##### Table of Contents



SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended March 31, 2005oro
    
    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. Employerincorporation or organization)
    
    Identification No.)140 Greenwich Avenue, 4th Floor, Greenwich, CT
    
    06830(Address of principal executive offices)
    
    (Zip Code)
 (203) 622-1150 
     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 þ       No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). Yes o       No þ 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 March 31, 2005Common Stock, $0.01 par value
    
    1,632,126
   1




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INDEX LYNCH CORPORATION AND SUBSIDIARIES PART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (Unaudited)Consolidated Balance Sheets:-     March 31, 2005-     December 31, 2004Consolidated Statements of Operations:-     Three months ended March 31, 2005 and 2004Consolidated Statements of Cash Flows:-     Three months ended March 31, 2005 and 2004Notes to Condensed Consolidated Financial Statements:Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3.
    
    Quantitative and Qualitative Disclosure About Market RiskItem 4.
    
    Controls and ProceduresPART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal ProceedingsItem 2.
    
    Issuer Purchase of Its Equity SecuritiesItem 6.
    
    Exhibits and Reports on Form 8-KSIGNATURESEx-10.1 Form of Indemnification Agreement dated as of February 28, 2005Ex-31.1 Section 302 Certification of CEOEx-31.2 Section 302 Certification of CFOEx-32 Section 906 Certification of CEO & CFO
  2




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##### Table of Contents



Part 1  FINANCIAL INFORMATION - 
 Item 1 Financial Statements LYNCH CORPORATION AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEETS  UNAUDITED
 (In thousands, except share amounts)
 March 31,
    
    
    December 31,2005
    
    
    2004(A)ASSETSCurrent AssetsCash and cash equivalents
    
    $
    2,356
    
    
    $
    2,580Restricted cash (Note E)
    
    
    1,000
    
    
    
    1,125Investments  marketable securities (Note F)
    
    
    4,031
    
    
    
    3,609Trade accounts receivables, less allowance for
doubtful accounts of $110 and $92,
respectively
    
    
    6,163
    
    
    
    6,360Unbilled accounts receivable
    
    
    3,335
    
    
    
    2,507Inventories (Note G)
    
    
    8,024
    
    
    
    7,852Deferred income taxes
    
    
    111
    
    
    
    111Prepaid expense
    
    
    607
    
    
    
    626Total Current Assets
    
    
    25,627
    
    
    
    24,770Property, Plant and EquipmentLand
    
    
    871
    
    
    
    871Buildings and improvements
    
    
    5,824
    
    
    
    5,811Machinery and equipment
    
    
    14,436
    
    
    
    14,44321,131
    
    
    
    21,125Less: accumulated depreciation
    
    
    (12,948
    )
    
    
    (12,669
    )8,183
    
    
    
    8,456Other assets
    
    
    594
    
    
    
    657Total Assets
    
    $
    34,404
    
    
    $
    33,883LIABILITIES AND SHAREHOLDERS EQUITYCurrent Liabilities:Notes payable to banks (Note H)
    
    $
    5,359
    
    
    $
    5,557Trade accounts payable
    
    
    2,816
    
    
    
    2,667Accrued warranty expense (Note I)
    
    
    416
    
    
    
    466Accrued compensation expense
    
    
    1,237
    
    
    
    1,101Accrued income taxes
    
    
    934
    
    
    
    966Accrued professional fees
    
    
    493
    
    
    
    534Accrued commissions
    
    
    148
    
    
    
    249Margin liability on marketable securities
    
    
    1,582
    
    
    
    1,566Other accrued expenses
    
    
    694
    
    
    
    890Commitments and contingencies (Note M)
    
    
    775
    
    
    
    775Customer advances
    
    
    2,658
    
    
    
    2,115Current maturities of long-term debt (Note H)
    
    
    3,843
    
    
    
    3,842Total Current Liabilities
    
    
    20,955
    
    
    
    20,728Long-term debt (Note H)
    
    
    2,963
    
    
    
    3,162Total Liabilities
    
    
    23,918
    
    
    
    23,890Shareholders EquityCommon stock, $0.01 par value - 10,000,000
shares authorized; 1,649,834 shares issued;
1,632,126 shares outstanding
    
    
    16
    
    
    
    16Additional paid-in capital
    
    
    17,404
    
    
    
    17,404Accumulated deficit
    
    
    (7,736
    )
    
    
    (7,786
    )Accumulated other comprehensive income (Note K)
    
    
    1,292
    
    
    
    849Treasury stock, at cost, of 17,708 shares
    
    
    (490
    )
    
    
    (490
    )Total Shareholders Equity
    
    
    10,486
    
    
    
    9,993Total Liabilities and Shareholders Equity.
    
    $
    34,404
    
    
    $
    33,883
  (A)
    The Balance Sheet at December 31, 2004 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 Consolidated Financial Statements 3




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PART I  FINANCIAL INFORMATION Item 1 Financial Statements LYNCH CORPORATION AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF OPERATIONS  UNAUDITED
 (In thousands, except share amounts)
 Three Months EndedMarch 31,2005
    
    
    2004SALES AND REVENUES
    
    $
    10,595
    
    
    $
    6,812Cost and expenses:Manufacturing cost of sales
    
    
    7,318
    
    
    
    5,300Selling and administrative
    
    
    3,050
    
    
    
    2,275OPERATING PROFIT (LOSS)
    
    
    227
    
    
    
    (763
    )Other income (expense):Investment income
    
    
    10
    
    
    
    4Interest expense
    
    
    (185
    )
    
    
    (51
    )Other income
    
    
    3
    
    
    
    27(172
    )
    
    
    (20
    )INCOME (LOSS) BEFORE INCOME TAXES
    
    
    55
    
    
    
    (783
    )Provision for income taxes
    
    
    (5
    )
    
    
    (25
    )NET INCOME (LOSS)
    
    $
    50
    
    
    $
    (808
    )Weighted average shares outstanding.
    
    
    1,632,126
    
    
    
    1,497,150BASIC AND DILUTED INCOME (LOSS) PER
SHARE:
    
    $
    0.03
    
    
    $
    (0.54
    )
  
    Effective September 30, 2004, the Company acquired, through its subsidiary M-tron Industries,
Inc., 100% of the common stock of Piezo Technology, Inc. (See Note D to the Condensed
Consolidated Financial Statements.) The three month results for the period ending March 31,
2004 do not include Piezo Technology, Inc. See accompanying Notes to Consolidated Financial Statements 4




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##### Table of Contents



PART I  FINANCIAL INFORMATION ITEM 1 Financial Statements LYNCH CORPORATION AND SUBSIDIARIES 
 CONSOLIDATED STATEMENT OF CASH FLOWS  UNAUDITED
 (In thousands)
 Three Months EndedMarch 31,2005
    
    
    2004OPERATING ACTIVITIESNet income (loss)
    
    $
    50
    
    
    $
    (808
    )Adjustments to reconcile net income (loss) to net
cash provided by operating activities:Depreciation
    
    
    304
    
    
    
    212Amortization of definite-lived intangible assets
    
    
    21
    
    
    
    62Changes in operating assets and liabilities:Receivables
    
    
    (631
    )
    
    
    3,066Inventories
    
    
    (172
    )
    
    
    (64
    )Accounts payable and accrued liabilities
    
    
    (119
    )
    
    
    (774
    )Other assets/liabilities
    
    
    604
    
    
    
    27Net cash provided by operating activities
    
    
    57
    
    
    
    1,721INVESTING ACTIVITIESCapital expenditures
    
    
    (31
    )
    
    
    (69
    )Restricted cash
    
    
    125
    
    
    
    Purchase of marketable securities
    
    
    
    
    
    
    (225
    )Payment on margin liability on marketable securities
    
    
    
    
    
    
    (300
    )Cash provided by (used in) investing activities
    
    
    94
    
    
    
    (594
    )FINANCING ACTIVITIESNet repayments of notes payable
    
    
    (198
    )
    
    
    (101
    )Repayment of long-term debt
    
    
    (198
    )
    
    
    (61
    )Other
    
    
    21
    
    
    
    Purchase of treasury stock
    
    
    
    
    
    
    (32
    )Net cash used in financing activities
    
    
    (375
    )
    
    
    (194
    )(Decrease) increase in cash and cash equivalents
    
    
    (224
    )
    
    
    933Cash and cash equivalents at beginning of period
    
    
    2,580
    
    
    
    3,981Cash and cash equivalents at end of period
    
    $
    2,356
    
    
    $
    4,914
 See accompanying Notes to Consolidated Financial Statements 5




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS A. Subsidiaries of the Registrant As of March 31, 2005, the Subsidiaries of the Registrant are as follows: Owned By LynchLynch Systems, Inc.
    
    
    100.0
    %M-tron Industries, Inc.
    
    
    100.0
    %M-tron Industries, Ltd.
    
    
    100.0
    %Piezo Technology, Inc.
    
    
    100.0
    %Piezo Technology India Private Ltd.
    
    
    99.9
    %
 B. Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial information and with
the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been included. Operating
results for the three month period ended March 31, 2005 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2005. The balance sheet at December 31, 2004 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. For further information, refer to the consolidated financial statements and footnotes thereto
included in the Registrant Company and Subsidiaries annual report on Form 10-K for the year ended
December 31, 2004. C. Adoption of Accounting Pronouncements On December 14, 2004, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 123 (revised 2004), State Based Payment (SFAS
123R), which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS
123). SFAS 123R supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and
amends SFAS No. 95 Statement of Cash Flows. Generally, the approach in SFAS 123R is similar to
the approach described in SFAS 123. However, SFAS 123R requires all share-based payments to
employees, including grants to employee stock options, to be recognized in the income statement
based on their fair values. Pro-forma disclosure is no longer an alternative. On April 14, 2005, the Securities and Exchange Commission announced that it would provide for
a phased-in implementation process for SFAS No. 123R. This ruling effectively delayed the
Companys adoption of the standard until the first quarter of 2006. The Company will continue to
evaluate the provisions of SFAS No. 123R to determine its impact on its financial condition and
results of operations. D. Acquisition On October 15, 2004, the Company acquired, through its wholly-owned subsidiary, Mtron, 100% of
the common stock of PTI. The acquisition was effective September 30, 2004. PTI manufactures and
markets high-end oscillators, crystals, resonators and filters used in electronic and
communications systems. The purchase price was approximately $8,736,000 (before deducting cash
acquired, and before adding acquisition costs and transaction fees). The Company funded the
purchase price by (a) new notes payable and long-term debt of $6,936,000 and (b) proceeds of
$1,800,000 received from the sale of Lynch Stock to Venator Merchant Fund (Venator), which is
controlled by the Companys Chairman, Marc Gabelli. 6




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The following is the preliminary allocation of the purchase price to the estimated fair value
of assets acquired and liabilities assumed for the PTI acquisition. The allocation is based on
managements estimates, including the valuation of the fixed and intangible assets by independent
third-party appraisers. (in thousands)Assets:Cash
    
    $
    1,389Accounts receivable
    
    
    1,565Inventories
    
    
    2,485Prepaid expenses and other current assets
    
    
    853Property and equipment
    
    
    4,773Intangible assets
    
    
    627Total assets acquired
    
    $
    11,692Liabilities:Accounts payable
    
    $
    556Accrued expenses
    
    
    1,255Debt assumed by the Company
    
    
    1,145Total liabilities assumed
    
    
    2,956Net Assets acquired
    
    $
    8,736
 The Company is in the process of finalizing the purchase price accounting and related income
tax implications. The fair market value of net assets acquired in the PTI acquisition exceeded the purchase
price, resulting in negative goodwill of approximately $4.1 million. In accordance with Statement
of Financial Accounting Standards No. 141 Accounting for Business Combinations, this negative
goodwill was allocated back to PTIs non-current assets, resulting in a write-down in the fair
market value initially assigned to property and equipment and intangible assets. The adjusted
intangible assets of $627,000 consist of customer relationships, trade name and funded
technologies, and were determined to have definite lives that range from two to ten years. E. Restricted Cash At March 31, 2005 and December 31, 2004, the Company had $1.0 million and $1.1 million,
respectively, of Restricted Cash that secures a Letter of Credit issued by Bank of America to the
First National Bank of Omaha as collateral for its M-tron subsidiarys loans. F. Investments The following is a summary of marketable securities (investments) held by the Company (in
thousands): Gross
    
    
    Gross
    
    
    EstimatedUnrealized
    
    
    Unrealized
    
    
    FairEquity Securities
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueMarch 31, 2005
    
    $
    2,774
    
    
    $
    1,257
    
    
    
    
    
    
    $
    4,031December 31, 2004
    
    $
    2,774
    
    
    $
    835
    
    
    
    
    
    
    $
    3,609
 The Company has a margin liability against this investment of $1,582,000 at March 31, 2005 and
of $1,566,000 at December 31, 2004 which must be settled upon the disposition of the related
securities whose fair value is based on quoted market prices. The Company has designated these
investments as available for sale pursuant to Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities. 7




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G. Inventories Inventories are stated at the lower of cost or market value. At March 31, 2005, inventories
were valued by two methods: last-in, first-out (LIFO) 56%, and first-in, first-out (FIFO) 44%. At
December 31, 2004, inventories were valued by the same two methods: LIFO  47%, and FIFO  53%. March 31,
    
    
    December 31,2005
    
    
    2004(in thousands)Raw materials
    
    $
    2,849
    
    
    $
    2,308Work in process
    
    
    3,195
    
    
    
    3,763Finished goods
    
    
    1,980
    
    
    
    1,781Total Inventories
    
    $
    8,024
    
    
    $
    7,852
 Current costs exceed LIFO value of inventories by $1,112,000 and $1,110,000 at March 31, 2005
and December 31, 2004, respectively. H. Indebtedness On a consolidated basis, at March 31, 2005, Lynch maintains short-term credit facilities
totaling $12.5 million, of which $2.6 million was available for future borrowings, including up to
$2.6 million for working capital and/or up to $0.5 million for Letters of Credit. These facilities
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 respective subsidiary
borrower, and include various financial covenants, which currently restrict the transfer of
substantially all the assets of the subsidiaries. Lynch
Systems, Inc. and M-tron Industries, Inc. maintain their own credit
facilities. In general, the credit facilities are secured by
property, plant and equipment, inventory, receivables and common
stock of certain subsidiaries and contain certain covenants
restricting distributions to the Company. The Lynch Systems facilities include an unsecured parent Company guarantee. M-trons revolving credit
agreement includes a unsecured parent Company guarantee and is supported by a $1.0 million Letter
of Credit that is secured by a $1.0 million deposit at Bank of America (see Note E  Restricted
Cash). MtronPTI
has received an extension on its credit agreement until June 30,
2005. MtronPTI intends to renew the credit agreement with the
incumbent lender for another year. Lynch Systems SunTrust Bank
loan matures May 31, 2005. Lynch Systems is currently in
discussions with the bank. If Lynch Systems is unable to renew this
agreement it will have to obtain new financing, however, there can be
no assurances that such financing will be available. At March 31, 2005, the Company was in violation of certain of its
financial covenants for which it received a waiver from one of the banks and
is in discussions with the other. 8




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##### Table of Contents



March 31,
    
    
    December 31,2005
    
    
    2004Notes payable:Mtron bank revolving loan at variable interest rates (greater of prime or
4.5%; 5.75% at March 31, 2005), due June, 2005
    
    $
    3,379
    
    
    $
    3,557Lynch Systems working capital revolving loan at variable interest rates,
(LIBOR + 2%; 4.69% at March 31, 2005), due May, 2005
    
    
    1,980
    
    
    
    2,000$
    5,359
    
    
    $
    5,557Long-term debt:Mtron commercial bank term loan at variable interest rates (6.25% at March 31,
2005), due April, 2007
    
    $
    629
    
    
    $
    686Yankton Area Progressive Growth loan at 0% interest, due April, 2005
    
    
    50
    
    
    
    50South Dakota Board of Economic Development at a fixed rate of 3%, due
December, 2007
    
    
    270
    
    
    
    273Yankton Areawide Business Council loan at a fixed interest rate of 5.5%, due
November, 2007
    
    
    81
    
    
    
    83Lynch Systems term loan at a fixed interest rate of 5.5%, due August, 2013
    
    
    415
    
    
    
    427Mtron bridge loan at variable interest rates (greater of prime or 4.5%; 5.75%
at March 31, 2005), due October, 2005
    
    
    3,000
    
    
    
    3,000Mtron term loan at variable interest rates (greater of prime plus 50 basis
points or 4.5%; 6.25% at March 31, 2005), due October, 2007
    
    
    1,858
    
    
    
    1,943Rice University Promissory Note at a fixed interest rate of 4.5%, due August,
2009
    
    
    319
    
    
    
    345Smythe Estate Promissory Note at a fixed interest rate of 4.5% due August, 2009
    
    
    184
    
    
    
    1976,806
    
    
    
    7,004Current maturities
    
    
    (3,843
    )
    
    
    (3,842
    )$
    2,963
    
    
    $
    3,162
 I. Long-Term Contracts and Warranty Expense Lynch Systems, a 100% wholly-owned subsidiary of the Company, is engaged in the manufacture
and marketing of glass-forming machines and specialized manufacturing machines. Certain sales
contracts require an advance payment (usually 30% of the contract price) which is accounted for as
a customer advance. The contractual sales prices are paid either (i) as the manufacturing process
reaches specified levels of completion or (ii) based on the shipment date or (iii) negotiated terms
of sale. Guarantees by letter of credit from a qualifying financial institution are required for
most sales contracts. Because of the specialized nature of these machines and the period of time
needed to complete production and shipping, Lynch Systems accounts for these contracts using the
percentage-of-completion accounting method as costs are incurred compared to total estimated
project costs (cost-to-cost basis). At March 31, 2005 and December 31, 2004, unbilled accounts
receivable were $3.3 million and $2.5 million, respectively. Lynch Systems provides a full warranty to world-wide customers who acquire machines. The
warranty covers both parts and labor and normally covers a period of one year or thirteen months.
Based upon experience, the warranty accrual is based upon three to five percent of the selling
price of the machine. The Company periodically assesses the adequacy of the reserve and adjusts the
amounts as necessary. (in thousands)Balance, December 31, 2004
    
    $
    466Warranties issued during the period
    
    
    18Settlements made during the period
    
    
    (68
    )Changes in liabilities for pre-existing warranties
during the period, including expirations
    
    
    Balance, March 31, 2005
    
    $
    416
 9




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J. Earnings Per Share and Stockholders Equity The Companys basic and diluted earnings per share are equivalent as the options issued in May
2002 to purchase 228,000 shares of the Companys common stock were anti-dilutive throughout 2003
and 2004. On March 24, 2005, the Board of Directors approved, subject to shareholder approval at the May
2005 Annual Meeting, amendments to the 2001Equity Incentive to increase the total number of shares
of the Companys Common Stock available for issuance from 300,000 to 600,000 shares and to add
provisions that require terms and conditions of awards to comply with section 409A of the Internal
Revenue Code of 1986. On May 2, 2002, the Companys shareholders approved the 2001 Equity Incentive Plan and the
issuance of up to 300,000 options to purchase shares of Company common stock to certain employees
of the Company, of which 228,000 options were granted (subject to shareholder approval) at $17.50
per share on December 10, 2001. Shareholders approval was obtained on May 2, 2002. These options
have lives of five to ten years. As of March 31, 2005, 180,000 of these options are fully vested.
During the first quarter 2005, 44,000 options were cancelled. The Company has a stock-based employee compensation plan. The Company accounts for the plan
under the recognition and measurement principles of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee
compensation cost is reflected in net income, as all options granted under those plans had an
exercise price equal to or above the market value of the underlying common stock on the date of
grant. The Company provides pro-forma disclosures of the compensation expense determined under the
fair value provisions of Financial Accounting Standards Board Statement No. 123, Accounting for
Stock-Based Compensation as follows: Three Months EndedMarch 31,2005
    
    
    2004(in thousands, except share amounts)Net income (loss) as reported
    
    $
    50
    
    
    $
    (808
    )Deduct: Total stock based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effect
    
    
    
    
    
    
    (39
    )Pro-forma net income (loss)
    
    $
    50
    
    
    $
    (847
    )Basic & diluted income (loss) per share:As reported
    
    $
    0.03
    
    
    $
    (0.54
    )Pro forma
    
    $
    0.03
    
    
    $
    (0.57
    )
 The net income (loss) as reported in each period did not include any stock-based compensation. 10




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##### Table of Contents



K. Accumulated Other Comprehensive Income (Loss) Total comprehensive income was $493,000 in the three months ended March 31, 2005, compared to
a total comprehensive loss of $222,000 in the three months ended March 31, 2004. Other
comprehensive income, resulting from unrealized gains on available for sale securities included in
total comprehensive income was $422,000 in the three months ended March 31, 2005 and $586,000 in
the three months ended March 31, 2004. Three Months EndedMarch 31,2005
    
    
    2004Net income (loss) as reported
    
    $
    50
    
    
    $
    (808
    )Foreign currency translation
    
    
    21
    
    
    
    Unrealized gain on available for sale securities
    
    
    422
    
    
    
    586Total comprehensive income (loss)
    
    $
    493
    
    
    $
    (222
    )
 The components of accumulated other comprehensive income (loss), net of related tax, at March 31,
2005 and December 31, 2004, and March 31, 2004 are as follows: March 31,
    
    
    December 31,
    
    
    March 31,2005
    
    
    2004
    
    
    2004Balance beginning of period
    
    $
    849
    
    
    $
    291
    
    
    $
    291Foreign currency translation..........................................
    
    
    21
    
    
    
    14
    
    
    
    Unrealized gain (loss) on available for-sale securities
    
    
    422
    
    
    
    544
    
    
    
    586Accumulated other comprehensive income
    
    $
    1,292
    
    
    $
    849
    
    
    $
    877
 L. Segment Information The Company has two reportable business segments: 1) glass manufacturing equipment business,
which represents the operations of Lynch Systems, and 2) frequency control devices (quartz crystals
and oscillators) that represents products manufactured and sold by MtronPTI. The Companys foreign
operations in Hong Kong and India exist under MtronPTI. Operating profit (loss) is equal to revenues less operating expenses, excluding investment
income, interest expense, and income taxes. The Company allocates a negligible portion of its
general corporate expenses to its operating segments. Such allocation was $125,000 and $87,500 in
the first three months of 2005 and 2004, respectively. Identifiable assets of each industry
segment are the assets used by the segment in its operations excluding general corporate assets.
General corporate assets are principally cash and cash equivalents, short-term investments and
certain other investments and receivables. 11




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##### Table of Contents



Three Months Ended March 31,2005
    
    
    2004RevenuesGlass manufacturing equipment  USA
    
    $
    450
    
    
    $
    152Glass manufacturing equipment  Foreign
    
    
    1,761
    
    
    
    2,147Total Glass manufacturing equipment
    
    
    2,211
    
    
    
    2,299Frequency control devices  USA
    
    
    4,854
    
    
    
    2,137Frequency control devices  Foreign
    
    
    3,530
    
    
    
    2,376Total Frequency control devices
    
    
    8,384
    
    
    
    4,513Consolidated total revenues
    
    $
    10,595
    
    
    $
    6,812Operating Profit (Loss)Glass manufacturing equipment
    
    $
    74
    
    
    $
    (392
    )Frequency control devices
    
    
    579
    
    
    
    62Total manufacturing
    
    
    653
    
    
    
    (330
    )Unallocated Corporate expense
    
    
    (426
    )
    
    
    (433
    )Consolidated total operating profit (loss)
    
    $
    227
    
    
    $
    (763
    )Other Profit (Loss)Investment income
    
    
    10
    
    
    
    4Interest expense
    
    
    (185
    )
    
    
    (51
    )Other income (expense)
    
    
    3
    
    
    
    27Consolidated total profit (loss) before taxes
    
    $
    55
    
    
    $
    (783
    )Capital ExpendituresGlass manufacturing equipment
    
    $
    12
    
    
    
    3Frequency control devices
    
    
    18
    
    
    
    66General Corporate
    
    
    1
    
    
    
    Consolidated total capital expenditures
    
    $
    31
    
    
    $
    69Total AssetsGlass manufacturing equipment
    
    $
    11,613
    
    
    $
    10,317Frequency control devices
    
    
    17,281
    
    
    
    8,176General Corporate
    
    
    5,510
    
    
    
    3,018Consolidated total assets
    
    $
    34,404
    
    
    $
    21,511
 M. Commitments and Contingencies In the normal course of business, subsidiaries of the Company are defendants in certain
product liability, worker claims and other litigation in which the amounts being sought may exceed
insurance coverage levels. The resolution of these matters is not expected to have a material
adverse effect on the Companys financial condition or operations. In addition, the Company and/or
one or more of its subsidiaries are parties to the following additional legal proceedings: 12




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In re: Spinnaker Coating, Inc., Debtor/PACE Local 1-1069 v. Spinnaker Coating, Inc., and Lynch
Corporation, U.S. Bankruptcy Court, District of Maine, Chapter 11, Adv. Pro. No. 02-2007, PACE
Local 1-1069 v. Lynch Corporation and Lynch Systems, Inc. Cumberland County Superior Court,
CV-2001-00352; and Maine Supreme Judicial Court, Law Docket No. CUM-04-682 On or about June 26, 2001, in anticipation of the July 15, 2001 closure of Spinnakers
Westbrook, Maine facility, Plaintiff PACE Local 1-1069 (PACE) filed a three count complaint in
Cumberland County Superior Court, CV-2001-00352 naming the following Defendants: Spinnaker
Industries, Inc., Spinnaker Coating, Inc., and Spinnaker Coating-Maine, Inc. (collectively, the
Spinnaker Entities) and the Company. The complaint alleged that under Maines Severance Pay Act
both the Spinnaker Entities and the Company would be liable to pay approximately $1,166,000
severance pay under Maines Severance Pay Act in connection with the plant closure. Subsequently,
the Spinnaker Entities filed for relief under Chapter 11 of the Bankruptcy Code and the action
proceeded against the Company on the issue of whether the Company has liability to PACEs members
under the Maine Severance Pay Act. In 2002, both PACE and the Company moved for summary judgment in the action. On July 28,
2003, the Court issued an order denying the Companys motion, finding that there remained a
disputed issue of material fact regarding one of the Companys primary defenses. The Court granted
partial summary judgment in favor of PACE to the extent that the Court found that the Company was
the Spinnaker Entities parent corporation and, therefore, the Company was an employer subject
to potential liability under Maines Severance Pay Act. On November 3, 2004, the Court held that the Spinnaker Entities bankruptcy did not prevent
the award of severance pay under the statute. The Court granted summary judgment to PACE on the
second count of its complaint based on its earlier ruling that the Company was the parent
corporation of the Spinnaker Entities. The Court also issued a separate order that related to the
calculation of damages, largely agreeing with the Company on the appropriate method of calculating
damages and awarded PACE $653,018 (subsequently modified to $656,020) in severance pay, which is
approximately one-half the amount claimed by PACE. The Court rejected PACEs claim for pre-judgment
interest, but granted its request for attorney fees. Both PACE and the Company have appealed to the Maine Supreme Judicial Court. The Company filed
its brief on April 4, 2005. PACE is due to file its brief on or before May 18, 2005. The Maine
Supreme Court has not yet scheduled oral argument. Management does not believe that the resolution
of this case will have a material adverse effect on the Companys consolidated financial condition
and operations. Qui Tam Lawsuit The Company, Lynch Interactive and numerous other parties have been named as defendants in a
lawsuit brought under the so-called qui tam provisions of the federal False Claims Act in the
United States District Court for the District of Columbia. The complaint was filed under seal with
the court on February 14, 2001, and the seal was lifted on January 11, 2002. The Company was
formally served with the complaint on July 9, 2002. The main allegation in the case is that the
defendants participated in the creation of sham bidding entities that allegedly defrauded the
United States Treasury by improperly participating in Federal Communications Commission (FCC)
spectrum auctions restricted to small businesses, as well as obtaining bidding credits in other
spectrum auctions allocated to small and very small businesses. While the lawsuit seeks to
recover an unspecified amount of damages, which would be subject to mandatory trebling under the
statute, a document filed by the relator (a private party that filed the action on behalf of the
United States) discloses an initial computation of damages of not less than $88 million resulting
from bidding credits awarded defendants in FCC auctions and $120 million of unjust enrichment
through the disposition of licenses obtained in FCC auctions. Later computations have increased
this amount. Lynch Interactive has stated that the bidding credits the defendants received were
considerably less than the $88 million amount reported. On September 30, 2003, the Court granted
Lynch Interactives motion to transfer the action to the Southern District of New York. On September 14, 2004, the Court issued a ruling denying defendants motion to refer the
issues in the action to the FCC. In December 2004, the defendants filed a motion in the United
States District Court for the 13




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##### Table of Contents



District of Columbia to compel the FCC to provide information subpoenaed by them in order to
conduct their defense. This motion was denied on May 5, 2005 and the defendants are considering
appropriate responses. In the mean-time, pre-trial discovery continues. The U. S. Department of Justice has notified the Court that is has declined to intervene in
the case. The Defendants strongly believe that the action is completely without merit and that the
relators damage computation is without basis, and are vigorously defending it. Under the
separation agreement between the Company and Lynch Interactive pursuant to which Lynch Interactive
was spun-off to the Companys shareholders on September 1, 1999, Lynch Interactive would be
obligated to indemnify the Company for any losses or damaged incurred by the Company as a result of
this action. Lynch Interactive has agreed in writing to defend the case on the Companys behalf
and to indemnify the Company for any losses it may incur. Lynch Interactive has retained legal
counsel to defend the claim on behalf of the Company and Lynch Interactive at the expense of Lynch
Interactive. Nevertheless, the Company cannot predict the ultimate outcome of the litigation, nor
can the Company predict the effect that the lawsuit or its outcome will have on the Companys
business or plan of operation. N. Income Taxes The Company files consolidated federal income tax returns. The Company has approximately
$4,200,000 net operating loss (NOL) carry-forward as of March 31, 2005. This NOL expires in 2026
if not utilized prior to that date. O. Guarantees The Company presently guarantees (unsecured) the SunTrust Bank loans of its subsidiary, Lynch
Systems. The Company presently guarantees (unsecured) the First National Bank of Omaha loans of its
subsidiary, MtronPTI, and has guaranteed a Letter of Credit issued to the First National Bank of
Omaha on behalf of its subsidiary, MtronPTI (see Note H  Indebtedness Debt). As of March 31,
2005, there was a $1,980,000 obligation to the SunTrust Bank. As of March 31, 2005, the $1,000,000
Letter of Credit issued by Bank of America to The First National Bank of Omaha was secured by a
$1,000,000 deposit at Bank of America. (See Note E  Restricted Cash, also see subsequent
events.) There were no other financial, performance, indirect guarantees or indemnification agreements. 
 Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations. Critical Accounting Policies The Company has identified the accounting policies listed below that we believe are most
critical to our financial condition and results of operations, and that require managements most
difficult, subjective and complex judgments in estimating the effect of inherent uncertainties.
This section should be read in conjunction with Note 1 to the Consolidated Financial Statements,
included in the Companys Annual Report on Form 10-K for the year ended December 31, 2004, which
includes other significant accounting policies. Accounts Receivable Accounts receivable on a consolidated basis consists principally of amounts due from both
domestic and foreign customers. Credit is extended based on an evaluation of the customers
financial condition and collateral is not generally required except at Lynch Systems. In relation
to export sales, the Company requires letters of credit supporting a significant portion of the
sales price prior to production to limit exposure to credit risk. Certain subsidiaries and business
segments have credit sales to industries that are subject to cyclical economic changes. The Company
maintains an allowance for doubtful accounts at a level that management believes is sufficient to
cover potential credit losses. 14




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We maintain allowances for doubtful accounts for estimated losses resulting from the inability
of our clients to make required payments. We base our estimates on our historical collection
experience, current trends, credit policy and relationship of our accounts receivable and revenues.
In determining these estimates, we examine historical write-offs of our receivables and review each
clients account to identify any specific customer collection issues. If the financial condition of
our customers was to deteriorate, resulting in an impairment of their ability to make payment,
additional allowances may be required. Our failure to estimate accurately the losses for doubtful
accounts and ensure that payments are received on a timely basis could have a material adverse
effect on our business, financial condition, and results of operations. Inventory Valuation Inventories are stated at the lower of cost or market value. Inventories valued using the
last-in, first-out (LIFO) method comprised approximately 56% and 47% of consolidated inventories at
March 31, 2005 and December 31, 2004, respectively. The balance of inventories are valued using the
first-in-first-out (FIFO) method. If actual market conditions are more or less favorable than those
projected by management, including the demand for our products, changes in technology, internal
labor costs and the costs of materials, adjustments may be required. Revenue Recognition and Accounting for Long-Term Contracts Revenues, with the exception of certain long-term contracts discussed below, are recognized
upon shipment when title passes. Shipping costs are included in manufacturing cost of sales. Lynch Systems, a 100% owned subsidiary of the Company, is engaged in the manufacture and
marketing of glass-forming machines and specialized manufacturing machines. Certain sales contracts
require an advance payment (usually 30% of the contract price) which is accounted for as a customer
advance. The contractual sales prices are paid either (i) as the manufacturing process reaches
specified levels of completion; or (ii) based on the shipment date; or (iii) negotiated terms of
sale. Guarantees by Letter of Credit from a qualifying financial institution are required for most
sales contracts. Because of the specialized nature of these machines and the period of time needed
to complete production and shipping, Lynch Systems accounts for these contracts using the
percentage-of-completion accounting method as costs are incurred compared to total estimated
project costs (cost-to-cost basis). At March 31, 2005, and December 31, 2004, unbilled accounts
receivable were $3.3 and $2.5 million respectively. The percentage of completion method is used since reasonably dependable estimates of the
revenues and costs applicable to various stages of a contract can be made, based on historical
experience and milestones set in the contract. These estimates include current customer contract
specifications, related engineering requirements and the achievement of project milestones.
Financial management maintains contact with project managers to discuss the status of the projects
and, for fixed-price engagements, financial management is updated on the budgeted costs and
required resources to complete the project. These budgets are then used to calculate revenue
recognition and to estimate the anticipated income or loss on the project. In the past, we have
occasionally been required to commit unanticipated additional resources to complete projects, which
have resulted in lower than anticipated profitability or losses on those contracts. Favorable
changes in estimates result in additional profit recognition, while unfavorable changes in
estimates result in the reversal of previously recognized earnings to the extent of the error of
the estimate. We may experience similar situations in the future. Provisions for estimated losses
on contracts are made during the period in which such losses become probable and can be reasonably
estimated. To date, such losses have not been significant. Warranty Expense Lynch Systems provides a full warranty to world-wide customers who acquire machines. The
warranty covers both parts and labor and normally covers a period of one year or thirteen months.
Based upon experience, the warranty accrual is based upon three to five percent of the selling
price of the machine. The Company periodically assesses the adequacy of the reserve and adjusts the
amounts as necessary. 15




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##### Table of Contents



(in thousands)Balance, December 31, 2004
    
    $
    466Warranties issued during the period
    
    
    18Settlements made during the period
    
    
    (68
    )Changes in liabilities for pre-existing warranties
during the period, including expirations
    
    
    Balance, March 31, 2005
    
    $
    416
 Results of Operations First Quarter 2005 Compared to First Quarter 2004 Consolidated Revenues and Gross Margin Consolidated revenues increased $3.8 million, or 56%, to $10.6 million for the three month
period ended March 31, 2005 from $6.8 million for the comparable period in 2004. The increase came
from MtronPTI, including the contribution of the PTI acquisition, and was partially offset by
slightly lower revenues at Lynch Systems. Revenues at MtronPTI increased by $3.9 million, or 86%, to $8.4 million for the three month
period ended March 31, 2005 from $4.5 million for the comparable period in 2004. The increase was
primarily due to the contribution of the PTI acquisition and revenue growth in the Far East. Revenues at Lynch Systems declined by $0.1 million, or 4%, to $2.2 million for the three month
period ended March 31, 2005 from $2.3 million for the comparable period in 2004. This decrease was
primarily due to less revenue for glass press machines. The consolidated gross margin as a percentage of revenues for the three month period ended
March 31, 2005 increased significantly to 30.9%, compared to 22.2% for the comparable period in
2004. Both MtronPTI and Lynch Systems experienced higher margins as compared to the comparable
period in 2004.. MtronPTIs gross margin as a percentage of revenues for the three month period ended March 31,
2005, increased to 29.8% from 23.3% for the comparable period in 2004. The sales improvement at
Mtron and the contribution from PTI, combined with selective price increases and operational
efficiencies resulted in the improved gross margin rates. Lynch Systems gross margin as a percentage of revenues for the three month period ended March
31, 2005, increased to 35.1% from 20.0% in the comparable period in 2004. This increase was primarily
due to favorable product mix. Operating Profit (Loss) Operating profit increased $990,000, or 130%, to $227,000 for the three month period ended
March 31, 2005 from an operating loss of $763,000 for the comparable period in 2004. The
improvement came from both MtronPTI and Lynch Systems. Operating profit at MtronPTI increased $517,000, or 834%, to $579,000 for the three month
period ended March 31, 2005 from $62,000 for the comparable period in 2004. The operating profit
improvement was primarily due to the 86% sales increase and improvements in gross margin, which was
partially offset by higher operating expenses resulting from the addition of PTI. Operating profit at Lynch Systems increased $466,000, or 119%, to $74,000 for the three month
period ended March 31, 2005 from an operating loss of $392,000 for the comparable period in 2004.
The operating profit improvement was primarily due to higher gross margin and lower operating
expenses. 16




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Corporate expenses for the three month period ended March 31, 2005, were $426,000,
approximately the same as the comparable period in 2004. Lower compensation costs in 2005 were
partially offset by higher audit fees. Other Income (Expense), Net Investment income increased $6,000 to $10,000 for the three month period ended March 31, 2005
from $4,000 for the comparable period in 2004. Interest expense increased $134,000 to $185,000 for the three month period ended March 31,
2005 from $51,000 for the comparable period in 2004 primarily due to increase in debt resulting
from acquisition of PTI and borrowing at Lynch Systems. Other income decreased $24,000 to $3,000 for the three month period ended March 31, 2005 from
$27,000 for the comparable period in 2004. Income Taxes The Company files consolidated federal income tax returns, which includes all subsidiaries. The first quarter 2005 income tax provision included federal, as well as state, local, and
foreign taxes. There was no federal tax benefit in the first quarter of 2005 as a result of net
operating losses (NOLs) because the Company had previously been refunded all taxes in its
carry-back period and there is uncertainty regarding the utilization of the NOL carry-forward. Net Income (Loss) Net income for the three month period ended March 31, 2005 was $50,000 compared to a net loss
of $808,000 in the three month period ended March 31, 2004. As a result, fully diluted income per
share was $0.03 for the three month period ended March 31, 2005 compared to a loss of $0.54 per
share for the three month period ended March 31, 2004. Backlog/New Orders Total backlog of manufactured products at March 31, 2005 was $18.1 million, a $0.5 million
improvement over the backlog at December 31, 2004, and $12.0 million more than the backlog at March
31, 2004. MtronPTI had backlog orders of $8.1 million at March 31, 2005 compared to $7.6 million at
December 31, 2004 and $3.9 million at March 31, 2004. Backlog increased from March of 2004
primarily due to the addition of backlog attributable to PTI. Lynch Systems had backlog orders of $10.0 million at March 31, 2005 compared to $9.9 million
at December 31, 2004 and $2.2 million at March 31, 2004. Backlog increased from March of 2004 due
to new orders from television and tableware manufacturers. Most of the backlog is scheduled to be
delivered in 2005. Financial Condition At March 31, 2005, the Company has current assets of $25.6 million and current liabilities of
$21.0 million. At March 31, 2005, working capital was $4.6 million, compared to $4.1 million at
December 31, 2004 and $7.5 million at March 31, 2004. The ratio of current assets to current liabilities was
1.22 to 1.00 at March 31, 2005; 1.19 to 1.00 at December 31, 2004; and 1.75 to 1.00 ratio at March
31, 2004. Cash provided by operating activities was approximately $0.1 million in the first three months
of 2005 compared to cash provided by operating activities of approximately $1.7 million in the
first three months of 2004. The year to year unfavorable change in operating cash flow of $1.6
million was primarily the result of a reduction in unbilled 17




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accounts receivable in the first three
months of 2004 of $2.4 million. Capital expenditures were $31,000 in the first three months of
2005, compared to $69,000 in the first three months of 2004.. At March 31, 2005, the Companys total cash, cash equivalents and investments in marketable
securities (before margin liability) total $7.4 million (including $1.0 million of restricted
cash). Total debt of $12.1 million at March 31, 2005 was $0.4 million less than the amount
outstanding at December 31, 2004 and $8.5 million more than the debt at March 31, 2004. Debt
outstanding at March 31, 2005 included $1.3 million of fixed rate debt at an average interest rate
of 4.4%, and $10.8 million of variable rate debt at an average interest rate of 5.7%. Lynch
Systems SunTrust Bank loan matures May 31, 2005. Lynch
Systems is currently in discussions with the bank. If Lynch Systems
is unable to renew this agreement it will have to obtain new
financing, however, there can be no assurances that such financing
will be available. This lender has provided a $7 million line-of-credit which can be used entirely for stand-by
Letters of Credit or up to $4 million for domestic revolving credit within the credit line. This
loan includes an unsecured parent company guarantee. At March 31, 2005, there were outstanding
Letters of Credit of $2,442,000 and borrowings of $1,980,000 under the working capital line. In connection with the completion of the acquisition of PTI, on October 14, 2004, M-tron and
PTI, each wholly-owned subsidiaries of Lynch Corporation, entered into a Loan Agreement with First
National Bank of Omaha. The Loan Agreement provides for loans in the amounts of $2,000,000 (the
Term Loan) and $3,000,000 (the Bridge Loan), together with a $5,500,000 Revolving Line of
Credit (the Revolving Loan). The Term Loan bears interest at the greater of prime rate plus 50
basis points, or 4.5%, and is to be repaid in monthly installments of $37,514, with the then
remaining principal balance plus accrued interest to be paid on the third anniversary of the Loan
Agreement. The Bridge Loan bears interest at the same rate as the Term Loan. Accrued interest
thereon is payable monthly and the principal amount thereof, together with accrued interest, is
payable on the first anniversary of the Loan Agreement. The Revolving Loan bears interest at the
greater of prime rate or 4.5%. On April 21, 2005, MtronPTIs long-time lending bank, First National
Bank of Omaha, granted an extension on its revolving loan until June 30, 2005. MtronPTI intends to
renew the loan. Amounts outstanding are to be repaid, together with accrued interest, on June 30,
2005. All outstanding obligations under the Loan Agreement are collateralized by security interests
in the assets of M-tron and PTI, as well as by a mortgage on PTIs premises. The Loan Agreement
contains a variety of affirmative and negative covenants of types customary in an asset-based
lending facility. The Loan Agreement also contains financial covenants relating to maintenance of
levels of minimal tangible net worth and working capital, and current, leverage and fixed charge
ratios, restricting the amount of capital expenditures. At March 31, 2005, the Company was in
violation of certain of its financial covenants for which it received
a waiver from one of the Banks and is in discussions with the other. Pursuant to an Unconditional Guaranty for Payment and Performance, the Company has guaranteed
to First National Bank of Omaha the payment and performance of its subsidiaries obligations under
the Loan Agreement and ancillary agreements and instruments. The Company has guaranteed a Letter
of Credit issued to the First National Bank of Omaha on behalf of its subsidiary, MtronPTI. As of
March 31, 2005, the $1,000,000 Letter of Credit issued by Bank of America to The First National
Bank of Omaha was secured by a $1,000,000 deposit at Bank of America. On May 14, 2004, MtronPTI and First National Bank of Omaha also entered into a new term loan
arrangement in the amount of $1,200,000. A portion of the proceeds from this new term loan were
used to pay off the term loan that had a September 2004 maturity date. This new loan has an April
30, 2007 maturity date and bears interest at the banks base rate plus 0.50%. $743,000 is outstanding on the new loan as of September 30, 2004.
This loan is secured by the August 31, 2001 loan agreement and $1,000,000 Letter of Credit dated
September 9, 2002 issued by Bank of America on behalf of Lynch. Restrictions on dividends under the M-tron loan with First National Bank of Omaha disallow
distributions to the parent company without consent of the bank. Lynch Systems, under its loan with
Sun Trust Bank, may pay a cash 18




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##### Table of Contents



dividend to the parent company equal to 50% of Lynch Systems net
income for the prior fiscal year, subject to the minimum net worth covenant in the loan agreement.
Under the M-tron loan agreement, advances to the parent company are disallowed without the prior
written consent of the lending bank. Under its loan agreement, Lynch Systems may pay an annual
management fee to the parent company in an amount not to exceed $250,000. In addition, Lynch
Systems may reimburse the parent company for expenses and taxes paid by the parent on behalf of
Lynch Systems. The
Company does not, at present, have credit facilities at the parent
company level. In order to meet the on-going working capital and
capital expenditure requirements, the Company will need to extend its
existing lines of credit or obtain new financing, however, there can
be no assurance that such financing will be available. Adoption of Accounting Pronouncements On December 14, 2004, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 123 (revised 2004), State Based Payment (SFAS
123R), which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS
123). SFAS 123R supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and
amends SFAS No. 95 Statement of Cash Flows. Generally, the approach in SFAS 123R is similar to
the approach described in SFAS 123. However, SFAS 123R requires all share-based payments to
employees, including grants to employee stock options, to be recognized in the income statement
based on their fair values. Pro-forma disclosure is no longer an alternative. On April 14, 2005, the Securities and Exchange Commission announced that it would provide for
a phased-in implementation process for SFAS No. 123R. This ruling effectively delayed the
Companys adoption of the standard until the first quarter of 2006. The Company will continue to
evaluate the provisions of SFAS No. 123R to determine its impact on its financial condition and
results of operations. Off-Balance Sheet Arrangements Aside from the Companys stand-by Letter of Credit in the amount of $1,000,000, the Company
does not have any off-balance sheet arrangements. Aggregate Contractual Obligations Details of the Companys contractual obligations for short-term debt, long-term debt, leases,
purchases and other long term obligations as of March 31, 2005 are as follows: Payments Due by Period - Including Interest (In Thousands)Less Than
    
    
    1 - 3
    
    
    3 - 5
    
    
    More ThanContractual Obligations
    
    Total
    
    
    1 Year
    
    
    Years
    
    
    Years
    
    
    5 YearsShort-term Debt (Revolving Credit)
    
    $
    5,646
    
    
    $
    5,646
    
    
    
    
    
    
    
    
    
    
    
    Long-term Debt Obligations
    
    
    7,343
    
    
    
    4,145
    
    
    
    2,912
    
    
    
    217
    
    
    
    69Capital Lease Obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating Lease Obligations
    
    
    313
    
    
    
    176
    
    
    
    123
    
    
    
    14
    
    
    
    Purchase Obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other Long-term Liabilities Reflected
on the Registrants Balance Sheet
under GAAP
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    TOTAL
    
    $
    13,302
    
    
    $
    9,967
    
    
    $
    3,035
    
    
    $
    231
    
    
    $
    69
 19




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Market Risk The Company is exposed to market risk relating to changes in the general level of U.S.
interest rates. Changes in interest rates affect the amounts of interest earned on the Companys
cash equivalents and short-term investments (approximately $3.4 million at March 31, 2005). The
Company generally finances the debt portion of the acquisition of long-term assets with fixed rate,
long-term debt. The Company does not use derivative financial instruments for trading or
speculative purposes. Management does not foresee any significant changes in the strategies used to
manage interest rate risk in the near future, although the strategies may be reevaluated as market
conditions dictate. There has been no significant change in market risk since March 31, 2005. Since the Companys international sales are in U.S. Dollars, there is no monetary risk. At March 31, 2005, approximately $10.8 million of the Companys debt bears interest at
variable rates. Accordingly, the Companys earnings and cash flows are only slightly affected by
changes in interest rates. Assuming the current level of borrowings for variable rate debt, and
assuming a two percentage point increase in the 2005 average interest rate under these borrowings,
it is estimated that the Companys interest expense would change by approximately $0.2 million. In
the event of an adverse change in interest rates, management would take actions to further mitigate
its exposure. Subsequent Events Venator Merchant Fund, L.P., a Delaware limited partnership (Venator), made a loan to the
Company in the amount of $700,000. The companys obligation to repay Venator is evidenced by a
Promissory Note dated May 12, 2005. The company is to pay Venator the principal sum of $700,000 on
September 11, 2005, or within seven days after demand by Venator is made. The company is also to
pay interest on the unpaid principal amount, together with payment of principal on the Maturity
Date, at the rate of 6% per annum. The Note contains covenants restricting the use of the proceeds of the Loan as follows: (a) up
to $250,000 are to be used for open market purchases of Registrants common stock; and (b) the
balance is to be used for working capital and general corporate purposes, including, without
limitation for legal and accounting accruals and corporate accruals and expenses. Under the terms of the Note, the Company must prepay the Promissory Note to the extent of the
net proceeds of any sale of its equity or debt securities. The Note also provides for certain
events of default that could accelerate the date on which payment of the Note is to be made. Venator is an investment limited partnership controlled by the Companys Chairman of the
Board, Marc Gabelli, and is the beneficial owner of approximately 20% of the Companys outstanding
common stock. Risk Factors Certain subsidiaries and business segments of the Company sell to industries that are subject
to cyclical economic changes. Any downturns in the economic environment would have a financial
impact on the Company and its consolidated subsidiaries and may cause the reported financial
information herein not to be indicative of future operating results, financial condition or cash
flows. Future activities and operating results may be adversely affected by fluctuating demand for
capital goods such as large glass presses, delay in the recovery of demand for components used by
telecommunications infrastructure manufacturers, disruption of foreign economies and the inability
to renew or obtain new financing for expiring loans. Financial instruments that potentially subject the Company to significant concentrations of
credit risk consist principally of cash investments and trade accounts receivable. 20




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The Company maintains cash and cash equivalents and short-term investments with various
financial institutions. These financial institutions are located throughout the country and the
Companys policy is designed to limit exposure to any one institution. The Company performs
periodic evaluations of the relative credit standing of those financial institutions that are
considered in the Companys investment strategy. Other than certain accounts receivable, the
Company does not require collateral on these financial instruments. In relation to export sales,
the Company requires Letters of Credit supporting a significant portion of the sales price prior to
production to limit exposure to credit risk. The Company maintains an allowance for doubtful
accounts at a level that management believes is sufficient to cover potential credit losses. Forward Looking Information Included in this Management Discussion and Analysis of Financial Condition and Results of
Operations are certain forward looking financial and other information, including without
limitation matters relating to Risks. It should be recognized that such information are
projections, estimates or forecasts based on various assumptions, including without limitation,
meeting its assumptions regarding expected operating performance and other matters specifically set
forth, as well as the expected performance of the economy as it impacts the Companys businesses,
government and regulatory actions and approvals, and tax consequences, and the risk factors and
cautionary statements set forth in reports filed by the Company with the Securities and Exchange
Commission. As a result, such information is subject to uncertainties, risks and inaccuracies,
which could be material. The Registrant makes available, free of charge, its Annual Report on Form 10-K, Quarterly
Reports on Form 10-Q, and current reports, if any, on Form 8-K. The Registrant also makes this information available on its website, whose internet address is
www.lynchcorp.com. 
 Item 3.Quantitative and Qualitative Disclosure About Market Risk See Market Risk under Item 2 above. 
 Item 4.Controls and Procedures The Chief Executive Officer and Chief Financial Officer have concluded that the Companys
disclosure controls and procedures were effective as of the end of the period covered by this
report based on the evaluation of these controls and procedures required by Exchange Act Rule
13a-15. There have been no changes in the Registrants internal control over financial reporting that
occurred during the Registrants last fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the Registrants internal control over financial reporting. 
 PART II. OTHER INFORMATION 
 Item 1.Legal Proceedings In re: Spinnaker Coating, Inc., Debtor/PACE Local 1-1069 v. Spinnaker Coating, Inc., and Lynch
Corporation, U.S. Bankruptcy Court, District of Maine, Chapter 11, Adv. Pro. No. 02-2007, PACE
Local 1-1069 v. Lynch Corporation and Lynch Systems, Inc. Cumberland County Superior Court,
CV-2001-00352; and Maine Supreme Judicial Court, Law Docket No. CUM-04-682 On or about June 26, 2001, in anticipation of the July 15, 2001 closure of Spinnakers
Westbrook, Maine facility, Plaintiff PACE Local 1-1069 (PACE) filed a three count complaint in
Cumberland County Superior Court, CV-2001-00352 naming the following Defendants: Spinnaker
Industries, Inc., Spinnaker Coating, Inc., and Spinnaker Coating-Maine, Inc. (collectively, the
Spinnaker Entities) and the Company. The complaint alleged that 21




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under Maines Severance Pay Act
both the Spinnaker Entities and the Company would be liable to pay approximately $1,166,000
severance pay under Maines Severance Pay Act in connection with the plant closure. Subsequently,
the Spinnaker Entities filed for relief under Chapter 11 of the Bankruptcy Code and the action
proceeded against the Company on the issue of whether the Company has liability to PACEs members
under the Maine Severance Pay Act. In 2002, both PACE and the Company moved for summary judgment in the action. On July 28,
2003, the Court issued an order denying the Companys motion, finding that there remained a
disputed issue of material fact regarding one of the Companys primary defenses. The Court granted
partial summary judgment in favor of PACE to the extent that the Court found that the Company was
the Spinnaker Entities parent corporation and, therefore, the Company was an employer subject
to potential liability under Maines Severance Pay Act. On November 3, 2004, the Court held that the Spinnaker Entities bankruptcy did not prevent
the award of severance pay under the statute. The Court granted summary judgment to PACE on the
second count of its complaint based on its earlier ruling that the Company was the parent
corporation of the Spinnaker Entities. The Court also issued a separate order that related to the
calculation of damages, largely agreeing with the Company on the appropriate method of calculating
damages and awarded PACE $653,018 (subsequently modified to $656,020) in severance pay, which is
approximately one-half the amount claimed by PACE. The Court rejected PACEs claim for pre-judgment
interest, but granted its request for attorney fees. Both PACE and the Company have appealed to the Maine Supreme Judicial Court. The Company filed
its brief on April 4, 2005. PACE is due to file its brief on or before May 18, 2005. The Maine
Supreme Court has not yet scheduled oral argument. Management does not believe that the resolution
of this case will have a material adverse effect on the Companys consolidated financial condition
and operations. Qui Tam Lawsuit The Company, Lynch Interactive and numerous other parties have been named as defendants in a
lawsuit brought under the so-called qui tam provisions of the federal False Claims Act in the
United States District Court for the District of Columbia. The complaint was filed under seal with
the court on February 14, 2001, and the seal was lifted on January 11, 2002. The Company was
formally served with the complaint on July 9, 2002. The main allegation in the case is that the
defendants participated in the creation of sham bidding entities that allegedly defrauded the
United States Treasury by improperly participating in Federal Communications Commission (FCC)
spectrum auctions restricted to small businesses, as well as obtaining bidding credits in other
spectrum auctions allocated to small and very small businesses. While the lawsuit seeks to
recover an unspecified amount of damages, which would be subject to mandatory trebling under the
statute, a document filed by the relator (a private party that filed the action on behalf of the United States) discloses an initial computation
of damages of not less than $88 million resulting from bidding credits awarded defendants in FCC
auctions and $120 million of unjust enrichment through the disposition of licenses obtained in FCC
auctions. Later computations have increased this amount. Lynch Interactive has stated that the
bidding credits the defendants received were considerably less than the $88 million amount
reported. On September 30, 2003, the Court granted Lynch Interactives motion to transfer the
action to the Southern District of New York. On September 14, 2004, the Court issued a ruling denying defendants motion to refer the
issues in the action to the FCC. In December 2004, the defendants filed a motion in the United
States District Court for the District of Columbia to compel the FCC to provide information
subpoenaed by them in order to conduct their defense. This motion was denied on May 5, 2005 and
the defendants are considering appropriate responses. In the mean-time, pre-trial discovery
continues. The U. S. Department of Justice has notified the Court that is has declined to intervene in
the case. The Defendants strongly believe that the action is completely without merit and that the
relators damage computation is without basis, and are vigorously defending it. Under the
separation agreement between the Company and Lynch Interactive pursuant to which Lynch Interactive
was spun-off to the Companys shareholders on September 1, 1999, Lynch Interactive would be
obligated to indemnify the Company for any losses or damaged incurred by the 22




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Company as a result of
this action. Lynch Interactive has agreed in writing to defend the case on the Companys behalf
and to indemnify the Company for any losses it may incur. Lynch Interactive has retained legal
counsel to defend the claim on behalf of the Company and Lynch Interactive at the expense of Lynch
Interactive. Nevertheless, the Company cannot predict the ultimate outcome of the litigation, nor
can the Company predict the effect that the lawsuit or its outcome will have on the Companys
business or plan of operation. 23




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Item 6.Exhibits Exhibits filed herewith:  10.1
    Form of Indemnification Agreement dated as of February 28, 2005 by and
between Lynch Corporation and its executive officers.31.1
    Certification of Principal Executive Officer pursuant to Rule 13a-14(a) or
15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    Certificate of Principal Financial Officer pursuant to Rule 13a-14(a) or
15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.32
    Certification of Principal Executive Officer and Principal Financial Officer
pursuant to Rule 13a-14(b) or 15d-14(b) of the Securities Act of 1934, as amended, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 24




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SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Company has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LYNCH CORPORATION
(Registrant)May 16, 2005
    By:
    /s/ EUGENE HYNESEugene HynesPrincipal Financial Officer EXHIBIT INDEX ExhibitNo.
    
    Description31
    
    
    Certifications of Registrants principal executive and principal financial
officers required by Exchange Act Rule 13a-14(a).32
    
    
    Section 1350 Certifications of Registrants principal executive and principal
financial officers required by Exchange Act Rule 13a-14(b).
    
    
    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, Lynch Corporation will furnish to
each of its shareholders a copy of any such Exhibit. Requests should be addressed to the Office of
the Secretary, Lynch Corporation, 140 Greenwich Avenue, 4th Floor, Greenwich CT 06830. 25