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 August 31, 2000 Commission File Number 0-1738
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GENERAL KINETICS INCORPORATED
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(Exact Name of Registrant as Specified in its Charter)
Virginia 54-0594435
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
14130-A Sullyfield Circle, Chantilly, VA 20151
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code 703-802-4848
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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 ___
The number of shares of Registrant's Common Stock
outstanding as of October 10, 2000 6,718,925 Shares
INDEX
Page No.
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Cautionary Statement Under the Private Securities Litigation Reform Act of 1996................... 3
Part I - Financial Information
Item 1 - Consolidated Financial Statements
Condensed Consolidated Balance Sheets -
August 31, 2000 and May 31, 2000.................................................................. 4
Condensed Consolidated Statements of Operations -
Three Months Ended August 31, 2000 and August 31, 1999, respectively.............................. 5
Condensed Consolidated Statements of Cash Flows -
Three Months Ended August 31, 2000 and August 31, 1999, respectively.............................. 6
Notes to Condensed Consolidated Financial Statements.............................................. 7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................................... 9
Part 2 - Other Information
Item 6 - Exhibits and Reports on Form 8-K.............................................................. 12
2
CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Statements in this Quarterly Report on Form 10-Q under the caption "Business"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations", as well as oral statements that may be made by the Company or by
officers, directors or employees of the Company acting on the Company's behalf,
that are not historical fact constitute "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. These forward-looking
statements involve risks and uncertainties, including, but not limited to, the
risk that the Company may not be able to obtain additional financing if
necessary; the risk that the Company may not be able to continue the necessary
development of its operations, including maintaining or increasing sales and
production levels, on a profitable basis; the risk the Company may in the future
have to comply with more stringent environmental laws or regulations, or more
vigorous enforcement policies of regulatory agencies, and that such compliance
could require substantial expenditures by the Company; the risk that U.S.
defense spending may be substantially reduced; and the risk that the Company's
Common Stock will not continue to be quoted on the NASD OTC Bulletin Board
services. In addition, the Company's business, operations and financial
condition are subject to substantial risks which are described in the Company's
reports and statements filed from time to time with the Securities and Exchange
Commission, including this Report.
PART I FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements
The unaudited 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, 2000 and 1999 set forth in the Company's annual
report on Form 10-K for the fiscal year ended May 31, 2000.
3
General Kinetics Incorporated
Balance Sheets
August 31, 2000 and
May 31, 2000
August 31, May 31,
2000 2000
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(Unaudited) (Audited)
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Assets
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Current Assets:
Cash and cash equivalents $ 219,300 $ 958,100
Accounts receivable, net of allowance of $75,000 and $75,000 1,562,900 1,130,600
Inventories 1,023,900 982,800
Prepaid expenses and other 32,400 36,200
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Total Current Assets 2,838,500 3,107,700
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Property, Plant and Equipment 2,753,300 2,751,900
Less: Accumulated Depreciation (1,867,300) (1,827,000)
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886,000 924,900
Other Assets 93,600 97,700
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Total Assets $ 3,818,100 $ 4,130,300
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Liabilities and Stockholders' Deficit
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Current Liabilities:
Advances from Factor $ - $ 44,100
Current maturities of long-term debt 69,600 69,600
Accounts payable, trade 977,100 873,700
Accrued expenses and other payables 505,200 739,300
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Total Current Liabilities 1,551,900 1,726,700
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Long-Term Debt - less current maturities (including
$8,716,600 and $8,654,700 of convertible debentures) 9,305,100 9,300,900
Other long-term liabilities 259,400 269,000
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Total Long-Term Liabilities 9,564,500 9,569,900
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Total Liabilities 11,116,400 11,296,600
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Stockholders' Deficit:
Common Stock, $0.25 par value, 50,000,000 1,811,500 1,811,500
shares authorized, 7,245,557 shares issued, 6,718,925
shares outstanding
Additional Contributed Capital 7,239,400 7,239,400
Accumulated Deficit (15,899,000) (15,767,000)
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(6,848,100) (6,716,100)
Less: Treasury Stock, at cost (526,632 shares) (450,200) (450,200)
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Total Stockholders' Deficit (7,298,300) (7,166,300)
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Total Liabilities and Stockholders' Deficit $ 3,818,100 $ 4,130,300
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The accompanying notes are an integral part of the above statements.
Page 4
General Kinetics Incorporated
Statements of Operations
(Unaudited)
Three Months Ended
August 31, August 31,
2000 1999
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Net Sales $ 2,266,600 $ 2,448,900
Cost of Sales 1,919,800 2,223,500
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Gross Profit 346,800 225,400
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Selling, General & Administrative 429,000 426,100
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Total Operating Expenses 429,000 426,100
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Operating Income (loss) (82,200) (200,700)
Interest Expense (49,800) (95,700)
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Net Income (loss) (132,000) (296,400)
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Basic Earnings per Share:
Basic Earnings (loss) per Share ($0.02) ($0.04)
Weighted Average Number of Common Shares
Outstanding 6,718,925 6,718,925
Diluted Earnings per Share:
Diluted Earnings (loss) per share ($0.02) ($0.04)
Weighted Average Number of Common Shares
and Dilutive Equivalents Outstanding 6,718,925 6,718,925
The accompanying notes are an integral part of the above statements.
Page 5
General Kinetics Incorporated
Statements of Cash Flows
(Unaudited)
Three Months Ended
August 31, August 31,
2000 1999
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Cash Flows From Operating Activities:
Net Income/(Loss) $ (132,000) $ (296,400)
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 40,300 48,700
Amortization of bond discount 15,500 15,500
(Increase) Decrease in Assets:
Accounts Receivable (432,300) (77,700)
Inventories (41,100) (99,500)
Prepaid Expenses 3,800 35,800
Other assets 4,100 (66,100)
Increase (Decrease) in Liabilities:
Accounts Payable - Trade 103,400 265,800
Accrued Expenses (234,200) (85,500)
Other Long Term Liabilities (9,600) (9,600)
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Net cash provided by/(used) in Operating Activities (682,100) (269,000)
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Cash Flows from Investing Activities:
Acquisition of property, plant and equipment (1,400) (45,600)
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Net cash provided by/(used) in Investing Activities (1,400) (45,600)
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Cash Flows from Financing Activities:
Advances from Factor/Borrowings
on Demand Notes Payable - 921,600
Repayments of advances from Factor/ (678,300)
Demand Notes Payable (44,100) -
Repayments on Long Term Debt (11,200) (20,500)
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Net cash provided by/(used) in Financing Activities (55,300) 222,800
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Net (decrease) increase in cash and cash equivalents (738,800) (91,800)
Cash and Cash Equivalents: Beginning of Period 958,100 307,400
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Cash and Cash Equivalents: End of Period $ 219,300 $ 215,600
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Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 98,200 $ 44,400
Income Taxes - -
The accompanying notes are an integral part of the above statements.
Page 6
GENERAL KINETICS INCORPORATED AND SUBSIDIARIES
Notes to Condensed Financial Statements
(Unaudited)
Note 1 - Basis of Presentation
The condensed financial statements at May 31, 2000, and for the three
months ended August 31, 2000 and August 31, 1999, respectively, include the
accounts of General Kinetics Incorporated ("GKI").
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-month period ended August 31, 2000,
are not necessarily indicative of the results to be expected for the full year.
Note 2 - Net Income/(Loss)Per Share
The Company implemented Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings Per Share", at May 31, 1998. SFAS 128 replaces the
presentation of primary and fully diluted earnings per share with basic and
diluted earnings per share and requires a reconciliation of the numerator and
denominator of basic earnings per share to diluted earnings per share. Earnings
per share have been computed using the weighted average number of common shares
outstanding. The Company has excluded the effects of outstanding options and
convertible securities as the effect would have been anti-dilutive.
Note 3 - Notes Payable
At August 31, 2000 and May 31, 2000 convertible debentures initially issued to
clients of Gutzwiller & Partner, AG ("Gutzwiller") have an aggregate principal
amount of approximately $9.0 million, mature in August 2004, 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. Shares issuable upon conversion are
also subject to certain rights to registration under the Securities Act of 1933,
as amended.
7
Note 4 - Income Taxes
The Company's estimated effective tax rate for fiscal 2000 is 0%. This
estimated effective tax rate is lower than the statutory rate due to the
existence of net operating loss carryforwards.
8
GENERAL KINETICS INCORPORATED
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Three Months Ended August 31, 2000, Compared to Three Months Ended August 31,
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1999
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Net sales from continuing operations for the three months ended August 31, 2000
were approximately $2.27 million compared to net sales of approximately $2.45
million for the quarter ended August 31, 1999. The small decrease in sales was
due primarily to what are believed to be normal fluctuations in demand for the
Company's products and services.
The gross margin percentage increased from 9.2% for the quarter ended August 31,
1999 to 15.3% for the quarter ended August 31, 2000. The primary reasons for the
increase in gross profits were the steps taken to address production issues
identified during fiscal 2000 as the Company faced large increases and decreases
in shipping volume. Although the gross margin increased in the first quarter of
fiscal 2001 as compared to the first quarter of fiscal 2000, the increase was
not enough to result in a net operating profit. The Company has taken and is
continuing to take steps to address these production issues through changes and
additions to plant supervision and by adding new scheduling and planning
procedures. The Company is trying to stabilize the level of shipments at a
profitable level through these changes and an increased sales effort.
Sales, General & Administrative costs remained substantially the same in the
first quarter of fiscal 2001, as compared to the first quarter of the prior
fiscal year. These costs were approximately $429,000 for the quarter ended
August 31, 2000 as compared to approximately $426,100 for the quarter ended
August 31, 1999.
For the three months ended August 31, 2000, the Company had an operating loss of
$82,200 compared to an operating loss of $200,700 for the comparable quarter of
the prior year. The decreased loss was due principally to the increase in gross
margins discussed above.
Interest expense decreased from $95,700 in the first quarter of fiscal 2000 to
$49,800 in the first quarter of fiscal 2001. This decrease was primarily due to
the absence of new accounts receivable financing in the first quarter of fiscal
2001, as compared to $30,900 of interest expense related to such financing in
the corresponding quarter of fiscal 2000.
The Company's estimated effective tax rate for fiscal 2001 is 0%. This
estimated effective tax rate is lower than the statutory rate due to the
existence of net operating loss carryforwards.
9
Liquidity and Capital Resources
The Company has relied upon internally generated funds and accounts receivable
financing, plus cash from sales of two of its operating companies, to finance
its operations. During the first quarter of fiscal 2001, operating losses
totaled $132,000. In order to generate the working capital required for
operations, the Company must continue to generate orders, stabilize its level of
shipments, and operate profitably during the remainder of fiscal 2001.
The Company must continue to market electronic enclosure products to government
and commercial markets, enter into contracts which the Company can complete with
favorable profit margins, ship the orders in a timely manner, and control its
costs in order to recover from its liquidity problems and seek to operate
profitably in the last three quarters of fiscal 2001.
As of May 31, 2000, the Company had cash of $219,300. The Company has faced
production issues that have contributed to the losses from operations. The
Company has taken and is continuing to take steps to address these production
issues through changes and additions to plant supervision and by adding new
scheduling and planning procedures. The Company is trying to stabilize the level
of shipments at a profitable level through these changes and an increased sales
effort. The backlog at August 31, 2000 was $3.18 million.
Management believes that cash on hand, borrowings from the factoring of accounts
receivable, and careful management of operating costs and cash disbursements can
enable the Company to meet its cash requirements through May 31, 2001. The
Company may also seek additional funding sources to provide a cushion to handle
variances in cash requirements if sales, gross profits and shipment levels
fluctuate throughout the fiscal year. However, there is no assurance the Company
will be successful in pursuing its plans or in obtaining additional financing to
meet those cash requirements. The Company must continue to maintain its level of
sales, consistently make timely shipments and produce its products at adequate
profit margins, or the Company will continue to face liquidity problems, and may
be left without sufficient cash to meet its ongoing requirements.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As explained above, the Company has
sustained significant operating losses in fiscal 2000 and the first quarter of
fiscal 2001. In addition, the Company has significant short-term cash
commitments, the funding of which is limited to cash flow from operations and
the factoring of certain accounts receivable. These factors raise significant
doubt about the Company's ability to continue as a going concern. The financial
statements do not contain any adjustment that might result from the outcome of
these uncertainties.
10
The Company is party to a factoring agreement with Reservoir Capital Corporation
("Reservoir") in which Reservoir agreed to purchase eligible accounts receivable
from the Company at an assignment price equal to 80% of the outstanding amount
of such accounts receivable. At August 31, 2000 there were no advances due to
Reservoir. The Company expects to draw on this facility through fiscal 2001 as
necessary to alleviate cash requirements, although, as discussed above, the
Company will also need to control expenses, maintain the sales backlog at
appropriate levels, and keep shipment levels in line with booked orders in order
to meet these requirements.
The Company had significant amounts payable to trade creditors at August 31,
2000. In addition, commitments under operating leases, net of sublessee income,
amount to $90,500 in fiscal 2001. Current maturities of long-term debt amount
to $69,600 in fiscal 2001.
The Company has outstanding debentures originally issued to clients of
Gutzwiller totaling approximately $9.0 million. The debentures mature in August
2004, are convertible into common stock at a conversion price of 50 cents per
share, and bear interest at 1% per annum payable annually.
Analysis of Cash Flows
Operating activities used $682,100 in cash in the first quarter of fiscal 2001.
This reflects a net loss of $132,400 plus $55,800 in non-cash expenses, offset
by $605,900 in cash to fund changes in working capital items. The primary reason
for the cash used to fund changes in working capital items was an increase in
accounts receivable of $432,300. This increase occurred principally because
accounts receivable had been temporarily reduced at May 31, 2000 due to a large
client receiving and paying for May shipments during the last month of fiscal
2000.
Investing activities used $1,400 in the first quarter of fiscal 2001. These
activities consisted of acquired property, plant and equipment.
Financing activities used $55,300 in the first quarter of fiscal 2001. These
activities consisted primarily of the repayment of factored accounts receivable
and certain long-term debt.
Management believes that inflation did not have a material effect on the
operations of the Company during fiscal 2000.
11
Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business, operations of the Company may be exposed to
fluctuations in currency values and interest rates. These fluctuations can vary
the cost of financing, investing, and operating transactions. Because the
Company has only fixed rate long-term convertible debentures and no foreign
currency transactions, there is no material impact on earnings from fluctuations
in interest and currency exchange rates.
PART II OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(b) Reports of Form 8-K
None
12
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: October 13, 2000 /s/ Larry M. Heimendinger
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Chairman of the Board
(Principal Executive Officer)
Date: October 13, 2000 /s/ Sandy B. Sewitch
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Chief Financial Officer
(Principal Accounting Officer and
Principal Financial Officer)
13