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 February 28, 1999 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 ___
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The number of shares of Registrant's Common
Stock outstanding as of April 5, 1999 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-
February 28, 1999 and May 31, 1998.................................................. 4
Condensed Consolidated Statements of Operations -
Three Months and Nine Months Ended February 28, 1999 and February 28, 1998,
respectively......................................................................... 5
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended February 28, 1999 and
February 28, 1998, respectively...................................................... 6
Notes to Condensed Consolidated Financial Statements................................. 7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................................... 10
Part 2 - Other Information
Item 6 - Exhibits and Reports on Form 8-K....................................................... 14
2
CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1996
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 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; the risk that the Company may not be able to continue
the necessary development of its operations on a profitable basis; 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 the Company's Annual Report on Form 10-K for the
fiscal year ended May 31, 1998, and 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, 1998 and 1997 set forth in the Company's Annual
Report on Form 10-K, as amended, for the fiscal year ended May 31, 1998.
3
General Kinetics Incorporated
Balance Sheet
February 28, 1999
February 28, May 31,
1998 1998
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(Unaudited) (Audited)
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Assets
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Current Assets:
Cash and cash equivalents $ 35,400 $ 1,923,300
Accounts receivable, net of allowance 1,844,700 560,700
Inventories 1,624,500 740,500
Prepaid expenses and other 33,700 4,900
Note Receivable, current - -
Note Receivable, affiliate 175,000 175,000
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Total Current Assets 3,713,300 3,404,400
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Property, Plant and Equipment 2,922,200 2,780,800
Less: Accumulated Depreciation (1,880,700) (1,766,100)
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1,041,500 1,014,700
Note Receivable, less current portion, net of allowance 400,000 350,000
Other Assets 24,000 1,200
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Total Assets $ 5,178,800 $ 4,770,300
============ ============
Liablilities and Stockholders' Deficit
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Current Liabilities:
Advances from Factor 179,400
Current maturities of long-term debt 103,000 103,000
Accounts payable, trade 672,900 217,400
Accrued expenses and other payables 644,500 591,900
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Total Current Liabilities 1,599,800 912,300
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Long-Term debt - less current maturities (including
$8,639,200 and $8,956,400 of convertible debentures) 9,264,200 9,369,300
Other long-term liabilities 248,600 277,100
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Total Long-Term Liabilities 9,512,800 9,646,400
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Total Liabilities 11,112,600 10,558,700
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Stockholders' Deficit:
Common Stock, $0.25 par value, 50,000,000 and 10,000,000 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 (14,534,500) (14,389,100)
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(5,483,600) (5,338,200)
Less: Treasury Stock, at cost (526,632 shares) (450,200) (450,200)
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Total Stockholders' Deficit (5,933,800) (5,788,400)
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Total Liabilities and Stockholders' Deficit $ 5,178,800 $ 4,770,300
============ ============
The accompanying notes are an integral part of the above statements.
Page 4
General Kinetics Incorporated
Statement of Operations
Nine Months Ended Three Months Ended
February 28, February 28, February 28, February 28,
1999 1998 1999 1998
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Net Sales $4,661,900 $4,763,000 $ 2,215,500 $ 1,821,200
Cost of Sales 3,403,400 3,526,900 1,600,500 1,387,500
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Gross Profit 1,258,500 1,236,100 615,000 433,700
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Selling, General & Administrative 1,337,900 1,104,900 445,700 366,000
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Total Operating Expenses 1,337,900 1,104,900 445,700 366,000
---------- ---------- ----------- -----------
Operating Income (loss) (79,400) 131,200 169,300 67,700
Interest Expense 133,000 186,500 46,900 58,600
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Income (loss) before extraordinary item (212,400) (55,300) 122,400 9,100
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Extraordinary item - gain from debt extinguishment 67,000 - - -
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Net Income (loss) $ (145,400) $ (55,300) $ 122,400 $ 9,100
========== ========== =========== ===========
Basic Earnings per Share:
Earnings (loss) before extraordinary item ($0.03) ($0.01) $ 0.02 $ 0.001
Earnings from extraordinary item 0.01 - - -
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Basic Earnings (loss) per share ($0.02) ($0.01) $ 0.02 $ 0.001
Weighted Average Number of Common Shares
Outstanding 6,718,925 6,718,925 6,718,925 6,718,925
Diluted Earnings per Share:
Earnings (loss) before extraordinary item ($0.03) ($0.01) $ 0.006 $ 0.001
Earnings from extraordinary item 0.01 - - -
---------- ---------- ----------- -----------
Diluted Earnings (loss) per share ($0.02) ($0.01) $ 0.006 $ 0.001
Weighted Average Number of Common Shares
and Dilutive Equivalents Outstanding 6,718,925 6,718,925 24,708,925 25,508,925
The accompanying notes are an integral part of the above statements.
Page 5
General Kinetics Incorporated
Statements of Cash Flows
Nine Months Ended
February 28, February 28,
1999 1998
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Cash Flows From Operating Activities:
Net Income/(Loss) $ (145,400) $ (55,300)
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 114,600 123,200
Extraordinary gain on debt extinguishment (67,000)
Amortization of bond discount 47,500 48,500
Bad debt provision (75,000)
(Increase) Decrease in Assets:
Accounts Receivable (1,284,000) 19,100
Inventories (884,000) (304,000)
Prepaid Expenses (28,800) 100
Other assets (22,800) 17,900
Increase (Decrease) in Liabilities:
Accounts Payable - Trade 455,500 (92,600)
Accrued Expenses 55,900 (2,100)
Other Long Term Liabilities (28,500) (28,800)
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Net cash provided by/(used) in Operating Activities (1,862,000) (274,000)
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Cash Flows from Investing Activities:
Acquisition of property, plant and equipment (141,400) (278,600)
Collection of Notes receivable 25,000
Issuance of Notes Receivable - (25,000)
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Net cash provided by/(used) in Investing Activities (116,400) (303,600)
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Cash Flows from Financing Activities:
Advances from Factor 300,800 -
Repayment of Advances from Factor (124,700)
Repayments on Long Term Debt (85,600) (104,500)
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Net cash provided by/(used) in Financing Activities 90,500 (104,500)
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Net (decrease) increase in cash and cash equivalents (1,887,900) (682,100)
Cash and Cash Equivalents: Beginning of Period 1,923,300 1,482,300
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Cash and Cash Equivalents: End of Period $ 35,400 $ 800,200
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Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 128,400 $ 161,500
Income Taxes 7,100 800
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 consolidated financial statements at May 31, 1998, and for the
three months and nine months ended February 28, 1999 and February 28, 1998,
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 for a fair presentation of the results of
the interim periods.
The results of operations for the three month and nine month periods ended
February 28, 1999, 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 No. 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. The 1997
earnings per share amount has been restated in accordance with SFAS No. 128.
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 for the nine month periods ended February 28,
1999 and 1998, as the effect would have been anti-dilutive.
Note 3 - Notes Payable
At November 31, 1998 and May 31, 1998, convertible debentures initially issued
to clients of Gutzwiller & Partner, A.G. ("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
7
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.
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 February 28, 1999,
however, the lender has agreed to waive the violations through May 31, 1999.
Note 4 - Income Taxes
The Company's estimated effective tax rate for fiscal 1999 is 0%. This
estimated effective tax rate is lower than the statutory rate due to the
existence of net operating loss carryforwards.
Note 5 - Cryptek Settlement
In December 1998, the Company entered into a settlement agreement with Cryptek
Secure Communications ("Cryptek"), LLC, resolving differences arising out of
Cryptek's 1996 purchase of GKI's former secure communications business. Pursuant
to such settlement, Cryptek made an immediate principal payment of $25,000 on
its outstanding promissory note to the Company and agreed to forego sublease
rent owed by the Company through November 1998. The remaining principal amount
of the Cryptek promissory note was reduced to $550,000 and the payment schedule
for such note was revised and extended through 2002. In addition, the face value
of the preferred membership interest in Cryptek held by the Company was reset at
$900,000, and the requirement for redemption of such interest by Cryptek was
extended through December 2002. Cryptek's pending action against the Company and
the Company's counterclaims against Cryptek have been discontinued and mutual
releases exchanged by the parties. The accompanying financial statements at
February 28, 1999 and May 31, 1998 include a valuation reserve of $150,000 and
$441,600, respectively, with respect to the note and related accrued interest.
Note 6 - Extraordinary Item
In October 1998, the Company Repurchased $100,000 of convertible debentures
for $33,000 in cash. The gain from the extinguishment of debt recorded as an
extraordinary gain of $67,000 in the accompanying statement of operations for
the nine months ended February 28, 1999.
8
Note 7 - Notes Receivable
The Company has agreed to extend the repayment period for certain outstanding
convertible loans totaling $175,000 to Link2It, LLC. Such loans will now be
scheduled to mature on January 1, 2000.
Note 8 - Union Negotiations
In the Company's Johnstown plant, approximately 70 employees are represented
by the International Brotherhood of Electrical Workers union, under a five year
collective bargaining agreement which will expire on May 31, 1999. The Company
and the Union have started negotiations for a new agreement during the fourth
quarter of fiscal 1999. Although the Company considers its employee relations to
be good, there can be no assurance to when, or on what terms, a new collective
bargaining agreement can be reached.
9
GENERAL KINETICS INCORPORATED
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Three Months Ended February 28, 1999 Compared to Three Months Ended February 28,
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1998
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Net sales for the three months ended February 28, 1999 were approximately $2.2
million as compared to approximately $1.8 million the three months ended
February 28, 1998. The increase in sales was primarily due to an increase in
demand for the quarter ended February 28, 1999 as compared to the corresponding
quarter of the prior fiscal year. The gross margin percentage increased from
23.8% for the quarter ended February 28, 1998 to 27.8% for the quarter ended
February 28, 1999. The increase in gross margin was primarily due to the
increase in net sales for the corresponding periods.
Sales, General & Administrative costs were approximately $445,700 in the third
quarter of fiscal 1999 as compared to approximately $366,000 in the third
quarter of the prior fiscal year. This increase was principally due to an
increase in marketing costs of approximately $56,500 related to the development
of a new commercial catalog and product line, along with increases in legal,
communications, travel and salary expenses.
For the three months ended February 28, 1999, the Company had operating income
of $169,300 compared to an operating income of $67,700 for the comparable
quarter of the prior year. The increase was due primarily to the increase in net
sales an gross margins described above.
Interest expense decreased from $58,600 in the third quarter of fiscal 1998 to
$46,900 in the third quarter of fiscal 1999. This increase occurred principally
because of a reduction in mortgage interest expense due to the sale of a
building in Orlando, Florida during the fourth quarter of fiscal 1998.
The Company's estimated effective tax rate for fiscal 1999 is 0%. This
estimated effective tax rate is lower than the statutory rate due to the
existence of net operating loss carryforwards.
10
Nine months Ended February 28, 1999, Compared to Nine months Ended February 28,
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1998
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Net sales for the nine months ended February 28, 1999 were approximately $4.7
million compared to net sales of approximately $4.8 million for the nine months
ended February 28, 1998. The decrease in sales was due primarily to a decrease
in demand in the first quarter of fiscal 1999 as compared to the same period of
the prior fiscal year. Management does not believe that the decrease in demand
reflected in the first nine months of fiscal 1999 represents a continuing trend.
Net sales increased by approximately 22% during the third quarter as compared to
the prior fiscal year. The contract backlog increased from approximately $1.9
million at May 31, 1998 to approximately $5.5 million at February 28, 1999. The
gross margin percentage increased slightly, from 26.0% for the nine months ended
February 28, 1998 to 27.0% for the nine months ended February 28, 1999. The
increase was principally due to the increased sales during the third quarter of
fiscal 1999.
Sales, General & Administrative costs were approximately $1.3 million in the
first nine months of fiscal 1999 as compared to approximately $1.1 million in
the first nine months of the prior fiscal year. This increase was principally
due to an increase in marketing costs of approximately $192,000 related to the
development of a new commercial catalog and product line, along with increases
in legal, communications, travel and salary expenses, partially offset by the
$75,000 reduction in the valuation reserve related to the Cryptek settlement.
For the nine months ended February 28, 1999, the Company had an operating loss
of $79,400 compared to operating income of $131,200 for the comparable nine
months of the prior year. The decrease was due principally to the decrease in
sales and increase in SG&A costs in the first nine months of fiscal 1999 in the
as compared to the corresponding period in the prior fiscal year.
Interest expense decreased from $186,500 in the first nine months of fiscal
1998 to $133,000 in the first nine months of fiscal 1999. This decrease
occurred principally because in fiscal 1999 the Company did not pay mortgage
interest on a building in Orlando, Florida that was sold during the fourth
quarter of fiscal 1998.
11
LIQUIDITY AND CAPITAL RESOURCES
The Company has relied upon internally generated funds, plus cash from sales
of two of its operating segments and the sale of its Orlando facility, to
finance its operations. The Company's capital requirements primarily result
from working capital needed to support increases in inventory and accounts
receivable.
The Company had a net loss of $145,400 for the first three quarters of fiscal
1999. Management does not believe that the loss experienced in the first nine
months of fiscal 1999 necessarily represents a continuing trend. Net sales
increased by approximately 22% during the third quarter as compared to the prior
fiscal year. The contract backlog increased from approximately $1.9 million at
May 31, 1998 to approximately $5.5 million at February 28, 1999. The Company
must continue to market electronic enclosure products to government and
commercial markets, {must produce quality products with on time deliveries}, and
enter into contracts that the Company can complete with favorable profit margins
in order to operate profitably for the remainder of fiscal 1999. The Company
also introduced and began marketing a catalog of commercial enclosures during
the second quarter of fiscal 1999 targeting markets such as the broadcast and
security industries.
The Company has outstanding debentures originally issued to clients of
Gutzwiller & Partner, A.G. 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.
As of February 28, 1999, the Company had cash and cash equivalents of
approximately $35,400. Management believes that cash on hand, cash flow
generated from operations, careful management of operating costs and cash
disbursements, and funds available from accounts receivable financing, should
enable the Company to meet its cash requirements through May 31, 1999.
In November 1998, the Company re-entered into 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. The Company
used this facility during the third quarter of fiscal 1999 (there was
approximately $179,400 of advances due to Reservoir at February 28, 1999) and
expects to draw on the facility during the remainder of fiscal 1999 when it
becomes necessary to alleviate short-term cash requirements.
12
Year 2000
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Many existing computer systems and software products, including many used by
the Company, accept only two digit entries in the date code field. Beginning in
the year 2000, and in certain instances prior to the year 2000, these date code
fields will need to accept four digit entries to distinguish 21st century dates
from 20th century dates. As a result, the Company's date critical functions may
be adversely affected unless these computer systems and software products are or
become able to accept four digit entries ("year 2000 compliant").
During the first quarter of fiscal 1999, the Company began updating its
accounting software package to a version that contains modifications intended to
make them year 2000 compliant. Management does not believe the Company will
suffer any material loss of customers or other material adverse effects as a
result of these modifications. There was no additional cost to the Company for
the accounting software upgrade to be year 2000 compliant. Most other software
programs used within the Company are considered to be year 2000 compliant. The
Company has begun to develop and implement a plan to test year 2000 compliance
in all of its systems, and to examine the effect of compliance by major vendors
and customers. There can be no assurance, however, that the Company's systems
will be rendered year 2000 compliant in a timely manner, or that the Company
might not incur significant unforeseen additional expenses to assure such
compliance. Failure to successfully complete and implement these modification
projects on a timely basis could have a material adverse effect on the Company's
operations.
Analysis of Cash Flows
Operating activities used approximately $1,862,000 in the first three quarters
of fiscal 1999, which reflects a net loss of $145,400 and a decrease of
$1,736,700 in cash provided to fund changes in working capital items offset by
an increase of $20,100 in non-cash expenses. The decrease in cash to fund
changes in working capital items was primarily due to an increase in accounts
receivable of $1,284,000 and an increase in inventories of $884,00. The increase
in accounts receivable was primarily due to an increase in billings in February
1999 as compared to May 1998, and the increase in inventories was principally
due to the increase in contract backlog on February 28, 1999 as compared to May
31, 1998.
Investing activities used $116,400 in the first three quarters of fiscal 1999.
These activities consisted primarily of the acquisition of property, plant and
equipment.
13
Financing activities provided $90,500 in the nine months ended February 28,
1999. Financing activities consisted principally of advances from the accounts
receivable factor offset by repayments of long term real estate debt.
PART II OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K
None
14
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: April 14, 1999 /s/ Larry M. Heimendinger
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Chairman of the Board
(Principal Executive Officer)
Date: April 14, 1999 /s/ Sandy B. Sewitch
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Chief Financial Officer
(Principal Accounting Officer and
Principal Financial Officer)
15