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 the quarterly period ended August 31, 1995
GENERAL KINETICS INCORPORATED
Commission File Number 0-1738
(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
13505 Dulles Technology Drive, Herndon, VA 22071-3415
(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 required to Form 8-K to add audit report regarding
acquisition financial statements previously filed)
The number of shares outstanding of Registrant's Common Stock, .25 par value,
as of September 30, 1995 6,508,925 Shares
INDEX
Page No.
Part I - Financial Information
Item I - Consolidated Financial Statements
Condensed Consolidated Balance Sheets -
August 31, 1995, and May 31, 1995 4
Condensed Consolidated Statements of Operations -
Three Months Ended August 31, 1995, and August 31, 1994,
respectively 5
Condensed Consolidated Statements of Cash Flows -
Three Months Ended August 31, 1995, and
August 31, 1994 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 13
PART I FINANCIAL INFORMATION
Item 1 - Condensed Consolidated Financial Statements
The unaudited condensed 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 condensed
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 condensed
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 & Subsidiaries
Consolidated Balance Sheets
August 31, 1995 May 31, 1995
(Unaudited) (Audited)
Assets
Current Assets:
Cash and cash equivalents $328,400 $212,200
Accounts receivable, net of allowance, $181,400 and $181,400 2,569,800 3,045,000
Inventories 3,180,200 3,201,000
Prepaid expenses and other 38,700 69,300
Total Current Assets 6,117,100 6,527,500
Property, Plant and Equipment 6,719,600 6,697,700
Less: Accumulated Depreciation (5,057,100) (4,950,300)
1,662,500 1,747,400
Other Assets, in 1995, principally capitalized software of
$353,800 and $300,600 467,100 419,400
Total Assets $8,246,700 $8,694,300
Liablilities and Stockholders' Deficit
Current Liabilities:
Advances from factor $2,700 $407,000
Current maturities of long-term debt 338,400 364,500
Accounts payable, trade 1,934,000 2,189,100
Accrued expenses and other payables 1,264,300 1,162,300
Total Current Liabilities 3,539,400 4,122,900
Long-Term debt - less current maturities (including
$8,918,300 and $8,885,900 due to controlling shareholder) 9,759,800 9,765,700
Other long-term liabilities 287,800 297,400
Total Long-Term Liabilities 10,047,600 10,063,100
Total Liabilities 13,587,000 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 7,394,700 7,466,400
Accumulated Deficit (13,818,800) (13,966,900)
(4,665,100) (4,741,500)
Less: Unearned ESOP shares (225,000) (300,000)
Treasury Stock, at cost (526,632 shares) (450,200) (450,200)
Total Stockholders' Deficit (5,340,300) (5,491,700)
Total Liabilities and Stockholders' Deficit $8,246,700 $8,694,300
The accompanying notes are an integral part of the above statements.
4
General Kinetics Incorporated & Subsidiaries
Consolidated Statements of Operations
(unaudited)
Three Months Ended
August 31, August 31,
1995 1994
Net Sales $4,900,800 $2,275,300
Cost of Sales 3,576,100 1,866,400
Gross Profit 1,324,700 408,900
Selling, General & Administrative 807,500 651,100
Product Research, Development & Improvement 257,400 271,900
Total Operating Expenses 1,064,900 923,000
Operating Income/(Loss) 259,800 (514,100)
Interest Expense 111,700 133,500
Net Income/(Loss) $148,100 $(647,600)
Net Earnings/(Loss) per Common and
Common Equivalent Share $0.01 $(0.10)
Weighted Average Number of Common
and Common Equivalent Shares Outstanding 25,508,925 6,508,925
The accompanying notes are an integral part of the above statements.
5
General Kinetics Incorporated & Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
Three Months Ended
August 31, August 31,
1995 1994
Cash Flows From Operating Activities:
Net Income/(Loss) $148,100 $(647,600)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 118,600 132,600
Gain on disposal of equipment (100) (2,600)
ESOP compensation 3,300 7,600
Amortization of bond discount 16,200 45,900
(Increase) Decrease in Assets:
Accounts Receivable 475,200 365,100
Inventories 20,800 11,300
Prepaid Expenses 30,600 (4,400)
Other assets - Software Development Costs (53,700)
Other assets 4,700 (9,400)
Increase (Decrease) in Liabilities:
Accounts Payable - Trade (255,100) (218,700)
Accrued Expenses 102,000 26,300
Other Long Term Liabilities (9,600) (600)
Net cash provided by/(used) in Operating Activities 601,000 (294,500)
Cash Flows from Investing Activities:
Acquisition of property, plant and equipment (33,300) (38,600)
Net proceeds from sale of property, plant and equipment 1,000 -
Acquisitions of Verdix Secure Products Division - 2,600
Net cash used in Investing Activities (32,300) (36,000)
Cash Flows from Financing Activities:
Advances from Factor/Borrowings on Demand Notes Payable 632,700 -
Repayments of Advances from Factor/Demand Notes Payable (1,037,000) -
Borrowings on Long Term Debt - 30,000
Repayments on Long Term Debt (48,200) (70,100)
Net cash used in Financing Activities (452,500) (40,100)
Net (decrease) increase in cash and cash equivalents 116,200 (370,600)
Cash and Cash Equivalents: Beginning of Period 212,200 765,200
Cash and Cash Equivalents: End of Period $328,400 $394,600
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $98,100 $86,700
Income Taxes - 27,929
Supplemental Disclosures of Non Cash Investing
and Financing Activities:
Reduction in paid in capital based on fair market
value of ESOP shares $71,650 $67,400
The accompanying notes are an integral part of the above statements.
6
GENERAL KINETICS INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1 - Basis of Presentation
The condensed consolidated financial statements at August 31, 1995 and
May 31, 1995, and for the three months ended August 31, 1995, and August 31,
1994, include the accounts of General Kinetics Incorporated and its wholly-
owned subsidiaries, Food Technology Corporation and GKI Tempest Services, Inc.
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 month period ended August 31,
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:
August 31, 1995 May 31, 1995
Raw Material $2,072,300 $1,353,000
Work in Process 1,107,900 1,848,000
Totals $3,180,200 $3,201,000
Note 3 - Commitments and Contingencies
An environmental study undertaken by consultants in connection with
refinancing the Orlando mortgage has identified certain areas of concern which
are being further analyzed and investigated by the Company and its consultants.
These concerns, which were first identified in July, 1995,
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relate to the preliminary indication that the Orlando property may contain
levels of certain contaminants approaching or exceeding regulatory standards.
The Company expects its consultants to assist in determining, among other
things, the nature, extent, and original source of these substances as well
as the degree of involvement required from the Company to satisfactorily
resolve these concerns. At the present time it is too early to determine
whether any monitoring, remediation, or other action may be necessary, or to
determine the cost, if any, that might be associated with such activities if
required. Accordingly, the Company has not recorded any provision for loss
with respect to this matter.
Note 4 - Net Income/(Loss) Per Share
Primary and fully diluted net earnings/(loss) per share have been computed
using the weighted average number of common shares and common equivalent
shares outstanding, to the extent dilutive. Common equivalent shares consist
of 19 million shares issuable upon conversion of Convertible Subordinated
Debentures issued to the Company's majority stockholder, Gutzwiller & Partner,
AG ("Gutzwiller"). Outstanding stock options were not determined to be
dilutive, and therefore no effect was given to them for the current period.
Net income for the current period was adjusted for the elimination of interest
expense for the convertible debt, net of applicable income taxes, while the
average number of shares of common stock and common stock equivalents
outstanding were increased. For the three months ended August 31, 1995, both
primary and fully diluted earnings per share amounted to $0.01.
Due to the losses for the three months ended August 31, 1994, the outstanding
stock options and Convertible Subordinated Debentures issued to Gutzwiller
were not considered dilutive and therefore no effect is given to any stock
equivalents for that period.
Note 5 - Notes Payable
At May 31 and August 31, 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.
8
Other Real Estate Mortgage Loans
The Company was in violation of certain financial covenants of the real estate
mortgage agreement on the Company's Johnstown facility as of August 31, 1995,
however, the lender has agreed to waive the violations through May 31, 1996.
The debt has been classified as a current liability at August 31, 1995 in the
accompanying financial statements.
The holder of the real estate mortgage on the Company's Orlando facility,
under which $243,900 was outstanding on August 31, 1995, has 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,
have been called for redemption on August 22, 1995. Such a redemption would
create an obligation to prepay amounts outstanding under the mortgage. As a
result of the mortgage holder's communication, the debt has been classified as
a current liability at May 31, 1995 and August 31, 1995 in the accompanying
financial statements.
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 August 31,
1995, the Company capitalized $53,700 in internally developed software costs
relating to the secure local area network product new release (VSLAN 5.0) and
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 product
that is currently being amortized has an estimated life of three years.
Amortization of capitalized costs was $1,300 in the first quarter of fiscal
1996.
9
GENERAL KINETICS INCORPORATED
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Three Months Ended August 31, 1995, Compared to Three Months Ended August 31,
1994
Net sales for the three months ended August 31, 1995 were $4.9 million as
compared to net sales of $2.3 million for the three months ended August 31,
1994. In the Secure Communications Division ("SCD"), net sales increased by
approximately $1.3 million, from $1.0 million for the first quarter of fiscal
1995 to $2.3 million in the first quarter of fiscal 1996. The increase in
SCD sales was primarily attributable to deliveries totaling $1.5 million on a
contract to ANT, a supplier of fax machines to the German Government.
Approximately $1.5 million of the contract remained in backlog at August 31,
1995, and shipments are expected to be substantially completed by calendar
year end.
The Electronic Enclosure Division's ("EED") net sales increased from $1.1
million for the quarter ended August 31, 1994, to $2.4 million for the quarter
ended August 31, 1995. This increase was due to an increase in customer demand
for the first quarter of fiscal 1995 as compared to the corresponding quarter
of the prior fiscal year.
Sales, General & Administrative costs increased from approximately $651,100
the first quarter of fiscal 1995 to approximately $807,500 in the first
quarter of the current fiscal year. The increase was primarily due to an
increased sales and marketing effort in the Secure Communications Division.
For the three months ended August 31, 1995, the Company showed an operating
profit of $148,100 compared to a $514,100 operating loss for the comparable
quarter of the prior year. The improvement in operations was primarily due to
increase in sales discussed above as well as a significant increase in the
gross margin in the Electronic Enclosure Division. 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 quarter of fiscal 1996 as
compared to the corresponding period of the prior fiscal year.
Interest expense for the three months ended August 31, 1995 was $111,700
compared to an interest expense of $133,500 for the three months ended August
31, 1994.
10
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 income of approximately
$148,100 in the first quarter of fiscal 1996 showed significant improvement
over the loss for the same period in the prior fiscal year. To achieve overall
profitability for fiscal 1996, 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 which started 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 quarter 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 sustained profitability in fiscal 1996.
Management believes that it has taken appropriate steps to return 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 overall profitability in fiscal 1996.
As of September 27, 1995, the Memorandum of Agreement between the Company and
the National Security Agency ("NSA") expired in accordance with its terms.
NSA has indicated that extension or replacement of that Memorandum is
dependent on, in particular, the Defense Investigative Service ("DIS") issuing
a favorable report with respect to foreign ownership issues affecting the
Company. As previously disclosed, the Company has been in discussions with
the DIS for that purpose and has submitted definitive proposals which it
believes are consistent with the DIS's expectations and requirements in this
regard. However, there can be no assurance that favorable DIS action will not
be delayed, or will be forthcoming. Management believes that such a
development should not, in any case, have any material adverse effect on the
Company in the near term.
Management believes that cash on hand as of August 31, 1995 ($328,400),
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. Under notice
from the holder of the real estate mortgage on the Company's Orlando facility,
under which $243,900 was outstanding at August 31, 1995, amounts
11
outstanding under that mortgage were stated to become prepayable on August 22,
1995. The Company is attempting to negotiate an extension of this due date to
allow it to continue to investigate its options, which include pursuing
potential refinancing; however, to date its present mortgage holder has not
granted the extension of the due date. In the event that such mortgage
cannot be refinanced or extended, the Company may have additional short term
cash requirements. However, the Company believes that should the Orlando
facility be foreclosed upon by the mortgage holder, the Orlando operations can
be absorbed by the excess capacity in the Johnstown facility without material
expense or disruption. The Orlando mortgage has been classified as a current
liability in the Company's financial statements; otherwise, the financial
statements do not include any further adjustments that might result from the
outcome of this uncertainty.
12
PART II OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(b) Reports of Form 8-K
1. 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: October 16, 1995 /s/ Larry M. Heimendinger
Larry M. Heimendinger
Chairman of the Board
(Principal Executive Officer)
Date: October 16, 1995
/s/ Sandy B. Sewitch
Sandy B. Sewitch
Chief Financial Officer
(Principal Accounting Officer and
Principal Financial Officer)
14