Here are some selected highlights from the report. It just arrived.
LETTER TO SHAREHOLDERS
It is a pleasure to report to you that fiscal 1996 marked a turning point in your Company's history.
For the first time ever, we produced revenue and purchase orders from a variety of different products. Growth continues as your Company, with its unique lignin-based resins and other resin products, receives re-orders, expands its share of existing markets, and moves into new markets through direct sales, new, global strategic alliances, and agreements with major international companies.
Your Company also introduced a revolutionary non-lignin resin technology with tremendous potential for sales in the coming years. For example, magazine articles were published recently about Lenox and the Estalloy tooling material in _Plastic News_ (2/24/97); _Modern Plastics_ (3/97); _Reinforced Plastics_ (2/97); _Urethanes Report_ (2/97); _Plastic World_ (2/97) and _Rubber & Plastics News_ (1/97). Copies of these articles are enclosed. Consequently, we have received more calls from potential customers about Lenox polyols for the urethane foam industry, Estalloy resins, and tooling than we have in the past for all other products combined.
The word "transition" would best describe fiscal 1996. We made a milestone move from the R&D mode of technical accomplishment to a marketing and production mode with specific, revenue producing products and technology licensing from the application of our resins to new products, and with the receipt of substantial orders from a broad customer base.
Growing resin sales, coupled with the management of a large number of new product development projects, generated a substantial backlog of signed orders worth more than $400,000. Another $600,000 of orders have been quoted and are pending approval and issuance of purchase orders to Lenox. These product orders are increasing and are expected to generate substantial sales in fiscal 1997 and beyond.
The key developments during the year were as follows:
* Your Company is making significant inroads into the foundry industry. Preliminary results at a very large U.S. automotive foundry have been very successful. As a result, production trials are now underway at the same foundry. Also, another automotive foundry has scheduled production trials.
*The product diversification program made a significant move forward with the introduction of a high-performance, non-lignin, resin-based composite material to produce molds for the manufacture of plastic parts for the automotive, recreational, aerospace, packaging, marine and building industries. Molds produced with this Lenox material system take only a fraction of the time required for the production of molds made from such traditional materials as machined aluminum, cast aluminum, cast kirksite, and laminated epoxy. This new product development is a potential technological breakthrough of major proportions that has created significant, near-term demand for our high-profit tooling and resin products. Sales for Lenox can accelerate quickly in this product line because the selling price for each of these Estalloy tools varies in price from $10,000 to $100,000 depending on the size and complexity of the respective tool. It is important to realize that almost every plastic part produced in the automotive and other industries requires tooling.
* Lenox licensee Polymer Systems International (PSI) has already scored success with the introduction of the Estalloy resin tooling system in an automotive body development program with Bayer Chemical Corporation, one of the world's largest chemical companies. Subsequent orders for Lenox of more than $600,000 in Estalloy material and tooling from various companies have been quoted and are in the process of being secured. This is the initial phase of marketing these products since Lenox obtained the worldwide rights to the technology only two months ago. Additionally, a major automotive supplier has signed a contract to pay $120,000 for the non-exclusive right to use this Estalloy tooling material to make tools for their automotive parts. PSI has also introduced two new products, an automotive aerodynamic spoiler and a structural canoe seat. Both were molded from Lenox lignin-based resin in Lenox Estalloy tools, thereby generating sales of both tooling and production molding resins.
* A lignin-based interior automotive door panel still in the development stage has exceeded the specifications of similar resin-based products.
* Excellent progress has already been made in our agreement with a Japanese foundry consortium. Lenox materials have been tested in Japan. Additional raw materials have been sent from Japan to Lenox for use in producing specific foundry resins for further tests in the Japanese market.
* Continuous re-orders of resin have been placed by the manufacturer of the Prestone product called SPRAY'N'GO, a lignin-based, traction-enhancing product for automobile tires on icy roads. This product is also marketed in the U.S. under the name INSTA TRAC. Last year, 10,000 canss were produced for Prestone and 300,000 cans have been produced this year.
* Your Company has raised $507,500 cash since the year end, has $500,000 of subscription agreements in place, and continues to be well financed.
* The Company holds signed purchase orders and research contracts for over $400,000 in addition to the $600,000 in quoted orders that are pending approval and issuance of purchase orders to Lenox.
* The Company has made arrangements to hire a Chief Operating Officer whose past accomplishments include being responsible for the growth of ABS plastics for Borg Warner to more than 250 million pounds of product per year, as well as pioneering the high volume applications of new plastic products and materials to the automotive industry. This ability and experience to generate and manage growth from research to high production will directly benefit Lenox in the near term.
And now a brief look at some details.
A significant breakthrough has occurred in the foundry products division. Lenox has received a commitment by a North American foundry to undertake a program to produce engine castings using casting cores produced with Lenox's lignin-based resin at their plant.
We are gratified that tests of these engine castings produced through Lenox technology continue to show such superior results ... that the foundry has approved this dramatically increased scale of testing. This industry segment alone represents a potential market of some 1 million pounds of resin per year ....
Another major automotive foundry is evaluating other Lenox foundry products. This customer alone represents a potential one-half million pounds of resin per year in an industry product that represents 15 million pounds per year. If successful, this could save the customer at least $20,000,000 in equipment costs needed to meet environmental regulations.
Thousands of castings have been produced using Lenox lignin based foundry resins. These castings have included: transmission housings, steam pipe fittings, air motor castings, governor housings, and special steel alloys for coal mining equipment. These applications should increase revenue and shareholder value.
....
Your company will continue to test a variety of Japanese raw materials for the Japanese foundry industry.
Lenox has expanded its patent base to provide the necessary patent protection for these technologies. Consequently, our efforts in the patent area this year were increased dramatically in order to have a negotiating position that is as strong as possible in our discussions with Japanese foundries and others. We made the strategic decision to incur this one-time cost now to realize stronger returns in the future as we develop this and other potential major markets.
....
Estalloy technology was acquired by Lenox only two months ago to complement the Company's lignin-based molding resins and position the Company to market high performance and high profit tooling resins and tooling products. The acquisition was made by providing payments in Lenox stock over the next two years. Also, the payments are contingent upon certain performance clauses for the material.
....
In the bonded wood sector, development work continues in our Port Huron lab, where we have a small, laboratory scale, high-performance press. Several particle board manufacturers have expressed an interest in product development and pilot projects. One major particle board manufacturer has already signed a secrecy agreement in order to begin evaluation of our Lenox formaldehyde-free products at their facilities. We expect these efforts to result in sales, a joint venture, a licensing agreement, or all three.
It has been particularly gratifying to see companies that have used Lenox lignin-based products re-order our products in 20,000-pound increments. Sales in several product lines continue to increase as the advantages of Lenox products are proven in the marketplace. These increased sales and the Company's new business relationships are moving Lenox to profitability and growth.
Management also recognizes that some of the industries we work with, such as the wood industry, are very conservative. That is why the company has diversified its product base, especially with the Estalloy technology, to provide immediate cash flow while the other products will be brought into the marketplace at a different time. No matter how conservative these industries are, the U.S. federal government has set specific deadlines for these various environmental issues which will require them to use environmentally friendly patent technologies which are the basis of our patent techologies....
The Company had a one-time opportunity to purchase a significant amount of high quality production and laboratory equipment at significant cost savings from DuPont. This was because DuPont had closed its paint manufacturing plant in Flint, Michigan. We were able to purchase this equipment by removing the equipment from the DuPont paint plant ourselves and then re-installing the equipment at out own plant in Port Huron.
While we believe these improvements will continue to lead to stronger shareholder value, it is important to note the impact of some accounting practices, particularly as they apply to the treatment of our patents.
....
We have already received 17 patents and have 25 pending in different countries of the world.
Our United States patents protect revenue resulting from the development of new technologies for 17 years. While the Canadian auditors write off the costs of the patents over five years, the asset is obviously still there....
Additionally, the Canadian auditors did not capitalize any of the ongoing costs that are necessary to produce a patent. We believe this results in the assets of your Company being understated.
To avoid conflicts of this nature in the future, your Company is reviewing its accounting and auditing procedures to ensure the proper treatment of our significant patent base.
It is important to realize how important patents are to Lenox. The revenues from licensing represent almost pure profit. As an example, the up-front fee from the Japanese consortium would require almost $600,000 in foundry sales to generate the same profit level at this volume of sales....
It also should be noted that the $60,000 we received from the Japanese foundry consortium, even though it is a cash-in-hand, non-refundable deposit, will not be counted as revenue until 1997, as directed by our auditors.
During the year, your Company capitalized all costs related to patents in accordance with U.S. accounting practices. However, as previously explained, Canadian auditors expensed these same items, thereby increasing the Company's loss for the year. Also, our former bookkeeper prematurely recorded signed purchase orders and research contracts as sales. The auditors did not count these as sales but these will be counted as sales in fiscal 1997, as they are shipped.
....
[END OF QUOTE]
There follows a sheet detailing the effects of the Canadian rules. The upshot is that operating cash and non-cash value was REDUCED by about $900,000.
This sheet also points out that the company raised $507,500 from stock sales.
The official figures show a net loss for FY'96 of $1,002,142, or $.21/share. That compares with a net loss of $625,467 ($.14/sh) for FY'95.
The balance sheet shows net shareholders' equity of $80,115 compared to a NEGATIVE equity at the end of FY'95 ($51,794).
That's enough for now.
Rgds.
-DT |
