.
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, 1998 Commission File Number 0-1738
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
------------------
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 January 5, 1999 6,718,925 Shares
INDEX
PAGE NO.
Cautionary Statement Under the Private Securities Litigation Reform Act of 1996.......... 3
Part I - Financial Information
Item I - Consolidated Financial Statements
Condensed Consolidated Balance Sheets -
November 30, 1998 and May 31, 1998............................................ 4
Condensed Consolidated Statements of Operations -
Three Months and Six Months Ended November 30, 1998 and November 30, 1997,
respectively................................................................... 5
Condensed Consolidated Statements of Cash Flows -
Six Months Ended November 30, 1998 and
November 30, 1997, 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............................................................................................. 13
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
November 30, 1998
November 30, May 31,
1998 1998
(Unaudited) (Audited)
Assets
Current Assets:
Cash and cash equivalents $ 300,100 $ 1,923,300
Accounts receivable, net of allowance 1,091,200 560,700
Inventories 1,137,700 740,500
Prepaid expenses and other 29,800 4,900
Note Receivable, current 25,000 -
Note Receivable, affiliate 175,000 175,000
-------- -----------
Total Current Assets 2,758,800 3,404,400
---------- -----------
Property, Plant and Equipment 2,871,400 2,780,800
Less: Accumulated Depreciation (1,836,500) (1,766,100)
----------- -----------
1,034,900 1,014,700
Note Receivable, less current portion, net of allowance 400,000 350,000
Other Assets 24,000 1,200
------------ -----------
Total Assets $ 4,217,700 $ 4,770,300
=========== ===========
Liablilities and Stockholders' Deficit
Current Liabilities:
Current maturities of long-term debt 103,000 103,000
Accounts payable, trade 119,100 217,400
Accrued expenses and other payables 528,600 591,900
------------ -----------
Total Current Liabilities 750,700 912,300
------------ -----------
Long-Term debt - less current maturities (including
$8,639,200 and $8,956,400 of convertible debentures) 9,265,000 9,369,300
Other long-term liabilities 258,200 277,100
------------ -----------
Total Long-Term Liabilities 9,523,200 9,646,400
------------ -----------
Total Liabilities 10,273,900 10,558,700
------------ -----------
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 (14,656,900) (14,389,100)
------------ ------------
(5,606,000) (5,338,200)
Less: Treasury Stock, at cost (526,632 shares) (450,200) (450,200)
--------- ---------
Total Stockholders' Deficit (6,056,200) (5,788,400)
----------- -----------
Total Liabilities and Stockholders' Deficit $ 4,217,700 $ 4,770,300
============ ===========
The accompanying notes are an integral part of the above statements.
Page 4
General Kinetica Incorporated
Statement of Operations
Six Months Ended Three Months Ended
November 30, November 30, November 30, November 30
1998 1997 1998 1997
---- ---- ---- ----
Net Sales $ 2,446,400 $ 2,941,800 $ 1,660,900 $ 1,663,100
Cost of Sales 1,802,900 2,139,400 1,203,100 1,188,200
------------ ------------ ------------ ------------
Gross Profit 643,500 802,400 457,800 474,900
------------ ------------ ------------ ------------
Selling, General & Administrative 892,200 738,900 407,400 382,300
Product Research, Development & Improvement -- -- -- --
------------ ------------ ------------ ------------
Total Operating Expenses 892,200 738,900 407,400 382,300
------------ ------------ ------------ ------------
Operating Income (loss) (248,700) 63,500 50,400 92,600
Interest Expense 86,100 127,900 40,200 60,000
------------ ------------ ------------ ------------
Income (loss) before extraordinary item (334,800) (64,400) 10,200 32,600
------------ ------------ ------------ ------------
Exraordinary item - gain from debt extinguishment 67,000 -- 67,000 --
------------ ------------ ------------ ------------
Net Income (loss) $ (267,800) $ (64,400) $ 77,200 $ 32,600
============ ============ ============ ============
Basic Earnings per Share:
Earnings (loss) before extraordinary item ($ 0.05) ($ 0.01) $ 0.00 $ 0.005
Earnings from extraordinary item 0.01 -- 0.01 --
------------ ------------ ------------ ------------
Basic Earnings (loss) per share ($ 0.04) ($ 0.01) $ 0.01 $ 0.005
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 ($ 0.012) ($ 0.001) $ 0.001 $ 0.002
Earnings from extraordinary item 0.003 -- 0.003 --
------------ ------------ ------------ ------------
Diluted Earnings (loss) per share ($ 0.009) ($ 0.001) $ 0.004 $ 0.002
Weighted Average Number of Common Shares
and Dilutive Equivalents Outstanding 24,708,925 25,508,925 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
Six Months Ended
November 30, November 30,
------------ ------------
1998 1997
---- ----
Cash Flows From Operating Activities:
Net Income/(Loss) $ (267,800) $ (64,400)
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 70,400 81,500
Extraordinary gain on debt extinguishment (67,000)
Amortization of bond discount 31,000 32,300
Bad debt provision (75,000)
(Increase) Decrease in Assets:
Accounts Receivable (530,500) (15,800)
Inventories (397,200) (500,700)
Prepaid Expenses (24,900) (11,200)
Other assets (22,800) 17,900
Increase (Decrease) in Liabilities:
Accounts Payable - Trade (98,300) (19,000)
Accrued Expenses (63,300) (28,700)
Other Long Term Liabilities (18,900) (19,200)
-------- --------
Net cash provided by/(used) in Operating Activites (1,464,300) (527,300)
----------- ---------
Cash Flows from Investing Activities:
Acquisition of property, plant and equipment (90,600) (113,500)
Issuance of Notes Receivable - (25,000)
------- ---------
Net cash provided by/(used) in Investing Activities (90,600) (138,500)
-------- ---------
Cash Flows from Financing Activities:
Borrowings on Long Term Debt - -
Repayments on Long Term Debt (68,300) (85,200)
-------- --------
Net cash provided by/(used) in Financing Activities (68,300) (85,200)
-------- --------
Net (decrease) increase in cash and cash equivalents (1,623,200) (751,000)
Cash and Cash Equivalents: Beginning of Period 1,923,300 1,482,300
---------- ---------
Cash and Cash Equivalents: End of Period $ 300,100 $ 731,300
========== =========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 104,200 $ 137,800
Income Taxes 6,800 800
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 six months ended November 30, 1998, and November 30, 1997,
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 and six month periods
ended November 30, 1998, 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 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 per share, and
bear interest at 1% per annum, which is payable annually.
7
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 November 30, 1998,
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
November 30, 1998 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 three months and six months ended November 30, 1998.
8
GENERAL KINETICS INCORPORATED
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Three Months Ended November 30, 1998 Compared to Three Months Ended November 30,
1997
Net sales for the three months ended November 30, 1998 were essentially
unchanged at $1.7 million as compared to the three months ended November 30,
1997. The gross margin percentage decreased from 28.6% for the quarter ended
November 31, 1997 to 27.6% for the quarter ended November 30, 1998. The decrease
in gross margin was primarily due to small changes in the product mix delivered
in the corresponding periods.
Sales, General & Administrative costs were approximately $407,400 in the
second quarter of fiscal 1999 as compared to approximately $382,300 in the
second quarter of the prior fiscal year. This increase was principally due to an
increase in marketing costs of approximately $78,500 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 a $75,000
adjustment to the valuation reserve related to the Cryptek settlement.
For the three months ended November 30, 1998, the Company had operating
income of $50,400 compared to an operating income of $92,600 for the comparable
quarter of the prior year. The decrease was due primarily to the increased
selling, general and administrative costs and the small decrease in the gross
profit margin discussed above, offset by the $75,000 reduction in the valuation
reserve discussed above.
Interest expense decreased from $60,000 in the second quarter of fiscal 1998
to $40,200 in the second quarter 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.
The Company recorded an extraordinary gain from debt extinguishment of
$67,000 during the quarter ended November 30, 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.
9
Six Months Ended November 30, 1998, Compared to Six Months Ended November 30,
1997
Net sales for the six months ended November 30, 1998 were approximately $2.4
million compared to net sales of approximately $2.9 million for the six months
ended November 30, 1997. 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 half of fiscal 1999 necessarily represents a continuing
trend. The contract backlog increased from approximately $1.9 million at May 31,
1998 to approximately $4.5 million at November 30, 1998. The gross margin
percentage decreased slightly, from 27.3% for the six months ended November 30,
1997 to 26.3 for the six months ended November 30, 1998. The decrease was
principally due to the decrease in sales for the corresponding periods.
Sales, General & Administrative costs were approximately $892,200 in the
first six months of fiscal 1999 as compared to approximately $738,900 in the
first six months of the prior fiscal year. This increase was principally due to
an increase in marketing costs of approximately $135,500 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 six months ended November 30, 1998, the Company had an operating loss
of $248,700 compared to operating income of $63,500 for the comparable six
months of the prior year. The decrease was due principally to the decrease in
sales and a small decrease in the gross profit margin in the first six months of
fiscal 1999 in the as compared to the corresponding period in the prior fiscal
year.
Interest expense decreased from $127,900 in the first six months of fiscal
1998 to $86,100 in the first six 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.
10
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 $300,800 for the first half of fiscal 1999.
Management does not believe that the loss experienced in the first six months of
fiscal 1999 necessarily represents a continuing trend. The contract backlog
increased from approximately $1.9 million at May 31, 1998 to approximately $4.5
million at November 30, 1998. The Company must continue to market electronic
enclosure products to government and commercial markets, 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 November 30, 1998, the Company had cash of approximately $.3 million.
Management believes that cash on hand and 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
expects to draw on the facility during fiscal 1999 when it becomes necessary to
alleviate short-term cash requirements.
Year 2000
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
11
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 expects to develop and implement a plan during fiscal 1999 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 $1,464,300 in the first half of fiscal
1999, which reflects a net loss of $267,800 and a decrease of $1,155,900 in cash
provided to fund changes in working capital items and a decrease of $40,600 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 $530,500 and an
increase in inventories of $397,200. The increase in accounts receivable was
primarily due to an increase in billings in November 1998 as compared to May
1998, and the increase in inventories was principally due to the increase in
contract backlog on November 30, 1998 as compared to May 31, 1998.
Investing activities used $90,600 in the first half of fiscal 1999. These
activities consisted primarily of the acquisition of property, plant and
equipment.
Financing activities used $68,300 in the six months ended November 30, 1998.
Financing activities consisted principally of repayments of long term real
estate debt.
12
Item 4 - Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders on November 20, 1998, the following
matters were voted on and approved:
1. Larry Heimendinger and Thomas Hacala were elected as Class I directors for
a term expiring in 2001 or until their successors are elected and
qualified. 4,809,214 shares of common stock, or 99.0% of the shares voting,
voted in favor of Messrs. Heimendinger and Hacala, and 50,386, or 1.0% of
the shares voting, withheld authority to vote for Messrs. Heimendinger and
Hacala. In addition to Messrs. Heimendinger and Hacala, Richard McConnell
remained as a Class III director and Marc Cotnoir remained as a Class II
director.
2. The Board's selection of BDO Seidman as the Company's independent public
accountants for the fiscal year ended May 31, 1999 was ratified. 4,784,068
shares of common stock, or 98.4% of the shares voting, voted in favor of
the proposal. 38,514 shares, or 0.8% of the shares voting, voted against
and 37,018, or 0.8% of the shares voting, abstained.
PART II OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K
None
13
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 14, 1999 /s/ Larry M. Heimendinger
---------------------------------
Chairman of the Board
(Principal Executive Officer)
Date: January 14, 1999 /s/ Sandy B. Sewitch
---------------------------------
Chief Financial Officer
(Principal Accounting Officer and
Principal Financial Officer)
14