SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended November 30, 1995 Commission File Number 0-1738
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GENERAL KINETICS INCORPORATED
(Exact Name of Registrant as Specified in its Charter)
Virginia 54-0594435
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
14130-C Sullyfield Circle, Chantilly, VA 22021
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code 703-802-9300
(Former Name, Former Address and Former Fiscal Year, If Changed Since
Last Report)
Indicate by checkmark 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__
(* Further amendment may be required to Form 8-K to add audit report
regarding acquisition financial statements previously filed)
The number of shares of Registrant's Common Stock outstanding as of
December 30, 1995 6,508,925 Shares
INDEX
Page No.
Part I - Financial Information
Item I - Consolidated Financial Statements
Condensed Consolidated Balance Sheets -
November 30, 1995, and May 31, 1995.................................................... 4
Condensed Consolidated Statements of Operations -
Six Months and Three Months Ended November 30, 1995, and November 30, 1994,
respectively............................................................................ 5
Condensed Consolidated Statements of Cash Flows -
Six Months and Three Months Ended November 30, 1995, and November 30, 1994,
respectively ........................................................................... 6
Notes to Condensed Consolidated Financial Statements.................................... 7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations...........................................................10
Item 4 - Submission of Matters to a Vote of Security Holders...........................................13
Part 2 - Other Information
Item 6 - Exhibits and Reports on Form 8-K...............................................................14
2
PART I FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements
The unaudited interim consolidated financial statements of General
Kinetics Incorporated ("GKI" or the "Company") set forth below have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and note disclosures normally included in the
annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to those rules and
regulations. The Company believes that the disclosures made are adequate to make
the information presented not misleading.
In the opinion of management of the Company, the accompanying
consolidated financial statements reflect all adjustments (consisting only of
normal recurring adjustments) that are necessary for a fair presentation of
results for the periods presented. It is suggested that these consolidated
financial statements be read in conjunction with the audited financial
statements for the fiscal years ended May 31, 1995 and 1994 set forth in the
Company's annual report on Form 10-K for the fiscal year ended May 31, 1995.
3
General Kinetics Incorporated and Subsidiaries
Consolidated Balance Sheets
November 30, May 31,
1995 1995
(Unaudited) (Audited)
Assets
Current Assets:
Cash and cash equivalents $ 385,300 $ 212,200
Accounts receivable, net of
allowance, $181,400 and $181,400 2,619,700 3,045,000
Inventories 2,573,100 3,201,000
Prepaid expenses and other 65,200 69,300
Total Current Assets 5,643,300 6,527,500
Property, Plant and Equipment 6,800,700 6,697,700
Less: Accumulated Depreciation (5,172,400) (4,950,300)
1,628,300 1,747,400
Other Assets, principally capitalized
software of $354,900 and $300,600 423,900 419,400
Total Assets $7,695,500 $8,694,300
Liabilities and Stockholders' Deficit
Current Liabilities:
Advances from factor $ -- $407,000
Current maturities of long-term debt 275,900 364,500
Accounts payable, trade 1,589,200 2,189,100
Accrued expenses and other payables 1,205,200 1,162,300
Total Current Liabilities 3,070,300 4,122,900
Long-Term debt - less current maturities
(including $8,934,400 and $8,885,900 due
to controlling shareholder) 9,867,500 9,765,700
Other long-term liabilities 278,200 297,400
Total Long-Term Liabilities 10,145,700 10,063,100
Total Liabilities 13,216,000 14,186,000
Stockholders' Deficit:
Common Stock, $0.25 par value, 50,000,000
and 10,000,000 shares authorized,
7,035,557 shares issued, 6,508,925 shares
outstanding 1,759,000 1,759,000
Additional Contributed Capital 7,326,400 7,466,400
Accumulated Deficit (14,005,900) (13,966,900)
(4,920,500) (4,741,500)
Less:
Unearned ESOP shares (150,000) (300,000)
Treasury Stock, at cost (526,632 shares) (450,000) (450,200)
Total Stockholders' Deficit (5,520,500) (5,491,700)
Total Liabilities and Stockholders'
Deficit $7,695,500 $8,694,300
4
General Kinetics Incorporated and Subsidiaries
Consolidated Statements of Operations
(UNAUDITED)
Six Months Ended Three Months Ended
November 30, November 30, November 30, November 30,
1995 1994 1995 1994
Net Sales $9,339,600 $4,797,400 $ 4,438,800 $ 2,522,100
Cost of Sales 7,159,800 3,902,500 3,587,700 2,036,100
Gross Profit 2,179,800 894,900 851,100 486,000
Selling, General & Administrative 1,581,700 1,426,200 770,200 775,100
Product Research, Development &
Improvement 450,400 511,800 193,000 239,900
Total Operating Expenses 2,032,100 1,938,000 963,200 1,015,000
Operating Income/(Loss) 147,700 (1,043,100) (112,100) (529,000)
Interest Expense 186,700 202,500 75,000 69,000
Net Loss $ (39,000) $(1,245,600) $ (187,100) $ (598,000)
Net Loss per Common Share $ (0.01) $ (0.19) $ (0.01) $ (0.09)
Weighted Average Number of Common
and Common Equivalent Shares
Outstanding 6,508,925 6,508,925 25,508,925 6,508,925
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GENERAL KINETICS INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(UNAUDITED)
Six Months Ended
November 30, November 30,
1995 1994
Cash Flows From Operating Activities:
Net (Loss) $ (39,000) $ (1,245,600)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 251,500 269,200
(Gain)/Loss on disposal of equipment 1,100 (3,400)
ESOP compensation 10,000 14,200
Amortization of bond discount 32,300 62,100
(Increase) Decrease in Assets:
Accounts Receivable 425,400 69,800
Inventories 627,900 (500,900)
Prepaid Expenses 4,100 (48,300)
Other assets - Software Development Costs (73,100) (98,000)
Other assets 50,400 (11,900)
Increase (Decrease) in Liabilities:
Accounts Payable - Trade (599,900) (80,900)
Accrued Expenses 42,900 (90,800)
Other Long Term Liabilities (19,200) (19,200)
Net cash provided by/(used) in Operating Activities 714,400 (1,683,700)
Cash Flows from Investing Activities (116,200) (121,600)
Acquisition of property, plant and equipment 1,000 5,800
Net cash used in Investing Activities (115,200) (115,800)
Cash Flows from Financing Activities:
Advances from Factor/Borrowings
on Demand Notes Payable 820,500 --
Repayments of Advances from Factor/
Demand Notes Payable (1,227,500) --
Borrowings on Long Term Debt 90,000 9,552,600
Repayments on Long Term Debt (109,100) (7,845,000)
Net cash provided by/(used) in Financing Activities (426,100) 1,707,600
Net (decrease) increase in cash and cash equivalents 173,100 (91,900)
Cash and Cash Equivalents: Beginning of Period 212,200 765,200
Cash and Cash Equivalents: End of Period $ 385,300 $ 673,300
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 245,600 $ 172,500
Income Taxes -- 58,400
Supplemental Disclosures of Non Cash Investing
and Financing Activities:
Reduction in paid in capital based on fair market
value of ESOP shares $ 140,000 135,800
The accompanying notes are an integral part of the above statements.
6
GENERAL KINETICS INCORPORATED AND SUBSIDIARIES
Notes to Condensed Financial Statements
(Unaudited)
Note 1 - Basis of Presentation
The condensed consolidated financial statements at May 31, 1995, and
for the three months and six months ended November 30, 1995, and November 30,
1995, include the accounts of General Kinetics Incorporated and its wholly-owned
subsidiary, Food Technology Corporation. All material intercompany accounts and
transactions have been eliminated.
The financial information included herein is unaudited. In addition,
the financial information does not include all disclosures required under
generally accepted accounting principles in that certain note information
included in the Company's Annual Report has been omitted; however, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary to a fair
presentation of the results of the interim periods.
The results of operations for the three and six month period ended
November 30, 1995, are not necessarily indicative of the results to be expected
for the full year.
Note 2 - Inventory
All inventories are valued at the lower of cost or market, cost being
determined on a first-in, first-out basis.
Consolidated inventories are as follows:
November 30, 1995 May 31, 1995
----------------- ------------
Raw Material $1,676,100 $1,353,000
Work in Process 897,000 1,848,000
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Totals $2,573,100 $3,201,000
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Note 3 - Commitments and Contingencies
The Company will continue to review, as appropriate, the environmental status
of its Orlando property, noted in its prior Form 10-Q for the period ended
August 31, 1995.
Note 4 - Loss Per Share
Loss per share has been computed using the weighted average number of common
shares and common equivalent shares, to the extent dilutive, outstanding during
the periods. Common equivalent shares are calculated using the treasury stock
method and consist of shares issuable upon exercise of stock options that have
been granted. Due to the losses for the six months and three months ended
November 30, 1995 and November 30, 1994, the outstanding stock options and
Convertible Subordinated Debentures issued to the Company's majority
stockholder, Gutzwiller & Partner, AG ("Gutzwiller") are not considered dilutive
and therefore no effect is given to any common stock equivalents.
Note 5 - Notes Payable
At May 31 and November 30 , 1995 convertible debentures issued to Gutzwiller
have an aggregate principal amount of $9.5 million, mature in 10 years, are
convertible into common stock at a conversion price of 50 cents per share, and
bear interest at 1% per annum, which is payable annually beginning August 1995.
The convertible debentures shall be subject to the terms of a Pledge and
Security Agreement providing for a security interest in substantially all the
assets of the Company, with certain exceptions (including without limitation
exceptions of accounts receivable and other financing), to secure the
obligations in respect of the debentures. Shares issuable upon conversion are
also subject to certain rights to registration under the Securities Act of 1933,
as amended.
Other Real Estate Mortgage Loans
The Company was in violation of certain loan covenants of the real estate
mortgage agreement on the Company's Johnstown facility as of November 30, 1995,
however, the lender has agreed to waive the violations through May 31, 1996.
Additionally, as previously reported, the holder of the real estate mortgage
on the Company's Orlando facility, under which $228,600 was outstanding at
November 30, 1995, had notified the Company that bonds originally issued to
finance that facility, pursuant to terms which permit them to be called prior to
stated maturity on certain dates, had been called for redemption on August 22,
1995. On October 31, 1995, the Company
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entered into a Forbearance Agreement with
the mortgage holder under which such redemption notice was withdrawn and the
Company has agreed to make accelerated payments of $10,000 per month in
principal and interest until the remaining principal is paid in full.
Note 6 - Other Assets
Costs incurred to establish the technological feasibility of a computer software
product are considered research and developed costs and are expensed as
incurred. When the technological feasibility of a software product has been
established, development costs subsequent to that date are capitalized.
Capitalization of these costs ceases when the product is considered available
for general release to customers. During the fiscal quarter ended November 30,
1995, the Company capitalized $19,500 in internally developed software costs
relating to certain software being developed for the TS-21 ruggedized facsimile
machine. Amortization of capitalized software development costs is computed on a
product-by-product basis over the estimated economic lives of the products. The
products that are currently being amortized have an estimated life of three
years. Amortization of capitalized costs was $17,500 in the second quarter of
fiscal 1996.
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GENERAL KINETICS INCORPORATED
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Six Months Ended November 30, 1995, Compared to Six Months Ended November 30,
1994
Net sales for the six months ended November 30, 1995 were $9.3 million as
compared to net sales of $4.8 million for the six months ended November 30,
1994. In the Secure Communications Division ("SCD"), net sales increased by
approximately $2.2 million, from $2.2 million for the first half of fiscal 1994
to $4.4 million in the first half of fiscal 1995. The increase in SCD sales was
primarily attributable to deliveries totaling $2.6 million on a contract to
Bosch Telecom, a supplier of fax machines to the German Government.
Approximately $1.5 million of the contract remained in backlog at November 30,
1995.
The Electronic Enclosure Division's ("EED") net sales increased from $2.0
million for the six months ended November 30, 1994, to $4.6 million for the six
months ended November 30, 1995. This increase was due to an increase in demand
for the six months ending November 30, 1995 as compared to the same period in
the prior fiscal year.
Operating expenses for the six months ended November 30, 1995 were
approximately $2.0 million compared with $1.9 million for the comparable six
months in fiscal year 1995.
For the six months ended November 30, 1995, the Company showed an operating
profit of approximately $148,000 compared to a $1.0 million operating loss for
the comparable six months of the prior fiscal year. The improvement in operating
results was primarily due to the increase in sales discussed above as well as a
significant increase in the gross margin in EED. Productivity improvements which
started in the second half of fiscal 1995 along with efforts to target new
contracts with higher profit margins resulted in the significant improvement in
EED gross profits for the first half of fiscal 1996 as compared to the
corresponding period of the prior fiscal year.
Interest expense for the six months ended November 30, 1995 was $186,700
compared to an interest expense of $202,500 for the six months ended November
30, 1994.
10
Three Months Ended November 30, 1995, Compared to Three Months Ended November
30, 1994
Net sales for the three months ended November 30, 1995 were $4.4 million as
compared to net sales of $2.5 million for the three months ended November 30,
1994. In SCD, net sales increased by approximately $0.9 million, from $1.2
million for the second quarter of fiscal 1995 to $2.1 million in the second
quarter of fiscal 1996. The increase in SCD sales was primarily attributable to
deliveries totaling $1.0 million on a contract to Bosch Telecom, a supplier of
fax machines to the German Government.
EED's net sales increased from $1.3 million for the quarter ended November
30, 1994, to $2.3 million for the quarter ended November 30, 1995, or by 77%.
This increase was due to an increase in customer demand for the second quarter
of fiscal 1996 as compared to the corresponding quarter of the prior fiscal
year.
Operating expenses were approximately $1.0 million in the second quarter of
fiscal 1995 as compared to approximately $1.0 in the second quarter of the
current fiscal year.
For the three months ended November 30, 1995, the Company showed an operating
loss of approximately $112,000 compared to a $529,000 operating loss for the
comparable quarter of the prior year. The improvement in operating results was
primarily due to the increase in sales discussed above as well as a significant
increase in the gross margin in EED. Productivity improvements which started in
the second half of fiscal 1995 along with efforts to target new contracts with
higher profit margins resulted in the significant improvement in EED gross
profits for the second quarter of fiscal 1996 as compared to the corresponding
period of the prior fiscal year.
Interest expense for the three months ended November 30, 1995, was $75,000
compared to an interest expense of $69,000 for the three months ended November
30, 1994.
Liquidity and Capital Resources
The Company has suffered recurring losses from operations and has a net capital
deficiency that raise substantial doubt about the Company's ability to continue
as a going concern. However, the operating loss for fiscal 1995 showed
significant improvement over the prior three fiscal years, and the Company had
unaudited net income of approximately $134,000 in the fourth quarter of fiscal
1995. In addition, the unaudited net loss of approximately $38,900 for the first
half of fiscal 1996 showed significant improvement over the loss of
approximately $1.2 million for the same period in the prior fiscal year. To
achieve overall profitability for fiscal 1996,
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the Company must continue to
increase revenues and gross profit margins. In the Secure Communications
Division, successful operations will depend, to a large extent, on the
division's ability to market the secured communications products overseas and to
domestic markets. The division is currently developing new products, including a
secure tactical facsimile machine which is expected to complete final
development in fiscal 1996, to increase net sales. The Division must be able to
update its secure product line in order to meet current market demands and
develop an adequate sales level for profitable operations. In the enclosure
division, productivity improvements in the second half of fiscal 1995 along with
efforts to target new contracts with higher profit margins resulted in a
significant improvement in gross profits for the 1995 fiscal year and the first
half of fiscal 1996 as compared to the prior two fiscal years. The division must
continue to market electronic enclosure products to government and commercial
markets, and enter into contracts with favorable profit margins which can be
produced within budget to achieve profitability in fiscal 1996. Management
believes that it has taken significant steps towards returning the Company to
profitability; however, there can be no assurance that revenues will increase or
that the Company will be able to generate revenues or margins sufficient to
achieve profitability in fiscal 1996.
On December 12, 1995, the Company entered into a preliminary understanding in
principle to sell its Secure Communications Division to an undisclosed third
party. The proposed transaction, expected to be at a significant premium over
book value, remains subject to conclusion and execution of a definitive
agreement, receipt of any required approvals, and other contingencies. The
Company anticipates that implementation of the 1-for-3 reverse stock split
approved by shareholders at the Annual Meeting held November 14, 1995 would be
delayed until after the closing of the proposed transaction.
Following GKI's discussions with the Defense Investigative Service ("DIS")
regarding foreign ownership issues affecting the Company, the facility clearance
for GKI has been revalidated and on that basis GKI expects to confirm extension
of the memorandum of agreement between the Company and the National Security
Agency ("NSA") which had expired in September 1995. In that connection, the DIS
has indicated that, if the potential sale of GKI's Secure Communications
Division mentioned above did not occur, it would expect to proceed with
implementation of the Company's previous proposals to resolve such ownership
issues.
Management believes that cash on hand as of November 30, 1995 ($385,300),
careful management of operating costs and cash disbursements, and accounts
receivable financing to alleviate short term cash requirements should enable the
Company to meet its cash requirements through May 31, 1996.
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Item 4 - Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders on November 14, 1995, the following
matters were voted on and approved:
1. Larry Heimendinger was elected as a Class I director for a term expiring in
1998 or until his successor is elected and qualified. 5,144,477 shares of
common stock, or 99.4% of the shares voting, voted in favor of Mr.
Heimendinger, and 28,888, or 0.6% of the shares voting, withheld authority to
vote for Mr. Heimendinger. In addition to Mr. Heimendinger, Marc E. Cotnoir
and Richard McConnell remained as Class II directors and Robert K. Gardner
remained as a Class III director.
2. Management was authorized to implement an amendment to the Company's
Restated Articles of Incorporation to effect a one-for-three reverse
common stock split. Under Virginia law, the affirmative vote of
two-thirds of the common stock outstanding and entitled to vote was
required to approve the proposed amendment. 4,600,860 shares of common
stock, or 70.7% of the shares entitled to vote, voted in favor of the
proposal. 519,985 shares, or 8.0% of the shares entitled to vote, voted
against and 52,500, or 0.8% of the shares entitled to vote, abstained. A
resolution specifically authorizing such other action as may be deemed
necessary or appropriate in connection with such reverse split was also
approved, by a comparable vote.
3. The Board's selection of BDO Seidman as the Company's independent public
accountants for the fiscal year ended May 31, 1996 was ratified.
5,121,053 shares of common stock, or 99.0% of the shares voting, voted in
favor of the proposal. 34,644 shares, or 0.7% of the shares voting, voted
against and 17,628, or 0.3% of the shares voting, abstained.
13
PART II OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) No reports on Form 8-K were filed by the Company during the fiscal
quarter ended November 30, 1995.
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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 thereunto duly authorized.
GENERAL KINETICS INCORPORATED
Date: January 16, 1996 /s/ Larry M. Heimendinger
Larry M. Heimendinger
Chairman of the Board
(Principal Executive Officer)
Date: January 16, 1996 /s/ Sandy B. Sewitch
Sandy B. Sewitch
Chief Financial Officer
(Principal Accounting Officer and
Principal Financial Officer)
15