##### Table of Contents



SECURITIES & EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q (Mark One) [X]
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2004 or [   ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
 For the transition period
from   
    to Commission File No. 1-106 LYNCH CORPORATION 
  Indiana
    
    38-1799862(State or other jurisdiction of
incorporation or organization)
    
    I.R.S. Employer
Identification No.)
 50 Kennedy Plaza, Suite 1250, Providence, Rhode Island
    
    02903(Address of principal executive offices)
    
    (Zip Code)
 (401) 453-2007 
  Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X]   No
[   ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [   ]   No [X] 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 August 1, 2004Common Stock, $0.01 par value
    
    
    1,495,483
 1




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INDEX LYNCH CORPORATION AND SUBSIDIARIES  
 PART I.
    
    FINANCIAL INFORMATIONItem 1.
     Financial Statements (Unaudited)Condensed Consolidated Balance Sheets:
-         June 30, 2004
-         December 31, 2003Condensed Consolidated Statements of Operations:
-         Three months ended June 30, 2004 and 2003
-         Six months ended June 30, 2004 and 2003Condensed Consolidated Statements of Cash Flows:
-         Six months ended June 30, 2004 and 2003Notes 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 4.
     Submission of Matters to a Vote of Security HoldersItem 6.
     Exhibits and Reports on Form 8-KSIGNATURESEX-10.(NN) THIRD AMEND. TO RESTATED LOAN AND SECURITY AGREEMENTEX-10.(OO) SECOND AMEND. TO AMENDED & RESTATED CREDIT AGREEMENTEX-10.(PP) TERM LOAN NOTEEX-31 SECTION 302 CERTIFICATIONS OF CEO & CFOEX-32 SECTION 906 CERTIFICATIONS OF CEO & CFO
  2




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##### Table of Contents



Part 1 - FINANCIAL INFORMATION  
 Item 1 - Financial Statements LYNCH CORPORATION AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED
 June 30,
    
    December 31,2004
    
    2003(unaudited)
    
    (A)ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    3,055
    
    
    $
    3,981Restricted cash (Note D)
    
    
    1,125
    
    
    
    1,125Investments  Marketable Securities (Note E)
    
    
    3,376
    
    
    
    2,311Trade accounts receivables, less allowances of $96 and $91, respectively
    
    
    3,622
    
    
    
    3,366Unbilled accounts receivable
    
    
    81
    
    
    
    2,431Inventories (Note F)
    
    
    6,015
    
    
    
    4,911Deferred income taxes
    
    
    57
    
    
    
    57Prepaid expenses
    
    
    452
    
    
    
    456TOTAL CURRENT ASSETS
    
    
    17,783
    
    
    
    18,638PROPERTY, PLANT AND EQUIPMENTLand
    
    
    291
    
    
    
    291Buildings and improvements
    
    
    4,198
    
    
    
    4,198Machinery and equipment
    
    
    11,562
    
    
    
    11,37716,051
    
    
    
    15,866Less: accumulated depreciation
    
    
    (12,117
    )
    
    
    (11,689
    )3,934
    
    
    
    4,177OTHER ASSETS
    
    
    81
    
    
    
    204TOTAL ASSETS
    
    $
    21,798
    
    
    $
    23,019LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Notes payable to banks (Note G)
    
    $
    1,879
    
    
    $
    1,976Trade accounts payable
    
    
    2,290
    
    
    
    2,054Accrued warranty expense (Note H)
    
    
    424
    
    
    
    585Accrued compensation expense
    
    
    766
    
    
    
    1,219Accrued income taxes
    
    
    862
    
    
    
    716Accrued professional fees
    
    
    225
    
    
    
    273Accrued commissions
    
    
    203
    
    
    
    429Margin liability on marketable securities
    
    
    1,535
    
    
    
    1,033Other accrued expenses (Note L)
    
    
    1,065
    
    
    
    664Customer advances
    
    
    836
    
    
    
    1,206Current maturities of long-term debt (Note G)
    
    
    331
    
    
    
    998TOTAL CURRENT LIABILITIES
    
    
    10,416
    
    
    
    11,153LONG-TERM DEBT (Note G)
    
    
    1,438
    
    
    
    833TOTAL LIABILITIES
    
    
    11,854
    
    
    
    11,986COMMITMENTS AND CONTINGENCIES (Note L)SHAREHOLDERS EQUITYCommon stock, $0.01 par value  10,000,000 shares authorized; 1,513,191 shares issued;
1,495,483 shares outstanding at June 30, 2004, 1,497,883 shares outstanding at
December 31,2003.
    
    
    15
    
    
    
    15Additional paid-in capital
    
    
    15,645
    
    
    
    15,645Accumulated deficit
    
    
    (5,828
    )
    
    
    (4,460
    )Accumulated other comprehensive Income (Note J)
    
    
    602
    
    
    
    291Treasury stock, at cost, of 17,708 shares at June 30, 2004, and 15,308 shares at
December 31, 2003
    
    
    (490
    )
    
    
    (458
    )TOTAL SHAREHOLDERS EQUITY
    
    
    9,944
    
    
    
    11,033TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    21,798
    
    
    $
    23,019
  (A)
    
    The Balance Sheet at December 31, 2003 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 3




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##### Table of Contents



PART I  FINANCIAL INFORMATION Item 1 - Financial Statements LYNCH CORPORATION AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS  UNAUDITED
(In Thousands, except share amounts)
 Three Months Ended
    
    Six Months EndedJune 30
    
    June 302004
    
    2003
    
    2004
    
    2003SALES AND REVENUES
    
    $
    6,736
    
    
    $
    6,714
    
    
    $
    13,548
    
    
    $
    11,458Cost and expenses:Manufacturing cost of sales
    
    
    4,750
    
    
    
    4,982
    
    
    
    10,050
    
    
    
    8,933Selling and administrative
    
    
    2,028
    
    
    
    2,010
    
    
    
    4,303
    
    
    
    3,843Lawsuit settlement provision (Note L)
    
    
    425
    
    
    
    
    
    
    
    425
    
    
    
    OPERATING LOSS
    
    
    (467
    )
    
    
    (278
    )
    
    
    (1,230
    )
    
    
    (1,318
    )Other income (expense):Investment Income
    
    
    4
    
    
    
    153
    
    
    
    8
    
    
    
    168Interest expense
    
    
    (62
    )
    
    
    (93
    )
    
    
    (113
    )
    
    
    (162
    )Other income (expense)
    
    
    (5
    )
    
    
    2
    
    
    
    22
    
    
    
    9(63
    )
    
    
    62
    
    
    
    (83
    )
    
    
    15LOSS BEFORE INCOME TAXES
    
    
    (530
    )
    
    
    (216
    )
    
    
    (1,313
    )
    
    
    (1,303
    )(Provision for) benefit from income taxes
    
    
    (30
    )
    
    
    43
    
    
    
    (55
    )
    
    
    392NET LOSS
    
    $
    (560
    )
    
    $
    (173
    )
    
    $
    (1,368
    )
    
    $
    (911
    )Weighted average shares outstanding
    
    
    1,495,500
    
    
    
    1,497,900
    
    
    
    1,496,300
    
    
    
    1,497,900BASIC AND DILUTED LOSS PER SHARE:
    
    $
    (0.37
    )
    
    $
    (0.12
    )
    
    $
    (0.91
    )
    
    $
    (0.61
    )
 See accompanying notes 4




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##### Table of Contents



PART I  FINANCIAL INFORMATION ITEM 1  Financial Statements LYNCH CORPORATION AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS - UNAUDITED
(In Thousands)
 Six Months EndedJune 30,2004
    
    2003OPERATING ACTIVITIESNet loss
    

    $
    (1,368
    )
    
    $
    (911
    )Adjustments to reconcile net loss to net cash provided by (used in) operating activities:Depreciation
    
    
    428
    
    
    
    483Amortization of definite-lived intangible assets
    
    
    123
    
    
    
    134Lawsuit settlement provision (Note L)
    
    
    425
    
    
    
    Gain realized on sale of marketable securities
    
    
    
    
    
    
    (134
    )Changes in operating assets and liabilities:Receivables
    
    
    2,094
    
    
    
    (716
    )Inventories
    
    
    (1,104
    )
    
    
    (1,131
    )Accounts payable and accrued liabilities
    
    
    (98
    )
    
    
    1,363Other assets/liabilities
    
    
    3
    
    
    
    (109
    )Net cash provided by (used in) operating activities
    
    
    503
    
    
    
    (1,021
    )INVESTING ACTIVITIESCapital expenditures
    
    
    (184
    )
    
    
    (108
    )Proceeds from sale of marketable securities
    
    
    
    
    
    
    252Purchase of marketable securities
    
    
    (754
    )
    
    
    (113
    )Payment on margin liability on marketable securities
    
    
    (300
    )
    
    
    (143
    )Cash (used in) investing activities
    
    
    (1,238
    )
    
    
    (112
    )FINANCING ACTIVITIESNet borrowings (repayments) of notes payable
    
    
    (97
    )
    
    
    377Repayment of long-term debt
    
    
    (62
    )
    
    
    (109
    )Proceeds from long-term debt
    
    
    
    
    
    
    296Purchase of treasury stock
    
    
    (32
    )
    
    
    Net cash (used in) provided by financing activities
    
    
    (191
    )
    
    
    564Increase (decrease) in cash and cash equivalents
    
    
    (926
    )
    
    
    (569
    )Cash and cash equivalents at beginning of period
    
    
    3,981
    
    
    
    5,986Cash and cash equivalents at end of period
    
    $
    3,055
    
    
    $
    5,417
 See accompanying notes 5




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS A. Subsidiaries of the Registrant Lynch Corporation dissolved its 100 percent owned, inactive subsidiaries, Lynch
International Holding Corporation and Lynch-AMAV in Delaware, their State of
incorporation on June 30, 2004. As of June 30, 2004, 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
    %
 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
and six month period ended June 30, 2004 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2004. The balance sheet at December 31, 2003 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, 2003. C. Adoption of Accounting Pronouncements In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an Interpretation of ARB No 51 (FIN 46). FIN 46
clarifies the application of Accounting Research Bulletin No. 51,
Consolidated Financial Statements, to certain entities in which equity
investors do not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other
parties. The consolidation requirements of FIN 46, as revised, are required
for periods ending after December 15, 2003 for interests in structures that are
commonly referred to as special-purpose entities, while the application of this
Interpretation for all other types of variable interest entities is required
for periods ended March 15, 2004. The Company does not have any interests in
variable interest entities. D. Restricted Cash At both June 30, 2004 and December 31, 2003, the Company had $1.1 million
of Restricted Cash that secures a Letter of Credit issued by Fleet Bank to the
First National Bank of Omaha as collateral for its M-tron subsidiarys loans. 6




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E. 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
    
    ValueJune 30, 2004
    
    $
    2,774
    
    
    $
    602
    
    
    
    
    
    
    $
    3,376December 31, 2003
    
    $
    2,020
    
    
    $
    291
    
    
    
    
    
    
    $
    2,311
 The Company has a margin liability against this investment of $1,535,000
at June 30, 2004 and of $1,033,000 at December 31, 2003 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. F. Inventories Inventories are stated at the lower of cost or market value. At June 30,
2004, inventories were valued by two methods: last-in, first-out (LIFO) 74%,
and first-in, first-out (FIFO) 26%. At December 31, 2003, inventories were
valued by the same two methods: LIFO  73%, and FIFO - 27%. June 30,
    
    December 31,2004
    
    2003(In Thousands)Raw materials
    
    $
    1,605
    
    
    $
    1,394Work in process
    
    
    2,066
    
    
    
    1,641Finished goods
    
    
    2,344
    
    
    
    1,876Total Inventories
    
    $
    6,015
    
    
    $
    4,911
 Current costs exceed LIFO value of inventories by $1,031,000 and $930,000
at June 30, 2004 and December 31, 2003 respectively. 7




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G. Indebtedness On a consolidated basis, at June 30, 2004, Lynch maintains short-term
credit facilities totaling $10.0 million, of which $3.6 million was available
for future borrowings, including up to $3.6 million for working capital and/or
up to $2.4 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. Both M-tron and Lynch Systems renewed the credit agreements that
expired on April 30, 2004 and May 30, 2004 respectively with the incumbent
lenders for another year. Lynch Systems, Inc. and M-tron Industries, Inc. maintain their own credit
facilities. The Lynch Systems facilities includes an unsecured parent Company
guarantee. M-trons revolving credit agreement is supported by a $1.0 million
Letter of Credit that is secured by a $1.1 million deposit in a Fleet Bank
Treasury Fixed Income Fund (see Note D  Restricted Cash). 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. Notes payable to banks and long-term debt consists of: June 30,
    
    December 31,2004
    
    2003(In Thousands)Notes payable:M-tron bank revolving loan at variable interest rates (4.5% at June 30, 2004), due May 2005
    
    $
    1,879
    
    
    $
    1,976Lynch Systems bank revolving loan at variable interest rates, due June, 2005
    
    
    
    
    
    
    $
    1,879
    
    
    $
    1,976Long-term debt:M-tron commercial bank term loan at variable interest rates (4.5% at June 30, 2004), due
May, 2007
    
    $
    800
    
    
    $
    829Yankton Area Progressive Growth loan at 0.0% interest, due April 2005
    
    
    150
    
    
    
    150South Dakota
Board of Economic Development at a fixed rate of 3%, due
December  , 2007
    
    
    279
    
    
    
    285Yankton Areawide Business Council loan at a fixed interest rate of 5.5%, due November 2007
    
    
    87
    
    
    
    90Lynch Systems term loan at a fixed interest rate of 5.5%, due August 2013
    
    
    453
    
    
    
    4771,769
    
    
    
    1,831Current maturities
    
    
    (331
    )
    
    
    (998
    )$
    1,438
    
    
    $
    833
 H. 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
June 30, 2004 and December 31, 2003, unbilled accounts receivable were $0.1
million and $2.4 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. 8




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##### Table of Contents



Balance, December 31, 2003
    
    $
    585Warranties issued during the period
    
    
    162Settlements made during the period
    
    
    (272
    )Changes in liabilities for pre-existing warranties during the period, including
expirations
    
    
    (51
    )Balance, June 30,
2004
    
    $
    424
 I. 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 throughout the first half of 2004. On December 10, 2001, the Board of Directors approved, subject to
shareholder approval at the May 2002 Annual Meeting, 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. Although the grants were approved by the shareholders on May 2, 2002,
the shares are not considered issued until exercised or in the money, neither
event having transpired to-date. 220,000 of these options are fully vested,
with the remaining options vesting quarterly over the next two quarters. 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 Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net loss as reported
    
    $
    (560
    )
    
    $
    (173
    )
    
    $
    (1,368
    )
    
    $
    (911
    )Deduct: Total stock based
employee compensation expense
determined under fair value based
method for all awards, net of
related tax
effect
    
    
    (38
    )
    
    
    (38
    )
    
    
    (77
    )
    
    
    (77
    )Pro forma net loss
    
    $
    (598
    )
    
    $
    (211
    )
    
    $
    (1,445
    )
    
    $
    (988
    )Basic and diluted loss per share:As reported
    
    $
    (0.37
    )
    
    $
    (0.12
    )
    
    $
    (0.91
    )
    
    $
    (0.61
    )Pro forma
    
    $
    (0.40
    )
    
    $
    (0.14
    )
    
    $
    (0.97
    )
    
    $
    (0.66
    )
 The net loss as reported in each period did not include any stock-based
compensation. During the quarter, the Company paid $382,000 to settle a previously
recorded liability related to the stock appreciation rights for certain
employees at Lynch Systems. J. Accumulated Other Comprehensive Income (Loss) Total comprehensive loss was $835,000 in the three months ended June 30,
2004, as opposed to a total comprehensive loss of $140,000 in the second
quarter of 2003. Other comprehensive loss, resulting from losses 9




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on available for sale securities, included in the total comprehensive loss was
$275,000 in the second quarter of 2004 as opposed to a gain of $33,000 in the
quarter ending June 30, 2003. Total comprehensive loss was $1,057,000 and $903,000 for the six months
ended 6/30/04 and 6/30/03 respectively, including other comprehensive income of
$311,000 in the first half of 2004 and other comprehensive income of $8,000 in
the first half of 2003 resulting from gains on available for sale securities. Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net loss as reported
    
    $
    (560
    )
    
    $
    (173
    )
    
    $
    (1,368
    )
    
    $
    (911
    )Unrealized gain
(loss) on available
for sale securities
    
    
    (275
    )
    
    
    33
    
    
    
    311
    
    
    
    8Total comprehensive
loss
    
    $
    (835
    )
    
    $
    (140
    )
    
    $
    (1,057
    )
    
    $
    (903
    )
 The components of accumulated other comprehensive income (loss), net of related
tax, at June 30, 2004 and December 31, 2003, and June 30, 2003 are as follows: June 30,
    
    December 31,
    
    June 30,2004
    
    2003
    
    2003Balance beginning of period
    
    $
    291
    
    
    $
    302
    
    
    $
    302Unrealized gain (loss) on
available for-sale securities
    
    
    311
    
    
    
    (11
    )
    
    
    8Accumulated other comprehensive
income
    
    $
    602
    
    
    $
    291
    
    
    $
    310
 K. Segment Information The Company has two reportable business segments. The first segment is
Lynch Systems glass manufacturing equipment business. Frequency control
devices (quartz crystals and oscillators) manufactured and sold by M-tron is
the other segment. Except for M-trons Hong Kong subsidiary which acts as a
buying agent and sales representative, the businesses are located domestically. Operating 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. 10




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##### Table of Contents



Three Months Ended
    
    Six Months EndedJune 30,
    
    June 302004
    
    2003
    
    2004
    
    2003(In Thousands)
    
    (In Thousands)RevenuesGlass manufacturing equipment  USA
    
    $
    181
    
    
    $
    2,077
    
    
    $
    333
    
    
    $
    2,693Glass manufacturing equipment - Foreign
    
    
    970
    
    
    
    1,105
    
    
    
    3,117
    
    
    
    1,972Total Glass manufacturing equipment
    
    
    1,151
    
    
    
    3,182
    
    
    
    3,450
    
    
    
    4,665Frequency control devices  USA
    
    
    2,052
    
    
    
    1,753
    
    
    
    4,189
    
    
    
    3,267Frequency control devices - Foreign
    
    
    3,533
    
    
    
    1,779
    
    
    
    5,909
    
    
    
    3,526Total Frequency control devices
    
    
    5,585
    
    
    
    3,532
    
    
    
    10,098
    
    
    
    6,793Consolidated Total
    
    $
    6,736
    
    
    $
    6,714
    
    
    $
    13,548
    
    
    $
    11,458Operating Profit (Loss)Glass manufacturing equipment
    
    $
    (130
    )
    
    $
    146
    
    
    $
    (522
    )
    
    $
    (337
    )Frequency control devices
    
    
    407
    
    
    
    (6
    )
    
    
    469
    
    
    
    (229
    )Total manufacturing
    
    
    277
    
    
    
    140
    
    
    
    (53
    )
    
    
    (566
    )Unallocated Corporate expenses
    
    
    (744
    )
    
    
    (418
    )
    
    
    (1,177
    )
    
    
    (752
    )Consolidated Total
    
    $
    (467
    )
    
    $
    (278
    )
    
    $
    (1,230
    )
    
    $
    (1,318
    )Capital ExpendituresGlass manufacturing equipment
    
    $
    10
    
    
    $
    28
    
    
    $
    13
    
    
    $
    56Frequency control devices
    
    
    105
    
    
    
    47
    
    
    
    171
    
    
    
    52Consolidated Total
    
    $
    115
    
    
    $
    75
    
    
    $
    184
    
    
    $
    108Total AssetsGlass manufacturing equipment
    
    
    
    
    
    
    
    
    
    $
    9,902
    
    
    $
    12,481Frequency control devices
    
    
    
    
    
    
    
    
    
    
    9,018
    
    
    
    8,383General Corporate
    
    
    
    
    
    
    
    
    
    
    2,878
    
    
    
    3,416Consolidated Total
    
    
    
    
    
    
    
    
    
    $
    21,798
    
    
    $
    24,280Total operating loss of reporting segments
    
    $
    (467
    )
    
    $
    (278
    )
    
    $
    (1,230
    )
    
    $
    (1,318
    )Other profit or loss:Investment income
    
    
    4
    
    
    
    155
    
    
    
    8
    
    
    
    177Interest expense
    
    
    (62
    )
    
    
    (93
    )
    
    
    (113
    )
    
    
    (162
    )Other income (expense)
    
    
    (5
    )
    
    
    
    
    
    
    22
    
    
    
    Loss before income taxes
    
    $
    (530
    )
    
    $
    (216
    )
    
    $
    (1,313
    )
    
    $
    (1,303
    )
 11




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L. Commitments and Contingencies In the normal course of business, subsidiaries of the Registrant 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, Registrant
and/or one or more of its subsidiaries are parties to the following additional
legal proceedings: 1. 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, and PACE Local 1-1069 v. Spinnaker
Industries, Inc., Spinnaker Coating, Inc., and Spinnaker Coating-Maine, Inc.,
Cumberland County Superior Court, CV-2001-00352 On or about June 26, 2001, in anticipation of the July 15, 2001 closure of
Spinnakers Westbrook, Maine facility, Plaintiff PACE Local 1-1069 (PACE)
filed a three count complaint in Cumberland County Superior Court,
CV-2001-00352 naming the following defendants: Spinnaker Industries, Inc.,
Spinnaker Coating, Inc., and Spinnaker Coating-Maine, Inc. (collectively, the
Spinnaker Entities) and Lynch. The complaint alleged that under Maines
Severance Pay Act both the Spinnaker Entities and Lynch would be liable to pay
approximately $1,166,000 severance pay under Maines Severance Pay Act in
connection with the plant closure. The Defendants filed a notice of removal,
thereby creating United States District Court Civil Action C.V. No. 01-236. The
case was remanded to state court. The Spinnaker Entities also filed a separate
complaint challenging the constitutionality of the Maine Severance Pay Act,
United States District Court Civil Action No. 01-232 which later was dismissed
by stipulation of the Spinnaker Entities. PACE also filed three separate
Motions for Ex-Parte Attachment against the Spinnaker Entities and Lynch. PACE
filed the First Motion for Attachment with its original Complaint. PACE sought
to attach $1,166,483.44, an amount large enough to cover the claims of all
PACEs members seeking severance. The Court denied that Motion as being
premature. PACE then filed a Second Motion against the Spinnaker Entities and
Lynch for an attachment large enough to cover the claims of eight individual
employees seeking severance pay in the amount of $120,736.27. On August 20,
2001, the Court granted that Motion in the amount of $118,500. On April 4,
2002, PACE subsequently recorded this attachment through UCC-1 filings with the
Maine Secretary of State against Lynch Manufacturing and Lynch Corporation.
PACE filed a Third Motion for Ex-Parte Attachment on August 29, 2001. This
Motion sought an attachment large enough to cover the severance pay claimed by
the remaining PACE members, $1,048,003. The Court denied this Motion but
permitted PACE the opportunity to obtain an attachment after all defendants had
an opportunity to respond and after hearing. Before any further action was taken with respect to PACEs Third Motion
for Attachment, the Spinnaker Defendants filed for relief under Chapter 11 of
the Bankruptcy Code. Following a series of filings in the United States
District Court for the District of Maine and the United States Bankruptcy Court
for the District of Maine which, like United States District Court Case No.
01-236, later were dismissed by the parties with prejudice and without costs,
PACEs case continues to proceed against Lynch in Cumberland County Superior
Court in Maine on the issue of whether Lynch has liability to PACEs members
under the Maine Severance Pay Act. On September 30, 2002, PACE requested a ruling from the Superior Court on
its Third Motion for Attachment. On October 21, 2002, Lynch filed a Motion for
Summary Judgment which incorporated its prior objection to any attachment. PACE
filed an Opposition to Lynchs Motion for Summary Judgment,which included a
request for summary judgment in its favor, and a Motion for Leave to Further
Amend the Complaint on November 12, 2002. Lynch thereafter filed a Reply
Memorandum in Support of its Motion for Summary Judgment on November 26, 2002
and an opposition to PACEs Motion for Leave to Further Amend the Complaint on
December 3, 2002. On December 31, 2002, the Superior Court held a hearing on
all pending Motions. The Superior Court requested that arguments focus on
Lynchs Motion for Summary Judgment since the granting of that Motion would
render PACEs Third Motion for Attachment and Motion to Further Amend the
Complaint moot. On July 28, 2003, the Superior Court issued an Order deciding both Lynchs
and PACEs Motions for Summary Judgment. The Court denied Lynchs Motion for
Summary Judgment, finding that there remained a disputed issue of material fact
regarding one of Lynchs primary defenses. The Court granted partial summary
judgment in favor of PACE to the extent that the Court found Lynch was an
employer subject to potential liability under Maines Severance Pay Act. The
Court held, however, that PACE must still prove its entitlement to severance
pay under the Act. In a separate ruling also issued on July 28, 2003, the
Court denied PACEs Third Motion for Attachment. 12




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##### Table of Contents



On March 8, 2004, Lynch filed a Motion for Summary Judgment on the issue
of an exemption under the Maine Severance Pay Act, based upon the nexus between
the plant closure in Westbrook, Maine and the Spinnaker defendants bankruptcy
filing. PACE concurrently filed a Motion for Summary Judgment on Count II of
the complaint on March 8, 2004. During a trial management conference on March 24, 2004, the parties agreed
to submit a Stipulation of Facts to the Court in lieu of a trial on any
remaining issues in the case. The Court has not yet scheduled oral arguments
from the parties related to the pending motions for summary judgment and
related to any remaining issues in the case. At a Settlement Conference held in the Cumberland County Superior Court
(Portland, Maine), the Company offered $425,000 in full settlement of the PACE
claim. Both parties have continued negotiations that could lead to a
settlement. During the 2nd quarter of 2004, the Company has provided for this
$425,000 potential settlement. Lynch believes that, in addition to other defenses, it is not subject to
the Maine Severance Pay Act, as now in effect. Management does not believe that
the resolution of this case will have a material adverse effect on the
Registrants consolidated financial condition and operations. The Company does not believe that it has any other contingent liabilities
related to Spinnaker. 2. Qui Tam Lawsuit There has been no material change in the status of this lawsuit as last
reported in Registrants Form 10-K for its fiscal year ended December 31, 2003. M. Income Taxes The Company files consolidated federal income tax returns. The Company
has a $2,375,000 net operating loss (NOL) carry-forward as of December 31,
2003. This NOL expires in 2024 if not utilized prior to that date. N. Guarantees The Company presently guarantees (unsecured) the SunTrust Bank loans of
its subsidiary, Lynch Systems, and has guaranteed a Letter of Credit issued to
the First National Bank of Omaha on behalf of its subsidiary, M-tron
Industries, Inc. (see Note G  Indebtedness Debt). As of June 30, 2004,
there were no obligations to the SunTrust Bank. As of June 30, 2004, the
$1,000,000 Letter of Credit issued by Fleet Bank to The First National Bank of
Omaha was secured by a $1,125,000 deposit in a Fleet Bank Treasury Fixed Income
Fund. (See Note D  Restricted Cash). 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 judgements
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 10K for the year ended
December 31, 2003, which includes other significant accounting policies. Accounts Receivable Accounts receivable on a consolidated basis consist principally of amounts
due from both domestic and foreign customers. Credit is extended based on an
evaluation of the customers financial condition and collateral is not
generally required except at Lynch Systems. The Company considers
concentrations of credit risk to be minimal due to the Companys diverse
customer base. In relation to export sales, the Company requires letters of
credit 13




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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. 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 were to deteriorate, resulting in an
impairment of their ability to make payment, additional allowances may be
required. Our failure to estimate accurately the losses for doubtful accounts
and ensure that payments are received on a timely basis could have a material
adverse effect on our business, financial condition, and results of operations. Inventory Valuation Inventories are stated at the lower of cost or market value. Inventories
valued using the last-in, first-out (LIFO) method comprised approximately 74%,
73% and 63% of consolidated inventories at June 30, 2004, December 31, 2003 and
2002, 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 June 30,
2004, and December 31, 2003, unbilled accounts receivable were $0.1 and $2.4
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
probably 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. 14




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##### Table of Contents



Balance, December 31, 2003
    
    $
    585Warranties issued during the period
    
    
    162Settlements made during the period
    
    
    (272
    )Changes in liabilities for pre-existing warranties during the period, including expirations
    
    
    (51
    )Balance, June 30, 2004
    
    $
    424
 Results of Operations Second Quarter 2004 and Six Months 2004 Compared to 2003 Sales and Revenues/Gross Margin Revenues for the second quarter of 2004 of $6.7 million were equal to
second quarter 2003 revenues. Improvements in M-trons sales were offset by
reduced sales at Lynch Systems that was caused by Lynch Systems low backlog at
December 31, 2003 and the timing of deliveries for orders booked by Lynch
Systems in April of 2004 that combined to depress Systems second quarter and
first half 2004 revenue. Six months 2004 sales of $13.5 million were $2.1 million greater than the
$11.4 million revenue recorded in the first six months of 2003 due to the low
opening backlog and the delivery schedules for glass press machines that
depressed Lynch Systems first half 2004 sales by $1.2 million that was
overcome by improvements in the telecommunications market that resulted in $3.3
million higher sales at M-tron. Second quarter 2004 gross margin as a percent of sales was 29.5% or 3.7
points better than the 25.8% gross margin achieved in the second quarter of
2003 due to mainly (a) the 58% volume increase at M-tron, (b) additional
absorption of fixed manufacturing costs at M-tron, and (c) efficiently
producing Champion products that had caused unfavorable variances in the prior
year. Six month 2004 gross margin as a percent of revenues of 25.8% was 3.8%
above the first half of 2003 due mainly to the higher level of sales at M-tron. Revenues at M-tron increased by $2.1 million, or 58.1%, to $5.6 million
for the second quarter of 2004 and by $3.3 million, or 48.7%, to $10.1 million
for the six month period ending June 2004 due primarily (a) a stronger general
economy, (b) improvements in the infrastructure segment of the
telecommunications market; and (c) landing new customers. Lynch Systems second quarter 2004 revenue of $1.2 million was $2.0
million, or 63.8%, below the same period of 2003. Lynch Systems revenues for
the first six months of 2004 declined by $1.2 million from the corresponding
2003 period to $3.5 million due mainly to depressed bookings for glass press
machines throughout the second half of 2003. However, order backlog of $8.8
million at June 30, 2004 represented an improvement of $6.0 million since
December 31, 2003. The Company expects to recognize half of the $6.6 million
tableware order that was booked on April 27, 2004 in fiscal 2004, the gross
margin on this contract may be less than historical rates. M-trons gross margin as a percentage of net sales for the second quarter
of 2004 improved over the same period of 2003 by 2.1% to 26.4%. M-trons gross
margin of 25.0% for the six month period ending June 30, 2004 represented a
2.8% improvement over the 22.2% gross margin achieved in the first half of
2003. The sales improvement in the second quarter and six month period ending
June 30, 2004 of 58.1% and 48.7% respectively combined with selective price
increases and operational efficiencies caused the improved gross margin rates.
M-tron achieved an incremental gross profit rate of 30.8% in the first half of
2004. Lynch Systems gross margin as a percentage of net sales for the second
quarter of 2004 improved 17.0% to 44.4% compared to the same period of 2003.
Lynch Systems gross margin of 28.1% for the six month period ending June, 2004
was 6.3% better than the first half 2003 gross margin of 21.8 percent. These
improvements in the second quarter and in the first half of 2004 were the
result of high margin repair part sales that represented a much higher
proportion of total sales (80% in 2Q 2004 versus 25% in 2Q 2003; 49%
year-to-date versus 30% in first half 2003 at a gross margin rate of 49.6% in
the second quarter and 38.5% in the period ending June 30, 2004). 15




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##### Table of Contents



Operating Loss Operating loss for the second quarter 2004 including a $425,000 expense
provision for a potential legal settlement was $0.5 million compared to the
second quarter 2003 operating loss of $0.3 million, representing an unfavorable
variance of $0.2 million on equal revenue. Six months 2004 operating loss of $1.2 million was $0.1 million less than
the first half 2003 loss of $1.3 million because the gross margin on $2.1
million additional revenue was virtually offset by the $425,000 provision for a
potential legal settlement. For the second quarter of 2004, M-tron had an operating profit of
$407,000, an improvement of $413,000 over the $6,000 loss in the second quarter
of 2003. M-trons six month 2004 operating profit of $469,000 represented a
major improvement of $698,000 when compared to M-trons $229,000 operating loss
in the six month period ending June 30, 2003. The operating profit
improvements were due mainly to the 58.1% sales increase in the second quarter
and 48.7% six month increase mentioned above and better product mix. For the 2004 second quarter, Lynch Systems had an operating loss of
$130,000 compared to an operating profit of $146,000 in the second quarter of
2003. Lynch Systems first half 2004 operating loss of $522,000 was $185,000
unfavorable to the six month 2003 operating loss of $337,000. Although Lynch
Systems second quarter and six months 2004 gross margin rate improved by 17.0%
and 6.3% respectively, the company could not compensate for the volume decline
mentioned above and higher variable selling and engineering expenses incurred
in the first quarter of 2004. Lynchs corporate headquarters incurred unallocated expenses of $744,000
in the second quarter of 2004, bringing the six months 2004 headquarters
expense to $1,177,000. The second quarter and six month 2004 headquarters
expenses exceeded the prior year by $326,000 and $425,000 respectively due to
higher professional fees, liability insurance (D&O), directors fees, and a
$425,000 provision in second quarter 2004 for the potential settlement of the
PACE suit as previously described in Note L. Other Income (Expense), Net Second quarter and first half 2004 investment income was $149,000 and
$160,000 respectively less than 2003 due to (a) lower average cash balances,
(b) investment in non-dividend paying securities, and (c) a realized gain on
sale of marketable securities in 2Q 2003 in the amount of $134,000. Second quarter interest expense of $62,000 was less than 2003 by $31,000
due to fewer and lower Letter of Credit fees and lower average borrowing to
fund M-trons losses. Interest expense of $113,000 for the first six months of 2004 was $49,000
less than the $162,000 incurred in the first half of 2003 due to fewer Letter
of Credit fees, lower average borrowing to fund M-trons losses, and lower
interest rates. Six month 2004 other income of $22,000 was mainly the result of selling
excess equipment that had no book value for $27,000 in the first quarter. Income Taxes The Company files consolidated federal income tax returns, which includes
all subsidiaries. First half 2004 income tax includes federal, state, local and foreign
taxes. There was no state income tax benefit in first six months of 2004
because tax carry-back is not available to the Companys Georgia business.
There was no federal tax benefit in the first half of 2004 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. The Company recorded a $30,000 tax
provision in second quarter 2004 and $55,000 for the six month period ending
June 30, 2004 for taxes at the Hong Kong tax rate on M-trons foreign
subsidiaries earnings. 16




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##### Table of Contents



The six month 2003 income tax benefit included federal, as well as state,
local, and foreign taxes. The second quarter 2003 and six month 2003 net tax
benefit of $43,000 and $392,000 respectively was the result of operating losses
incurred which were expected to be realized during the remainder of 2003. Net Loss Net loss for the second quarter of 2004 was $560,000 compared to a
net loss of $173,000 in the quarter ending June 30, 2003. Six month 2004 net
loss of $1,368,000 was unfavorable to the $911,000 net loss in the first six
months of 2003 by $457,000. The $387,000 additional loss in the second
quarter is primarily due to income tax expense of $30,000 versus a $43,000 tax
benefit last year and the $425,000 legal settlement provision recorded in the
second quarter of 2004. As a result, fully diluted second quarter 2004 loss
per share was $0.37 compared to a loss of $0.12 per share in the second quarter
2003. First half 2004 fully diluted loss per share of $0.91 was $0.30 per share
worse than the $0.61 per share loss in the first half of 2003 due mainly to the
2004 sales increase of $2.1 million that resulted in additional gross profit
being more than offset by (a) the $425,000 legal settlement provision in 2004;
(b) a tax provision in 2004 of $55,000 compared to a $392,000 tax benefit in
2003; and (c) $160,000 less investment income due mainly to a realized gain on
sale of marketable securities in 2003 of $134,000. Backlog/New Orders Total backlog of manufactured products at June 30, 2004 was $12.1 million,
a $6.5 million improvement over the backlog at December 31, 2003, and $0.5
million less than the backlog at June 30, 2003. M-trons backlog improved by $0.7 million since last June and $0.5 since
December 31, 2003, due mainly to increasing demand for telecommunications
hardware. Lynch Systems backlog has improved by $6.0 million since December 31, 2003
as a result of a $6.6 million order for tableware manufacturing equipment.
First half 2004 bookings of $9.5 million were $1.8 million less than first half
2003 due to the lack of glass press machine orders in 2004. Financial Condition At June 30, 2004, the Company has current assets of $17.8 million and
current liabilities of $10.4 million. Working capital was therefore $7.4
million as compared to $7.5 million at December 31, 2003 and $8.1 million at
June 30, 2003. The ratio of current assets to current liabilities was 1.71 to
1.00 at June 30, 2004; 1.67 to 1.00 at December 31, 2003; and 1.71 to 1.00
ratio at June 30, 2003. Cash provided in operating activities was approximately $0.5 million in
the first half of 2004 compared to cash used of approximately $1.0 million in
the first half of 2003. The year over year favorable change in operating cash
flow of $1.5 million was mainly the result of $1.4 million less cash used in
working capital. Capital expenditures were $184,000 in the first half of 2004
compared to $108,000 in the period ending June 30, 2003. Total debt of $3.6 million at June 30, 2004 was $0.2 million less than the
amount outstanding at December 31, 2003 and $1.1 million less than the debt at
June 30, 2003. The year over year reduction in debt is primarily due to
M-trons improved operating results that enabled it to reduce its revolving
credit loan by $735,000 while at the same time reducing its funded debt by
$305,000. Debt outstanding at June 30, 2004 included $0.9 million of fixed
rate debt at an average interest rate of 3.9%, and $2.7 million of variable
rate debt at a June 30, 2004 average interest rate of 4.5%. 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
dividend to the parent company equal to 50% of LSs 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, LS may pay an annual management fee to the parent company in an
amount not to exceed $250,000. In addition, LS may reimburse the parent
company for expenses and taxes paid by the parent on behalf of LS. 17




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At June 30, 2004, the Companys total cash, cash equivalents and
investments in marketable securities total $7.6 million (including $1.1 million
of restricted cash). In addition, the Company had a consolidated borrowing
capacity of $3.6 million under M-trons and LSs revolving line of credit.
Therefore, gross cash and securities and availability under the revolving
credit loans total $11.2 million and exceed the combined outstanding debt and
margin liability on securities of $5.2 million by $6.0 million. On May 29, 2004, Lynch Systems renewed its SunTrust Bank loan with a new
maturity date of May 31, 2005. This long-time 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 (formerly $2 million) for domestic revolving credit within the
credit line. This loan, as well as the previous loan, includes an unsecured
parent company guarantee. At June 30, 2004, there were outstanding Letters of
Credit of $35,000 and no borrowings under the working capital line. On April 30, 2004, M-trons long-time lending bank, First National Bank of
Omaha, renewed the $3 million revolving credit loan that now matures on April
30, 2005. On May 14, 2004, M-tron 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%.
$800,000 is outstanding on the new loan as of June 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 Fleet Bank on behalf of Lynch. The Company has guaranteed a Letter of Credit issued to the First National
Bank of Omaha on behalf of its subsidiary, M-tron Industries, Inc. As of March
31, 2004, the $1,000,000 Letter of Credit issued by Fleet Bank to The First
National Bank of Omaha was secured by a $1,125,000 deposit in a Fleet Bank
Treasury Fixed Income Fund. The Companys outstanding Letter of Credit in the
amount of $1.0 million for the benefit of the bank can be reduced to $500,000
when M-tron is profitable for 5 of 6 consecutive months and the cumulative
after tax profit equals or exceeds $500,000. The remaining $500,000 Letter of
Credit will be released when the earnings parameters are met for a second time.
These thresholds were not met in 2003 or the first half of 2004 and there is
no assurance they will be met in 2004. The Company does not at present have credit facilities at the parent
company level. The Company believes that existing cash and cash equivalents,
cash generated from operations and available borrowings under its subsidiaries
lines of credit will be sufficient to meet its on-going working capital and
capital expenditure requirements for the foreseeable future. Adoption of Accounting Pronouncements In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51 (FIN 46). Fin
46 clarifies the application of Accounting Research Bulletin No. 51,
Consolidated Financial Statements, to certain entities in which equity
investors do not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other
parties. The consolidation requirements of FIN 46, as revised, are required to
be applied for periods ending after December 15, 2003 for interests in
structures that are commonly referred to as special-purpose entities, while the
application of this Interpretation for all other types of variable interest
entities is required for periods ending after March 15, 2004. The Company does
not have any interests in variable interest entities. 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 are as
follows: 18




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##### Table of Contents



Payments Due by Period
 Including Interest (in 000s)Less Than
    
    1  3
    
    3  5
    
    More ThanContractual Obligations
    
    Total
    
    1 Year
    
    Years
    
    Years
    
    5 YearsShort-term Debt
    
    $
    1,942
    
    
    $
    1,942
    
    
    
    
    
    
    
    
    
    
    
    Long-term Debt Obligations
    
    
    2,003
    
    
    
    521
    
    
    $
    1,187
    
    
    $
    125
    
    
    $
    170Capital Lease Obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating Lease Obligations
    
    
    493
    
    
    
    250
    
    
    
    243
    
    
    
    
    
    
    
    Purchase Obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other Long-term
Liabilities Reflected on
the Registrants Balance
Sheet under GAAP
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    TOTAL
    
    $
    4,438
    
    
    $
    2,713
    
    
    $
    1,430
    
    
    $
    125
    
    
    $
    170
 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 $4.2 million at June 30, 2004). 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 June 30, 2004. Since the Companys international sales are in U.S. Dollars, there is no
monetary risk. At June 30, 2004, approximately $2.7 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 2004 average interest rate under these
borrowings, it is estimated that the Companys interest expense would change by
less than $0.1 million. In the event of an adverse change in interest rates,
management would take actions to further mitigate its exposure. 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. 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. 19




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##### Table of Contents



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, whos
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  1.
    
    In re Spinnaker Coating, Inc., Debtor/PACE Local I-1069 v. Spinnaker
Coating, Inc., and Lynch Corporation, U.S. Bankruptcy Court, District of
Maine, Chapter 11, Adv. Pro. No. 02-2007; and PACE Local 1-1069 v.
Spinnaker Industries, Inc., Spinnaker Coating, Inc., and Spinnaker
Coating-Maine, Inc., Cumberland County Superior Court, CV-2001-00352: On or about June 26, 2001, in anticipation of the July 15, 2001 closure of
Spinnakers Westbrook, Maine facility, Plaintiff PACE Local 1-1069 (PACE)
filed a three count complaint in Cumberland County Superior Court,
CV-2001-00352 naming the following defendants: Spinnaker Industries, Inc.,
Spinnaker Coating, Inc., and Spinnaker Coating-Maine, Inc. (collectively, the
Spinnaker Entities) and Lynch. The complaint alleged that under Maines
Severance Pay Act both the Spinnaker Entities and Lynch would be liable to pay
approximately $1,166,000 severance pay under Maines Severance Pay Act in
connection with the plant closure. The Defendants filed a notice of removal,
thereby creating United States District Court Civil Action C.V. No. 01-236. The
case was remanded to state court. The Spinnaker Entities also filed a separate
complaint challenging the constitutionality of the Maine Severance Pay Act,
United States District Court Civil Action No. 01-232 which later was dismissed
by stipulation of the Spinnaker Entities. PACE also filed three separate
Motions for Ex-Parte Attachment against the Spinnaker Entities and Lynch. PACE
filed the First Motion for Attachment with its original Complaint. PACE sought
to attach $1,166,483.44, an amount large enough to cover the claims of all
PACEs members seeking severance. The Court denied that Motion as being
premature. PACE then filed a Second Motion against the Spinnaker Entities and
Lynch for an attachment large enough to cover the claims of eight individual
employees seeking severance pay in the amount of $120,736.27. On August 20,
2001, the Court granted that Motion in the amount of $118,500. On April 4,
2002, PACE subsequently recorded this attachment through UCC-1 filings with the
Maine Secretary of State against Lynch Manufacturing and Lynch Corporation.
PACE filed a Third Motion for Ex-Parte Attachment on August 29, 2001. This
Motion sought an attachment large enough to cover the severance pay claimed by
the 20




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##### Table of Contents



remaining PACE members, $1,048,003. The Court denied this Motion but permitted
PACE the opportunity to obtain an attachment after all defendants had an
opportunity to respond and after hearing. Before any further action was taken with respect to PACEs Third Motion
for Attachment, the Spinnaker Defendants filed for relief under Chapter 11 of
the Bankruptcy Code. Following a series of filings in the United States
District Court for the District of Maine and the United States Bankruptcy Court
for the District of Maine which, like United States District Court Case No.
01-236, later were dismissed by the parties with prejudice and without costs,
PACEs case continues to proceed against Lynch in Cumberland County Superior
Court in Maine on the issue of whether Lynch has liability to PACEs members
under the Maine Severance Pay Act. On September 30, 2002, PACE requested a ruling from the Superior Court on
its Third Motion for Attachment. On October 21, 2002, Lynch filed a Motion for
Summary Judgment which incorporated its prior objection to any attachment. PACE
filed an Opposition to Lynchs Motion for Summary Judgment,which included a
request for summary judgment in its favor, and a Motion for Leave to Further
Amend the Complaint on November 12, 2002. Lynch thereafter filed a Reply
Memorandum in Support of its Motion for Summary Judgment on November 26, 2002
and an opposition to PACEs Motion for Leave to Further Amend the Complaint on
December 3, 2002. On December 31, 2002, the Superior Court held a hearing on
all pending Motions. The Superior Court requested that arguments focus on
Lynchs Motion for Summary Judgment since the granting of that Motion would
render PACEs Third Motion for Attachment and Motion to Further Amend the
Complaint moot. On July 28, 2003, the Superior Court issued an Order deciding both Lynchs
and PACEs Motions for Summary Judgment. The Court denied Lynchs Motion for
Summary Judgment, finding that there remained a disputed issue of material fact
regarding one of Lynchs primary defenses. The Court granted partial summary
judgment in favor of PACE to the extent that the Court found Lynch was an
employer subject to potential liability under Maines Severance Pay Act. The
Court held, however, that PACE must still prove its entitlement to severance
pay under the Act. In a separate ruling also issued on July 28, 2003, the
Court denied PACEs Third Motion for Attachment. On March 8, 2004, Lynch filed a Motion for Summary Judgment on the issue
of an exemption under the Maine Severance Pay Act, based upon the nexus between
the plant closure in Westbrook, Maine and the Spinnaker defendants bankruptcy
filing. PACE concurrently filed a Motion for Summary Judgment on Count II of
the complaint on March 8, 2004. During a Trial Management Conference on March 24, 2004, the parties agreed
to submit a Stipulation of Facts to the Court in lieu of a trial on any
remaining issues in the case. The Court has not yet scheduled oral arguments
from the parties related to the pending motions for summary judgment and
related to any remaining issues in the case. At a settlement conference held in the Cumberland County Superior Court
(Portland, Maine), the Company offered $425,000 in full settlement of the PACE
claim. Both parties have continued negotiations that could lead to a
settlement. During the 2nd quarter of 2004, the Company has provided for this
$425,000 potential settlement. Lynch believes that, in addition to other defenses, it is not subject to
the Maine Severance Pay Act, as now in effect. Management does not believe that
the resolution of this case will have a material adverse effect on the
Registrants consolidated financial condition and operations. The Company does not believe that it has any other contingent liabilities
related to Spinnaker. 2. Qui Tam Lawsuit There has been no material change in the status of this lawsuit as last
reported in Registrants Form 10-K for its fiscal year ended December 31, 2002. 21




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##### Table of Contents



Item 2. Issuer Purchase of Its Equity Securities Maximum Number (orTotal Number of
    
    Approximate DollarShares Purchased as
    
    Value) of SharesPart of Publicly
    
    that May Yet BeTotal Number of
    
    Average Price Paid
    
    Announced Plans or
    
    Purchased Under thePeriod
    
    Shares Purchased
    
    per Share
    
    Programs
    
    Plans or ProgramsFebruary 4, 2004
To
February 29, 2004
    
    
    400
    
    
    $
    12.5125
    
    
    
    400
    
    
    49,600 SharesMarch 1, 2004 
March 31, 2004
    
    
    2,000
    
    
    $
    13.5000
    
    
    
    2,000
    
    
    47,600 SharesApril 1, 2004 
June 30, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    47,600 SharesTotal
    
    
    2,400
    
    
    $
    13.3770
    
    
    
    2,400
    
    
    47,600 Shares
 On February 4, 2004, Lynch announced that on January 23, 2004, the Board
of Directors authorized the repurchase of up to 50,000 shares of the Companys
outstanding common stock. The timing of the buy-back and the exact number of
shares purchased will depend on market conditions; this program does not have
an expiration date. The Company will buy back shares through both public and
private channels at prices believed to be appropriate and in the best interest
of shareholders. As of June 30, 2004, the Company has repurchased 2,400 shares in the
amount of $32,105, at an average price of $13.377 per share. 47,600 shares may
yet be purchased under this program. 
 Item 4. Submission of Matters to a Vote of Security Holders At the Annual Meeting of Stockholders of the Registrant held on May 6, 2004: The following persons were elected as Directors with the following votes: Name
    
    Votes For
    
    Votes WithheldVal Cerutti
    
    
    1,399,589
    
    
    
    5,291Mario J. Gabelli
    
    
    1,399,589
    
    
    
    5,291Avrum Gray
    
    
    1,402,289
    
    
    
    2,591Ralph R. Papitto
    
    
    1,401,637
    
    
    
    3,243Anthony R. Pustorino
    
    
    1,399,589
    
    
    
    5,291
 
 Item 6. Exhibits and Reports on Form 8-K (a)
    
    Exhibits filed herewith:10(nn)
    
    Third Amendment to Restated Loan and Security Agreement
dated April 30, 2004 between M-tron Industries, Inc. and First
National Bank of Omaha.10(oo)
    
    Second Amendment to Amended and Restated Credit Agreement
between Lynch Systems, Inc. and SunTrust Bank dated May 29,
2004.10(pp)
    
    Term Loan Note between M-tron Industries, Inc. and First
National Bank of Omaha dated May 14, 2004.31
    
    
    
    Certifications of Registrants principal
executive and principal chief financial officer required by
Exchange Act Rule 13a-14(a).32
    
    
    
    Section 1350 Certifications of Registrants
principal executive and principal financial officers required
by Exchange Act Rule 13a-14(b).
 22




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##### Table of Contents



(b)
    
    Reports on Form 8-K:1.
    
    
    
    Registrants press release announcing its results
of operations for the first quarter ending March 31, 2004 was
filed with a Form 8-K on May 13, 2004.2.
    
    
    
    Registrants press release announcing its results
of operations for the fourth quarter and year-ending December 31, 2003 was
filed with a Form 8-K on April 14, 2004.
 
 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:August 11, 2004
    
    /s/ RAYMOND H. KELLERRaymond H. KellerChief Financial Officer
 23




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##### Table of Contents



EXHIBIT INDEX ExhibitNo.
    
    Description10(nn)
    
    Third Amendment to Restated Loan and Security Agreement dated
April 30, 2004 between M-tron Industries, Inc. and First National
Bank of Omaha. 10(oo)
    
    Second Amendment to Amended and Restated Credit Agreement between
Lynch Systems, Inc. and SunTrust Bank dated May 29, 2004. 10(pp)
    
    Term Loan Note between M-tron Industries, Inc. and First National
Bank of Omaha dated May 14, 2004. 31
    
    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, 50 Kennedy Plaza, Suite 1250, Providence, RI
02903. 24