LGL GROUP INC - Quarter Report: 2008 June (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
FORM 10-Q
(Mark
One)
xQUARTERLY REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
quarterly period ended June 30,
2008
or
¨TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
transition period from
to
Commission
File Number: 1-106
|
THE
LGL GROUP, INC.
|
|
(Exact
name of registrant as specified in its
charter)
|
|
Delaware
|
38-1799862
|
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
|
2525
Shader Rd., Orlando, Florida
|
32804
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
|
(407)
298-2000
|
|
(Registrant’s
telephone number, including area code)
|
|
(Former
name, former address and former fiscal year, if changed since last
report)
|
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions 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 ¨ (Do
not check if a smaller reporting company)
|
Smaller
reporting company x
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
|
Class
|
Outstanding at August 11,
2008
|
|
|
Common
Stock, $0.01 par value
|
2,176,216
|
THE
LGL GROUP, INC.
|
3
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– June
30, 2008
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– December
31, 2007
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5
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– Three
months ended June 30, 2008 and 2007
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– Six
months ended June 30, 2008 and 2007
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||
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6
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– Six
months ended June 30, 2008 and 2007
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7
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– Six
months ended June 30, 2008 and 2007
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8
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14
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18
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18
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20
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20
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20
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21
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PART I
FINANCIAL
INFORMATION
Item 1 —
Condensed
Consolidated Financial Statements.
THE
LGL GROUP, INC.
CONDENSED CONSOLIDATED
BALANCE SHEETS — UNAUDITED
(In
thousands)
|
June
30,
2008
|
December
31,
2007
(A)
|
|||||||
|
ASSETS
|
||||||||
|
Current
Assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 4,904 | $ | 5,233 | ||||
|
Investments
- marketable securities
|
33 | 48 | ||||||
|
Accounts
receivable, less allowances of $517 and $415, respectively
|
6,026 | 6,382 | ||||||
|
Inventories
|
5,462 | 5,181 | ||||||
|
Prepaid
expenses and other current assets
|
193 | 381 | ||||||
|
Assets
of Discontinued Operations
|
4 | 5 | ||||||
|
Total
Current Assets
|
16,622 | 17,230 | ||||||
|
Property,
Plant and Equipment:
|
||||||||
|
Land
|
698 | 698 | ||||||
|
Buildings
and improvements
|
5,028 | 5,020 | ||||||
|
Machinery
and equipment
|
12,586 | 12,541 | ||||||
|
Gross
Property, Plant and Equipment
|
18,312 | 18,259 | ||||||
|
Less:
Accumulated Depreciation
|
(13,676 | ) | (13,196 | ) | ||||
|
Net
Property, Plant and Equipment
|
4,636 | 5,063 | ||||||
|
Deferred
Income Taxes
|
111 | 111 | ||||||
|
Other
Assets
|
435 | 472 | ||||||
|
Total
Assets
|
$ | 21,804 | $ | 22,876 | ||||
THE LGL
GROUP, INC.
CONDENSED CONSOLIDATED
BALANCE SHEETS — UNAUDITED, continued
(In
thousands, except share and per share amounts)
|
June
30,
2008
|
December
31,
2007
(A)
|
|||||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
|
Current
Liabilities:
|
||||||||
|
Note
payable to bank
|
$ | 1,346 | $ | 1,035 | ||||
|
Trade
accounts payable
|
2,506 | 2,535 | ||||||
|
Accrued
compensation expense
|
1,572 | 1,481 | ||||||
|
Accrued
professional fees
|
16 | 51 | ||||||
|
Swap
liability on hedge contracts
|
78 | 80 | ||||||
|
Other accrued expenses
|
589 | 640 | ||||||
|
Current
maturities of long-term debt
|
409 | 419 | ||||||
|
Liabilities
of Discontinued Operations
|
177 | 231 | ||||||
|
Total
Current Liabilities
|
6,693 | 6,472 | ||||||
|
Long-term
debt
|
3,852 | 4,035 | ||||||
|
Total
Liabilities
|
10,545 | 10,507 | ||||||
|
Commitments
and Contingencies
|
||||||||
|
Stockholders’
Equity:
|
||||||||
|
Common
stock, $0.01 par value - 10,000,000 shares authorized; 2,188,510 shares
issued; 2,176,216 and 2,167,202 shares outstanding,
respectively
|
22 | 22 | ||||||
|
Additional
paid-in capital
|
20,815 | 20,921 | ||||||
|
Accumulated
deficit
|
(9,229 | ) | (8,066 | ) | ||||
|
Accumulated
other comprehensive loss
|
(114 | ) | (101 | ) | ||||
|
Treasury
stock, at cost, 12,294 and 21,308 shares, respectively
|
(235 | ) | (407 | ) | ||||
|
Total
Stockholders’ Equity
|
11,259 | 12,369 | ||||||
|
Total
Liabilities and Stockholders’ Equity
|
$ | 21,804 | $ | 22,876 | ||||
|
(A)
|
The
Condensed Consolidated Balance Sheet at December 31, 2007 has been derived
from the audited financial statements at that date, but does not include
all of the information and footnotes required by accounting principles
generally accepted in the United States for complete financial statements.
|
See
accompanying Notes to Condensed Consolidated Financial Statements.
THE LGL GROUP, INC.
CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS — UNAUDITED
(In
thousands, except share and per share amounts)
|
Three
Months
Ended
June 30,
|
Six
Months
Ended
June 30,
|
|||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
REVENUES
|
$ | 10,150 | $ | 10,014 | $ | 19,933 | $ | 19,391 | ||||||||
|
Cost
and expenses:
|
||||||||||||||||
|
Manufacturing
cost of sales
|
7,544 | 7,476 | 14,698 | 14,892 | ||||||||||||
|
Engineering,
selling and administrative
|
3,000 | 2,674 | 6,085 | 5,325 | ||||||||||||
|
Impairment
loss on Lynch Systems’ assets
|
-- | 905 | -- | 905 | ||||||||||||
|
OPERATING
LOSS
|
(394 | ) | (1,041 | ) | (850 | ) | (1,731 | ) | ||||||||
|
Other
income (expense):
|
||||||||||||||||
|
Investment
income
|
-- | -- | -- | 1,526 | ||||||||||||
|
Interest
expense
|
(66 | ) | (91 | ) | (129 | ) | (180 | ) | ||||||||
|
Gain
on sale of land
|
-- | 88 | -- | 88 | ||||||||||||
|
Other
expense
|
(41 | ) | (202 | ) | (73 | ) | (39 | ) | ||||||||
|
Total
Other Income (Expense)
|
(107 | ) | (205 | ) | (202 | ) | 1,395 | |||||||||
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LOSS
FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
|
(501 | ) | (1,246 | ) | (1,052 | ) | (336 | ) | ||||||||
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Benefit
(Provision) for income taxes
|
(57 | ) | 108 | (106 | ) | 50 | ||||||||||
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LOSS FROM
CONTINUING OPERATIONS
|
(558 | ) | (1,138 | ) | (1,158 | ) | (286 | ) | ||||||||
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Discontinued
Operations:
|
||||||||||||||||
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Loss
from Discontinued Operations
|
(15 | ) | (803 | ) | (5 | ) | (1,007 | ) | ||||||||
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Loss
on sale of Lynch Systems
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-- | (982 | ) | -- | (982 | ) | ||||||||||
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Loss
from discontinued operations
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(15 | ) | (1,785 | ) | (5 | ) | (1,989 | ) | ||||||||
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NET
LOSS
|
$ | (573 | ) | $ | (2,923 | ) | $ | (1,163 | ) | $ | (2,275 | ) | ||||
|
Weighted
average shares outstanding, basic and diluted
|
2,172,052 | 2,154,702 | 2,169,820 | 2,154,702 | ||||||||||||
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BASIC
AND DILUTED LOSS PER SHARE FROM CONTINUING OPERATIONS
|
$ | (0.26 | ) | $ | (0.53 | ) | $ | (0.54 | ) | $ | (0.13 | ) | ||||
|
BASIC
AND DILUTED LOSS PER SHARE FROM DISCONTINUED OPERATIONS
|
$ | (0.01 | ) | $ | (0.83 | ) | $ | (0.00 | ) | $ | (0.93 | ) | ||||
|
BASIC
AND DILUTED NET LOSS PER SHARE
|
$ | (0.27 | ) | $ | (1.36 | ) | $ | (0.54 | ) | $ | (1.06 | ) | ||||
See
accompanying Notes to Condensed Consolidated Financial Statements
THE LGL GROUP, INC.
CONDENSED CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY — UNAUDITED
(In
thousands, except share amounts)
|
Shares
of
Common
Stock
Outstanding
|
Common
Stock
|
Additional
Paid-In
Capital
|
Accumulated
Deficit
|
Accumulated
Other Comprehensive Income (Loss)
|
Treasury
Stock
|
Total
|
||||||||||||||||||||||
|
Balance
at January 1, 2007
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2,154,702 | $ | 22 | $ | 21,081 | $ | (5,512 | ) | $ | 1,790 | $ | (646 | ) | $ | 16,735 | |||||||||||||
|
Comprehensive
loss:
|
||||||||||||||||||||||||||||
|
Net
loss for period
|
-- | -- | -- | (2,275 | ) | -- | -- | (2,275 | ) | |||||||||||||||||||
|
Other
comprehensive loss
|
-- | -- | -- | -- | (1,775 | ) | -- | (1,775 | ) | |||||||||||||||||||
|
Comprehensive
loss
|
-- | -- | -- | -- | -- | -- | (4,050 | ) | ||||||||||||||||||||
|
Stock
based compensation
|
-- | -- | 49 | -- | -- | -- | 49 | |||||||||||||||||||||
|
Balance
at June 30, 2007
|
2,154,702 | $ | 22 | $ | 21,130 | $ | (7,787 | ) | $ | 15 | $ | (646 | ) | $ | 12,734 | |||||||||||||
|
Balance
at January 1, 2008
|
2,167,202 | $ | 22 | $ | 20,921 | $ | (8,066 | ) | $ | (101 | ) | $ | (407 | ) | $ | 12,369 | ||||||||||||
|
Comprehensive
loss:
|
||||||||||||||||||||||||||||
|
Net
loss for period
|
-- | -- | -- | (1,163 | ) | -- | -- | (1,163 | ) | |||||||||||||||||||
|
Other
comprehensive loss
|
-- | -- | -- | -- | (13 | ) | -- | (13 | ) | |||||||||||||||||||
|
Comprehensive
loss
|
-- | -- | -- | -- | -- | -- | (1,176 | ) | ||||||||||||||||||||
|
Stock
based compensation
|
-- | -- | 66 | -- | -- | -- | 66 | |||||||||||||||||||||
|
Issuance
of treasury shares for vested restricted stock
|
9,014 | -- | (172 | ) | -- | -- | 172 | -- | ||||||||||||||||||||
|
Balance
at June 30, 2008
|
2,176,216 | $ | 22 | $ | 20,815 | $ | (9,229 | ) | $ | (114 | ) | $ | (235 | ) | $ | 11,259 | ||||||||||||
See
accompanying Notes to Condensed Consolidated Financial Statements
THE
LGL GROUP, INC.
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS — UNAUDITED
(In
thousands)
|
Six
Months Ended
June
30,
|
||||||||
|
2008
|
2007
|
|||||||
|
OPERATING
ACTIVITIES
|
||||||||
|
Net
loss
|
$ | (1,163 | ) | $ | (2,275 | ) | ||
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
|
Impairment
on Lynch Systems’
assets
|
-- | 905 | ||||||
|
Loss
on sale of Lynch
Systems
|
-- | 982 | ||||||
|
Depreciation
|
516 | 517 | ||||||
|
Stock
based compensation
|
66 | 49 | ||||||
|
Amortization
of finite-lived intangible assets
|
30 | 44 | ||||||
|
Gain
on sale of land
|
-- | (88 | ) | |||||
|
Gain
realized on sale of marketable securities
|
-- | (1,526 | ) | |||||
|
Changes
in operating assets and liabilities:
|
||||||||
|
Receivables
|
356 | 103 | ||||||
|
Inventories
|
(281 | ) | 933 | |||||
|
Accounts
payable and accrued liabilities
|
(27 | ) | (1,286 | ) | ||||
|
Other
assets/liabilities
|
198 | (6 | ) | |||||
|
Net cash used in operating
activities of continuing operations
|
(305 | ) | (1,648 | ) | ||||
|
Net
cash (used in) provided by operating activities of discontinued
operations
|
(53 | ) | 420 | |||||
|
Net
cash used in operating activities
|
(358 | ) | (1,228 | ) | ||||
|
INVESTING
ACTIVITIES
|
||||||||
|
Capital
expenditures
|
(89 | ) | (59 | ) | ||||
|
Restricted
cash
|
-- | 19 | ||||||
|
Proceeds
from sale of marketable securities
|
-- | 2,292 | ||||||
|
Proceeds
from sale of land
|
-- | 171 | ||||||
|
Net
cash (used in) provided by investing activities of continuing
operations
|
(89 | ) | 2,423 | |||||
|
Net
cash used in investing activities of discontinued
operations
|
-- | 722 | ||||||
|
Net
cash (used in) provided by investing activities
|
(89 | ) | 3,145 | |||||
|
FINANCING
ACTIVITIES
|
||||||||
|
Net
borrowings on note payable to bank
|
311 | 805 | ||||||
|
Repayments
of long-term debt
|
(193 | ) | (611 | ) | ||||
|
Net
cash provided by financing activities of continuing
operations
|
118 | 194 | ||||||
|
Net
cash used in financing activities of discontinued
operations
|
-- | (900 | ) | |||||
|
Net
cash provided by (used in) financing activities
|
118 | (706 | ) | |||||
|
Increase
(decrease) in cash and cash equivalents
|
(329 | ) | 1,211 | |||||
|
Cash
and cash equivalents at beginning of period
|
5,233 | 4,429 | ||||||
|
Cash
and cash equivalents at end of period
|
$ | 4,904 | $ | 5,640 | ||||
|
Supplemental
Disclosure:
|
||||||||
|
Cash
paid for interest
|
$ | 199 | $ | 176 | ||||
|
Cash
paid for income taxes
|
$ | 308 | $ | 46 | ||||
|
Non-cash
Financing Transactions:
|
||||||||
|
Issuance
of treasury shares for vested restricted
stock
|
$ | 172 | $ | -- | ||||
See
accompanying Notes to Condensed Consolidated Financial Statements
THE LGL
GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
A.
|
Subsidiaries
of the Registrant
|
As of
June 30, 2008, the Subsidiaries of the Company are as follows:
|
Owned By
LGL
|
|
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.
(“Mtron”), which includes the operations of M-tron Industries, Ltd. and Piezo
Technology, Inc. (“PTI”). The combined operations 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 K).
|
B.
|
Basis
of Presentation
|
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. Operating
results for the three and six month periods ended June 30, 2008 are not
necessarily indicative of the results that may be expected for the full year
ending December 31, 2008.
The
balance sheet at December 31, 2007 has been derived from the audited financial
statements at that date, but does not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. The financial
results presented for the three and six month periods ended June 30, 2007 have
been reclassified to present the operations of Lynch Systems as discontinued
operations (see Note K).
For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company’s Annual Report on Form 10-K for the
year ended December 31, 2007.
|
C.
|
Investments
|
The
following is a summary of marketable securities (investments) held by the
Company (in thousands):
|
Cost
|
Gross
Unrealized
(Loss)
|
Fair
Value
|
||||||||||
|
June
30, 2008
|
$ | 68 | $ | (35 | ) | $ | 33 | |||||
|
December
31, 2007
|
$ | 68 | $ | (20 | ) | $ | 48 | |||||
|
D.
|
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 75.0%
and 70.5% of the inventory, as of June 30, 2008 and December 31, 2007,
respectively, and the remaining 25.0% and 29.5% as of June 30, 2008 and December
31, 2007, respectively, is valued using last-in first-out
(“LIFO”). The Company reduces the value of its inventory to market
value when the market value is believed to be less than the cost of the
item.
|
June
30,
2008
|
December
31,
2007
|
|||||||
|
(in
thousands)
|
||||||||
|
Raw
materials
|
$ | 2,550 | $ | 2,306 | ||||
|
Work
in process
|
1,621 | 1,498 | ||||||
|
Finished
goods
|
1,291 | 1,377 | ||||||
|
Total
Inventories
|
$ | 5,462 | $ | 5,181 | ||||
Current
cost exceeded the LIFO value of inventory by $336,000 and $266,000 at June 30,
2008 and December 31, 2007, respectively.
|
E.
|
Note
Payable to Banks and Long-Term Debt
|
|
June
30,
2008
|
December
31,
2007
|
|||||||
|
Note
Payable:
|
(in
thousands)
|
|||||||
|
MtronPTI
revolving loan (First National Bank of Omaha (“FNBO”)) at 30-day LIBOR
plus 2.1% (4.56% at June 30, 2008), due June 2009
|
$ | 1,346 | $ | 1,035 | ||||
|
Long-Term
Debt:
|
||||||||
|
MtronPTI
term loan (RBC Centura Bank (“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 June 30,
2008
|
$ | 2,856 | $ | 2,894 | ||||
|
MtronPTI
term loan (FNBO) at 30-day LIBOR plus 2.1%. Interest rate swap converts
loan to a fixed rate, at 5.60% at June 30, 2008, due January
2013
|
1,310 | 1,430 | ||||||
|
Rice
University Promissory Note at a fixed interest rate of 4.5%, due August
2009
|
95 | 130 | ||||||
| 4,261 | 4,454 | |||||||
|
Current
maturities
|
(409 | ) | (419 | ) | ||||
|
Long
-Term Debt
|
$ | 3,852 | $ | 4,035 | ||||
On
October 14, 2004, MtronPTI, entered into a loan agreement with FNBO (the “FNBO
Loan Agreement”). The FNBO Loan Agreement provides for a short-term
credit facility of up to $5,500,000 (the “FNBO Revolving Loan”). The
provisions of the FNBO Revolving Loan were subsequently amended, most recently
on June 30, 2008. The principal balance of the FNBO Revolving Loan
currently bears interest at 30-day LIBOR plus 2.1%, with interest only payments
due monthly and the final payment of principal and interest due on June 30,
2009. At June 30, 2008, the amount outstanding under the revolving
credit loan was $1,346,000. The Company had $4,154,000 of unused
borrowing capacity under its revolving line of credit at June 30, 2008, compared
to $4,465,000 at December 31, 2007.
The FNBO
Loan Agreement also provides for a term loan in the original principal amount of
$2,000,000 (the “FNBO Term Loan”). The provisions of the FNBO Term
Loan were subsequently amended, most recently on January 24,
2008. Under such amendment, the original principal amount of the FNBO
Term Loan is approximately $1,410,000, and the principal balance bears interest
at 30-day LIBOR plus 2.1%, with principal and interest payments due monthly and
the final payment of principal and interest due January 24, 2013.
The FNBO
Loan Agreement contains a variety of affirmative and negative covenants,
including, but not limited to, financial covenants that MtronPTI maintain: (i)
tangible net worth of not less than $7,000,000, (ii) a ratio of current assets
to current liabilities of not less than 1.5 to 1.0; (iii) a ratio of total
liabilities to tangible net worth of not greater than 2.75 to 1.0; and (iv) a
fixed charge ratio of 1.2 to 1.0. At June 30, 2008, the Company was
in compliance with these covenants.
All
outstanding obligations under the FNBO Loan Agreement are guaranteed by the
Company.
In
connection with the FNBO Term Loan, MtronPTI entered into a separate interest
rate swap agreement with FNBO from which it receives periodic payments at the
LIBOR Base Rate and makes periodic payments at a fixed rate of 5.60% through the
life of the FNBO Term Loan. The Company has designated this swap as a
cash flow hedge in accordance with Financial Accounting Standards Board (“FASB”)
133 “Accounting for Derivative Instruments and Hedging Activities” (“FASB
133”). The fair value of the interest rate swap at June 30, 2008 is
$6,000 net of any tax effect, and is included in “swap liability on hedge
contracts” on the condensed consolidated balance sheets. The change
in fair value is reflected in other comprehensive loss, net of any tax
effect.
On
September 30, 2005, MtronPTI entered into a loan agreement (the “RBC Loan
Agreement”) with RBC, which provides for a loan in the original principal amount
of $3,040,000 (the “RBC Term Loan”). The RBC Term Loan bears interest
at LIBOR Base Rate plus 2.75% and is being repaid in monthly installments based
on a 20 year amortization, with the then remaining principal balance and
interest due on the fifth anniversary of the RBC Loan Agreement. The
RBC Loan Agreement contains a variety of affirmative and negative covenants,
including, but not limited to, financial covenants that MtronPTI maintain: (i) a
ratio of total liabilities to tangible net worth of at least 4.0 to 1.0; (ii)
tangible net worth of at least $4.2 million; and (iii) a fixed charge coverage
ratio of not less than 1.2 to 1.0. At June 30, 2008, the Company was
in compliance with these covenants.
All
outstanding obligations under the RBC Loan Agreement are collateralized by
security interests in the assets of MtronPTI and guaranteed by the
Company.
In
connection with the RBC Term Loan, MtronPTI entered into a five-year interest
rate swap from which it receives periodic payments at the LIBOR Base Rate and
makes 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. The fair value of the interest
rate swap at June 30, 2008 is ($84,000) net of any tax effect, and is included
in “swap liability on hedge contracts” on the condensed consolidated balance
sheets. The change in fair value is reflected in other comprehensive
loss, net of any tax effect.
|
F.
|
Stock
Based Compensation
|
The
Company utilizes the provisions of Statement of Financial Accounting Standards
(“SFAS”) 123R, “Share-Based Payment” (“SFAS 123-R”) 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. Compensation expense is recognized for all
share-based payments granted under SFAS 123-R, and 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 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. 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. Total stock
compensation related expense for all outstanding grants for the three-month
period ended June 30, 2008 was $33,000 and for the six-month period ended June
30, 2008 was $66,000. 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.
|
G.
|
Loss
Per Share
|
The
Company computes loss per share in accordance with SFAS No. 128,
“Earnings Per Share.” Basic loss per share is computed by dividing
net 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 loss per share
computation because the impact of the assumed exercise of stock options and
unvested restricted stock would have been anti-dilutive:
|
Three
Months Ended
June
30,
|
Six
Months Ended
June
30,
|
|||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
Options
to purchase common stock
|
200,000 | 200,000 | 200,000 | 200,000 | ||||||||||||
|
Unvested
restricted stock
|
7,754 | 30,000 | 7,754 | 30,000 | ||||||||||||
|
Total
|
207,754 | 230,000 | 207,754 | 230,000 | ||||||||||||
|
H.
|
Other
Comprehensive Loss
|
Other
comprehensive 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
six months ended June 30, 2008, total comprehensive loss was ($1,176,000),
comprised of net loss of ($1,163,000) and change in Accumulated Other
Comprehensive Loss of ($13,000), compared to total comprehensive loss of
($4,050,000) in the six months ended June 30, 2007, which was comprised of net
loss of ($2,275,000) and change in Other Comprehensive Loss of
($1,775,000).
The
change in accumulated other comprehensive loss, net of related tax, for the six
month periods ended June 30, 2008 and 2007, are as follows:
|
Six
Months Ended
June
30,
|
||||||||
|
2008
|
2007
|
|||||||
|
(in
thousands)
|
||||||||
|
Balance
beginning of
period
|
$ | (101 | ) | $ | 1,790 | |||
|
Deferred
gain on swap liability on hedge contracts
|
2 | 16 | ||||||
|
Unrealized
loss on available-for-sale securities
|
(15 | ) | (265 | ) | ||||
|
Reclassification
adjustment for gains included in net income
|
-- | (1,526 | ) | |||||
|
Balance
end of
period
|
$ | (114 | ) | $ | 15 | |||
The
components of accumulated other comprehensive loss, net of related tax at June
30, 2008 and December 31, 2007, are as follows:
|
June
30,
2008
|
December
31, 2007
|
|||||||
|
(in
thousands)
|
||||||||
|
Deferred
loss on swap liability on hedge contracts
|
$ | (79 | ) | $ | (78 | ) | ||
|
Unrealized
loss on available-for-sale securities
|
(35 | ) | (23 | ) | ||||
|
Accumulated
other comprehensive
loss
|
$ | (114 | ) | $ | (101 | ) | ||
|
I.
|
Fair
Value Measurements
|
The
Company measures financial assets and liabilities at fair value in accordance
with SFAS 157. These measurements involve various valuation techniques and
assume that the transactions would occur between market participants in the most
advantageous market for the Company. The following is a summary of
valuation techniques utilized by the Company for its significant financial
assets and liabilities:
Assets
To
estimate the market value of its marketable securities, the Company obtains
current market pricing from quoted market sources or uses pricing for similar
securities. Assets measured at fair value on a recurring basis are summarized
below.
|
Quoted
Prices in Active Markets for Identical Assets (Level
1)
|
Significant
Other Observable Inputs (Level 2)
|
Significant
Unobservable Inputs (Level 3)
|
June
30, 2008
|
|||||||||||||
|
Marketable
securities
|
$ | 33 | $ | -- | $ | -- | $ | 33 | ||||||||
Liabilities
To
estimate the fair value of the swap liability on hedge contracts as of the
measurement date, the Company obtains inputs other than quoted value prices that
are observable for the liability. Liabilities measured at fair value on a
recurring basis are summarized below.
|
Quoted
Prices in Active Markets for Identical Assets (Level
1)
|
Significant
Other Observable Inputs (Level 2)
|
Significant
Unobservable Inputs (Level 3)
|
June
30, 2008
|
|||||||||||||
|
Swap
liability on hedge contracts
|
$ | -- | $ | (78 | ) | $ | -- | $ | (78 | ) | ||||||
|
J.
|
Significant
Foreign Sales
|
For the
three and six months ended June 30, 2008 and 2007, significant foreign revenues
to specific countries were as follows:
|
Three
Months Ended June 30,
|
||||||||
|
Foreign
Revenues:
|
2008
|
2007
|
||||||
|
Malaysia
|
$ | 1,709 | $ | 818 | ||||
|
China
|
1,523 | 1,086 | ||||||
|
Thailand
|
625 | 760 | ||||||
|
Mexico
|
411 | 741 | ||||||
|
Canada
|
314 | 701 | ||||||
|
All
other foreign countries
|
1,146 | 1,257 | ||||||
|
Total
foreign revenues
|
$ | 5,728 | $ | 5,363 | ||||
|
Six
Months Ended June 30,
|
||||||||
|
Foreign
Revenues:
|
2008
|
2007
|
||||||
|
Malaysia
|
$ | 3,296 | $ | 1,465 | ||||
|
China
|
2,564 | 1,863 | ||||||
|
Thailand
|
1,048 | 1,355 | ||||||
|
Mexico
|
841 | 1,346 | ||||||
|
Canada
|
832 | 1,061 | ||||||
|
All
other foreign countries
|
2,528 | 2,319 | ||||||
|
Total
foreign revenues
|
$ | 11,109 | $ | 9,409 | ||||
|
K.
|
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 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.
The assets retained by Lynch systems include the land, buildings and some
equipment. The Company intends to sell the land, buildings and remaining
equipment in separate transactions.
As a
result of the sale of Lynch Systems, certain reclassifications of assets,
liabilities, revenues, costs, and expenses have been made to the prior period
financial statements to reflect the operations of Lynch Systems as discontinued
operations. Specifically, we have reclassified the results of
operations of Lynch Systems for all periods presented to “Loss from Discontinued
Operations” within the Condensed Consolidated Statements of
Operations. In addition, the remaining assets and liabilities of the
business divested in 2007 have been reclassified to “Assets of Discontinued
Operations” and “Liabilities of Discontinued Operations” and the assets of the
divested business held for separate sale continue to be classified as held and
used in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal
of Long-Lived Assets,” and are included within
“Land and Buildings and Improvements.”
Revenues
from discontinued operations were $0 and $1,244,000 for the three months ended
June 30, 2008 and 2007, respectively. Loss from discontinued
operations was ($15,000) and ($803,000) for the three months ended June 30, 2008
and 2007, respectively.
Revenues
from discontinued operations were $0 and $2,534,000 for the six months ended
June 30, 2008 and 2007, respectively. Loss from discontinued
operations was ($5,000) and ($1,007,000) for the six months ended June 30, 2008
and 2007, respectively.
|
L.
|
Commitments
and Contingencies
|
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.
|
M.
|
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. 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 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 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.
The
Company provided $57,000 for foreign income taxes and $0 for state taxes in the
three month period ended June 30, 2008. The Company provided $106,000
for foreign income taxes and $0 for state taxes in the six month period ended
June 30, 2008.
Due to
the uncertainty surrounding the realization of the favorable U.S. tax attributes
in future tax returns, we continue to record a full valuation allowance against
our otherwise recognizable U.S. net deferred tax assets as of June 30, 2008 and
December 31, 2007, except for the Company’s $111,000 in AMT deferred tax assets
which do not expire.
|
N.
|
Related
Party Transactions
|
At June
30, 2008, the Company had $4,904,000 of cash and cash equivalents. Of
this amount, $1,109,000 is invested in United States Treasury money market funds
for which affiliates of the Company serve as investment managers to the
respective funds, compared with $1,095,000 of $5,233,000 at December 31,
2007.
Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
Forward
Looking Statements
Information
included or incorporated by reference in this Quarterly Report on Form 10-Q 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.
Results
of Operations
Three
months ended June 30, 2008 compared to three months ended June 30,
2007
Consolidated
Revenues and Gross Margin
Consolidated
revenues from continuing operations increased by $136,000, or 1.4%, to
$10,150,000 for the second quarter 2008 from $10,014,000 for the comparable
period in 2007. The increase is due primarily to an increase in
foreign sales of $365,000 over the comparable period in 2007 offset by a
decrease in domestic sales of $229,000. This growth in foreign
sales is driven by the Company’s customers’ continuing migration of
manufacturing into low labor cost regions.
Consolidated
gross margin from continuing operations as a percentage of revenues for the
second quarter 2008 increased to 25.7% from 25.3% for the comparable period in
2007.
Operating
Loss
Operating
loss from continuing operations of $394,000 for the second quarter 2008 is an
improvement of $647,000 from the $1,041,000 operating loss for the comparable
period in 2007. The $647,000 improvement was primarily driven by an
impairment loss on Lynch Systems’ assets recognized in the second quarter of
2007 of $905,000 compared to $0 in 2008, offset by an increase in engineering,
selling and administrative expenses of $326,000 in the second quarter of
2008 compared to the same period in 2007, which was primarily driven by an
increase in professional fees due to the Company’s restatement of its financial
statements for the first two quarters of 2007, fiscal 2006 and prior years and
its continuing compliance requirements under Sarbanes-Oxley.
Other
Income (Expenses)
Net
interest expense for the second quarter 2008 was $66,000, compared with $91,000
for the comparable period in 2007 due to the overall reduction in Company debt
in the second quarter of 2008 in relation to the comparable period in 2007, as
well as a reduction in the variable interest rate on MtronPTI’s revolving
loan. In the second quarter of 2007, MtronPTI recognized $173,000 in
other expense relating to the remeasurement process of consolidating one of its
foreign subsidiaries, offset by the gain on the sale of vacant land of
$88,000.
Income
Taxes
The
Company files consolidated federal income tax returns, which includes all
subsidiaries. The income tax provision for the six-month period ended
June 30, 2008 included foreign taxes. The provision gives effect to
our estimated tax liability at the end of the year.
Due to
the uncertainty surrounding the realization of the favorable U.S. tax attributes
in future tax returns, we continue to record a full valuation allowance against
our otherwise recognizable U.S. net deferred tax assets as of June 30, 2008 and
December 31, 2007, except for the Company’s $111,000 in AMT deferred tax assets
which do not expire.
Results
of Discontinued Operations
As a
result of the sale of Lynch Systems in the second quarter of 2007, we have
reclassified the results of operations of Lynch Systems for all periods
presented to “Discontinued Operations” within the Condensed Consolidated
Statements of Operations, in accordance with accounting principles generally
accepted in the United States of America.
For the
quarter ended June 30, 2008, the revenues from discontinued operations were $0
and loss from discontinued operations was $15,000 compared with revenues of
$1,244,000 and loss from discontinued operations of $803,000 including a loss on
the sale of Lynch systems of $982,000 for the second quarter of
2007.
Net
Loss
Net loss
for the second quarter 2008 was $573,000 compared to net loss of $2,923,000 for
the comparable period in 2007. The second quarter 2008 loss was comprised of a
$558,000 loss from continuing operations and $15,000 loss from discontinued
operations compared with a $1,138,000 loss from continuing operations and
$1,785,000 loss from discontinued operations for the second quarter of 2007. The
decrease in net loss is due to impairment loss on Lynch Systems’ assets of
$905,000 and total net loss from discontinued operations of $1,785,000 in the
second quarter of 2007 compared to an impairment loss of $0 and net loss from
discontinued operations of $15,000 for 2008.
Six
months ended June 30, 2008 compared to six months ended June 30,
2007
Consolidated
Revenues and Gross Margin
Consolidated
revenues from continuing operations for the six-month period ending June 30,
2008 increased by $542,000, or 2.8%, to $19,933,000 from $19,391,000 for the
comparable period in 2007. The increase is due primarily to an
increase in foreign sales of $1,700,000 over the comparable period in 2007
offset by a decrease in domestic sales of $1,158,000. This growth in
foreign sales is driven by the Company’s customers’ continuing migration of
manufacturing into low labor cost
regions.
Consolidated
gross margin from continuing operations as a percentage of revenues for the
six-month period ending June 30, 2008 increased to 26.3% from 23.2% for the
comparable period in 2007. The improvement in gross margin reflects
the Company’s continuing efforts to improve upon its manufacturing and supply
chain efficiency.
Operating
Loss
Operating
loss from continuing operations of $850,000 for the six-month period ending June
30, 2008 is an improvement of $881,000 from the $1,731,000 operating loss for
the comparable period in 2007. The $881,000 improvement was caused by
a margin percentage improvement of 3.1%, resulting in additional gross margin of
$601,000 on a same sales level reflecting the Company’s continuing efforts to
improve upon its manufacturing inefficiencies experienced in 2007, offset by an
increase in professional fees primarily due to the Company’s restatement of its
financial statements for the first two quarters of 2007, fiscal 2006 and prior
years and its continuing compliance requirements under
Sarbanes-Oxley. In addition, in 2007 the Company recognized an
impairment loss on Lynch Systems’ assets of
$905,000.
Other
Income (Expenses)
Investment
income from continuing operations decreased $1,526,000 to $0 for the six-month
period ended June 30, 2008. This was due to the sale of substantially
all of the marketable securities that were held for sale during the first
quarter 2007. Net interest expense for the six-month period
ended June 30, 2008 was $129,000, compared with $180,000 for the comparable
period in 2007 due to the overall reduction in Company debt in 2008 in relation
to the comparable period in 2007, as well as a reduction in the variable
interest rate on MtronPTI’s revolving loan. In the second quarter of
2007, MtronPTI recognized $173,000 in other expense relating to the
remeasurement process of consolidating one of its foreign
subsidiaries.
Income
Taxes
The
Company files consolidated federal income tax returns, which includes all
subsidiaries. The income tax provision for the six-month period ended
June 30, 2008 included foreign taxes. The provision gives effect to
our estimated tax liability at the end of the year.
Due to
the uncertainty surrounding the realization of the favorable U.S. tax attributes
in future tax returns, we continue to record a full valuation allowance against
our otherwise recognizable U.S. net deferred tax assets as of June 30, 2008 and
December 31, 2007, except for the Company’s $111,000 in AMT deferred tax assets
which do not expire.
Results
of Discontinued Operations
As a
result of the sale of Lynch Systems in the second quarter of 2007, we have
reclassified the results of operations of Lynch Systems for all periods
presented to “Discontinued Operations” within the Condensed Consolidated
Statements of Operations, in accordance with accounting principles generally
accepted in the United States.
For the
six-month period ended June 30, 2008, the revenues from discontinued operations
were $0 and loss from discontinued operations was $5,000 compared with revenues
of $2,534,000 and loss from discontinued operations of $1,007,000 including a
loss on the sale of Lynch Systems of $982,000 for the comparable period in
2007.
Net
Loss
Net loss
for the six-month period ended June 30, 2008 was $1,163,000 compared to a net
loss of $2,275,000 for the comparable period in 2007. The six-month period ended
June 30, 2008 loss was comprised of a $1,158,000 loss from continuing operations
and $5,000 loss from discontinued operations compared with a $286,000 loss from
continuing operations and $1,989,000 loss from discontinued operations for the
comparable period in 2007. The decrease in net loss is due to an impairment loss
on Lynch Systems’ assets of $905,000 and total net loss from discontinued
operations of $1,989,000, offset by investment income of $1,526,000 during the
six-month period ended June 30, 2007 compared to an impairment loss of $0, net
loss from discontinued operations of $5,000 and investment income of $0 for
2008.
Liquidity
and Capital Resources
The
Company’s cash, cash equivalents and investments in marketable securities at
June 30, 2008 was $4,937,000 as compared to $5,281,000 at December 31,
2007. MtronPTI had unused borrowing capacity of $4,154,000 under
MtronPTI’s revolving line of credit at June 30, 2008, as compared to $4,465,000
at December 31, 2007. At June 30, 2008, MtronPTI had $1,346,000
outstanding in its revolving loan, compared with $1,035,000 at December 31,
2007.
At June
30, 2008, the Company’s net working capital was $9,929,000 as compared to
$10,984,000 at December 31, 2007 after taking into account the reclassification
of Lynch Systems assets into “Assets or Liabilities of Discontinued
Operations.” At June 30, 2008, the Company had current assets of
$16,622,000 and current liabilities of $6,693,000. After taking
into account the reclassification of Lynch Systems assets into “Assets or
Liabilities of Discontinued Operations,” at December 31, 2007, the Company had
current assets of $17,225,000 and current liabilities of
$6,241,000. The ratio of current assets to current liabilities was
2.48 to 1.00 at June 30, 2008, compared to 2.76 to 1.00 at December 31,
2007.
Cash used
in operating activities from continuing operations was $305,000 for the six
months ended June 30, 2008, compared to cash used in operating activities from
continuing operations of $1,648,000 for the six months ended June 30,
2007. The decrease in cash used in operating activities is due to
cash used in the six months ended June 30, 2007 to pay down accounts payable and
accrued liabilities of $1,286,000 compared to $27,000 for the six months ended
June 30, 2008.
Cash used
in investing activities from continuing operations was $89,000 for the six
months ended June 30, 2008, versus cash provided of $2,433,000 for the six
months ended June 30, 2007. The cash from investing activities came
primarily from the sale of securities in March 2007. The proceeds of
that sale were $2,292,000.
Cash
provided by financing activities from continuing operations was $118,000 for the
six months ended June 30, 2008, compared with $194,000 for the six months ended
June 30, 2007. The decrease in cash provided by financing activities
is due primarily to a decrease in net borrowings on the Company’s note payable
offset by a decrease in scheduled repayments of its long-term debt.
At June
30, 2008, total liabilities of $10,545,000 was $38,000 more than the total
liabilities at December 31, 2007 of $10,507,000. The debt increased due to the
increase in MtronPTI’s borrowing on its revolving loan, which was partially
offset by a decrease in term loans outstanding due to scheduled
repayments. At June 30, 2008, the Company had $409,000 in current
maturities of long-term debt compared with $419,000 at December 31,
2007. The increase in consolidated debt was in addition to the
decrease in cash and cash equivalents of $329,000.
The
Company believes that existing cash and cash equivalents, cash generated from
operations and available borrowings on its revolver, will be sufficient to meet
its ongoing working capital and capital expenditure requirements for the
foreseeable future.
On
October 14, 2004, MtronPTI, entered into the FNBO Loan Agreement. The
FNBO Loan Agreement provides for a short-term credit facility of up to
$5,500,000, the FNBO Revolving Loan. The provisions of the FNBO
Revolving Loan were subsequently amended, most recently on June 30,
2008. The principal balance of the FNBO Revolving Loan currently
bears interest at 30-day LIBOR plus 2.1%, with interest only payments due
monthly and the final payment of principal and interest due on June 30,
2009. At June 30, 2008, the amount outstanding under the revolving
credit loan was $1,346,000. The Company had $4,154,000 of unused
borrowing capacity under its revolving line of credit at June 30, 2008, compared
to $4,465,000 at December 31, 2007.
The FNBO
Loan Agreement also provides for a term loan in the original principal amount of
$2,000,000, the FNBO Term Loan. The provisions of the FNBO Term Loan
were subsequently amended, most recently on January 24, 2008. Under
such amendment, the original principal amount of the FNBO Term Loan is
approximately $1,410,000, and the principal balance bears interest at 30-day
LIBOR plus 2.1%, with principal and interest payments due monthly and the final
payment of principal and interest due January 24, 2013.
The FNBO
Loan Agreement contains a variety of affirmative and negative covenants,
including, but not limited to, financial covenants that MtronPTI maintain: (i)
tangible net worth of not less than $7,000,000, (ii) a ratio of current assets
to current liabilities of not less than 1.5 to 1.0; (iii) a ratio of total
liabilities to tangible net worth of not greater than 2.75 to 1.0; and (iv) a
fixed charge ratio of 1.2 to 1.0. At June 30, 2008, the Company was
in compliance with these covenants.
All
outstanding obligations under the FNBO Loan Agreement are guaranteed by the
Company.
In
connection with the FNBO Term Loan, MtronPTI entered into a separate interest
rate swap agreement with FNBO from which it receives periodic payments at the
LIBOR Base Rate and makes periodic payments at a fixed rate of 5.60% through the
life of the FNBO Term Loan. The Company has designated this swap as a
cash flow hedge in accordance with FASB 133 “Accounting for Derivative
Instruments and Hedging Activities”. The fair value of the interest
rate swap at June 30, 2008 is $6,000 net of any tax effect, and is included in
“swap liability on hedge contracts” on the condensed consolidated balance
sheets. The change in fair value is reflected in other comprehensive
loss, net of any tax effect.
On
September 30, 2005, MtronPTI entered into the RBC Loan Agreement, which provides
for a loan in the original principal amount of $3,040,000, the RBC Term
Loan. The RBC Term Loan bears interest at LIBOR Base Rate plus 2.75%
and is being repaid in monthly installments based on a 20 year amortization,
with the then remaining principal balance and interest due on the fifth
anniversary of the RBC Loan Agreement. The RBC Loan Agreement
contains a variety of affirmative and negative covenants, including, but not
limited to, financial covenants that MtronPTI maintain: (i) a ratio of total
liabilities to tangible net worth of at least 4.0 to 1.0; (ii) tangible net
worth of at least $4.2 million; and (iii) a fixed charge coverage ratio of not
less than 1.2 to 1.0. At June 30, 2008, the Company was in compliance
with these covenants.
All
outstanding obligations under the RBC Loan Agreement are collateralized by
security interests in the assets of MtronPTI and guaranteed by the
Company.
In
connection with the RBC Term Loan, MtronPTI entered into a five-year interest
rate swap from which it receives periodic payments at the LIBOR Base Rate and
makes 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 June
30, 2008 is ($84,000) net of any tax effect, and is included in “swap liability
on hedge contracts” on the condensed consolidated balance sheets. The
change in fair value is reflected in other comprehensive loss, net of any tax
effect.
Off-Balance Sheet
Arrangements
The Company does not have any
off-balance sheet arrangements.
Item
3. Quantitative and Qualitative
Disclosures About Market Risk.
Not
applicable.
Item 4T. 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 June 30, 2008. Based on this
evaluation, management has concluded that as of June 30, 2008, such disclosure
controls and procedures were not effective.
Changes
in Internal Control Over Financial Reporting
The
Company’s 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 had
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 accounting principles
generally accepted in the United States of America. As a result of its
assessment of our internal control over financial reporting, management
identified material weaknesses in the following areas: entity-level controls,
enterprise-wide risk oversight, financial statement close and reporting process,
inventory controls and information technology company-level
controls.
There
were no significant changes in our internal control over financial reporting,
other than those stated below, that occurred during the most recent fiscal
quarter that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Remediation
Efforts to Address Material Weaknesses in Internal Control over Financial
Reporting
Throughout
the process to report on the operations for the three months ended
June 30, 2008, management made progress in the implementation of a remediation
plan to address the material weaknesses identified as of December 31,
2007. We have implemented controls and procedures that have addressed
and corrected the previously reported control deficiency related to material
weakness in internal control over financial reporting with respect to inventory
controls. The primary changes made by the Company to remedy the
identified material weakness were improvements in the documentation of
implemented controls and procedures and their respective reviews and
approvals. In addition, management continuously identifies and
communicates in a timely manner to the responsible personnel across the Company
changes to its compliance program and actively follows up on its appropriate
implementation.
Management
has continued to identify a material weakness in the area of information
technology company-level controls.
We will
continue to implement process changes to address the material weaknesses
previously noted regarding the internal controls over financial reporting for
fiscal 2007. We are currently undergoing a comprehensive effort to remedy the
control deficiencies identified. This effort, under the direction of the
Company’s senior management and the newly hired IT Director who started in July
2008, includes the documentation, testing and review of our internal controls.
During the course of these activities, we may identify other potential
improvements to our internal controls over financial reporting that we will
evaluate for possible future implementation. We expect to continue such
documentation, testing and review and may identify other control deficiencies,
possibly including additional material weaknesses, and other potential
improvements to our internal controls in the future.
Evaluation
of Internal Control Over Financial Reporting
Based on
management’s continuing assessment of the Company’s internal control over
financial reporting, management has concluded that the Company’s internal
control over financial reporting was not effective as of June 30, 2008 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.
PART II
OTHER
INFORMATION
Item 1. 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. There is no litigation pending currently.
Item 1A. Risk Factors.
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 and June 30,
2008.
As
disclosed in Part II, Item 9A(T), “Controls and Procedures,” of our Annual
Report on Form 10-K, and updated herein in Part I, Item 4T, “Controls and
Procedures,” of our Quarterly Report on Form 10-Q, 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 and not effective as of June 30, 2008. 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.
Item 4. Submission of Matters to a
Vote of Security Holders.
We held
our 2008 annual meeting of stockholders on June 26, 2008 (the “Annual
Meeting”). A quorum was present at the Annual Meeting, with 2,171,709
shares of common stock entitled to be cast in person or by proxy at the Annual
Meeting.
At the
Annual Meeting, our stockholders reelected each of our incumbent directors, to
serve until our 2009 annual meeting of stockholders and until their sucessors
are duly elected and qualify, by the following votes:
|
Shares
For:
|
Shares
Withheld:
|
|||||||
|
Marc
Gabelli
|
1,668,086 | 266,770 | ||||||
|
Timothy
Foufas
|
1,668,086 | 266,770 | ||||||
|
E.
Val Cerutti
|
1,668,085 | 266,771 | ||||||
|
Peter
DaPuzzo
|
1,668,085 | 266,771 | ||||||
|
Avrum
Gray
|
1,666,751 | 268,105 | ||||||
|
Patrick
J. Guarino
|
1,668,086 | 266,770 | ||||||
|
Jeremiah
Healy
|
1,493,411 | 441,445 | ||||||
|
Kuni
Nakamura
|
1,668,086 | 266,770 | ||||||
|
Anthony
J. Pustorino
|
1,668,085 | 266,771 | ||||||
|
Javier
Romero
|
1,668,086 | 266,770 | ||||||
Our
stockholders also voted to ratify the appointment of J.H. Cohn LLP as our
independent registered public accounting firm for the fiscal year ending
December 31, 2008.
|
Shares
|
||||
|
For:
|
1,931,466 | |||
|
Against:
|
870 | |||
|
Abstain:
|
2,520 | |||
Item 6. Exhibits.
EXHIBIT
INDEX
|
Exhibit
No.
|
Description
|
|
31(a)*
|
Certification
by Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
31(b)*
|
Certification
by Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
32(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 Quarterly Report on Form 10-Q or
have been incorporated by reference into this Quarterly Report on Form 10-Q.
Upon request, The LGL Group, Inc. will furnish to each of its stockholders a
copy of any such Exhibit. Requests should be addressed to the Office of the
Secretary, The LGL Group, Inc., 2525 Shader Rd., Orlando, Florida
32804.
SIGNATURES
Pursuant
to the requirements 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.
|
|||
|
Date: August
14, 2008
|
BY:
|
/s/
Robert Zylstra
|
|
|
Robert
Zylstra
|
|||
|
President
and Chief Executive Officer
(Principal
Executive Officer)
|
|||
|
Date: August
14, 2008
|
BY:
|
/s/
Harold D. Castle
|
|
|
Harold
D. Castle
|
|||
|
Chief
Financial Officer
(Principal
Financial Officer)
|
|||
22