SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A-1
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2001
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 1-106
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LYNCH CORPORATION
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(Exact name of Registrant as specified in its charter)
Indiana 38-1799862
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(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification No.)
401 Theodore Fremd Avenue, Rye, New York 10580
---------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(914) 921-7601
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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 (2) 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 July 31, 2001
----- ----------------------------
Common Stock, no par value 1,510,183
INDEX
LYNCH CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) (as amended August 29, 2001 to correct
transposition errors made during the EDGAR process)
Condensed Consolidated Balance Sheets:
- June 30, 2001
- December 31, 2000
Condensed Consolidated Statements of Operations:
- Three and six months ended June 30, 2001 and 2000
Condensed Consolidated Statements of Cash Flows:
- Six months ended June 30, 2001 and 2000
Notes to Consolidated Financial Statements:
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk
PART II. OTHER INFORMATION
Item 4. Submission of Matters to Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K - None
SIGNATURES
Part 1 - FINANCIAL INFORMATION -
Item 1 - Financial Statements
LYNCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
June 30 December 31
2001 2000
(unaudited) (A)
---------- ----------
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents .............................. $ 12,475 $ 10,543
Restricted Cash ........................................ -- 6,500
Receivables, less allowances of $577 and $1,582 ........ 26,112 35,019
Inventories ............................................ 29,423 35,139
Deferred income taxes .................................. 6,451 7,624
Other current assets ................................... 1,760 1,807
--------- ---------
TOTAL CURRENT ASSETS ................................... 76,221 96,632
PROPERTY, PLANT AND EQUIPMENT
Land ................................................... 682 797
Buildings and improvements ............................. 10,314 11,076
Machinery and equipment ................................ 39,910 56,951
--------- ---------
50,906 68,824
Accumulated Depreciation ............................... (29,188) (27,713)
--------- ---------
21,718 41,111
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED, NET .. 558 21,589
OTHER ASSETS ................................................ 3,164 3,488
--------- ---------
TOTAL ASSETS ............................................ $ 101,661 $ 162,820
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks ................................. $ 26,783 $ 30,288
Trade accounts payable ................................. 15,016 19,251
Accrued interest payable ............................... 1,180 1,185
Accrued liabilities .................................... 11,002 15,234
Customer advances ...................................... 3,355 3,916
Current maturities of long-term debt ................... 2,058 1,376
--------- ---------
TOTAL CURRENT LIABILITIES .............................. 59,394 71,250
LONG TERM DEBT .............................................. 61,690 61,350
DEFERRED INCOME TAXES ....................................... 6,095 6,752
OTHER LONG TERM LIABILITIES ................................. 3,806 4,223
MINORITY INTERESTS .......................................... -- 3,813
SHAREHOLDERS' EQUITY
COMMON STOCK, NO PAR OR STATED VALUE - 10,000,000 SHARES
1,513,191 SHARES ISSUED AND 1,510,183 SHARES OUTSTANDING 5,139 5,139
ADDITIONAL PAID-IN CAPITAL ............................... 10,403 10,403
(ACCUMULATED DEFICIT) RETAINED EARNINGS .................. (44,339) 405
OFFICER'S NOTE RECEIVABLE ................................ (394) (382)
ACCUMULATED OTHER COMPREHENSIVE LOSS ..................... (71) (71)
TREASURY STOCK OF 3,008 SHARES, AT COST ................. (62) (62)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY ............................... (29,324) 15,432
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............... $ 101,661 $ 162,820
========= =========
(A) The Balance Sheet at December 31, 2000 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 accompanying notes
LYNCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share amounts)
Three Months Six Months
Ended June 30 Ended June 30
---------------------- ----------------------
2001 2000 2001 2000
--------------------- -----------------------
SALES AND REVENUES ............................ $ 45,353 $ 53,008 $ 98,901 $ 105,482
Costs and expenses:
Manufacturing cost of sales ............... 44,661 45,448 93,214 91,775
Selling and administrative ................ 4,985 6,028 10,589 11,790
Asset impairment and restructuring charges 1,577 -- 38,061 527
----------- ----------- ----------- -----------
OPERATING (LOSS) PROFIT ....................... (5,870) 1,532 (42,963) 1,390
Other income (expense):
Investment Income ......................... 138 273 317 961
Interest expense .......................... (2,533) (2,491) (5,237) (5,941)
----------- ----------- ----------- -----------
(2,395) (2,218) (4,920) (4,980)
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS BEFORE INCOME TAXES,
MINORITY INTERESTS AND EXTRAORDINARY ITEM ..... (8,265) (686) (47,883) (3,590)
(Provision) benefit from income taxes ......... (298) 15 (868) 1,079
Minority interests ............................ (110) 811 4,008 1,893
----------- ----------- ----------- -----------
INCOME (LOSS) FROM BEFORE EXTRAORDINARY ITEM .. (8,673) 140 (44,743) (618)
EXTRAORDINARY ITEM
Gain on early extinguishment of debt (less
income tax provision of $1,577 and
minority interest of $1,381) ............. -- 991 -- 2,245
----------- ----------- ----------- -----------
NET INCOME (LOSS) ............................. ($ 8,673) $ 1,131 ($ 44,743) $ 1,627
=========== =========== =========== ===========
Weighted average shares outstanding ........ 1,510,000 1,510,000 1,510,000 1,472,000
=========== =========== =========== ===========
Basic and diluted earnings per share:
Income (loss) before extraordinary item ... $ (5.74) $ 0.09 $ (29.64) $ (.42)
Extraordinary item ........................ 0.00 0.66 0.00 1.53
----------- ----------- ----------- -----------
NET INCOME (LOSS) ............................. ($ 5.74) $ 0.75 ($ 29.64) $ 1.11
=========== =========== =========== ===========
See accompanying notes
LYNCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
Six Months Ended
June 30
2001 2000
---------- ----------
OPERATING ACTIVITIES
Net income (loss) ................................. $(44,743) $ 1,627
Adjustment to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Extraordinary item ........................... -- (2,245)
Depreciation ................................. 2,807 2,867
Amortization of goodwill and other assets .... 558 396
Amortization of deferred financing costs ..... 225 402
Impairment of assets and restructuring charges 38,061
Deferred taxes ............................... 516 (63)
Minority interests ........................... (4,008) 579
Changes in operating assets and liabilities:
Receivables ............................... 8,907 (6,595)
Inventories ............................... 5,716 (1,684)
Accounts payable and accrued liabilities .. (9,033) 7,918
Other ..................................... 930 240
-------- --------
Cash provided by (used in) operating activities ... (64) 3,442
-------- --------
INVESTING ACTIVITIES
Capital expenditures .............................. (776) (1,395)
Restricted Cash ................................... 6,500 --
-------- --------
Cash provided by (used in) investing activities ... 5,724 (1,395)
-------- --------
FINANCING ACTIVITIES
Change in notes payable ........................... (3,505) 796
Repayment & buy back of long-term debt ............ -- (54,650)
Deferred financing costs .......................... -- (69)
Sale of common stock .............................. -- 3,000
Other ............................................. (223) (514)
-------- --------
Cash (used in) financing activities ............... (3,728) (51,437)
-------- --------
Net increase in cash and cash equivalents ......... 1,932 (49,390)
Cash and cash equivalents at beginning of period .. 10,543 69,132
-------- --------
Cash and cash equivalents at end of period ........ $ 12,475 $ 19,742
======== ========
See accompanying notes
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A. Subsidiaries of the Registrant
-- ------------------------------
As of June 30, 2001, the Subsidiaries of the Registrant are as follows:
Subsidiary Owned By Lynch
---------- --------------
Lynch Display Technologies, Inc. ........................................ 100.0%
Lynch Systems, Inc. ..................................................... 100.0%
Lynch International Holding Corporation ............................ 100.0%
Lynch-AMAV LLC ..................................................... 75.0%
M-tron Industries, Inc. ................................................. 100.0%
M-tron Industries, Ltd. ............................................ 100.0%
Spinnaker Industries, Inc. .............................................. 47.6%(O)/60.4%(V)
Entoleter, Inc. ............................................... 47.6%(O)/60.4%(V)
Spinnaker Coating, Inc. ....................................... 47.6%(O)/60.4%(V)
Spinnaker Coating-Maine, Inc. ........................... 47.6%(O)/60.4%(V)
Spinnaker Electrical Tape Company .......................... 47.6%(O)/60.4%(V)
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 accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three and six
month periods ended June 30, 2001 are not necessarily indicative of the results
that may be expected for the year ended December 31, 2001. For further
information, refer to the consolidated financial statements and footnotes
included in the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2000.
Although the Company owns 48% of the equity of Spinnaker (60% voting control),
under generally accepted accounting principles, the Company is required to
absorb all of the losses of Spinnaker since the non-Company interests are not
required to absorb their share of the losses (52%) after their investment is
absorbed by losses.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, Business Combinations and Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets,
effective for years beginning after December 15, 2001. Under the new rules,
goodwill will no longer be amortized but will be subject to annual impairment
tests in accordance with the Statements. Other intangible assets will continue
to be amortized over their useful lives. The pooling of interests method is no
longer permitted for business combinations initiated after June 30, 2001. The
Company will apply the new rules on accounting for goodwill and other intangible
assets beginning in the first quarter of 2002. During 2002, the Company will
perform the first of the required impairment tests of goodwill as of January 1,
2002 and has not yet determined what the effect of these tests will be on the
earnings and financial position of the Company.
C. Inventories
-- -----------
Inventories are stated at the lower of cost or market value. At June 30, 2001
and December 31, 2000, inventories were valued by three methods: last-in,
first-out (LIFO) 31% specific identification 67%, and first-in, first-out (FIFO)
- 2%. At December 31, 2000, the percentages were 28%, 71%, and 1%, respectively.
(In Thousands) June 30, Dec. 31,
2001 2000
-------------------
Raw materials ..... $ 8,932 $10,172
Work in process ... 3,812 2,796
Finished goods .... 16,679 22,171
------- -------
Total Inventories $29,423 $35,139
======= =======
D. Indebtedness
-- ------------
Spinnaker Industries, Inc. maintains revolving lines of credit at its
subsidiaries which total $35 million, of which $23.5 million was outstanding as
of June 30, 2001 and it had $2.7 million of available borrowings. In general,
the credit facilities are secured by property, plant and equipment, inventory,
receivables and common stock of certain subsidiaries and contain certain
covenants restricting distributions to the Registrant.
Long term debt consists of:
June 30, Dec.31,
2001 2000
------------------
Spinnaker Industries, Inc. 10.75% Senior Secured
Note due 2006 ............................... $ 51,135 $ 51,135
14% Subordinated Note with PIK interest and
principal due on January 31, 2003 ........... 9,783 9,172
Other .......................................... 2,830 2,419
-------- --------
63,748 62,726
Current Maturities ............................. (2,058) (1,376)
-------- --------
$ 61,690 $ 61,350
======== ========
E. 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 of which there were none.
F. Segment Information
-- -------------------
The Company is engaged in the manufacture of adhesive-backed label stock,
frequency control devices and other manufacturing. The Company measures
performance of its segments primarily by revenues, operating profit and EBITDA
(operating profit before income taxes, depreciation, amortization and allocated
corporate expenses). Identifiable assets of each segment have not changed
materially since December 31, 2000, except for the impairment of certain assets
as discussed in Note G.
EBITDA for operating segments is equal to operating profit before interest,
taxes, depreciation and amortization. EBITDA is presented because it is a widely
accepted financial indicator of value and ability to incur and service debt.
EBITDA is not a substitute for operating income or cash flows from operating
activities in accordance with generally accepted accounting principles.
Operating profit (loss) is equal to revenues less operating expenses, excluding
interest and income taxes.
Three Months Ended Six Months Ended
June 30 June 30
------------------------ ---------------------
2001 2000 2001 2000
------------------------ ---------------------
Revenues:
Adhesive-backed label stock ........................ $ 31,627 $ 37,332 $ 68,760 $ 77,618
Frequency control devices (a) ...................... 5,762 10,074 15,804 18,484
Other Manufacturing ................................ 7,964 5,602 14,337 9,380
--------- --------- --------- ---------
Consolidated Total ................................. $ 45,353 $ 53,008 98,901 $ 105,482
--------- --------- --------- ---------
EBITDA
Adhesive-backed label stock ........................ $ (3,520) $ 2,161 $ (3,778) $ 3,968
Frequency control devices (a) ...................... (615) 1,310 383 2,494
Other manufacturing ................................ 1,917 766 2,941 615
Corporate manufacturing expenses ................... (457) (587) (757) (1,141)
--------- --------- --------- ---------
Total manufacturing ................................ (2,675) 3,650 (1,211) 5,936
Corporate expenses ................................. (249) (379) (635) (756)
Asset impairment - restructuring ................... (878) -- (1,309) (527)
--------- --------- --------- ---------
Consolidated Total ................................. $ (3,802) $ 3,271 $ (3,155) $ 4,653
--------- --------- --------- ---------
Operating Profit
Adhesive-backed label stock ....................... $ (4,506) $ 705 $ (6,082) $ 1,416
Frequency control devices ......................... (832) 1,139 (40) 2,159
Other manufacturing ............................... 1,753 633 2,616 349
Corporate manufacturing expenses .................. (457) (491) (757) (1,101)
--------- --------- --------- ---------
Total manufacturing ............................... (4,042) 1,986 (4,263) 2,823
Unallocated corporate expenses .................... (251) (454) (639) (906)
Asset impairment - restructuring charge - Spinnaker (1,577) -- (38,061) (527)
--------- --------- --------- ---------
Consolidated Total ................................ $ (5,870) $ 1,532 $ (42,963) $ 1,390
========= ========= ========= =========
Total Operating Profit for reportable
segments .......................................... (5,870) $ 1,532 (42,963) $ 1,390
Other profit or loss
Investment income ................................. 138 273 317 961
Interest expense .................................. (2,533) (2,491) (5,237) (5,941)
--------- --------- --------- ---------
Loss from continuing operations
before income taxes, minority
interest and extraordinary items .................. $ (8,265) $ (686) $ (47,883) $ (3,590)
========= ========= ========= =========
Note: (a) Includes one-time write-offs and reversals, as follows:
Three Months Ended Six Months Ended
(In Thousands) June 30, 2001 June 30, 2001
------------------ -----------------
Write-off of deferred rights offering expenses $(300) $ (300)
Reversal of bonus accrual .................... 367 367
Severance expenses ........................... (47) (47)
Inventory write-down ......................... (375) (375)
----- -----
Total ...................................... $(355) $(355)
===== =====
G. Asset Impairment and Restructuring Charges
-- ------------------------------------------
Three Months Six Months
Ended Ended
June 30, 2001 June 30, 2001
------------ -------------
Restructuring charges and asset impairment:
Severance .......................... $ 878 $ 1,309
Asset impairment ................... 699 36,752
Total asset impairment and restructuring $ 1,577 $38,061
------- -------
Inventory write-down ................... $ 3,482 $ 3,482
======= =======
As discussed in the Spinnaker Annual Report on Form 10-K for the year ended
December 31, 2000, Spinnaker recognized certain restructuring charges, primarily
affiliated with its Spinnaker Coating and Spinnaker Coating - Maine business. To
better concentrate on Coating's strengths and market niche, a decision was made
by its management to reorganize and realign the business in the fourth quarter
of 2000 and going forward in 2001. The restructuring reserve was composed of the
following (in thousands):
Spinnaker's Spinnaker's
First Quarter 2001 Second Quarter 2001
------------------------ ------------------------
Balance Balance
12/31/00 Charges Payments Charges Payments 6/30/01
----------- ----------- ----------- ----------- ---------- ----------
Severance $ 1,125 $ 431 $ (217) $ 878 $ (468) $ 1,749
On May 15, 2001, Spinnaker announced that it intended to close its Spinnaker
Coating - Maine, Inc. ("Coating - Maine") facility in Westbrook, Maine. The
Company's decision to close this facility was made after reviewing the first
quarter of 2001 operating losses at Maine and assessing the probability of
returning the Maine operations to profitability in light of the substantial new
capacity being added to the industry. As a result of the decision, Spinnaker
will focus its entire efforts on the Spinnaker Coating operations in Troy, Ohio
where it principally manufacturers specialty-coated products. In connection with
the closing, Spinnaker has recorded as of June 30, 2001, non-cash write-downs of
$36.7 million to reflect the significantly reduced value of the related
long-lived assets. Separately, Spinnaker announced it sold selected assets from
its Maine facility to Fasson Roll North America, a division of Avery Dennison
Corporation.
The asset impairments resulted from the write-down to estimated fair market
value of fixed assets to be taken out of service and held for sale or disposal.
The majority of this charge related to the impairment of goodwill associated
with the acquisition of Coating - Maine in 1998. As of June 30, 2001, the
impairment amount caused a reduction to the carrying value of goodwill and fixed
assets by approximately $20.8 million and $15.9 million, respectively. In
conjunction with the closing and included in restructuring charges, Spinnaker
has incurred severance and related costs totaling $.9 million for the quarter
ended June 30, 2001 for the termination of 143 employees. Spinnaker expects to
incur additional severance related costs and recognize a curtailment gain for
the Non-Union defined benefit pension plan during subsequent quarters.
H. Subsequent Events
-- -----------------
Effective July 31, 2001, Louis A. Guzzetti, Jr. resigned from the Board of
Directors of the Company. In connection with Mr. Guzzetti's resignation, on
August 9, 2001, the Company purchased 12,300 shares of its Common Stock from Mr.
Guzzetti for a purchase price of $396,204.56. Such purchase price was equal to
the outstanding principal amount and unpaid interest on the loans made by the
Company to Mr. Guzzetti on June 5, 2000 and September 20, 2000 to finance his
original purchase of such Common Stock (the "Guzzetti Loans"). The Company
surrendered the promissory note evidencing the Guzzetti Loans to Mr. Guzzetti in
full payment of the purchase price. Also on August 9, 2001, the Company paid
$372,931.25 to Mr. Gabelli in full payment of the outstanding principal amount
and unpaid interest on the loans made by Mr. Gabelli to the Company on June 5,
2000 and September 20, 2000 to fund the Guzzetti Loans.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
-----------------------------------------------------------
Sales and Revenues/Gross Margin
Revenues for the second quarter of 2001 decreased by $7.7 million or 14.4%, to
$45.4 million, from the second quarter of 2000. Revenues for the six months
ended June 30, 2001 decreased by $6.6 million or 6.2% from the comparable 2000
period reflecting decreased order flow.
Spinnaker's net sales for the quarter ended June 30, 2001 were $32.8 million,
compared to $38.5 million in the corresponding 2000 period. The decrease in net
sales for 2001 is attributed to lower sales volumes and lower selling prices in
most pressure-sensitive products. As a part of Spinnaker's restructuring
program, the elimination of non-pressure sensitive product lines in 2000 caused
volumes to be lower. Another contributing factor is the ongoing process of the
shutdown of its Maine facility.
Spinnaker's gross margin as a percentage of net sales for the quarter ended June
30, 2001 was down 15.9% from the corresponding 2000 period. The primary reason
for the lower margin in 2001 was continued price erosion within the pressure
sensitive market due to competitive pressures and excess capacity in the
industry and overall sluggish economic conditions. These factors also
contributed to lower volumes of products sold for the three months ended June
30, 2001. Additionally, Spinnaker incurred higher material costs (primarily at
its Maine facility), offset by a reduction in workforce and depreciation. Also
contributing to the decrease in gross margin for the second quarter of 2001 was
a one-time write-down to inventory, associated with the closing of its Maine
facility for approximately $3.5 million.
Spinnaker's net sales for the six month's ended June 30, 2001 were $70.8
million, compared to $80.3 million in the corresponding 2000 period. The
decrease in net sales for 2001 is attributed to lower sales volumes in pressure
sensitive water based, hot melt and sheet products, in which aggregate volumes
decreased approximately 11% over the comparable 2000 period. Net sales in 2001
are also being negatively impacted by the elimination of non pressure-sensitive
products, with sales for non-pressure sensitive products for 2001 of
approximately $.9 million, compared to $3.5 million for the corresponding 2000
period. Offsetting a portion of these losses in the non-pressure sensitive area
are increased sales volumes of pressure sensitive government postage products.
Sales of postage products have risen approximately 31% over the corresponding
2000 period.
On a comparable basis, gross margin as a percentage of revenues for the six
months ended June 30, 2001 was down 10.7% from the first six months of 2000.
Contributing to the decline in gross margin, were higher material costs
(primarily at the Coating - Maine facility), along with continued price erosion
and volume declines. Consistent with the recent trends in the industry, over
capacity and sluggish economic conditions have impaired Spinnaker's operating
performance. Through its ongoing restructuring measures, Spinnaker has partially
offset these unfavorable impacts through reduction in workforce and
depreciation. Also contributing to the decrease in gross margin for the second
quarter of 2001 was a one-time write-down to inventory, associated with the
closing of Coating - Maine, of approximately $3.5 million.
Revenues at M-tron decreased by $4.3 million or 42.8% to $5.8 million for the
second quarter of 2001 due to decreased demand from the infrastructure segment
of the telecommunications industry. M-tron's revenues for the first six months
of 2001 decreased $2.7 million or 14.5% to $15.8 million due to the same
factors. Lynch Systems' revenues for the second quarter of 2001 increased by
$2.3 million from the corresponding 2000 period to $6.7 million reflecting
increased orders and sales of glass press machines. Lynch Systems' revenues for
the first six months of 2001 increased $5.6 million from the corresponding 2000
period to $12.3 million for the same reasons.
Operating Loss
Operating loss for the second quarter 2001 was $5.9 million compared to the
second quarter 2000 operating profit of $1.5 million on a negative swing of $7.4
million. For the first six months of 2001 operating loss was $43.0 million
compared to the corresponding 2000 period's operating profit of $1.4 million.
Spinnaker's loss from operations for the three months ended June 30, 2001 was
$1.4 million excluding an impairment charge of approximately $.7 million related
to certain long-lived assets associated with the closing of the Coating - Maine
facility (see discussion at Note G to the condensed consolidated financial
statements) and charges of $4.4 million related to restructuring and one-time
inventory write-downs compared to income from operations in the corresponding
2000 period of approximately $.2 million. Additionally, Spinnaker's 2001
operating results reflect lower operating margins, offset by a reduction in
selling and administrative costs that are primarily the result of the ongoing
restructuring efforts which began in the last quarter of 2000. Spinnaker's
restructuring and asset impairment charges were: ( in thousands)
Three Months Ended
June 30, 2001
-------------
Restructuring charges:
Severance ............................ $ 878
Asset impairment ..................... 699
Total restructuring and asset impairment $1,577
------
Inventory write-down ................... $3,482
======
As discussed in Spinnaker's Annual Report on Form 10-K for the year ended
December 31, 2000, Spinnaker recognized certain restructuring charges, primarily
affiliated with its Spinnaker Coating - Maine business. To better concentrate on
Coating's strengths and market niche, a decision was made by Spinnaker's
management to reorganize and realign the business in the fourth quarter of 2000
and going forward in 2001. The restructuring reserve was composed of the
following (in thousands):
Spinnaker's Spinnaker's
First Quarter 2001 Second Quarter 2001
Balance Balance
12/31/00 Charges Payments Charges Payments 6/30/01
---------- -------- -------- --------- -------- ---------
Severance $ 1,125 $ 431 $ (217) $ 878 $ (468) $ 1,749
Spinnaker expects to incur additional severance related costs and recognize a
curtailment gain during subsequent quarters for the non-union defined benefit
pension plan.
Spinnaker's loss from continuing operations for the six months ended June 30,
2001 was approximately $45.0 million, compared to $.2 million in the
corresponding 2000 period.
Spinnaker also recognized charges of $41.5 million in the first half of 2001.
The charge relates to the continued restructuring efforts that began in the
fourth quarter of 2000 and a write-down of assets affiliated with Coating -
Maine. Spinnaker's restructuring and asset impairment charges were: (in
thousands)
Six Months Ended
June 30, 2001
Restructuring charges:
Severance ............................................... $ 1,309
Asset impairment ........................................ 36,752
-------
Total restructuring and asset impairment $38,061
Inventory write-down $ 3,482
=======
For the 2001 second quarter M-tron had an operating loss of $.8 million compared
to an operating profit of $1.1 million in the second quarter of 2000 due to
decreased sales volumes mentioned above. For the first six months of 2001,
M-tron's operating loss was $40,000 compared to an operating profit for the
corresponding 2000 period of $2.2 million due to the reduction in revenue
factors mentioned above. Included in M-tron's results for both the three and six
month periods of 2001 are the following one-time charges and reversals:
Three Months Ended Six Months Ended
(In Thousands) June 30, 2001 June 30, 2001
---------------- ---------------
Write-off of deferred rights offering expenses $(300) $(300)
Reversal of bonus accrual 367 367
Severance expenses (47) (47)
Inventory write-down (375) (375)
----- -----
Total $(355) $(355)
===== =====
For the 2001 second quarter, Lynch Systems had an operating profit of $1.7
million compared to an operating profit of $.7 million in the second quarter of
2000. For the first six month period of 2001 Lynch Systems also had an operating
profit of $2.7 million compared to an operating profit of $.3 million in the
comparable period in 2000. This turnaround for both periods at Lynch Systems is
due to the increased sales mentioned above and better absorption of overhead.
Other Income (Expense), Net
Investment income decreased for the three and the six months ended June 30, 2001
due to the buy back of debt with the net proceeds of the 2000 sale of
Spinnaker's industrial tape units, which were invested in short term instruments
during the earlier 2000 periods.
Interest expense was $2.5 million for the second quarter 2001 which was
comparable to the corresponding period in 2000. During the six-month period
ended June 30, 2001, interest expense decreased by $.7 million from the
corresponding period in 2000. This reduction was primarily due to Spinnaker's
repurchase of its Senior Notes in the later part of 2000.
Tax Provision
The income tax (provision) benefit includes federal, as well as state and local
taxes. Because of Spinnaker's losses, a valuation allowance of approximately
$3.0 and $17.0 million was established to offset the income tax benefit for the
three and six months ended June 30, 2001. For financial reporting purposes, the
valuation allowance has been recognized to offset the deferred tax assets
generated during the period. Spinnaker has approximately $60 million of net
operating loss carryforwards available to offset future taxable income, which
expire in the years 2008 through 2020.
Minority Interest
Minority interests contribution to the net income (loss) decreased by $.9
million for the second quarter 2001 from the corresponding period in 2000 due to
a profit at a 75% owned foreign subsidiary of Lynch Systems and the previous
total absorption of the Spinnaker minority interests equity from previous
Spinnaker losses. For the six months ended June 30, 2001, the minority interest
benefit increased due to increased Spinnaker losses. The minority interest
equity was fully absorbed during the first quarter of 2001. Although the Company
owns 48% of the equity of Spinnaker (60% voting control), under generally
accepted accounting principles, the Company is required to absorb all of the
losses of Spinnaker since the non-Company interests are not required to absorb
their share of the losses (52%) after their investment is absorbed by losses.
Net Income/Loss
Net loss for the second quarter 2001 was $8.7 million compared to a net income
of $1.1 million in the year earlier quarter. The $9.8 million negative swing is
primarily due to increased Spinnaker losses primarily generated by minority
write-downs, asset impairment charges and restructuring charges. Net loss for
the six months ended June 30, 2001 was $44.8 million, or $29.64 per share, as
compared to a net income of $1.6 million, or $1.11 per share in the previous
year's six month period.
Backlog/New Orders
Total backlog of manufactured products from continuing operations at June 30,
2001 was $18.1 million, which represents a decrease of $7.8 million from the
backlog of $25.9 million at December 31, 2000. Decreased order receipt at M-tron
accounted for the significant decrease to the backlog at June 30, 2001. Lynch
Systems' backlog increased by $2.1 million from December 31, 2000 to June 30,
2001.
FINANCIAL CONDITION
Liquidity/Capital Resources
As of June 30, 2001, the Company had current assets of $76.2 million and current
liabilities of $59.4 million. Working capital was therefore $16.8 million as
compared to $25.4 million at December 31, 2000. The decrease is primarily due to
the deteriorated operating results at Spinnaker and M-tron.
First six months capital expenditures were $.8 million in 2001 and $1.4 million
in 2000. The Company plans to spend approximately $2.0 million on capital
expenditures for the year and anticipates that it will have sufficient cash flow
from operations and borrowing availability under various credit facilities at
its subsidiaries to fund such capital expenditure plans.
At June 30, 2001, total debt was $90.5 million, of which Spinnaker accounted for
$85.1 million, which was $2.5 million less than the $93.0 million at the end of
2000. The reduction is primarily due to principal repayments. Long term debt at
June 30, 2001 included $63.1 million of fixed interest rate debt, at an average
cash interest rate of 11.3% and $27.9 million of variable interest rate debt at
an average interest rate of 9.2%. Additionally, the Company had unused lines of
credit facilities of which the Spinnaker Credit Facility is a major portion. The
Spinnaker Credit Facility is available to fund acquisitions and support periodic
fluctuations in working capital. Credit availability under the Spinnaker Credit
Facility is subject to certain variables, such as inventory and receivables
eligible to be included in the borrowing base. The Company is charged an
available credit fee of 0.375% per annum. Outstanding borrowings bear interest
at variable rates related to the prime interest rate or LIBOR. At June 30, 2001,
the combined effective interest rate was 6.99%. The Refinanced Credit Facility
will expire July 31, 2002. As of June 30, 2001 aggregate availability under the
Refinanced Credit Facility was approximately $26.2 million, of which
approximately $23.5 million was outstanding.
The Company does not at present have credit facilities at the parent company
level. Management believes it has adequate working capital at this level to fund
current operations into the near future.
The Company may from time to time make acquisitions which would probably be
financed with a significant component of debt. This acquisition debt as well as
current debt outstanding would contain restrictions on the amount of readily
available funds that can be transferred to the Company from its subsidiaries.
Subsequent Events
Effective July 31, 2001, Louis A. Guzzetti, Jr. resigned from the Board of
Directors of the Company. In connection with Mr. Guzzetti's resignation, on
August 9, 2001, the Company purchased 12,300 shares of its Common Stock from Mr.
Guzzetti for a purchase price of $396,204.56. Such purchase price was equal to
the outstanding principal amount and unpaid interest on the loans made by the
Company to Mr. Guzzetti on June 5, 2000 and September 20, 2000 to finance his
original purchase of such Common Stock (the "Guzzetti Loans"). The Company
surrendered the promissory note evidencing the Guzzetti Loans to Mr. Guzzetti in
full payment of the purchase price. Also on August 9, 2001, the Company paid
$372,931.25 to Mr. Gabelli in full payment of the outstanding principal amount
and unpaid interest on the loans made by Mr. Gabelli to the Company on June 5,
2000 and September 20, 2000 to fund the Guzzetti Loans.
Accounting and Reporting Policies
Impact of Recently Issued Accounting Standards
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, Business Combinations and Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets,
effective for years beginning after December 15, 2001. Under the new rules,
goodwill will no longer be amortized but will be subject to annual impairment
tests in accordance with the Statements. Other intangible assets will continue
to be amortized over their useful lives. The pooling of interests method is no
longer permitted for business combinations initiated after June 30, 2001. The
Company will apply the new rules on accounting for goodwill and other intangible
assets beginning in the first quarter of 2002. During 2002, the Company will
perform the first of the required impairment tests of goodwill as of January 1,
2002 and has not yet determined what the effect of these tests will be on the
earnings and financial position of the Company.
MARKET RISK
There has been no significant change in market risk since December 31, 2000. The
Company is exposed to market risk relating to changes in the general level of
U.S. interest rates. Changes in interest rates affect the amounts of interest
earned on the Company's cash equivalents and short-term investments
(approximately $12.5 million at June 30, 2001). The Company generally finances
the debt portion of the acquisition of long-term assets with fixed rate,
long-term debt. The Company generally maintains the majority of its debt as
fixed rate in nature by borrowing on a fixed long-term basis. The Company does
not use derivative financial instruments for trading or speculative purposes.
Management does not foresee any significant changes in the strategies used to
manage interest rate risk in the near future, although the strategies may be
reevaluated as market conditions dictate.
At June 30, 2001, approximately $27.5 million, or 30% of the Company's long-term
debt and notes payable bears interest at variable rates. Accordingly, the
Company's earnings and cash flows are affected by changes in interest rates.
Assuming the current level of borrowings for variable rate debt and assuming a
one percentage point change in the 2001 average interest rate under these
borrowings, it is estimated that the Company's six months 2001 interest expense
would have changed by less than $.2 million. In the event of an adverse change
in interest rates, management would likely take actions to further mitigate its
exposure. However, due to the uncertainty of the actions that would be taken and
their possible effects, the analysis assumes no such actions. Further, the
analysis does not consider the effects of the change in the level of overall
economic activity that could exist in such an environment.
Forward Looking Information
Included in this Management Discussion and Analysis of Financial Condition and
Results of Operations are certain forward looking financial and other
information, including without limitation matters relating to Spinnaker and
Market Risk. It should be recognized that such information are projections,
estimates or forecasts based on various assumptions, including without
limitation, meeting its assumptions regarding expected operating performance and
other matters specifically set forth, as well as the expected performance of the
economy as it impacts the Company's businesses, government and regulatory
actions and approvals, and tax consequences, and the risk factors and cautionary
statements set forth in reports filed by the Company and Spinnaker with the
Securities and Exchange Commission. As a result, such information is subject to
uncertainties, risks and inaccuracies, which could be material.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
---------------------------------------------------------
See "Market Risk" under Item 2 above.
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
At the Annual Meeting of Stockholders of the Registrant held on May 11, 2001 the
following persons were elected as Directors with the following votes:
Name Votes For Votes Withheld
---- --------- --------------
E. Val Cerutti ....... 1,397,809 4886
Robert E. Dolan ...... 1,397,704 4991
Mario J. Gabelli ..... 1,397,764 4931
Avrum Gray ........... 1,397,709 4986
Louis A. Guzzetti, Jr 1,397,649 5046
Ralph R. Papitto ..... 1,397,809 4886
Item 6. Exhibits and Reports on Form 8-K
------- --------------------------------
(a) Exhibits - None
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter
ended June 30, 2001
SIGNATURES
----------
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LYNCH CORPORATION
(Registrant)
By: s/Roger J. Dexter
Roger J. Dexter
Chief Financial Officer
August 14, 2001