Discontinued Operations
|
-- | -- | -- | 457 | -- | 457 | ||||||||||||||||||
|
Total
Current Assets
|
21,180 | -- | 21,180 | 19,839 | (1,521 | ) | 18,318 | |||||||||||||||||
|
Property,
Plant and Equipment
|
||||||||||||||||||||||||
|
Land
|
855 | 855 | 635 | 63 | 698 | |||||||||||||||||||
|
Buildings
and improvements
|
5,770 | 5,770 | 2,761 | 2,259 | 5,020 | |||||||||||||||||||
|
Machinery
and equipment
|
15,401 | 4 | 15,405 | 12,065 | 4 | 12,069 | ||||||||||||||||||
|
Total
Property, Plant and Equipment
|
22,026 | 4 | 22,030 | 15,461 | 2,326 | 17,787 | ||||||||||||||||||
|
Less:
Accumulated depreciation
|
(15,521 | ) | 26 | (15,495 | ) | (10,989 | ) | (1,598 | ) | (12,587 | ) | |||||||||||||
|
Net
Property, Plant, and Equipment
|
6,505 | 30 | 6,535 | 4,472 | 728 | 5,200 | ||||||||||||||||||
|
Deferred
Income Taxes
|
111 | -- | 111 | 111 | -- | 111 | ||||||||||||||||||
|
Other
assets
|
439 | -- | 439 | 450 | -- | 450 | ||||||||||||||||||
|
Total
Assets
|
$ | 28,235 | $ | 30 | $ | 28,265 | $ | 24,872 | $ | (793 | ) | $ | 24,079 | |||||||||||
|
March
31, 2007 (Unaudited)
|
June
30, 2007 (Unaudited)
|
|||||||||||||||||||||||
|
As
Reported
|
Adjustments
|
As
Restated
|
As
Reported
|
Adjustments
|
As
Restated
|
|||||||||||||||||||
|
Liabilities
And Shareholders' Equity
|
||||||||||||||||||||||||
|
Current
Liabilities:
|
||||||||||||||||||||||||
|
Notes
payable to bank
|
$ | 1,930 | $ | -- | $ | 1,930 | $ | 2,161 | $ | -- | $ | 2,161 | ||||||||||||
|
Trade
accounts payable
|
2,217 | -- | 2,217 | 2,194 | -- | 2,194 | ||||||||||||||||||
|
Accrued
warranty expense
|
87 | -- | 87 | -- | -- | -- | ||||||||||||||||||
|
Accrued
compensation expense
|
1,837 | -- | 1,837 | 1,074 | -- | 1,074 | ||||||||||||||||||
|
Accrued
income taxes
|
38 | -- | 38 | 26 | -- | 26 | ||||||||||||||||||
|
Accrued
professional fees
|
284 | -- | 284 | 356 | -- | 356 | ||||||||||||||||||
|
Other
accrued expenses
|
752 | -- | 752 | 440 | 81 | 521 | ||||||||||||||||||
|
Customer
advances
|
684 | -- | 684 | -- | -- | -- | ||||||||||||||||||
|
Current
maturities of long-term debt
|
1,833 | -- | 1,833 | 1,565 | -- | 1,565 | ||||||||||||||||||
|
Liabilities
of Discontinued Operations
|
-- | -- | -- | 497 | -- | 497 | ||||||||||||||||||
|
Total
Current Liabilities
|
9,662 | -- | 9,662 | 8,313 | 81 | 8,394 | ||||||||||||||||||
|
Long-term
debt
|
2,987 | -- | 2,987 | 2,951 | -- | 2,951 | ||||||||||||||||||
|
Total
Liabilities
|
12, 649 | -- | 12,649 | 11,264 | 81 | 11,345 | ||||||||||||||||||
|
Commitments
and Contingencies
|
||||||||||||||||||||||||
|
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 | 22 | -- | 22 | ||||||||||||||||||
|
Additional
paid-in capital
|
21,102 | -- | 21,102 | 21,130 | -- | 21,130 | ||||||||||||||||||
|
Accumulated
deficit
|
(5,238 | ) | 374 | (4,864 | ) | (6,911 | ) | (876 | ) | (7,787 | ) | |||||||||||||
|
Accumulated
other comprehensive income
|
346 | (344 | ) | 2 | 13 | 2 | 15 | |||||||||||||||||
|
Treasury
stock, at cost, of 33,808 shares
|
(646 | ) | -- | (646 | ) | (646 | ) | -- | (646 | ) | ||||||||||||||
|
Total
Shareholders' Equity
|
15,586 | 30 | 15,616 | 13,608 | (874 | ) | 12,734 | |||||||||||||||||
|
Total
Liabilities and Shareholders' Equity
|
$ | 28,235 | $ | 30 | $ | 28,265 | $ | 24,872 | $ | (793 | ) | $ | 24,079 |
For the
three month period ended September 30, 2007, the carry forward effect of any
adjustments noted above would be immaterial to the period’s condensed
consolidated statements of operations. The carry forward effect of
the adjustments noted above to the condensed consolidated balance sheet as of
September 30, 2007 for the affected balances are as follows (in
thousands):
|
September
30, 2007 (Unaudited)
|
||||||||||||
|
As
Reported
|
Adjustments
|
As
Restated
|
||||||||||
|
Assets
Held for Sale
|
$ | 1,502 | $ | (1,502 | ) | $ | -- | |||||
|
Property,
Plant and Equipment:
|
||||||||||||
|
Land
|
$ | 635 | $ | 63 | $ | 698 | ||||||
|
Buildings
and improvements
|
2,761 | 2,259 | 5,020 | |||||||||
|
Accumulated
depreciation
|
(11,279 | ) | (1,598 | ) | (12,877 | ) | ||||||
|
Shareholders'
Equity:
|
||||||||||||
|
Accumulated
deficit
|
$ | (7,505 | ) | 874 | $ | (6,629 | ) | |||||
The
following table presents a reconciliation of the effects of adjustments made to
the Company’s previously reported quarterly condensed consolidated balance
sheets for the three quarters of 2006 (in thousands, except share
amounts):
|
March
31, 2006 (Unaudited)
|
June
30, 2006 (Unaudited)
|
|||||||||||||||||||||||
|
As
Reported
|
Adjustments
|
As
Restated
|
As
Reported
|
Adjustments
|
As
Restated
|
|||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||
|
Current
Assets:
|
||||||||||||||||||||||||
|
Cash
and cash equivalents
|
$ | 3,465 | $ | -- | $ | 3,465 | $ | 2,840 | $ | -- | $ | 2,840 | ||||||||||||
|
Restricted
cash
|
650 | -- | 650 | 650 | -- | 650 | ||||||||||||||||||
|
Investments
- marketable securities
|
3,242 | -- | 3,242 | 2,930 | -- | 2,930 | ||||||||||||||||||
|
Accounts
receivable, net of allowances of $300 and $715,
respectively
|
7,653 | -- | 7,653 | 7,232 | -- | 7,232 | ||||||||||||||||||
|
Unbilled
accounts receivable
|
1,880 | -- | 1,880 | 2,675 | -- | 2,675 | ||||||||||||||||||
|
Inventories
|
7,250 | -- | 7,250 | 8,828 | -- | 8,828 | ||||||||||||||||||
|
Prepaid
expense and other assets
|
509 | -- | 509 | 556 | -- | 556 | ||||||||||||||||||
|
Total
Current Assets
|
24,649 | -- | 24,649 | 25,711 | -- | 25,711 | ||||||||||||||||||
|
Property,
Plant and Equipment
|
||||||||||||||||||||||||
|
Land
|
855 | -- | 855 | 855 | -- | 855 | ||||||||||||||||||
|
Buildings
and improvements
|
5,767 | -- | 5,767 | 5,770 | -- | 5,770 | ||||||||||||||||||
|
Machinery
and equipment
|
14,659 | 2 | 14,661 | 14,940 | (3 | ) | 14,937 | |||||||||||||||||
|
Total
Property, Plant and Equipment
|
21,281 | 2 | 21,283 | 21,565 | (3 | ) | 21,562 | |||||||||||||||||
|
Less:
Accumulated depreciation
|
(14,332 | ) | 19 | (14,313 | ) | (14,615 | ) | 21 | (14,594 | ) | ||||||||||||||
|
Net
Property, Plant, and Equipment
|
6,949 | 21 | 6,970 | 6,950 | 18 | 6,968 | ||||||||||||||||||
|
Deferred
Income Taxes
|
111 | -- | 111 | 112 | -- | 112 | ||||||||||||||||||
|
Other
assets
|
564 | -- | 564 | 547 | -- | 547 | ||||||||||||||||||
|
Total
Assets
|
$ | 32,273 | $ | 21 | $ | 32,294 | $ | 33,320 | $ | 18 | $ | 33,338 | ||||||||||||
|
March
31, 2006 (Unaudited)
|
June
30, 2006 (Unaudited)
|
|||||||||||||||||||||||
|
As
Reported
|
Adjustments
|
As
Restated
|
As
Reported
|
Adjustments
|
As
Restated
|
|||||||||||||||||||
|
Liabilities
And Shareholders' Equity
|
||||||||||||||||||||||||
|
Current
Liabilities:
|
||||||||||||||||||||||||
|
Notes
payable to bank
|
$ | 2,381 | $ | -- | $ | 2,381 | $ | 3,118 | $ | -- | $ | 3,118 | ||||||||||||
|
Trade
accounts payable
|
2,739 | -- | 2,739 | 3,500 | -- | 3,500 | ||||||||||||||||||
|
Accrued
warranty expense
|
365 | -- | 365 | 232 | -- | 232 | ||||||||||||||||||
|
Accrued
compensation expense
|
1,567 | -- | 1,567 | 1,567 | -- | 1,567 | ||||||||||||||||||
|
Accrued
income taxes
|
742 | -- | 742 | 127 | -- | 127 | ||||||||||||||||||
|
Accrued
professional fees
|
292 | -- | 292 | 292 | -- | 292 | ||||||||||||||||||
|
Other
accrued expenses
|
1,233 | -- | 1,233 | 661 | -- | 661 | ||||||||||||||||||
|
Commitments
and contingencies
|
34 | -- | 34 | -- | -- | -- | ||||||||||||||||||
|
Customer
advances
|
1,403 | -- | 1,403 | 1,463 | -- | 1,463 | ||||||||||||||||||
|
Current
maturities of long-term debt
|
845 | -- | 845 | 854 | -- | 854 | ||||||||||||||||||
|
Total
Current Liabilities
|
11,601 | -- | 11,601 | 11,814 | -- | 11,814 | ||||||||||||||||||
|
Long-term
debt
|
4,835 | -- | 4,835 | 4,638 | -- | 4,638 | ||||||||||||||||||
|
Total
Liabilities
|
16,436 | -- | 16,436 | 16,452 | -- | 16,452 | ||||||||||||||||||
|
Commitments
and Contingencies
|
||||||||||||||||||||||||
|
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 | 22 | -- | 22 | ||||||||||||||||||
|
Additional
paid-in capital
|
21,053 | -- | 21,053 | 21,053 | -- | 21,053 | ||||||||||||||||||
|
Accumulated
deficit
|
(6,210 | ) | 124 | (6,086 | ) | (5,116 | ) | 145 | (4,971 | ) | ||||||||||||||
|
Accumulated
other comprehensive income
|
1,618 | (103 | ) | 1,515 | 1,555 | (127 | ) | 1,428 | ||||||||||||||||
|
Treasury
stock, at cost, of 33,808 shares
|
(646 | ) | -- | (646 | ) | (646 | ) | -- | (646 | ) | ||||||||||||||
|
Total
Shareholders' Equity
|
15,837 | 21 | 15,858 | 16,868 | 18 | 16,886 | ||||||||||||||||||
|
Total
Liabilities and Shareholders' Equity
|
$ | 32,273 | $ | 21 | $ | 32,294 | $ | 33,320 | $ | 18 | $ | 33,338 |
|
September
30, 2006 (Unaudited)
|
||||||||||||
|
As
Reported
|
Adjustments
|
As
Restated
|
||||||||||
|
Assets
|
||||||||||||
|
Current
Assets:
|
||||||||||||
|
Cash
and cash equivalents
|
$ | 3,989 | $ | -- | $ | 3,989 | ||||||
|
Restricted
cash
|
650 | -- | 650 | |||||||||
|
Investments
- marketable securities
|
2,548 | -- | 2,548 | |||||||||
|
Accounts
receivable, net of allowance of $715
|
8,701 | -- | 8,701 | |||||||||
|
Unbilled
accounts receivable
|
586 | -- | 586 | |||||||||
|
Inventories
|
9,291 | -- | 9,291 | |||||||||
|
Prepaid
expense and other assets
|
568 | -- | 568 | |||||||||
|
Total
Current Assets
|
26,333 | -- | 26,333 | |||||||||
|
Property,
Plant and Equipment
|
||||||||||||
|
Land
|
855 | -- | 855 | |||||||||
|
Buildings
and improvements
|
5,770 | -- | 5,770 | |||||||||
|
Machinery
and equipment
|
15,115 | (3 | ) | 15,112 | ||||||||
|
Total
Property, Plant and Equipment
|
21,740 | (3 | ) | 21,737 | ||||||||
|
Less:
Accumulated depreciation
|
(14,909 | ) | 21 | (14,888 | ) | |||||||
|
Net
Property, Plant, and Equipment
|
6,831 | 18 | 6,849 | |||||||||
|
Deferred
Income Taxes
|
111 | -- | 111 | |||||||||
|
Other
assets
|
469 | -- | 469 | |||||||||
|
Total
Assets
|
$ | 33,744 | $ | 18 | $ | 33,762 | ||||||
|
Liabilities
And Shareholders' Equity
|
||||||||||||
|
Current
Liabilities:
|
||||||||||||
|
Notes
payable to bank
|
$ | 3,403 | $ | -- | $ | 3,403 | ||||||
|
Trade
accounts payable
|
3,408 | -- | 3,408 | |||||||||
|
Accrued
warranty expense
|
208 | -- | 208 | |||||||||
|
Accrued
compensation expense
|
1,787 | -- | 1,787 | |||||||||
|
Accrued
income taxes
|
391 | -- | 391 | |||||||||
|
Accrued
professional fees
|
471 | -- | 471 | |||||||||
|
Other
accrued expenses
|
1,017 | -- | 1,017 | |||||||||
|
Customer
advances
|
532 | -- | 532 | |||||||||
|
Current
maturities of long-term debt
|
879 | -- | 879 | |||||||||
|
Total
Current Liabilities
|
12,096 | -- | 12,096 | |||||||||
|
Long-term
debt
|
4,423 | -- | 4,423 | |||||||||
|
Total
Liabilities
|
16,519 | -- | 16,519 | |||||||||
|
September
30, 2006 (Unaudited)
|
||||||||||||
|
As
Reported
|
Adjustments
|
As
Restated
|
||||||||||
|
Commitments
and Contingencies
|
||||||||||||
|
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
|
(4,808 | ) | 114 | (4,694 | ) | |||||||
|
Accumulated
other comprehensive income
|
1,604 | (96 | ) | 1,508 | ||||||||
|
Treasury
stock, at cost, of 33,808 shares
|
(646 | ) | -- | (646 | ) | |||||||
|
Total
Shareholders' Equity
|
17,225 | 18 | 17,243 | |||||||||
|
Total
Liabilities and Shareholders' Equity
|
$ | 33,744 | $ | 18 | $ | 33,762 |
The
following table presents a reconciliation of the effects of adjustments made to
the Company’s previously reported quarterly condensed consolidated statements of
operations for the first two quarters of 2007 (in thousands, except share
amounts):
|
March
31, 2007 (Unaudited)
|
June
30, 2007 (Unaudited)
|
|||||||||||||||||||||||
|
As
Reported
|
Adjustments
|
As
Restated
|
As
Reported
|
Adjustments
|
As
Restated
|
|||||||||||||||||||
|
Revenues
|
$ | 10,667 | $ | -- | $ | 10,667 | $ | 10,014 | $ | -- | $ | 10,014 | ||||||||||||
|
Costs
and expenses:
|
||||||||||||||||||||||||
|
Manufacturing
cost of sales
|
8,307 | (1 | ) | 8,306 | 7,477 | (1 | ) | 7,476 | ||||||||||||||||
|
Selling
and administrative
|
3,248 | -- | 3,248 | 2,674 | -- | 2,674 | ||||||||||||||||||
|
Impairment
loss on Lynch Systems’ assets
|
-- | -- | -- | -- | 905 | 905 | ||||||||||||||||||
|
Operating
Loss
|
(888 | ) | 1 | (887 | ) | (137 | ) | (904 | ) | (1,041 | ) | |||||||||||||
|
Other
income (expense):
|
||||||||||||||||||||||||
|
Investment
income
|
1,526 | -- | 1,526 | -- | -- | -- | ||||||||||||||||||
|
Interest
expense
|
(96 | ) | -- | (96 | ) | (91 | ) | -- | (91 | ) | ||||||||||||||
|
Gain
on sale of land
|
-- | -- | -- | 88 | -- | 88 | ||||||||||||||||||
|
Other
income (expense)
|
(10 | ) | 173 | 163 | (29 | ) | (173 | ) | (202 | ) | ||||||||||||||
|
Total
other income (expense)
|
1,420 | 173 | 1,593 | (32 | ) | (173 | ) | (205 | ) | |||||||||||||||
|
Income
(Loss) From Continuing Operations Before Income Taxes
|
532 | 174 | 706 | (169 | ) | (1,077 | ) | (1,246 | ) | |||||||||||||||
|
Benefit
(Provision) for income taxes
|
(58 | ) | -- | (58 | ) | 108 | -- | 108 | ||||||||||||||||
|
Income
(Loss) From Continuing Operations
|
474 | 174 | 648 | (61 | ) | (1,077 | ) | (1,138 | ) | |||||||||||||||
|
Discontinued
Operations:
|
||||||||||||||||||||||||
|
Loss
from discontinued operations
|
-- | -- | -- | (803 | ) | -- | (803 | ) | ||||||||||||||||
|
Loss
on sale of Lynch Systems
|
-- | -- | -- | (982 | ) | -- | (982 | ) | ||||||||||||||||
|
Loss
from discontinued operations
|
-- | -- | -- | (1,785 | ) | -- | (1,785 | ) | ||||||||||||||||
|
Net Income
(Loss)
|
$ | 474 | $ | 174 | $ | 648 | $ | (1,846 | ) | $ | (1,077 | ) | $ | (2,923 | ) | |||||||||
|
March
31, 2007 (Unaudited)
|
June
30, 2007 (Unaudited)
|
|||||||||||||||||||||||
|
As
Reported
|
Adjustments
|
As
Restated
|
As
Reported
|
Adjustments
|
As
Restated
|
|||||||||||||||||||
|
Weighted
average number of shares used in basic, diluted EPS
calculation
|
2,154,702 | 2,154,702 | 2,154,702 | 2,154,702 | 2,154,702 | 2,154,702 | ||||||||||||||||||
|
Basic
and diluted income (loss) per common share from continuing
operations
|
N/A | N/A | N/A | $ | (0.03 | ) | $ | (0.50 | ) | $ | (0.53 | ) | ||||||||||||
|
Basic
and diluted loss per common share from discontinued
operations
|
N/A | N/A | N/A | $ | (0.83 | ) | $ | 0.00 | $ | (0.83 | ) | |||||||||||||
|
Basic
and diluted net income (loss) per common share
|
$ | 0.22 | $ | 0.08 | $ | 0.30 | $ | (0.86 | ) | $ | (0.50 | ) | $ | (1.36 | ) |
The
following table presents a reconciliation of the effects of adjustments made to
the Company’s previously reported quarterly condensed consolidated statements of
operations for the four quarters of 2006 (in thousands, except share
amounts):
|
March
31, 2006 (Unaudited)
|
June
30, 2006 (Unaudited)
|
|||||||||||||||||||||||
|
As
Reported
|
Adjustments
|
As
Restated
|
As
Reported
|
Adjustments
|
As
Restated
|
|||||||||||||||||||
|
Revenues
|
$ | 12,091 | $ | -- | $ | 12,091 | $ | 13,146 | $ | -- | $ | 13,146 | ||||||||||||
|
Costs
and expenses:
|
||||||||||||||||||||||||
|
Manufacturing
cost of sales
|
8,544 | (2 | ) | 8,542 | 9,032 | (2 | ) | 9,030 | ||||||||||||||||
|
Selling
and administrative
|
3,161 | -- | 3,161 | 3,656 | -- | 3,656 | ||||||||||||||||||
|
Operating
Income
|
386 | 2 | 388 | 458 | 2 | 460 | ||||||||||||||||||
|
Other
income (expense):
|
||||||||||||||||||||||||
|
Investment
income
|
235 | -- | 235 | 283 | -- | 283 | ||||||||||||||||||
|
Interest
expense
|
(163 | ) | -- | (163 | ) | (179 | ) | -- | (179 | ) | ||||||||||||||
|
Other
income (expense)
|
(8 | ) | 14 | 6 | -- | 19 | 19 | |||||||||||||||||
|
Total
other income
|
64 | 14 | 78 | 104 | 19 | 123 | ||||||||||||||||||
|
Income
Before Income Taxes
|
450 | 16 | 466 | 562 | 21 | 583 | ||||||||||||||||||
|
Benefit
(provision) for income taxes
|
(84 | ) | -- | (84 | ) | (63 | ) | -- | (63 | ) | ||||||||||||||
|
Net
Income
|
$ | 366 | $ | 16 | $ | 382 | $ | 499 | $ | 21 | $ | 520 | ||||||||||||
|
Weighted
average number of shares used in basic, diluted EPS
calculation
|
2,154,702 | 2,154,702 | 2,154,702 | 2,154,702 | 2,154,702 | 2,154,702 | ||||||||||||||||||
|
Basic
and diluted net income per common share
|
$ | 0.17 | $ | 0.01 | $ | 0.18 | $ | 0.23 | $ | 0.01 | $ | 0.24 | ||||||||||||
|
September
30, 2006 (Unaudited)
|
December
31, 2006 (Unaudited)
|
|||||||||||||||||||||||
|
As
Reported
|
Adjustments
|
As
Restated
|
As
Reported
|
Adjustments
|
As
Restated
|
|||||||||||||||||||
|
Revenues
|
$ | 13,038 | $ | -- | $ | 13,038 | $ | 11,025 | $ | -- | $ | 11,025 | ||||||||||||
|
Costs
and expenses:
|
||||||||||||||||||||||||
|
Manufacturing
cost of sales
|
9,575 | -- | 9,575 | 8,596 | (1 | ) | 8,595 | |||||||||||||||||
|
Selling
and administrative
|
3,492 | -- | 3,492 | 3,792 | -- | 3,792 | ||||||||||||||||||
|
Operating
Loss
|
(29 | ) | -- | (29 | ) | (1,363 | ) | 1 | (1,362 | ) | ||||||||||||||
|
Other
income (expense):
|
||||||||||||||||||||||||
|
Investment
income
|
711 | -- | 711 | 521 | -- | 521 | ||||||||||||||||||
|
Interest
expense
|
(151 | ) | -- | (151 | ) | (77 | ) | -- | (77 | ) | ||||||||||||||
|
Other
income (expense)
|
(17 | ) | (31 | ) | (48 | ) | 32 | 84 | 116 | |||||||||||||||
|
Total
other income
|
543 | (31 | ) | 512 | 476 | 84 | 560 | |||||||||||||||||
|
Income
(Loss) Before Income Taxes
|
514 | (31 | ) | 483 | (887 | ) | 85 | (802 | ) | |||||||||||||||
|
Benefit
(Provision) for income taxes
|
389 | -- | 389 | (16 | ) | -- | (16 | ) | ||||||||||||||||
|
Net Income
(Loss)
|
$ | 903 | $ | (31 | ) | $ | 872 | $ | (903 | ) | $ | 85 | $ | (818 | ) | |||||||||
|
Weighted
average number of shares used in basic, diluted EPS
calculation
|
2,154,702 | 2,154,702 | 2,154,702 | 2,154,702 | 2,154,702 | 2,154,702 | ||||||||||||||||||
|
Basic
and diluted net income (loss) per common share
|
$ | 0.42 | $ | (0.01 | ) | $ | 0.41 | $ | (0.42 | ) | $ | 0.04 | $ | (0.38 | ) | |||||||||
|
3.
|
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 70.5% and
72.9% of the inventory, for 2007 and 2006, respectively, and the remaining 29.5%
and 27.1%, for 2007 and 2006, respectively, is valued using last-in-first-out
(LIFO). The Company reduces the value of its inventory to market
value when the value is believed to be less than the cost of the
item.
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
(in
thousands)
|
||||||||
|
Raw
materials and supplies
|
$ | 2,306 | $ | 2,575 | ||||
|
Work
in
progress
|
1,498 | 1,693 | ||||||
|
Finished
goods
|
1,377 | 1,837 | ||||||
|
Total
|
$ | 5,181 | $ | 6,105 | ||||
Current cost exceeded the LIFO value of
inventory by $266,000 and $334,000 at December 31, 2007 and 2006,
respectively.
Note
payable to banks and long-term debt is comprised of:
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
(in
thousands)
|
||||||||
|
Note
Payable:
|
||||||||
|
Mtron
revolving loan (First National Bank of Omaha (“FNBO”)) at 30-day LIBOR
plus 2.1%; 7.35% at December 31, 2007, due June 2008
|
$ | 1,035 | $ | 1,356 | ||||
|
Long-Term
Debt:
|
||||||||
|
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, 2007
|
$ | 2,894 | $ | 2,964 | ||||
|
Mtron
term loan (FNBO) at 30-day LIBOR plus 2.1%; 6.92% at December 31, 2007,
due August 2010
|
1,430 | 1,287 | ||||||
|
Mtron
commercial bank term loan at variable interest rates, paid in full during
2007
|
-- | 239 | ||||||
|
South
Dakota Board of Economic Development at a fixed rate of 3%, paid in full
during 2007
|
-- | 250 | ||||||
|
Yankton
Areawide Business Council loan at a fixed interest rate of 5.5%, paid in
full during 2007
|
-- | 65 | ||||||
|
Rice
University Promissory Note at a fixed interest rate of 4.5%, due August
2009
|
130 | 203 | ||||||
|
Smythe
Estate Promissory Note at a fixed interest rate of 4.5%, paid in full
during 2007
|
-- | 119 | ||||||
| 4,454 | 5,127 | |||||||
|
Current
maturities
|
(419 | ) | (2,027 | ) | ||||
|
Long
Term Debt
|
$ | 4,035 | $ | 3,100 | ||||
MtronPTI
maintains its own short-term line of credit facilities. In general,
the credit facilities are collateralized by property, plant and equipment,
inventory, receivables and common stock of certain subsidiaries and contain
certain covenants restricting distributions to the Company as well as various
financial covenant restrictions.
At
December 31, 2007, 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 $1,035,000. The Revolving Loan bears interest at 30-day LIBOR
plus 2.1% (7.35% at December 31, 2007). On August 1, 2007,
Mtron amended its credit agreement with FNBO which adjusted the interest rate
and has a due date for its revolving loan principal amount of June 30, 2008 with
interest only payments due monthly.
The
Company had $4,465,000 of unused borrowing capacity under its revolving lines of
credit at December 31, 2007, compared to $6,744,000 at December 31,
2006.
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 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 collateralized 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 interest rate
swap’s notional amount is for the entire outstanding balance. The
fair value of the interest rate swap at December 31, 2007 is ($80,000) net of
any tax effect, and is included in ”other accrued expenses” on the consolidated
balance sheet and $14,000 net of any tax effect at December 31, 2006
and is included in “other assets” on the consolidated balance
sheet. The value is reflected in other comprehensive income (loss),
net of any tax effect.
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.
On
October 14, 2004, MtronPTI, entered into a Loan Agreement with
FNBO. The FNBO Loan Agreement provided for a loan in the amount of
$2,000,000 (the “Term Loan”). The FNBO Term Loan has been
subsequently amended, with the most recent amendment dated August 1,
2007. Under the recent amendment, the Term Loan was for $1,500,000
and bears interest at 30-day LIBOR plus 2.1% and is repaid in monthly
installments of $30,000, with the then remaining principal balance plus accrued
unpaid interest to be paid on August 30, 2010. In January 2008, the
Company entered into an interest rate swap agreement with FNBO fixing the
interest rate at 5.60% through the life of the Term Loan amendment.
Debt
outstanding at December 31, 2007 included $3,024,000 of fixed rate debt at
year-end weighted average interest rate of 7.38% (after considering the effect
of the interest rate swap) and variable rate debt of $2,465,000 at a year end
average rate of 7.10%.
Aggregate
principal maturities of long-term debt for each of the next five years based
upon payment terms and interest rates in effect at December 31, 2007 are as
follows:
2008 -
$419,000; 2009 - $420,000; and 2010 - $3,615,000.
|
5.
|
Related
Party Transactions
|
At
December 31, 2007, the Company had $5,233,000 of cash and cash equivalents
compared with $4,429,000 at December 31, 2006. Of this amount,
$1,095,000 at December 31, 2007 is invested in United States Treasury money
market funds for which affiliates of the Company serve as investment managers to
the respective funds, compared to $2,040,000 at December 31, 2006.
|
6.
|
Stock
Option Plans
|
Effective
January 1, 2006, SFAS 123-R applies to new awards and to awards modified,
repurchased or cancelled after the effective date as well as to the unvested
portion of awards outstanding as of the effective date. The Company
uses the Black-Scholes-Merton option-pricing model to value stock option grants
under SFAS 123-R with the assumptions disclosed in Note 1 under Stock Based
Compensation and Earnings Per Share, applying the modified prospective method
for existing grants which requires the Company to value stock options prior to
its adoption of SFAS 123-R under the fair value method and expense the value
over the requisite service period. The Company did not grant any stock options
during the years ended December 31, 2007 or 2006.
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, 2007, 20,000 remain outstanding. Also outstanding at December 31,
2007, are 180,000 options granted in 2001 to a former Chief Executive Officer at
$17.50 per share. These options are also anti-dilutive and they
expire on October 1, 2009. Total options outstanding at December 31,
2007, are 200,000 as summarized in the following table:
|
Exercise
Price
|
Number
Outstanding
|
Weighted-Average
Remaining
Contractual
Life
|
Number
Exercisable
|
|||||||||||
|
$
|
17.50
|
180,000 | 1.8 | 180,000 | ||||||||||
|
$
|
13.17
|
20,000 | 2.4 | 20,000 | ||||||||||
|
Total
|
200,000 | 200,000 | ||||||||||||
The
following table summarizes information about stock options outstanding and
exercisable at December 31, 2007 and 2006 as well as activity during the years
then ended:
|
Number
of Stock Options
|
Weighted
Average Exercise price
|
Weighted
Average Years Remaining
|
||||||||||
|
Outstanding
at December 31, 2005
|
300,000 | $ | 15.77 | 3.9 | ||||||||
|
Granted
during 2006
|
- | - | - | |||||||||
|
Exercised
during 2006
|
- | - | - | |||||||||
|
Forfeited
or expired during 2006
|
(25,000 | ) | 13.17 | - | ||||||||
|
Outstanding
at December 31, 2006
|
275,000 | 16.01 | 2.9 | |||||||||
|
Granted
during 2007
|
- | - | - | |||||||||
|
Exercised
during 2007
|
- | - | - | |||||||||
|
Forfeited
or expired during 2007
|
(75,000 | ) | 13.17 | - | ||||||||
|
Outstanding
at December 31, 2007
|
200,000 | $ | 17.07 | 1.8 | ||||||||
|
Exercisable
at December 31, 2007
|
200,000 | $ | 17.07 | 1.8 | ||||||||
|
Vested
at December 31, 2007
|
200,000 | $ | 17.07 | 1.8 | ||||||||
There
were no options granted during the years ended December 31, 2007 and
2006. At December 31, 2007, the aggregate intrinsic value of options
outstanding and options exercisable was zero because the market value of the
underlying stock was below the average exercise price of all
options.
|
7.
|
Shareholders’
Equity
|
On August
31, 2007, The LGL Group, Inc., an Indiana corporation ("LGL Indiana")
was merged (the "Merger") with and into its wholly-owned subsidiary, The LGL
Group, Inc., a Delaware corporation ("LGL Delaware"), pursuant to an Agreement
and Plan of Merger (the "Merger Agreement") dated August 28, 2007 and approved
by the shareholders of LGL Indiana at its 2007 Annual Meeting of Shareholders
held on August 28, 2007. As a result of the Merger, LGL Indiana and LGL Delaware
became a single corporation named The LGL Group, Inc., existing under and
governed by the laws of the State of
Delaware (the "Surviving Entity").
Under the
terms of the Merger, each share of common stock of LGL Indiana issued and
outstanding was exchanged for one share of common stock of LGL Delaware, such
that all former holders of securities of LGL Indiana are now holders of
securities of the Surviving Entity. As no physical exchange of
certificates is required in connection with the Merger, certificates formerly
representing shares of issued and outstanding common stock of LGL Indiana are
deemed to represent the same number of shares of common stock of the Surviving
Entity. The result of the transaction had no accounting
effect.
Additionally,
under the terms of the Merger, the Certificate of
Incorporation and By-Laws of LGL
Delaware became
the Certificate of Incorporation and By-Laws
of the Surviving Entity (the "Formation Documents"), and the directors and
officers of LGL Indiana immediately prior to the Merger became the directors and
officers of the Surviving Entity.
Both
MtronPTI and Lynch Systems have plans that provide certain former shareholders
with Stock Appreciation Rights (SARs). These SARs are fully vested
and expire at the earlier of certain defined events, or at various dates from
2008 to 2010. These SARs provide the participants a certain
percentage, ranging from 1-5%, of the increase in the defined value of MtronPTI
and Lynch Systems, respectively. With the sale of Lynch Systems (see
Note 1 and 13), the Company paid out any obligation due under the Lynch Systems
agreements. Expense related to the SARs was $4,300 in 2007 and
$27,400 in 2006, from continuing operations. There is a SAR liability
at December 31, 2007 of $50,000 compared with $45,000 at December 31,
2006.
In 2006,
the Company issued restricted stock to two executives, which are being accounted
for under SFAS No. 123R. Total stock compensation expense
recognized by the Company for the year ended December 31, 2007 and 2006
associated with this restricted stock was $79,000 and $28,000,
respectively. Of these grants, a total of 12,500 shares vested in
2007 and were issued from treasury shares to the respective
individuals.
|
8.
|
Income
Taxes
|
The
Company files consolidated federal income tax returns, which includes all U.S.
subsidiaries.
The
Company has a total net operating loss (“NOL”) carry-forward of $5,378,000 as of
December 31, 2007 compared with its net operating loss (“NOL”) carry-forward of
$2,746,000 as of December 31, 2006. This NOL expires through 2027 if
not utilized prior to that date. The Company has research and
development credit carry-forwards of approximately $743,000 at December 31, 2007
(compared with $561,000 at December 31, 2006) that can be used to reduce future
income tax liabilities and expire principally between 2020 and
2027. In addition, the Company has foreign tax credit carry-forwards
of approximately $230,000 at December 31, 2007 compared with foreign tax credit
carry-forwards of approximately $210,000 at December 31, 2006, 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 2017.
Deferred
income taxes for 2007 and 2006 provided for the temporary differences between
the financial reporting basis and the tax basis of the Company’s assets and
liabilities. Tax effects of temporary differences and carry-forwards
at December 31, 2007 and 2006 are as follows:
|
December
31, 2007
|
December
31, 2006
|
|||||||||||||||
|
Deferred
Tax
|
Deferred
Tax
|
|||||||||||||||
|
Asset
|
Liability
|
Asset
|
Liability
|
|||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Inventory
reserve
|
$ | 1,287 | $ | -- | $ | 1,110 | $ | -- | ||||||||
|
Fixed
assets
|
-- | 667 | -- | 813 | ||||||||||||
|
Other
reserves and accruals
|
553 | -- | 601 | -- | ||||||||||||
|
Unrealized
gains on marketable securities
|
-- | -- | -- | 695 | ||||||||||||
|
Undistributed
foreign earnings
|
-- | 536 | 473 | |||||||||||||
|
Other
|
-- | 148 | -- | 166 | ||||||||||||
|
Tax
credit carry-forwards
|
1,084 | -- | 881 | -- | ||||||||||||
|
Tax
loss carry-forwards
|
2,042 | -- | 1,042 | -- | ||||||||||||
|
Total
deferred income taxes
|
4,966 | $ | 1,351 | 3,634 | $ | 2,147 | ||||||||||
|
Valuation
allowance
|
(3,504 | ) | (1,376 | ) | ||||||||||||
|
Net
deferred tax asset
|
$ | 1,462 | $ | 2,258 | ||||||||||||
At
December 31, 2007 the net deferred tax asset of $111,000 presented in the
Company’s balance sheet is comprised of deferred tax assets of $1,462,000 offset
by deferred tax liabilities of $1,351,000. 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 $2,258,000 offset by deferred tax
liabilities of $2,147,000. The carrying value of the Company’s net
deferred tax asset at December 31, 2007 of $111,000 is equal to the amount of
the Company’s carry-forward alternative minimum tax (“AMT”) at that
date. These AMT credits do not expire.
The
benefit (provision) for income taxes from continuing operations is summarized as
follows:
|
2007
|
2006
|
|||||||
|
(in
thousands)
|
||||||||
|
Current:
|
||||||||
|
Federal
|
$ | -- | $ | 492 | ||||
|
State
and local
|
-- | -- | ||||||
|
Foreign
|
(135 | ) | (266 | ) | ||||
|
Total
Current
|
(135 | ) | 226 | |||||
|
Deferred:
|
||||||||
|
Federal
|
-- | -- | ||||||
|
State
and local
|
-- | -- | ||||||
|
Total
Deferred
|
-- | -- | ||||||
| $ | (135 | ) | $ | 226 | ||||
A
reconciliation of the benefit (provision) 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:
|
2007
|
2006
|
|||||||
|
(in
thousands)
|
||||||||
|
Tax
at statutory rate
|
$ | 143 | $ | (861 | ) | |||
|
Permanent
differences
|
(46 | ) | (88 | ) | ||||
|
Foreign
tax rate differential
|
(21 | ) | 73 | |||||
|
State
and local taxes, net of federal benefit
|
-- | (12 | ) | |||||
|
Change
in tax reserves
|
-- | 492 | ||||||
|
Valuation
allowance
|
(211 | ) | 647 | |||||
|
Other
|
-- | (25 | ) | |||||
| $ | (135 | ) | $ | 226 | ||||
The
income tax expense for the period ended December 31, 2007 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 for the year 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.
Profit
before income taxes from foreign operations was $713,000 and $1,419,000 in 2007
and 2006, respectively. At December 31, 2007, U.S. income taxes have
been provided on approximately $3,927,000 of earnings of the Company’s foreign
subsidiaries because these earnings are not considered to be indefinitely
reinvested. As of December 31, 2007, earnings on non-U.S.
subsidiaries considered to be indefinitely reinvested totaled
$715,000. No provision for U.S. income taxes has been provided
thereon. Upon distribution of those earnings in the form of dividends
or otherwise, the Company would be subject to U.S. taxes reduced by any foreign
tax credits available. It is not practicable to estimate the amount
of additional tax that might be payable on this undistributed foreign
income.
The
valuation allowance increased $2,128,000 from $1,376,000 in 2006 to $3,504,000
at December 31, 2007.
In June
2006, the FASB issued FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes-an Interpretation of FASB Statement No. 109”
(the “Interpretation”) (“FIN 48”). The Interpretation clarifies the accounting
for uncertainty in income taxes recognized in an enterprise’s financial
statements in accordance with SFAS No. 109. The Interpretation prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. The Interpretation also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. The Interpretation is effective for fiscal
years beginning after December 15, 2006. We have applied the provisions of
the Interpretation effective January 1, 2007 and accordingly, the adoption
of the Interpretation did not have a material effect on the Company’s financial
condition or results of operations.
In
accordance with FIN 48, the Company will recognize any interest and penalties
related to unrecognized tax benefits in income tax expense.
At the
date of adoption on January 1, 2007, the Company did not have a liability for
unrecognized tax benefits. In addition, the Company did not record
any increases or decreases to our liability for unrecognized tax benefits during
year ended December 31, 2007. Accordingly, the Company has
not accrued for any interest and penalties as of December 31,
2007. The Company does not anticipate any change in its liability for
unrecognized tax benefits over the next fiscal year.
The
Company files income tax returns in the U.S. federal, various state and Hong
Kong jurisdictions. The Company is generally no longer subject to income tax
examinations by U.S. federal, state and Hong Kong tax authorities for years
before 2001.
|
9.
|
Other
Comprehensive Income (Loss)
|
Other
comprehensive income (loss) includes the changes in fair value of investments
classified as available for sale and the changes in fair values of derivatives
designated as cash flow hedges.
For the
year ended December 31, 2007, total comprehensive (loss) was ($4,445,000),
comprised of other comprehensive loss of ($1,891,000), plus net loss
of ($2,554,000). Other comprehensive loss included $1,779,000
included in net income from the sale of securities, $20,000 from unrealized
losses on available for sale securities and $92,000 from the change in the fair
value of the interest rate swap.
For the
year ended December 31, 2006, total comprehensive income was $2,000,000,
comprised of other comprehensive income of $1,044,000, plus net income of
$956,000. Other comprehensive income included $747,000 included in
net income from the sale of securities, $1,777,000 from unrealized gains on
available for sale securities and $14,000 from the change in the fair value of
the interest rate swap, all net of tax.
The
components of accumulated other comprehensive income (loss), net of related tax,
at December 31, 2007 and 2006 are as follows:
|
December
31,
|
||||||||
|
2007
|
2006
(Restated)
|
|||||||
|
(in
thousands)
|
||||||||
|
Balance
beginning of year
|
$ | 1,790 | $ | 746 | ||||
|
Deferred
gain (loss) on hedge contract
|
(92 | ) | 14 | |||||
|
Unrealized
(loss) gain on available-for-sale securities
|
(20 | ) | 1,777 | |||||
|
Reclassification
adjustment for gains included in operations
|
(1,779 | ) | (747 | ) | ||||
|
Balance
end of year
|
$ | (101 | ) | $ | 1,790 | |||
|
December
31,
|
||||||||
|
2007
|
2006
(Restated)
|
|||||||
|
(in
thousands)
|
||||||||
|
Deferred
gain (loss) on hedge contract
|
$ | (78 | ) | $ | 14 | |||
|
Unrealized
(loss) gain on available for-sale securities
|
(23 | ) | 1,776 | |||||
|
Accumulated
other comprehensive income (loss)
|
$ | (101 | ) | $ | 1,790 | |||
|
10.
|
Employee
Benefit Plans
|
The
Company offers a defined contribution plan for eligible
employees. The following table sets forth the consolidated expenses
from continuing operations for this plan:
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
(in
thousands)
|
||||||||
|
Defined
contribution total
|
$ | 199 | $ | 155 | ||||
Under the
MtronPTI defined contribution plan, the Company contributes 50% of the first 6%
of eligible compensation contributed by participants. Participants
vest in employer contributions starting after their second year of service at
20% increments vesting 100% in year six.
|
11.
|
Commitments
And Contingencies
|
In the
normal course of business, subsidiaries of the Company may be 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 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 realtor’s counsel as legal fees and
expenses. In July 2006, the definitive settlement agreements with the
government and the realtor 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.
Rent
Expense
Rent
expense under operating leases was $117,000 and $127,000 for the years ended
December 31, 2007 and 2006, respectively. The Company leases certain
property and equipment, including warehousing, and sales and distribution
equipment, under operating leases that extend from one to two
years. Certain of these leases have renewal options.
Future
minimum rental payments under long-term non-cancelable operating leases
subsequent to December 31, 2007 are as follows:
|
(in
thousands)
|
|
|
2008
|
62
|
|
2009
|
26
|
|
12.
|
Segment
Information
|
The
Company has one reportable business segment from continuing operations:
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 costs of sales, operating expenses,
excluding investment income, interest expense, and income
taxes. Identifiable assets of each segment are the assets used by the
segment in its operations excluding general corporate assets. General
corporate assets are principally cash and cash equivalents, short-term
investments and certain other investments and receivables.
|
Years
Ended December 31,
|
||||||||
|
2007
|
2006
(Restated)
|
|||||||
|
(in
thousands)
|
||||||||
|
Revenues
from Continuing Operations
|
||||||||
|
Frequency
control devices - USA
|
$ | 17,187 | $ | 20,501 | ||||
|
Frequency
control devices - Foreign
|
22,349 | 21,048 | ||||||
|
Total
consolidated revenues
|
$ | 39,536 | $ | 41,549 | ||||
|
Operating
Profit (Loss) from Continuing Operations
|
||||||||
|
Frequency
control devices
|
$ | 1,084 | $ | 3,077 | ||||
|
Unallocated
corporate expense
|
(1,892 | ) | (1,723 | ) | ||||
|
Impairment
loss on Lynch Systems’ assets
|
(905 | ) | ||||||
|
Consolidated
total operating profit (loss)
|
(1,713 | ) | 1,354 | |||||
|
Investment
income
|
1,526 | 1,752 | ||||||
|
Interest
expense
|
(306 | ) | (465 | ) | ||||
|
Gain
on sale of land
|
88 | -- | ||||||
|
Other
income (expense)
|
(15 | ) | 79 | |||||
|
Other
income
|
1,293 | 1,366 | ||||||
|
Income
(Loss) Before Income Taxes from Continuing Operations
|
$ | (420 | ) | $ | 2,720 | |||
|
Capital
Expenditures
|
||||||||
|
Frequency
control devices
|
$ | 474 | $ | 737 | ||||
|
Capital
expenditures from discontinued operations
|
-- | 18 | ||||||
|
Consolidated
total capital expenditures
|
$ | 474 | $ | 755 | ||||
|
Total
Assets
|
||||||||
|
Frequency
control devices
|
$ | 17,566 | $ | 19,005 | ||||
|
General
corporate
|
4,622 | 6,633 | ||||||
|
Total
assets from discontinued operations and Lynch Systems’ remaining
assets
|
688 | 5,347 | ||||||
|
Consolidated
total assets
|
$ | 22,876 | $ | 30,985 | ||||
For years
ended December 31, 2007 and 2006, significant foreign revenues from continuing
operations (10% or more of foreign sales) were as follows:
|
Years
Ended December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
(in
thousands)
|
||||||||
|
Frequency
Control Devices - Significant
|
||||||||
|
Foreign
Revenues
|
||||||||
|
Malaysia
|
$ | 5,602 | $ | 2,262 | ||||
|
China
|
4,256 | 4,250 | ||||||
|
Canada
|
2,673 | 3,683 | ||||||
|
Mexico
|
2,465 | 1,543 | ||||||
|
Thailand
|
2,462 | 2,114 | ||||||
|
All
other foreign countries
|
4,891 | 7,196 | ||||||
|
Total
foreign revenues
|
$ | 22,349 | $ | 21,048 | ||||
“All
other foreign countries” include countries, which individually comprise less
than 10% of total foreign revenues. If a country had significant
foreign revenues in any one of the two years presented, the sales to that
country are shown for the other years presented even if it is under the 10%
threshold.
|
13.
|
Discontinued
Operations
|
In June
2007, the Company finalized its sale of certain assets and liabilities of Lynch
Systems to a third party as discussed in Note 1. The assets sold
under the Purchase Agreement, as amended, included certain accounts receivable,
inventory, machinery and equipment. The Buyer also assumed certain liabilities
of Lynch Systems, including accounts payable, customer deposits and accrued
warranties. After deduction of the amount of the liabilities assumed, $601,074,
from the value of the assets sold, $1,455,000, and taking into account the
Buyer's partial funding of the severance obligation, $118,000, Lynch Systems was
due a net cash payment in the amount of $972,000. Of such amount, $722,000 was
paid upon closing and the $250,000 balance, which was escrowed, was paid on
October 3, 2007 in accordance with the Escrow Agreement. The assets retained by
Lynch systems include the land, buildings and some equipment used in its
operations. The Company intends to sell the land, buildings and remaining
equipment in a separate transaction. The result of the sale transaction was a
net loss of ($982,000).
In
accordance with SFAS No. 144, the results of operations for Lynch
Systems the periods reported are reported within Discontinued Operations within
the Consolidated Statements of Operations and their related assets and
liabilities are reported within Assets from Discontinued Operations and
Liabilities from Discontinued Operations, respectively, within the Consolidated
Balance Sheets. The land, buildings and remaining equipment of Lynch
Systems are considered to be held and used in accordance with SFAS No. 144 and
have not been reclassified. The Company is currently marketing these
assets for sale. The 2006 financial statements have been reclassified
to present the operations of Lynch Systems’ assets within discontinued
operations.
Revenues
from discontinued operations were $2,534,000 and $7,751,000 for 2007 and 2006,
respectively. Pre-tax loss from discontinued operations (not
including loss on the sale or impairment loss on assets) were ($1,017,000) and
($1,990,000) for 2007 and 2006, respectively.
80