SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended MARCH 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ---------------- to -----------------
Commission File No. 1-106
LYNCH CORPORATION
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Indiana 38-1799862
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
401 Theodore Fremd Avenue, Rye, New York 10580
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(914) 921-7601
- --------------------------------------------------------------------------------
Registrant=s telephone number, including area code
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 (20 has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
Indicate the number of shares outstanding of each of the Registrant=s classes of
Common Stock, as of the latest practical date.
Class Outstanding At May 1, 1998
----- --------------------------
Common Stock, no par value 1,418,248
Page 2 of 16
INDEX
LYNCH CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet:
- March 31, 1998
- December 31, 1997 (Audited)
Condensed Consolidated Statements of Operations:
- Three months ended March 31, 1998 and 1997
Condensed Consolidated Statements of Cash Flows:
- Three months ended March 31, 1998 and 1997
Notes to Consolidated Financial Statements:
Item 2. Management=s Discussion and Analysis of Financial Condition and
Results of Operations
PART II. OTHER INFORMATION
Item 2. Changes in Securities
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
Page 3 of 16
Part 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements
LYNCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(In thousands)
March 31, December 31,
1998 1997
--------- ---------
(Unaudited) (A)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 24,529 $ 33,557
Marketable securities and short-term investments 647
985
Receivables, less allowances of $1,417 and $1,448 59,781
54,480
Inventories 45,055 35,685
Deferred income taxes 17,993 17,993
Other current assets 11,147 10,059
--------- ---------
Total current assets 159,152 152,759
PROPERTY, PLANT AND EQUIPMENT:
Land 2,780 1,742
Buildings and improvements 27,403 25,272
Machinery and equipment 211,707 190,579
--------- ---------
241,890 217,593
Less accumulated depreciation (64,872) (60,064)
--------- ---------
Net property, plant and equipment 177,018 157,529
EXCESS OF COSTS OVER FAIR VALUE OF NET ASSETS ACQUIRED 93,607 73,257
INVESTMENTS IN AND ADVANCES TO PCS ENTITIES 25,949 25,448
OTHER ASSETS 16,190 14,645
--------- ---------
Total assets $ 471,916 $ 423,638
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks $ 61,429 $ 29,021
Trade accounts payable 25,588 21,381
Accrued liabilities 39,587 37,104
Current maturities of long-term Debt 10,801 9,302
--------- ---------
Total current liabilities 137,405 96,808
LONG-TERM DEBT 245,950 242,776
DEFERRED INCOME TAXES 34,070 33,764
PENSION LIABILITIES AND OTHER POST-RETIREMENT BENEFITS 2,970 0
MINORITY INTERESTS 15,001 13,839
SHAREHOLDERS' EQUITY:
Common stock, no par or stated value: authorized
10,000,000 shares; issued 1,471,191 shares
(at stated value) 5,139 5,139
ADDITIONAL PAID - IN CAPITAL 8,710 8,644
RETAINED EARNINGS 22,978 23,414
ACCUMULATED OTHER COMPREHENSIVE INCOME 423 0
TREASURY STOCK OF 52,943 AND 54,143 SHARES AT COST (730) (746)
--------- ---------
Total Shareholders' Equity 36,520 36,451
--------- ---------
Total Liabilities and Shareholders' Equity $ 471,916 $ 423,638
========= =========
(A)The Balance Sheet at December 31, 1997 has been derived from the Audited
Financial Statements at that date, but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See Notes to Condensed Consolidated Financial Statements
Page 4 of 16
LYNCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(UNAUDITED)
(In thousands, except share amounts)
Three months ended
March 31,
Sales And Revenues 1998 1997
---- ----
Multimedia $ 12,932 $ 10,067
Services 33,971 33,633
Manufacturing 68,314 65,079
----------- -----------
115,217 108,779
----------- -----------
Costs and expenses:
Multimedia 9,221 7,807
Services 31,950 30,969
Manufacturing 58,691 55,442
Selling and administrative 10,968 10,325
----------- -----------
OPERATING PROFIT 4,387 4,236
Other income (expense):
Investment income 669 433
Interest expense (6,348) (5,469)
Share of operations of
affiliated companies 73 14
Loss on sale of subsidiary stock (58) 0
----------- -----------
(5,664) (5,022)
----------- -----------
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES AND
MINORITY INTERESTS (1,277) (786)
Benefit for income taxes 536 315
Minority interests 305 (41)
----------- -----------
NET LOSS $ (436) $ (512)
=========== ===========
Weighted average shares
outstanding 1,418,000 1,413,000
=========== ===========
BASIC EARNINGS PER SHARE:
NET LOSS $ (0.31) $ (0.36)
=========== ===========
DILUTED EARNINGS PER SHARE:
NET LOSS $ (0.31) $ (0.36)
=========== ===========
See Notes to Condensed Consolidated Financial Statements
Page 5 of 16
LYNCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(UNAUDITED)
(In thousands)
Three months ended
March 31,
---------------------------------
1998 1997
---------------------------------
OPERATING ACTIVITIES
Net loss $ (436) $ (512)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 5,977 4,826
Net effect of purchases and
sales of trading securities 338 490
Share of operations of affiliated companies (73) (14)
Minority interests (305) 41
Loss on sale of stock by subsidiaries 58 0
Changes in operating assets and liabilities:
Receivables (702) 998
Inventories (100) 922
Accounts payable and accrued liabilities 8,031 (663)
Other (2,567) (1,153)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 10,221 4,935
-------- --------
INVESTING ACTIVITIES
Capital expenditures (4,421) (3,315)
Investment in Spinnaker Coating-Maine, Inc. (44,770) 0
Investment in Coronet Communications Company 0 2,995
Investment in Upper Peninsula Telephone Company 0 (15,474)
Investment in Personal Communications
Services Partnerships 0 4,989
Other (781) 7
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (49,972) (10,798)
-------- --------
FINANCING ACTIVITIES
Issuance (repayments)of long-term debt, net 30,081 (1,017)
Treasury stock transactions 90 657
Minority interest transactions 552 (38)
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 30,723 (398)
-------- --------
Net decrease in cash and cash equivalents (9,028) (6,261)
Cash and cash equivalents at beginning of period 33,557 33,946
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD 24,529 27,685
======== ========
See Notes to Condensed Consolidated Financial Statements.
Page 6 of 16
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
A. SUBSIDIARIES OF THE REGISTRANT
Owned by
Subsidiary Lynch
- ---------- -----
Brighton Communications Corporation 100.0%
Lynch Telephone Corporation IV 100.0%
Bretton Woods Telephone Company, Inc. 100.0%
World Surfer, Inc. 100.0%
Lynch Kansas Telephone Corporation 100.0%
Lynch Telephone Corporation VI 98.0%
J.B.N. Telephone Company, Inc. 98.0%
J.B.N. Finance Corporation 98.0%
Giant Communications, Inc. 98.0%
Lynch Telephone Corporation VII 100.0%
USTC Kansas, Inc. 100.0%
Haviland Telephone Company, Inc. 100.0%
Haviland Finance Corporation 100.0%
DFT Communications Corporation 100.0%
Dunkirk & Fredonia Telephone Company 100.0%
Cassadaga Telephone Company 100.0%
Macom, Inc. 100.0%
Comantel, Inc. 100.0%
D&F Cellular Telephone, Inc. 100.0%
Erie Shore Communications, Inc. 100.0%
DFT Long Distance Corporation 100.0%
LMT Holding Corporation 100.0%
Lynch Michigan Telephone Holding Corporation 100.0%
Upper Peninsula Telephone Company 100.0%
Alpha Enterprises Limited 100.0%
Upper Peninsula Cellular North, Inc. 100.0%
Upper Peninsula Cellular South, Inc. 100.0%
Global Television, Inc. 100.0%
Inter-Community Acquisition Corporation 100.0%
Home Transport Services, Inc. 100.0%
Lynch Capital Corporation 100.0%
Lynch Entertainment Corporation 100.0%
Lynch Entertainment Corporation II 100.0%
Lynch International Exports, Inc. 100.0%
Lynch Manufacturing Corporation 100.0%
Lynch Display Technologies, Inc. 100.0%
Lynch Systems, Inc. 100.0%
M-tron Industries, Inc. 91.0%
M-tron Industries, Ltd. 91.0%
Spinnaker Industries, Inc 63.0%
Entoleter, Inc. 63.0%
Spinnaker Coating, Inc. 63.0%
Spinnaker Coating-Maine, Inc. 63.0%
Central Products Company 63.0%
Page 7 of 16
Lynch Multimedia Corporation 100.0%
CLR Video, L.L.C. 60.0%
The Morgan Group, Inc. 66.24%(V)/51.47%(O)
Morgan Drive Away, Inc. 66.24%(V)/51.47%(O)
Transport Services Unlimited, Inc. 66.24%(V)/51.47%(O)
Interstate Indemnity Company 66.24%(V)/51.47%(O)
Morgan Finance, Inc. 66.24%(V)/51.47%(O)
TDI, Inc. 66.24%(V)/51.47%(O)
Home Transport Corporation 66.24%(V)/51.47%(O)
MDA Corporation 66.24%(V)/51.47%(0)
Lynch PCS Communications Corporation 100.0%
Lynch PCS Corporation A 100.0%
Lynch PCS Corporation F 100.0%
Lynch PCS Corporation G 100.0%
Lynch Interactive Corporation 100.0%
Lynch Telecommunications Corporation 100.0%
Lynch Telephone Corporation 83.1%
Western New Mexico Telephone Co., Inc. 83.1%
WNM Communications Corporation 83.1%
Wescel Cellular, Inc. 83.1%
Wescel Cellular of New Mexico
Limited Partnership 51.0% 42.4%
Wescel Cellular, Inc. II 83.1%
Northwest New Mexico Cellular, Inc. 50.0% 40.6%
Northwest New Mexico Cellular of
New Mexico Limited Partnership 51.0% 20.7%
Enchantment Cable Corporation 83.1%
Lynch Telephone Corporation II 83.0%
Inter-Community Telephone Company 83.0%
Inter-Community Telephone Company II 83.0%
Lynch Telephone Corporation III 81.0%
Cuba City Telephone Exchange Company 81.0%
Belmont Telephone Company 81.0%
Notes:
(V)=Percentage voting control; (O)=Percentage of equity ownership
B. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of the management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three month period
ended March 31, 1998 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1998. For further information, refer to
the consolidated financial statements and footnotes thereto included in the
Registrant=s Annual Report on Form 10-K for the year ended December 31, 1997.
C. ACQUISITIONS
On March 17, 1998, Spinnaker Coating-Maine, Inc. acquired the pressure sensitive
adhesive-backed label stock business of S.D. Warren. The purchase price was
approximately $52.0 million, plus the assumption of certain liabilities and was
funded by issuing the seller a convertible subordinated note of $7.0 million
with the remainder
Page 8 of 16
funded by Spinnaker's revolving credit facility. As a result of this
transaction, the Registrant recorded approximately $19.6 million in goodwill
which is being amortized over 30 years.
On March 18, 1997, Lynch Michigan Telephone Holding Company, a wholly-owned
subsidiary of the Registrant, acquired approximately 60% of the outstanding
shares of Upper Peninsula Telephone Company for $15.2 million. The Registrant
completed the acquisition of the remaining 40% on May 23, 1997. The total cost
of the acquisition was $26.5 million. As a result of this transaction, the
Registrant recorded approximately $7.4 million in goodwill which is being
amortized over 25 years.
All of the above acquisitions were accounted for as purchases, and accordingly,
the assets acquired and liabilities assumed were recorded at their estimated
fair market values.
The operating results of the acquired companies are included in the Consolidated
Statement of Operations from their respective acquisition dates. The following
unaudited proforma information shows the results of the Registrant=s operations
as though the acquisition of S.D. Warren's adhesive-backed label stock business
and the acquisition of Upper Peninsula Telephone Company was made at the
beginning of 1997.
Three Months Ended
March 31
--------
1998 1997
---- ----
(In thousands, except per share data)
Sales and Revenues $127,331 $127,377
Operating Profit 5,030 6,849
Income (Loss) from Continuing
Operations Before Income Taxes
and Minority Interest (1,593) 468
Net Income (Loss) (318) 289
Net Income (Loss) Per Share $(0.22) $0.20
D. INVENTORIES
Inventories are stated at the lower of cost or market value. At March 31, 1998,
inventories were valued by three methods: last-in, first-out (LIFO) - 41%,
specific identification - 53%, and first-in, first-out (FIFO) - 6%. At December
31, 1997, the respective percentages were 48%, 43%, and 9%.
In Thousands
------------
3-31-98 12-31-97
------- --------
Raw material and supplies $11,858 $10,493
Work in process 4,525 3,544
Finished goods 28,672 21,648
------- -------
Total Inventories $45,055 $35,685
======= =======
E. INDEBTEDNESS
On a consolidated basis, at March 31, 1998, the Registrant maintains short-term
and long-term lines of credit facilities totaling $106.0 million, of which $30.8
million was available. The Registrant (Parent Company) maintains $24.0 million
short-term line of credit facilities, of which $10.0 million was available at
March 31, 1998. The $14.0 million facility will expire on June 15, 1998. The
$10.0 million facility will expire on December 29, 1998. Spinnaker Industries,
Inc. maintains lines of credit at its subsidiaries which total $60.0 million, of
which $11.2 million was available at March 31, 1998. The Morgan Group maintains
lines of credit totaling $10.0 million, of which $2.0 million was available at
March 31, 1998. These facilities, as well as facilities at other subsidiaries of
the Registrant, generally limit the credit available under the lines of credit
to certain variables, such as inventories and receivables, and are secured by
the operating assets of the subsidiary, and include various financial covenants.
Page 9 of 16
Due to certain of these restrictive covenants and working capital requirements
of the subsidiaries, cash distributions from the subsidiaries are limited. At
March 31, 1998, $45.9 million of these total facilities expire within one year.
In general, the long-term debt credit facilities are secured by property, plant
and equipment, inventory, receivables and common stock of certain subsidiaries
and contain certain covenants restricting distributions to the Registrant.
Long term debt consists of: 3-31-98 12-31-97
------- --------
Spinnaker Industries, Inc. 10.75% Senior
Secured Note due 2006 $115,000 $115,000
Rural Electrification Administration and
Rural Telephone Bank notes payable in
equal quarterly installments through 2027
at fixed interest rates ranging from 2% to
7.5% (4.7% weighted average) 46,650 47,109
Bank credit facilities utilized by certain
telephone and telephone holding companies
through 2009, $34.5 million at a fixed
interest rate averaging 9.1% and $19.0 million
at variable interest rates averaging 8.8% 53,483 54,633
Unsecured notes issued in connection with
acquisitions at fixed interest rates
averaging 9.2% with maturities through 2006 35,051 28,049
Other 6,567 7,287
-------- -------
256,751 252,078
Current maturities (10,801) (9,302)
--------- -------
$245,950 $242,776
======== ========
F. LOSS ON SALE OF SUBSIDIARY STOCK
During the first quarter of 1998, as a result of the exercise of a portion of
the stock warrants held by the management of Spinnaker, the Registrant recorded
a loss of $58,000 ($34,000 net of income tax, or $0.02 per share).
G. EARNINGS PER SHARE
In December 1997, the Registrant adopted Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share," which changed the methodology
of calculating earnings per share. Basic earnings per common share amounts are
based on the average number of common shares outstanding during each period,
excluding the dilutive effects of options, warrants, and convertible securities.
Diluted earnings per share reflect the effect, where dilutive, of the exercise
of all stock options having an exercise price less than the greater of the
average or closing market price at the end of the period of the Common Stock of
the Registrant using the treasury stock method. All earnings per share amounts
have been presented in accordance with, and where appropriate, restated to
conform to the SFAS No. 128 requirements.
H. COMPREHENSIVE INCOME
Effective January 1, 1998, the Registrant adopted Statement of SFAS No. 130,
"Reporting Comprehensive Income". SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components; however, the
adoption of SFAS No. 130 had no impact on the Company's net income (loss) or
shareholders' equity. SFAS No. 130 requires unrealized gains or loses on the
Registrant's available-for-sale securities, which prior to adoption were
reported separately in shareholders equity to be included in other comprehensive
income.
The components or comprehensive income, net of tax, for the three months ended
March 31, 1998 and 1997 are as follows:
1998 1997
------ -----
Net Loss $(436) $(512)
Unrealized gains on securities 423 --
----- -----
Comprehensive income (loss) $ (13) $(512)
----- -----
The components of accumulated other comprehensive income, net of related tax, at
March 31, 1998 and December 31, 1997 are as follows:
1998 1997
---- ----
Unrealized gains on securities $423 $--
---- ----
Accumulated comprehensive income $423 $--
Item 2. MANAGEMENT=S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
SALES AND REVENUES
Revenues for the first quarter of 1998 increased by $6.4 million or 6%, to
$115.2 million, from the first quarter of 1997. Within the operating segments,
multimedia, whose revenues increased by 28%, contributed $2.9 million to the
increase; and manufacturing, whose revenues increased by 5%, contributed $3.2
million to the overall increase. Revenues of the services segment increased by
1%.
The increase in multimedia revenues is primarily attributable to the acquisition
of Upper Peninsula Telephone Company in March 1997($2.3 million contribution).
For multimedia businesses owned for a comparable period in 1998 and 1997,
revenues increased by 6%. Within the manufacturing group, revenues for Spinnaker
increased by $2.4 million, or 4% from first quarter 1997; Lynch Systems'
revenues decreased by $.7 million; and M-tron's revenues increased by $1.6
million, or 35%. Spinnaker completed the acquisition of S.D. Warren's pressure
sensitive adhesive-backed label stock business on March 18, 1998, which
primarily accounted for the revenue increase in Spinnaker.
OPERATING PROFIT
Operating profit for the first quarter of 1998 increased by $.2 million to $4.4
million, from the first quarter of 1997. Operating profit in the multimedia
segment increased by $1.4 million, primarily due to Upper Peninsula Telephone
Company acquisition. Manufacturing's operating profit was flat as increases in
operating profits at Spinnaker, due to manufacturing efficiencies, and M-tron,
due to higher revenues, offset decreases at Lynch Systems. Services' operating
profit decreased by nearly $.8 million, primarily resulting from higher claims
costs as well as increased expenditures for data processing and in Specialized
Transport by the Morgan Group. Corporate expenses increased by $0.5 million,
primarily attributable to the non-cash charge relating to stock appreciation
rights ("SARs"). The SARs charges in the first quarter of 1998 totaled $1.1
million compared to $.3 million in 1997 comparable period.
Page 11 of 16
Consolidated EBITDA (earnings before interest, taxes, depreciation and
amortization) increased by 14% to $10.2 million in 1998, compared to $9.0
million in the first quarter of 1997. In the multimedia segment, higher revenues
resulted in increased EBITDA of $2.0 million or 43%, offset by increased
depreciation and amortization expense of $.6 million, both primarily associated
with the acquisition of Upper Peninsula Telephone Company in 1997. For
multimedia businesses owned for a comparable period in 1998 and 1997, EBITDA
increased by 11%. EBITDA for the services segment decreased by nearly $.8
million, primarily due to higher claims costs and increased expenditures for
data processing and in Specialized Transport by the Morgan Group. The
manufacturing group's EBITDA increased by $.4 million or 10%, primarily due to
stronger performance at Spinnaker and M-tron, partially offset by a decline at
Lynch Systems.
OTHER INCOME (EXPENSE), NET
Investment income in the first quarter of 1998 of $.7 million increased by $.2
million from the first quarter of 1997.
Interest expense increased by $.9 million to $6.3 million in the first quarter
of 1998 from $5.4 million in the first quarter of 1997. The increase was
primarily due to the increased debt level resulting from the acquisition of
Upper Peninsula Telephone Company in March 1997, as well as Spinnaker's
acquisition of S.D. Warren's pressure sensitive adhesive-backed label stock
business on March 17, 1998. These amounts in 1998 and 1997 did not include $.4
million of capitalized interest associated with the development of Fortunet
Communications, L.P.'s personal communications services ("PCS") licenses.
TAX PROVISION
The income tax provision (benefit) includes federal, as well as state and local
taxes. The tax provision (benefit) for the three months ended March 31, 1998 and
1997, represent effective tax rates of (42%) and (40%), respectively. The
differences from the federal statutory rate are principally due to the effect of
state income taxes and amortization of non-deductible goodwill.
MINORITY INTEREST
Minority interest was $0.3 million lower in the first quarter of 1998 compared
to 1997, primarily due to decreased net profits at the Morgan Group, Inc. a 51%
owned subsidiary.
NET INCOME/LOSS
Net loss for the three months ended March 31, 1998 was ($.4) million, or ($0.31)
per share, as compared to ($.5) million, or ($0.36) per share in the previous
year=s quarter.
BACKLOG/NEW ORDERS
Total backlog of manufactured products at March 31, 1998 was $33.6 million,
which represents an increase of $2.7 million from the backlog of $30.9 million
at December 31, 1997. Included in the current backlog is a $16 million glass
press order at Lynch Systems from an international customer. The customer has
Page 12 of 16
currently alerted the Company not to proceed with construction on these presses
until notified and Lynch Systems does not expect significant production during
1998. The purchase order associated with this order contains a cancellation
provision in which the customer pays Lynch Systems $2.4 million in event the
customer induced delay. Lynch Systems is currently negotiating with the customer
for a settlement of this cancellation provision. An increase in backlog at
Spinnaker offset declining backlogs at Lynch Systems and M-tron.
LIQUIDITY/CAPITAL RESOURCES
As of March 31, 1998, the Company had current assets of $159.2 million and
current liabilities of $137.4 million. Working capital was therefore $21.8
million as compared to $56.0 million at December 31, 1997. The decrease is
primarily due to the acquisition of the S.D. Warren's pressure sensitive
adhesive backed label stock business, a majority of which was financed by the
draw down on a working capital revolver, which is classified as a current
liability.
First quarter capital expenditures were $4.4 million in 1998 and $3.3 million in
1997.
At March 31, 1998, total debt was $318.2 million, which was $37.1 million more
than the $281.1 million at the end of 1997, primarily due to the acquisition of
S.D. Warren. Debt at March 31, 1998 included $236.3 million of fixed interest
rate debt, at an average cash interest rate of 9.0% and $81.9 million of
variable interest rate debt at an average interest rate of 9.3%. Additionally,
at March 31, 1998 the Company had $19.6 million in unused short-term lines of
credit of which $2.0 million of which was attributable to Morgan. Spinnaker has
$11.2 million available under a long-term line of credit. Certain restrictive
covenants within the debt facilities at both Spinnaker and Morgan limit their
ability to provide the parent company with significant funding. As of March 31,
1998, the Parent Company had borrowed $14.0 million under short-term lines of
credit facilities. The lines currently total $24.0 million. These funds were
primarily used to fund the bids by partnerships in the PCS Auctions and fund a
portion of the purchase price of Upper Peninsula Telephone Company. These
short-term lines of credit expire June 15, 1998 ($14.0 million) and December 29,
1998 ($10.0 million). Management anticipates that these lines will be renewed
for one year but there is no assurance that they will be.
Lynch Corporation maintains an active acquisition program and generally finances
each acquisition with a significant component of debt. This acquisition debt
contains restrictions on the amount of readily available funds that can be
transferred to Lynch Corporation from its subsidiaries.
In December 1996, the Company's Board of Directors announced that it is
examining the possibility of splitting, through a "spin-off", either its
communications operations or its manufacturing operations. A spin-off could
improve management focus, facilitate and enhance financings and set the stage
for future growth, including acquisitions. A spin-off could also help surface
the underlying values of the company as the different business segments appeal
to differing "value" and "growth" cultures in the investment community. There
are a number of matters to be examined in connection with a possible spin-off,
including tax consequences, and there is no assurance that such a spin-off will
be effected.
The Company has a significant need for resources to fund the operation of the
parent company, meet its current funding commitments and fund future growth.
Page 13 of 16
Lynch is currently considering various alternative long and short-term financing
arrangements. One such alternative would be to sell a portion or all of certain
investments in operating entities either directly or through an exchange debt
instrument. Additional debt and/or equity financing vehicles at the parent
company and/or subsidiaries are also being considered. While management expects
to obtain adequate financing resources to enable the company to meet its
obligations, there is no assurance that such can be readily obtained or at
reasonable costs.
A subsidiary of the Company has a minority position in an entity, Fortunet
Communications, L.P. ("Fortunet"). Fortunet participated in the auction
conducted by the Federal Communications Commission for 30 megahertz of broadband
spectrum to be used for personal communications services, the so-called
"C-Block" Auction. In this auction, Fortunet acquired 30 licenses to provide
personal communications services to geographic areas of the United States with a
total population of 7.0 million. The cost of these licenses was $216.2 million,
$194.6 million of the cost of these licenses was funded via a loan from the
United States Government. The loan requires quarterly interest payments at 7%
(the Company argues strenuously that the interest rate should have been 6.51%,
the applicable treasury rate at the time the licenses were awarded), and with
quarterly principal amortization in years 7 through 10. In March 1997, the FCC
suspended installment payments on the government debt, which are scheduled to
resume on July 31, 1998. As of March 31, 1998, the subsidiary had invested
$598,000 in partnership equity and $24.0 million in loans, as well as possible
funding commitments to provide an additional $17.6 million in loans. The
subsidiary is currently evaluating its funding alternatives and options in light
of the current FCC proposals (see below) and has not yet determined how it will
go forward with regard to the possible funding commitments. There are many risks
associated with personal communications services. In addition, funding aspects
of acquisition and development of licenses plus the amortization of the license,
could significantly and materially impact the Company's reported net income over
the next several years.
Fortunet, as well as many of the license holders from this auction, had
petitioned the FCC for relief in terms of (1) resetting the interest rate to the
appropriate rate at the time; (2) further reducing or delaying the required debt
payments in order to afford better access to capital markets; and (3) relaxing
the restrictions with regard to ownership structure and alternative arrangements
in order to afford these small businesses the opportunity to more realistically
restructure and build-out their systems. The response from the FCC, which was
announced in September 1997, and modified somewhat in March 1998, afforded the
license holders a choice of four options, one of which was the resumption of
current debt payments which had been suspended in 1997. The ramifications of
choosing the other three courses of action could result in the Company's
subsidiary ultimately forfeiting either 30%, 50%, or 100% of its current
investment in these licenses. The FCC has set June 8, 1998 as the date for the
bidders of the C-Block licenses to decide which option they will choose. In the
third quarter of 1997, a 30% reserve of its investment at that time was created
as this represents management's estimate of the impairment of this investment
given the current available alternatives. Fortunet has not yet reached a
decision with respect to these options. Such decision may affect the value of
Lynch's subsidiary and reported financial results.
Page 14 of 16
Included in this Management Discussion and Analysis of Financial Condition and
Results of Operations and Item 5 below are certain forward looking financial and
other information, including without limitation matters relating to PCS, a
possible spin-off and a refinancing/strategic initiative program. It should be
recognized that such information are projections, estimates or forecasts based
on various assumptions, including without limitation, meeting its assumptions
regarding expected operating performance and other matters specifically set
forth, as well as the expected performance of the economy as it impacts the
Registrant=s businesses, tax consequences and what actions the FCC may take with
respect to PCS. As a result, such information is subject to uncertainties, risks
and inaccuracies.
PART II OTHER INFORMATION
Item 2. CHANGES IN SECURITY AND USE OF PROCEEDS
As of January 2, 1998, Registrant granted 200 shares of its common
stock to each of six outside directors of Registrant at a price of
$84.63 per share pursuant to Registrant's Directors Stock Plan. The
issuance was exempt from registration under the Securities Act of
1933 (the "Securities Act") under Section 4(2) thereof and/or the
"no sale" theory. On March 5, 1998, Registrant granted 3,900 phantom
stock units to seven employees of Registrant at $84.63 per unit
pursuant to Registrant's Phantom Stock Plan. Registrant disclaims
that the phantom stock units are equity securities. In addition,
such units would be exempt from registration under the Securities
Act under Section 4(2) thereof and/or the "no sale" theory.
Item 5. OTHER INFORMATION
The Federal Communications Commission has set June 8, 1998, as the
date for the holders of C-Block PCS licenses to decide on which
restructuring option to elect. Fortunet Communications, L.P. in
which a subsidiary of Registrant is a 49.9% limited partner and has
a $24.6 million investment, has not yet reached a decision with
respect to the options. Such decision may affect the value of
Registrant's subsidiary and reported financial results. For further
information on PCS, see Management's Discussion and Analysis of
Financial Condition and Results of Operation - Liquidity/Capital
Resources, above, and Item 1.I.C. of Registrant Form 10-K for the
year ended December 31, 1997.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10(a)(a) - Lease Agreement between Registrant and Gabelli
Funds, Inc.
27 - Financial Data Schedule
(b) Reports on Form 8-K
As of November 18, 1997, and April 27, 1998, reports with
respect to acquisition of the assets of the pressure sensitive
tape business of S.D. Warren Company by the
Page 15 of 16
Registrant's approximately 63%-owned subsidiary, Spinnaker
Industries, Inc.
As of February 5, 1998, a report with respect to a possible
Preferred Stock Offering by Spinnaker Industries, Inc.
Page 16 of 16
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LYNCH CORPORATION
(Registrant)
By: S/Robert E. Dolan
---------------------
Robert E. Dolan
Chief Financial Officer