<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(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, 1995
-------------
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
---- SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from____________________________________
to________________________________
Commission File number 0-1298
-----------------------------
LUNN INDUSTRIES, INC.
---------------------
(Exact name of Registrant as specified in its charter)
Delaware 11-1581582
-------------------------------------------------------------- ----------------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer
Identification
No.)
1 Garvies Point Road, Glen Cove, New York 11542-2828
----------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 671-9000
--------------
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 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 [ ]
The aggregate number of shares of Common Stock outstanding as of July 19, 1995
was 7,409,908.
Transitional Small Business Disclosure Format (check one)
Yes ________ No X
PAGE 1 OF 13 PAGES.
INDEX OF EXHIBITS AT PAGE 13
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LUNN INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEET
JUNE 30, 1995
-----------------------------------------------------------------------
ASSETS
-----------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30,
1995
(UNAUDITED)
-----------------------------------------------------------------------
<S> <C>
CURRENT ASSETS
Accounts Receivable - trade, less allowance for
doubtful accounts of $134,341 2,400,156
Inventories 3,575,170
Prepaid expense and other current assets 225,661
-------------
TOTAL CURRENT ASSETS 6,200,987
-------------
PROPERTY, PLANT AND EQUIPMENT - NET 7,692,157
-------------
Other Assets:
Security deposits and other assets 113,901
Intangible assets - net 573,389
-------------
Total other assets 687,290
TOTAL ASSETS $14,580,434
-------------
-------------
</TABLE>
2
<PAGE>
LUNN INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEET
JUNE 30, 1995
-----------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
-----------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30,
1995
(UNAUDITED)
-----------------------------------------------------------------------
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdraft $36,803
Accounts payable - trade 1,624,625
Accrued liabilities 1,101,354
Accrued income taxes 92,341
Notes payable 3,470,743
Capital lease obligations 15,009
-------------
TOTAL CURRENT LIABILITIES 6,340,875
-------------
LONG-TERM LIABILITIES:
Notes Payable 811,300
TOTAL LONG TERM LIABILITIES 811,300
-------------
TOTAL LIABILITIES 7,152,175
-------------
STOCKHOLDERS' EQUITY:
Common stock: par value, $.01 per share, 74,100
authorized 20,000,000 shares; outstanding
7,410,058
Additional paid-in capital 11,390,324
Accumulated deficit (4,035,828)
-------------
7,428,596
Less treasury stock (150 shares) (337)
-------------
TOTAL STOCKHOLDERS' EQUITY 7,428,259
-------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $14,580,434
-------------
-------------
</TABLE>
3
<PAGE>
LUNN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1995 AND 1994
UNAUDITED
<TABLE>
<CAPTION>
------------------------------ ----------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ------------------------------
1995 1994 1995 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET SALES $3,806,937 $4,295,375 $7,144,709 $8,669,493
Cost of Sales 2,990,820 3,372,864 5,664,034 6,884,219
----------- ----------- ----------- -----------
Gross Profit (Loss) 816,117 922,511 1,480,675 1,785,274
Selling, General and Administrative
Expenses 538,584 761,363 1,083,915 1,503,101
----------- ----------- ----------- -----------
Operating Income 277,533 161,148 396,760 282,173
----------- ----------- ----------- -----------
Other Income (Expense)
Interest Income (Expense) (111,439) (69,979) (212,088) (142,883)
Reportable Portion of Gain on Sale of Building - 37,250 - 74,500
Other Income (Expense) 12,443 10,483 20,589 19,542
----------- ----------- ----------- -----------
(98,996) (22,246) (191,499) (48,841)
----------- ----------- ----------- -----------
Income (loss) from Continuing Operations Before
Income Taxes, Discontinued Operations, Extraordinary
Items and Change on Accounting Principal 178,537 138,902 205,261 233,332
Provision for Income Tax 0 5,084 0 24,231
Income (loss) from Continuing Operations Before
Discontinued Operations, Extraordinary Items and
Change in Accounting Principal 178,537 133,818 205,261 209,101
Discontinued Operations:
Loss from Operations (net of Applicable Income 0 0 0 88,937
Tax Benefit of $60,788 for the Period Ended
June 30, 1994).
Gain on Disposal, Including Income Tax 0 0 0 107,272
Provision of $73,326
NET INCOME $178,537 $133,818 $205,261 $227,436
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted Average Number of Shares 7,357,519 7,057,927 7,251,927 6,257,927
Income Per Share
Ordinary $0.02 $0.01 $0.03 $0.03
Extraordinary - - -
----------- ----------- ----------- -----------
$0.02 $0.01 $0.03 $0.03
Dividends None None None None
</TABLE>
4
<PAGE>
LUNN INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $205,261 $239,974
Adjustments to Reconcile Net Income
Provided by Operating Activities:
Depreciation and Amortization 504,696 487,114
Deferred Income Tax 17,979
Sale of Building deferred gain (74,500)
Changes in Assets & Liabilities:
Accounts Receivable (Increase) (897,621) (314,575)
Inventory (Increase) (356,158) (758,570)
Prepaid Exp & Other Assets (Increase) (69,312) (141,908)
Insurance Proceeds Receivable 570,829
Accounts Payable - Increase (Decrease) 459,570 (357,981)
Accrued Liabilities Increase (Decrease) 298,449 35,819
Accrued Income Taxes 0 9,502
Other Current Liabilities 0 0
Customer Advances Increase (Decrease) 18,000 (37,296)
----------- -----------
162,885 (323,613)
CASH FLOW FROM INVESTING ACTIVITIES
Sale of Property, Plant & Equipment (Purchase) (842,816) (182,708)
Intangibles (528,515) 0
Construction in Progress 0 (100,061)
----------- -----------
(1,371,331) (282,769)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of Notes (77,450) 0
Reduction in Other Long-Term Debt 6,180
Long Term Portion Shawmut Term (24,019) (600,000)
New Borrowing 1,175,000 0
Sale of Capital Stock 127,080 1,288,664
Payment Capital Lease Obligations (1,223) 0
----------- -----------
1,199,388 694,844
Net Increase (Decrease) in Cash (9,058) 88,462
Cash Balance - Beginning (27,745) $7,810
----------- -----------
Cash Balance - Ending ($36,803) $96,272
----------- -----------
----------- -----------
</TABLE>
5
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LUNN INDUSTRIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED
CONDENSED STATEMENTS
NOTE 1 - CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The information contained in the condensed consolidated financial
statements for the three and six months ended June 30, 1995 is unaudited, but
includes all adjustments, consisting of normal recurring adjustments, which the
Company considers necessary for a fair presentation of the financial position
and the results of operations for these periods.
The financial statements and notes are presented as permitted by Form 10-
QSB, and do not contain certain information included in the Company's annual
statements and notes. Those financial statements should be read in conjunction
with the Company's annual financial statement as reported in its most recent
Annual Report on Form 10-KSB.
The unaudited results of operations for the period ended June 30, 1995 are
not necessarily indicative of the results to be expected for the full year.
NOTE 2 - CHANGE OF ASSETS
On January 17, 1995, the Company purchased certain assets from the Limco
Aluminum Bonding Company for $137,500 in cash and promissory notes of $705,000
due in 48 equal monthly payments with interest at prime rate. Assets acquired
consisted of inventory ($75,161), machinery and equipment ($517,339), trademarks
($100,000) and covenant not to compete ($150,000).
THE REMAINDER OF THIS PAGE WAS INTENTIONALLY LEFT BLANK.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
During the second quarter ended June 30, 1995, the Company continued to
implement its operating plan to rebuild the core business (composites and
aluminum honeycomb), add new products and businesses (bonded assemblies),
improve the financial base and stability of the Company, increase profitability
and cash flow, and steadily decrease the Company's historical dependence on
military sales. A relative measure of the success of the plan, thus far, is
demonstrated in the improvement in operating income and income before taxes for
the second quarter and six month periods ended June 30, 1995, compared to
similar periods in 1994. This improvement occurred despite the fact that net
sales in 1995 actually declined for the three and six months period ended June
30, 1995.
Operating income for the quarter ended June 30, 1995 increased $116
Thousand (72.2%) as compared to the second quarter of 1994, and operating income
increased $115 Thousand (40.6%) during the six-month period ended June 30, 1995,
as compared to the same period in 1994. The improved income for 1995, reflects
structural changes in the Company during 1994 and 1995 to reduce manufacturing
facilities from six to three, reduce overall manpower from approximately 240 to
approximately 160, relocate the Wyandanch, NY. and Newtown, CT. composite
business facilities to improved modern facilities in Glen Cove, NY., acquire the
assets of a bonded assemblies business in Glen Cove, NY., and reorganize and
streamline manufacturing operations in the Company's aluminum honeycomb business
located in Belcamp and Jessup, Maryland.
SG&A expenses for the second quarter 1995 decreased $223 Thousand (29.3%)
compared to the same period in 1994. Of this decrease, approximately $167
Thousand was attributable to the composite/bonded segment and $56 Thousand
related to the aluminum honeycomb segment.
Net sales for the second quarter ended June 30, 1995 were $3.8 Million as
compared to $4.3 Million for the second quarter 1994, a decline of $488 Thousand
(11.4%). Net sales for the first six months of 1995 were $7.1 Million as
compared to $8.7 Million for 1994, a decline of $1.6 Million (17.6%). The
decline in 1995 net sales was due entirely to reduced military composite sales.
Second quarter and six months 1995 military composite sales were $702 Thousand
and $1.1 Million, respectively, compared to $1.9 Million and $4.2 Million,
respectively, for comparable periods during 1994. These declines resulted
principally from continued reduction of the defense budget and slowdown in
military procurement, as well as delayed releases of delivery orders on the mast
fairing refurbishment contract received in December 1994. Additionally, first
quarter 1995 composite production was impacted by closing and relocating the
Company's Newtown, CT. and Wyandanch, NY. composite facilities to Glen Cove, NY.
during December 1994 and January 1995. An added factor contributing to reduced
1995 composite sales was
7
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the Company's completion of the approximate $2 Million U.S. Navy Aegis radar
reflector program during December 1994 associated with closing down the Newtown,
CT. facilities. The Company was unsuccessful in its bid to participate in a
greatly scaled back follow-on program for redesigned reflectors. Note: second
quarter 1994 Aegis reflectors sales were approximately $340 Thousand.
The decline in military composite sales was offset by increased aluminum
honeycomb sales and the addition of substantial bonded assembly sales. During
the second quarter 1995 aluminum honeycomb net sales were $2.6 Million compared
to $2.4 Million in the second quarter 1994, and six month 1995 honeycomb sales
were $5.2 Million compared to $4.5 Million during the similar period in 1994.
Bonded assembly sales for the second quarter 1995 were $518 Thousand and six
month 1995 sales were $900 Thousand. There were no comparable bonded assembly
sales during 1994. Increased honeycomb sales resulted from a number of factors
including: an improving domestic commercial aircraft market, greatly improved
Alcore customer relations in all market sectors, greater stability and
dependability in Alcore manufacturing operations, and increases in both new
customers and new markets including construction and transportation (rail car
and luxury ship building), as well as new aerospace customers.
Bonded assembly sales at the time the Company completed the acquisition of
the Limco bonding assets were approximately $60 Thousand per month. Since
January 1995 that rate has improved to approximately $130 thousand per month
during the first quarter of 1995, and subsequently to approximately $170
thousand per month during the second quarter of 1995. Bonded assemblies are
sold essentially to the same aerospace customer base as Alcore aluminum
honeycomb products. Alcore honeycomb core materials are used extensively in the
bonded assembly products. Management anticipates additional synergy may be
available to further grow bonded assemblies in both aerospace and non-aerospace
market applications. Additionally, management anticipates certain aerospace
applications may become more readily available for composite structures in the
future based on improved facilities and synergism with bonded assemblies and
aluminum honeycomb.
Net income decreased $22 Thousand (9.8%) for the six months ended June 30,
1995 compared to the same period 1994. Interest expenses increased $69
Thousand due to the rise in interest rates and additional borrowing used for the
acquisition of the assets of the bonded assemblies business in January 1995.
Also, a deferred gain of $75 Thousand, recognized in 1994, on the previous sale
of the Wyandanch building was eliminated and did not reoccur in 1995. Net
income increased $45 Thousand (33.4%) for the quarter ended June 30, 1995, as
compared to 1994.
Total backlog of orders as of June 30, 1995 was approximately $11.6
Million. This compared to approximately $6.5 Million as of June 30, 1994. The
backlog has improved in all areas of the business, and the Company has
successfully maintained a monthly
8
<PAGE>
bookings rate for new orders greater than the monthly shipment rate for seven
out of the most recent eight months. The breakout of current backlog for the
primary business segments is as listed below:
<TABLE>
<CAPTION>
<S> <C>
Composites and bonded assemblies $ 6.0 Million
Aluminum Honeycomb $ 5.6 Million
--------------
Total Company Backlog $11.6 Million
</TABLE>
FINANCIAL CONDITION
Cash generated from operating activities during the first six months of
1995 was $710 Thousand consisting primarily of net income of $205 Thousand plus
non-cash charges for depreciation and amortization of $505 Thousand. This
compared to $671 Thousand generated during the corresponding period of 1994.
Significant uses of cash included increases in accounts receivable of $898
Thousand and inventory of $356 Thousand related to acquisition of the assets of
the bonded assemblies business during the first quarter, increased shipment
during both the first and second quarters, and the requirement to rebuild
inventory to support resumption of composite manufacturing and increase bonded
assemblies shipments in the Glen Cove facility during the first half of 1995.
Cash provided by operations included increases of $758 Thousand in accounts
payable and accrued liabilities.
Cash utilized in investing activities was primarily for the bonded
assemblies acquisition during the first quarter including $517 Thousand for
fixed assets, intangibles of $529 Thousand, and $326 Thousand leasehold
improvements at the Glen Cove, NY. facility.
Cash provided by financing activities during the first three months of 1995
was $1.2 Million compared to $695 Thousand during the same period in 1994. The
new borrowing of $1.2 Million consisted first of two promissory notes, $609
Thousand and $96 Thousand, respectively, both payable in 48 equal monthly
payments, plus interest at prime. Second, the Company borrowed an additional
$360 Thousand payable to Cook & Cie, S.A., payable in January 1997 plus interest
at 10% per annum payable in common stock. The proceeds from this note were
utilized to fund the relocation of the Company's composite business from its
Newtown, CT. and Wyandanch, NY. facilities to Glen Cove, NY, as well as the
acquisition of the bonding assemblies business assets from Limco Manufacturing.
Third, the Company borrowed $100 Thousand from J. E. Sheehan & Company, Inc., to
be repaid in July 1995 with interest at 10% per annum plus a fee of $5 Thousand
to support the Company's short term working capital needs. This loan has
subsequently been
9
<PAGE>
renegotiated and recapitalized at $110 Thousand payable on January 2, 1996 with
interest at 10% plus an additional fee of $5 Thousand.
Effective December 30, 1994, the bank modified and extended the Company's
original loan agreement. The new terms of the loan agreement included the
cancellation of the Forbearance Agreement, extended the maturity date to March
31, 1996, amortized the term loan principal payments over four years, reduced
interest rates on the term loan and the revolving loan to prime plus 1.25% and
1.75%, respectively, established new covenants and structured a series of
progressively increasing fees, eventually totaling $250 Thousand to be earned,
but not paid until the maturity or early repayment of the loan. The exact fee
amount is dependent on whether the loan is prepaid, prior to, or at maturity.
On July 12, 1995, the Company sold undeveloped land in East Setauket, NY.
for $174 Thousand, net of real estate sales agent commission. Approximately
$134 Thousand of proceeds was used to pay principal and interest to Shawmut Bank
through May 1995. The balance was used for working capital.
Based on 1994 year end financial results and the extensive one-time non-
operating non-recurring adjustments to the income statement and balance sheet,
the Company is in technical default on certain of the covenants of its modified
and extended loan agreement with its bank. The Company is currently holding
conversations with the bank to resolve outstanding issues and develop a going
forward plan.
Additionally, the Company has entered into an agreement with a financial
consultant to explore additional sources of equity and debt financing to
support the Company's short term need for capital to finance sales growth
related to the improved backlog and perhaps eventually replace the existing
credit facility. The Company is also continuing its program to identify and
contact possible merger candidates as a means to increase the influence of the
Company in specific markets, improve the working capital of the Company and add
additional products and technology to improve competitiveness of the Company on
a worldwide basis.
10
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In June 1995, the Company was served with a complaint filed in U.S.
District Court (Connecticut, District) by Diana Pisani Romaniello
("Romaniello"), individually, and on behalf of the United States Government.
Norfield Corporation ("Norfield"), formerly a wholly subsidiary of the Company,
was also named as a defendant in the suit. This action was brought under the
False Claims Act (the "Act") alleging that Norfield had falsified records in
order to receive payments under a sub-contract with a prime contractor for the
construction of radar reflector equipment for the U.S. Department of Defense.
The falsification of records is allegedly to have taken place in the last
half of 1991 and the first half of 1992.
The complaint alleges that among other claims, the defendant Norfield
terminated Romaniello to silence her objection to the falsification of records.
The Company had acquired ownership of Norfield several days prior to the
termination of Romaniello and had previously sub-contracted work to Norfield for
the radar equipment for the U.S. Department of Defense. This association with
Norfield caused Romaniello to name the Company in the suit.
The plaintiff is seeking: (a) Punitive damages equal two times Romaniello's
back pay; (b) Damages equal to three times the damages the U.S. Government has
sustained; (c) A civil penalty of $5 to $10 Thousand for each violation of the
Act; (d) Between 15 and 30 percent of the damages and fines assessed against the
defendants be awarded to Romaniello. The Company believes that the plaintiff's
claim is without merit, and intends to vigorously defending this suit.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
3.1 Certificate of Incorporation - incorporated by
reference to the Registrant's Form 10-K for
the year ending December 31, 1992.
3.2 By-Laws - incorporated by reference to the
Registrant's Form 10-K for the year ending
December 31, 1991
(B) REPORTS ON FORM 8-K.
None
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned duly authorized.
LUNN INDUSTRIES, INC.
Dated: August 16, 1995 By: /s/ Lawrence Schwartz
----------------------------
Lawrence Schwartz
Vice President, Secretary and Treasurer
(Chief Accounting Officer)
12
<PAGE>
INDEX OF EXHIBITS
EXHIBIT DESCRIPTION PAGE
------- ----------- ----
3.1 Certificate of Incorporation - incorporated by
reference to the Registrant's Form 10-K for
the year ending December 31, 1992.
3.2 By-Laws - incorporated by reference to the
Registrant's Form 10-K for the year ending
December 31, 1991
THE REMAINDER OF THIS PAGE WAS INTENTIONALLY LEFT BLANK.
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 2,534,497
<ALLOWANCES> 134,341
<INVENTORY> 3,575,170
<CURRENT-ASSETS> 6,200,987
<PP&E> 10,783,957
<DEPRECIATION> 3,091,800
<TOTAL-ASSETS> 14,580,434
<CURRENT-LIABILITIES> 6,340,875
<BONDS> 811,300
<COMMON> 74,100
0
0
<OTHER-SE> 7,354,159
<TOTAL-LIABILITY-AND-EQUITY> 14,580,434
<SALES> 7,144,709
<TOTAL-REVENUES> 7,144,709
<CGS> 5,664,034
<TOTAL-COSTS> 6,747,949
<OTHER-EXPENSES> (20,589)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 212,088
<INCOME-PRETAX> 205,261
<INCOME-TAX> 0
<INCOME-CONTINUING> 205,261
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 205,261
<EPS-PRIMARY> .03
<EPS-DILUTED> 0
</TABLE>
