<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, 1997
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 (I.R.S. Employer
incorporation or organization) 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 August 5, 1997
was 12,762,293.
Transitional Small Business Disclosure Format (check one)
Yes / / No /X/
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LUNN INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEET
JUNE 30, 1997
ASSETS
June 30,
1997
(unaudited)
-----------
CURRENT ASSETS
Cash 11,608
Accounts receivable - trade, net of
allowance for doubtful accounts of
approximately $116,000 3,011,896
Inventories 4,639,999
Prepaid expense and other current assets 474,338
----------
TOTAL CURRENT ASSETS 8,137,841
==========
Property and equipment - net of accumulated
depreciation of $5,513,669 12,571,201
----------
Other Assets:
Security deposits and other assets 163,680
Goodwill and other intangibles, net of
accumulated amortization of $127,277 395,789
----------
Total other assets 559,469
TOTAL ASSETS 21,268,511
==========
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LUNN INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEET
JUNE 30, 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
JUNE 30,
1997
(unaudited)
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Cash overdraft 291,779
Current portion of obligations under capital lease 98,624
Accounts payable - trade 949,183
Accrued liabilities 281,063
-----------
TOTAL CURRENT LIABILITIES 1,620,649
-----------
LONG-TERM LIABILITIES:
Bond payable 2,398,844
Long-term debt 5,101,502
Obligation under capital lease, net of
current portion 242,856
-----------
TOTAL LONG TERM LIABILITIES 7,743,202
-----------
TOTAL LIABILITIES 9,363,851
-----------
STOCKHOLDERS' EQUITY:
Preferred stock $.01 par value; authorized
1,000,000 shares; no shares issued and
outstanding -
Common stock: par value $.01 per share;
authorized 30,000,000 shares; issued
and outstanding 12,814,793 128,148
Additional paid-in capital 14,458,433
Accumulated deficit (2,681,584)
-----------
11,904,997
Less treasury stock (150 shares) (337)
-----------
TOTAL STOCKHOLDERS' EQUITY 11,904,660
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 21,268,511
===========
<PAGE>
LUNN INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Sales $ 5,704,791 $ 4,641,694 $ 10,725,570 $ 8,855,004
Cost of sales 4,349,240 3,679,946 8,238,530 6,942,619
------------ ------------ ------------ ------------
Gross income 1,355,551 961,748 2,487,040 1,912,385
Selling, general and administrative expenses 813,321 653,850 1,628,846 1,394,785
------------ ------------ ------------ ------------
Operating income 542,230 307,898 858,194 517,600
Other income (expenses):
Interest expense, net (121,715) (121,376) (232,797) (247,721)
Other, net (6,778) 14,844 23,408 24,950
------------ ------------ ------------ ------------
(128,493) (106,532) (209,389) (222,771)
Income before provision for income taxes 413,737 201,366 648,805 294,829
Provision for income taxes 1,000 0 1,000 0
------------ ------------ ------------ ------------
Net Income $ 412,737 $ 201,366 $ 647,805 $ 294,829
============ ============ ============ ============
Weighted average number of common shares outstanding 13,355,951 13,218,710 13,285,299 9,912,769
Income per share $ 0.03 $ 0.02 $ 0.05 $ 0.03
============ ============ ============ ============
</TABLE>
<PAGE>
LUNN INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
1997 1996
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 647,805 $ 294,829
Adjustments to reconcile net income
provided by operating activities:
Depreciation and amortization 727,262 561,717
Allowance for doubtful accounts (60,718) (57,149)
Expenses paid through issuance of stock 18,000 71,800
Debt paid through issuance of stock - 46,666
Changes in assets & liabilities:
Accounts receivable 65,460 (1,099,901)
Inventory 125,818 (532,878)
Prepaid exp & other assets (88,660) (70,903)
Accounts payable (395,900) (360,109)
Accrued liabilities (270,090) 256,127
------------ ------------
Net cash provided by (used in)
operating activities 768,977 (889,801)
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of land and building (2,332,089) -
Purchase of plant and equipment (1,693,734) (467,919)
Leasehold improvements - (35,094)
------------ ------------
Net cash used in investing activities (4,025,823) (503,013)
CASH FLOWS FROM FINANCING ACTIVITIES
Bank overdraft 166,850 -
Repayment of debt (15,000) (858,830)
Proceeds from long-term debt,
net of repayments 582,379 850,015
Proceeds from IDA Bond, net of
issuance cost 2,398,844 -
Proceeds from issuance, of common stock - 1,273,225
Proceeds from exercise of warrants 175,118 -
Payment on capital lease obligations (44,913) 7,375
------------ ------------
Net cash provided by financing
activities 3,263,278 1,271,785
Net increase (decrease) in cash 6,432 (121,029)
Cash balance - beginning 5,176 206,075
------------ ------------
Cash balance - ending $ 11,608 $ 85,046
============ ============
<PAGE>
LUNN INDUSTRIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED
CONDENSED STATEMENTS
NOTE 1 - CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The information contained in the consolidated condensed financial
statements for the period ended June 30, 1997 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.
These financial statements and notes are presented as permitted by Form
10-QSB, and do not contain certain information included in the Company's annual
financial statements and notes. These 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, 1997
are not necessarily indicative of the results to be expected for the full year.
NOTE 2 - BOND FINANCING:
During May and July, 1997, the Company completed financing arrangements with the
State of Maryland and Harford County, Maryland to finance the purchase,
expansion and rehabilitation of the Company's Belcamp, Maryland honeycomb
manufacturing facility. The financing arrangement included the issuance on May
14, 1997 of $2.6 million in fifteen-year tax-exempt industrial development
bonds. Additionally, on July 7, 1997 the Company received a 10-year $810
thousand loan from the Maryland Industrial and Commercial Redevelopment Fund
(MICRF), plus a five-year $60 thousand loan and three year $30 thousand tax
credit from Harford County, Maryland.
6
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
Continuing gains in both the composite and aluminum honeycomb business segments
have enabled the Company to report a 105% increase in second quarter
consolidated net income over that of the same quarter last year. Consolidated
net income for the quarter ended June 30, 1997 rose to $413 thousand or $.03 a
share, up from $201 thousand or $.02 per share over the same period last year.
Consolidated net income for the first six months of 1997 was $648 thousand, or
$.05 per share, an increase of 120%, compared to $295 thousand or $.03 per share
during the first six months of 1996.
Consolidated sales during the second quarter of 1997 were $5.7 million compared
to $4.6 million in the second quarter of 1996, an increase of 23%. Consolidated
sales for the first six months of 1997 were $10.7 million compared to $8.9
million in 1996, an increase of 21%. Quarterly and six months sales increases
were reflected across all business segments of the Company, due primarily to
increased demand for commercial and military aircraft and aerospace materials
and assemblies.
Sales for the aluminum honeycomb segment for the second quarter and first six
months of 1997 increased to $3.8 and $7.1 million, respectively, compared to
$3.1 and $6.1 million, respectively during similar periods in 1996. Increased
honeycomb sales resulted from a number of factors, including startup and full
production rate on engine nacelle honeycomb assemblies for the C-17 program and
honeycomb control surfaces for the 767 and 757 Boeing programs. General overall
aircraft build rate increases further added to the increased sales volume.
Sales for the composite segment for the second quarter and first six months of
1997 increased to $1.9 million and $3.6 million, respectively, compared to $1.5
and $2.8 million for 1996. Improved composite sales resulted primarily from
increased shipments of bonded assemblies for military and commercial aircraft,
space and other aerospace applications.
The backlog of customer orders as of June 30, 1997 increased to $30.4 million,
an increase of $18.8 million or 162% compared to a backlog of $11.6 million at
the end of the second quarter 1996.
Consolidated operating income for the second quarter 1997 was $542 thousand
compared to $308 thousand in the second quarter of 1996, an increase of 76%.
Consolidated operating income for the first six months of 1997 was $858 thousand
compared to $518 thousand in 1996, an increase of 66%. Operating income for the
aluminum honeycomb segment for the second quarter and first six months of 1997
increased to $383 thousand and $629 thousand, respectively, compared to $292
thousand and $488 thousand, respectively during similar periods in 1996.
Operating income for the composite segment
7
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for the second quarter and first six months of 1997 increased to $159 thousand
and $229 thousand respectively, compared to $16 thousand and $30 thousand
respectively during similar periods in 1996. The overall improvements in
consolidated operating income for 1997 resulted from higher sales and increased
productivity from larger long-term contracts, improved gross margin (23% vs.
21.5%) and reduced selling, marketing and administrative expenses (15% vs. 16%).
Interest expense for the second quarter 1997 was $122 thousand compared to $121
thousand in the second quarter of 1996. Interest expense for the first six
months of 1997 was $233 thousand on $5.4 million loans outstanding, compared to
$248 thousand on $4.1 million loans outstanding in 1996, a decrease of 6%. The
interest rate in 1996 was prime plus 2-1/2% (10-1/2%) vs. 8.65% in 1997.
The expansion and rehabilitation of the Belcamp, Maryland facility are scheduled
for completion during the fourth quarter of 1997 and will support expanding
production requirements for engine nacelle honeycomb for the military C-17
aircraft program and honeycomb control surfaces for Boeing 767 and 757 aircraft
programs.
On June 6, 1997, the Company entered into a merger agreement with Technical
Products Group, Inc. ("TPG"), headquartered in Atlanta, Georgia to merge TPG
with and into Lunn, with Lunn being the surviving corporation. TPG is a
privately held Delaware corporation formed by the acquisition of the assets of
three operating units of the Brunswick Technical Group of Brunswick Corporation.
TPG is a major supplier of advanced composite material products to the
aerospace, defense and commercial markets. TPG's products include radomes,
aircraft components, engine components, rocket motor cases, missile and
satellite composite structures, pressure vessels, relocatable shelters, missile
launch tubes, torque shafts and fuel tanks, as well as a wide range of
integrated defense systems, including electro-optical systems, chemical
detection systems, ordnance delivery systems and lightweight camouflage systems.
Upon consummation of the merger, each outstanding share of Lunn common stock
will be converted into 0.1 shares of newly-issued common stock of the combined
company. Each outstanding share of TPG common stock will be converted into
8.3028 shares of the common stock of the combined company. The combined company
will succeed to and assume all of the rights and obligations of TPG and Lunn. In
addition, the combined company will assume all TPG options, Lunn options and
Lunn warrants, each such option and warrant to become exercisable for the number
of whole shares of the combined company's common stock equal to the number of
shares of TPG common stock or Lunn common stock covered thereby immediately
prior to the merger multiplied by 0.1 in the case of Lunn options and Lunn
warrants and 8.3028 in the case of TPG options.
On June 25, 1997 the Company filed an S-4 Registration Statement and Combined
Proxy with the Securities and Exchange Commission. Once the Registration
Statement is
8
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declared effective, the Company will establish a record date, send proxy
materials to all shareholders and schedule and hold an annual meeting of
shareholders to vote on the proposed merger. It is anticipated that, unless
delayed by unforeseen circumstances, the proxy solicitation and annual meeting
will take place either late in the third quarter or early in the fourth quarter
of 1997.
FINANCIAL CONDITION
Net cash provided from operations during the first six months of 1997 was $769
thousand, compared to $890 thousand cash used in operations during the same
period in 1996. Net cash provided during the first six months of 1997 was
comprised of $648 thousand net income plus $684 thousand in non-cash items,
primarily depreciation, offset by $563 thousand in changes in assets and
liabilities. Net cash used in operations during the first six months of 1996
consisted of $295 thousand net income, plus $623 thousand in non-cash items,
again primarily depreciation, offset by $1.808 million in changes in assets and
liabilities.
Net cash used in investing activities during the first six months of 1997 was
$4.026 million. This was comprised of $2.332 million utilized for the purchase
of the Company's honeycomb manufacturing facility located in Belcamp, MD, $493
thousand for the purchase of new machinery and equipment and $1.201 million for
construction in progress at the Company's facilities located in Belcamp,
Maryland and Glen Cove, New York.
Net cash provided by financing activities was approximately $3.263 million,
comprised primarily of $2.399 million proceeds from the State of Maryland
Industrial Development Bonds, $175 thousand proceeds from the exercise of
warrants and $582 thousand in increased borrowing against the Company's
revolving credit facility.
On May 14, 1997, the Company entered into a financing agreement with the State
of Maryland to provide $2.6 million in 15 year tax-exempt industrial development
bonds bearing interest at a variable rate adjusted weekly to finance the
purchase of the Company's Belcamp, Maryland honeycomb manufacturing facility and
an adjacent 3.2 acre parcel of land. Previously, on April 17, 1997, the Company
entered into an interest rate hedge agreement with First Union Bank of Maryland
to fix the interest rate on the tax exempt bonds at 5.07% through the year 2012.
Additionally, on July 7, 1997, in conjunction with the tax exempt bond financing
noted above, the Company entered into a ten-year $810 thousand Maryland
Industrial and Commercial Redevelopment Fund (MICRF) loan agreement with
interest set at a fixed rate of 5.1% annually, plus a five-year $60 thousand
loan from Harford County, Maryland with interest set at a fixed rate of 5.5% and
a $30 thousand Harford County, Maryland three
9
<PAGE>
year tax credit. The proceeds of these loans are intended to finance the
expansion and rehabilitation of the Belcamp, Maryland honeycomb facility.
The Company believes it has sufficient capital resources to operate successfully
over the next twelve months. Capital expenditure projects are being implemented
in accordance with the Company's 1997 capital plan to ensure adequate capacity,
facilities and support are available to meet anticipated increased demand for
the Company's products. The Company believes that, based on current quarter and
six-month results, operating cash flow together with credit availability under
the Company's revolving credit line will be sufficient to support its working
capital needs. However, should circumstances arise affecting cash flow or
requiring additional capital expenditures beyond those anticipated, there can be
no assurances that such funds will be available. (See "Forward-Looking
Statements - Cautionary Factors.")
Recent Accounting Pronouncements:
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Statements of an
Enterprise and Related Information"( Statement 131). Statement 131 establishes
standards to report information about operating segments and related discussions
about products and services, geographic areas and major customers. Statement 131
is effective for financial statements for the period beginning after December
15,1997. The statement permits early application and requires restatements of
all prior periods. The Company is currently evaluating the requirements of
Statement 131, but does not believe that the adoption of Statement 131 will have
a material effect on previously reported segment information.
Forward Looking Statements - Cautionary Factors
Except for the historical information and statements contained in this Report,
the matters and items set forth in this Report are forward looking statements
that involve uncertainties and risks, some of which are discussed at appropriate
points in the Report and are also summarized as follows:
1. The U.S. Government is a significant customer of the Company. Prime contracts
represent 9% of its revenues for the six months ended June 30, 1997. With the
continuing pressure to reduce government spending, in addition to the worldwide
political climate creating an environment of less visible military threats to
the united States, the de-emphasis in military spending is expected to continue.
This could potentially have a material adverse effect on future projects upon
which the Company's backlog is based and upon programs the Company is pursuing.
10
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2. Vendor prices for production materials such as aluminum foil, resins, liquid
and film adhesives, reinforcing fiber materials and other materials and supplies
could increase as demand for aircraft parts and assemblies increase to match
higher build rates for commercial aircraft. Higher material prices and demand
for lower aircraft part and assembly prices could place increasing pressure on
the Company's operating margins and net income.
3. The Company currently sells honeycomb and bonded panel products to the
commercial aircraft industry. Future planning for the Company anticipates
continuing increases in demand for these products over the next several years.
To the extent these increases fail to materialize or fall significantly below
projections, the Company's business could be materially affected.
Subsequent Events
On August 1, 1997, the Company's wholly-owned subsidiary, Alcore, entered into a
technology license agreement with Showa Aircraft Industry Co., Ltd. of Japan
("Showa") for an initial term of ten years with an additional five year term
upon the consent of Alcore and Showa. The agreement calls for Alcore to supply
Showa all appropriate and necessary technical documentation, processes and
production know-how to enable Showa to manufacture and sell PAA (phosphoric acid
anodized) aluminum honeycomb exclusively in Japan, Asia and the Pacific Rim
countries. The agreement also provides that Cytec Engineered Materials, Inc.
("Cytec"), Alcore's exclusive supplier of certain proprietary primer and
adhesive materials for PAA honeycomb, to offer the same primer and adhesive
materials to Showa for the duration of the term of the exclusive agreement
between Alcore and Cytec. In the interim period before Showa establishes full
PAA honeycomb manufacturing capability, including the capability to PAA anodize
and prime aluminum foil, the agreement calls for Alcore to supply Showa PAA
anodized and primed foil for use
by Showa in the manufacture of PAA honeycomb. Additionally, the agreement called
for Alcore to support Showa's efforts to secure full PAA honeycomb qualification
by Boeing and other aircraft manufacturers on an expedited basis. In return for
the technology transfer, Showa paid Alcore $500 thousand plus $100 thousand
additional to be paid at the time Showa begins full PAA honeycomb production
utilizing Showa PAA anodized and primed aluminum foil. Additionally, Showa will
pay royalties of 4% for a period of five years on sales of all Showa produced
PAA honeycomb utilizing Showa PAA anodized and primed aluminum foil.
11
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Item 6. Exhibits and Reports
(a) Exhibits
None
(b) Reports on Form 8-K.
The Company filed a Report on Form 8-K dated May 15, 1997, reporting under the
Item 2. Acquisition or Disposition of Assets, that on May 15, 1997, Alcore, Inc.
("Alcore"), a wholly owned subsidiary of the Company purchased two adjacent
parcels of land containing approximately 7.29 acres, in the aggregate, in the
Riverside Business Park at 1324 and 1326 Brass Mill Road in Belcamp, Maryland
together with all improvements located thereon including a building containing
approximately 50,000 square feet, which Alcore previously leased. There were no
financial statements filed with this Report.
<PAGE>
LUNN INDUSTRIES, INC.
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 13, 1997
By: s/Lawrence Schwartz
-------------------
Lawrence Schwartz
Vice President, Secretary and Treasurer
Chief Financial and Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 11,608
<SECURITIES> 0
<RECEIVABLES> 3,128,066
<ALLOWANCES> 116,170
<INVENTORY> 4,639,999
<CURRENT-ASSETS> 8,137,841
<PP&E> 18,084,870
<DEPRECIATION> 5,513,669
<TOTAL-ASSETS> 21,268,511
<CURRENT-LIABILITIES> 1,620,649
<BONDS> 7,743,202
<COMMON> 128,148
0
0
<OTHER-SE> 11,776,512
<TOTAL-LIABILITY-AND-EQUITY> 21,268,511
<SALES> 10,725,570
<TOTAL-REVENUES> 10,725,570
<CGS> 8,238,530
<TOTAL-COSTS> 1,628,846
<OTHER-EXPENSES> (23,408)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 232,797
<INCOME-PRETAX> 648,805
<INCOME-TAX> 1,000
<INCOME-CONTINUING> 647,805
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 647,805
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
