PART I
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, 1996
Commission File Number 0-1738
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GENERAL KINETICS INCORPORATED
(Exact Name of Registrant as Specified in its Charter)
Virginia 54-0594435
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
14130-C Sullyfield Circle, Chantilly, VA 20151
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code 703-802-9300
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
September 30, 1996 6,508,925 Shares
INDEX
Page No.
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Cautionary Statement Under the Private Securities Litigation Reform Act of 1995.......................3
Part I - Financial Information
Item I - Consolidated Financial Statements
Condensed Consolidated Balance Sheets -
August 31, 1996 and May 31, 1996.............................................................4
Condensed Consolidated Statements of Operations -
Three Months Ended August 31, 1996 and August 31, 1995,
respectively..................................................................................5
Condensed Consolidated Statements of Cash Flows -
Three Months Ended August 31, 1996 and
August 31, 1995...............................................................................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
2
CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Statements in this Quarterly Report on Form 10-Q under the caption "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 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 the Company may not be able to
maintain its listing on the American Stock Exchange; and the risk that the
Company may not be able to continue the necessary development of its operations
on a profitable basis. 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 of Form 10-K, as
amended, for the fiscal year ended May 31, 1996, 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, 1996 and 1995 set forth in the
Company's annual report on Form 10-K for the fiscal year ended May 31, 1996.
3
GENERAL KINETICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
August 31, May, 31
1996 1996
(Unaudited) (Audited)
Assets
Current Assets:
Cash and cash equivalents $ 153,600 $ 364,100
Accounts receivable, net of allowance, $178,000 and $249,700 2,236,400 1,325,500
Inventories 2,906,400 3,505,900
Prepaid expenses and other 28,900 24,600
----------- -----------
Total Current Assets 5,325,300 5,220,100
----------- -----------
Property, Plant and Equipment 6,899,500 6,869,300
Less: Accumulated Depreciation (5,475,600) (5,387,600)
----------- -----------
1,423,900 1,481,700
Other Assets, in 1996, principally capitalized software of
$193,200 and $206,100 311,200 324,000
----------- -----------
Total Assets $ 7,060,400 $ 7,025,800
=========== ===========
Liablilities and Stockholders' Deficit
Current Liabilities:
Advances from factor $ 317,000 $ 146,500
Current maturities of long-term debt 218,600 244,800
Accounts payable, trade 1,429,000 1,541,600
Accrued expenses and other payables 1,195,400 1,224,400
------------ ------------
Total Current Liabilities 3,160,000 3,157,300
------------ ------------
Long-Term debt - less current maturities (including
$8,982,900 and $8,966,700 due to controlling shareholder) 9,778,300 9,800,100
Other long-term liabilities 282,200 292,300
------------ ------------
Total Long-Term Liabilities 10,060,500 10,092,400
------------ ------------
Total Liabilities 13,220,500 13,249,700
------------ ------------
Stockholders' Deficit:
Common Stock, $0.25 par value, 50,000,000 and 10,000,000 1,759,000 1,759,000
shares authorized, 7,035,557 shares issued, 6,508,925
shares outstanding
Additional Contributed Capital 7,186,900 7,186,900
Accumulated Deficit (14,655,800) (14,719,600)
------------ ------------
(5,709,900) (5,773,700)
Less: Unearned ESOP shares -- --
Treasury Stock, at cost (526,632 shares) (450,200) (450,200)
------------ ------------
Total Stockholders' Deficit (6,160,100) (6,223,900)
------------ ------------
Total Liabilities and Stockholders' Deficit $ 7,060,400 $ 7,025,800
============ ============
The accompanying notes are an integral part of the above statements.
4
GENERAL KINETICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
August 31, August 31,
1996 1995
Net Sales $ 3,490,000 $ 4,900,800
Cost of Sales 2,484,900 3,576,100
----------- -----------
Gross Profit 1,005,100 1,324,700
----------- -----------
Selling, General & Administrative 654,300 807,500
Product Research, Development & Improvement 181,600 257,400
----------- -----------
Total Operating Expenses 835,900 1,064,900
----------- -----------
Operating Income 169,200 259,800
Interest Expense 105,400 111,700
----------- -----------
Net Income $ 63,800 $ 148,100
=========== ===========
Net Earnings per share $ 0.00 $ 0.01
=========== ===========
Weighted Average Number of Common Shares
and Dilutive Equivalents Outstanding 25,508,925 25,508,925
=========== ===========
The accompanying notes are an integral part of the above statements.
5
GENERAL KINETICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
August 31, August 31,
1996 1995
Cash Flows From Operating Activities:
Net Income $ 63,800 $ 148,100
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 100,800 118,600
Gain on disposal of equipment -- (100)
ESOP compensation -- 3,300
Amortization of bond discount 16,200 16,200
(Increase) Decrease in Assets:
Accounts Receivable (910,900) 475,200
Inventories 599,500 20,800
Prepaid Expenses (4,300) 30,600
Other assets - Software Development Costs -- (53,700)
Other assets -- 4,700
Increase (Decrease) in Liabilities:
Accounts Payable - Trade (112,600) (255,100)
Accrued Expenses (29,000) 102,000
Other Long Term Liabilities (10,100) (9,600)
---------- -----------
Net cash provided by/(used) in
Operating Activites (286,600) 601,000
---------- -----------
Cash Flows from Investing Activities:
Acquisition of property, plant and equipment (30,200) (33,300)
Net proceeds from sale of property, plant
and equipment -- 1,000
---------- -----------
Net cash used in Investing Activities (30,200) (32,300)
---------- -----------
Cash Flows from Financing Activities:
Advances from Factor/Borrowings
on Demand Notes Payable 733,600 632,700
Repayments of Advances from Factor/
Demand Notes Payable (563,100) (1,037,000)
Borrowings on Long Term Debt -- --
Repayments on Long Term Debt (64,200) (48,200)
---------- -----------
Net cash used in Financing Activities 106,300 (452,500)
---------- -----------
Net (decrease) increase in cash and cash
equivalents (210,500) 116,200
Cash and Cash Equivalents: Beginning of Period 364,100 212,200
---------- -----------
Cash and Cash Equivalents: End of Period $ 153,600 $ 328,400
========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 105,400 $ 98,100
Income Taxes -- --
Supplemental Disclosures of Non Cash Investing
and Financing Activities:
Reduction in paid in capital based on fair market
value of ESOP shares $ -- $ 71,650
The accompanying notes are an integral part of the above statements.
6
GENERAL KINETICS INCORPORATED AND SUBSIDIARIES
Notes to Condensed Financial Statements
(Unaudited)
Note 1 - Basis of Presentation
The condensed consolidated financial statements at May 31, 1996, and
for the three months ended August 31, 1996, and August 31, 1995, include the
accounts of General Kinetics Incorporated and its wholly-owned subsidiary, Food
Technology Corporation. All material intercompany accounts and transactions have
been eliminated.
The financial information included herein is unaudited. In addition,
the financial information does not include all disclosures required under
generally accepted accounting principles in that certain note information
included in the Company's Annual Report has been omitted; however, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary to a fair
presentation of the results of the interim periods.
The results of operations for the three month period ended August 31,
1996, are not necessarily indicative of the results to be expected for the full
year.
Note 2 - Proposed Sale of the Secure Communications Division
In July 1996, the Company reached a preliminary understanding in
principle to sell the assets of its Secure Communications Division ("SCD") to an
undisclosed third party. The proposed transaction remains subject to conclusion
and execution of a definitive agreement, receipt of any required approvals, and
other contingencies. A previous preliminary understanding reached in December
1995 to sell the division to another third party had not progressed to a
definitive agreement. The Company has not been actively attempting to sell the
division, but has considered certain offers as presented to it.
Under the terms of the preliminary understanding, the assets to be sold
consist primarily of accounts receivable, inventories, capitalized software,
property, plant and equipment. These assets are offset by certain liabilities to
be acquired by the purchaser, consisting primarily of accounts payable and other
accrued liabilities related to the division.
Based on the terms of the preliminary understanding, the Company does
not anticipate a loss on the sale of the division.
7
Net sales of SCD for the three months ended August 31, 1996 and 1995
were approximately $850,900 and $2.3 million, respectively. The net
income/(loss) for the division for the three months ended August 31, 1996 and
1995 were approximately $(34,800) and $10,100, respectively. These amounts are
included in the accompanying income statement.
Assets and liabilities proposed to be sold consisted of the following
at August 31 and May 31, 1996:
August 31, 1996 May 31, 1996
--------------- ------------
Accounts receivable $ 604,710 $ 429,839
Inventories 2,374,755 2,490,382
Prepaid expenses 6,910 6,910
Property, plant and Equip. 172,425 198,567
Other assets 296,579 304,429
--------- ---------
Total assets 3,455,379 3,429,667
--------- ---------
Accounts payable 526,151 692,798
Accrued expenses 400,930 419,163
--------- ---------
Net assets to be sold $2,528,299 $2,317,716
========== ==========
The accompanying balance sheets and statements of operations have not
been restated to reflect the potential transaction.
Note 3 - Commitments and Contingencies
No significant changes.
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 shareholder, Gutzwiller & Partner, AG now being
renamed RABO Investment Management 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 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 were increased. For the three months ended August 31, 1996 and
1995, both primary and fully diluted earnings per share amounted to less than
$0.01 and $0.01, respectively.
8
Note 5 - Notes Payable
At May 31 and August 31, 1996 convertible debentures issued to Gutzwiller have
an aggregate principal amount of $9.5 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 beginning August 1995.
Shares issuable upon conversion are also subject to certain rights to
registration under the Securities Act of 1933, as amended.
Other Real Estate Mortgage Loans
The Company was in violation of certain loan covenants of the real estate
mortgage agreement on the Company's Johnstown facility as of August 31, 1996,
however, the lender has agreed to waive the violations through May 31, 1997. The
debt has been classified as a current liability at August 31, 1996 in the
accompanying financial statements.
Additionally, as previously reported, the Company has entered into a
Forbearance Agreement with the holder of the real estate mortgage on the
Company's Orlando facility (under which $141,800 was outstanding at August 31,
1996). Pursuant to the Forbearance Agreement, a redemption notice with respect
to the bonds originally issued to finance the facility, previously delivered by
the mortgage holder, was withdrawn and the Company has agreed to make
accelerated payments of $10,000 per month in principal and interest until the
remaining principal is paid in full.
9
GENERAL KINETICS INCORPORATED
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Three Months Ended August 31, 1996, Compared to Three Months Ended August 31,
1995
Net sales for the three months ended August 31, 1996 were approximately $3.5
million compared to net sales of approximately $4.9 million for the quarter
ended August 31, 1995. The Electronic Enclosure Division's net sales increased
from approximately $2.4 million for the quarter ended August 31, 1995 to
approximately $2.6 million for the quarter ended August 31, 1996. However, sales
in the Secure Communications Division were $850,900 for the quarter ended August
31, 1996 compared to approximately $2.3 million in the corresponding quarter of
the prior fiscal year. This reduction occurred principally because sales for the
quarter ended August 31, 1995 included approximately $1.5 million in shipments
under a contract with a supplier of fax machines to the German government. Final
deliveries under this contract were completed in April 1996, and there were no
deliveries under this contract for the quarter ended August 31, 1996.
Sales, General & Administrative costs were approximately $654,300 in the first
quarter of fiscal 1996 to as compared to approximately $807,500 in the first
quarter of the prior fiscal year. The reduction was principally due to cost
savings measures undertaken in the Secure Communications Division to offset the
reduction in sales discussed above.
For the three months ended August 31, 1996, the Company showed operating
income of approximately $169,200 compared to operating income of $259,800 for
the comparable quarter of the prior year. The decrease was due principally to a
decrease in net income in SCD of approximately $45,000 and an expense of
approximately $59,000 during the quarter ended August 31, 1996 for research and
development in respect to the feasibility of potential new products or services,
through joint ventures or otherwise, outside of the Company's present operating
divisions.
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 1996 showed
significant improvement over the prior three fiscal years, and there was a small
operating profit in the first quarter of fiscal 1997. In
10
the Electronic Enclosure Division, productivity improvements along with
efforts to target new contracts with higher profit margins for the Company
resulted in a significant improvement in gross profits for the 1996 fiscal
year as compared to the prior three fiscal years. The division must continue to
market electronic enclosure products to government and commercial markets,
and enter into contracts which the division can complete with favorable
profit margins to continue to operate profitably in fiscal 1997. If the
Company does not sell its Secure Communications Division in accordance
with the preliminary understanding discussed above, successful operations
will depend, to a large extent, on the success of the new TS-21 tactical fax
machine and the division's ability to market the secured communications
products overseas and to domestic markets.
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 profitability in fiscal 1997.
In July 1996, the Company reached a preliminary understanding in principle to
sell its Secure Communications Division to an undisclosed third party. The
proposed transaction remains subject to conclusion and execution of a definitive
agreement, receipt of any required approvals, and other contingencies. The
Company has not been actively attempting to sell the division, but has
considered certain offers as presented to it. A previous preliminary
understanding reached on December 12, 1995 to sell the division to another third
party had not progressed to a definitive agreement.
In June 1993, the Company 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 factoring agreement with
Reservoir was renewed in December 1994, and continues on a month-to-month basis.
At August 31, 1996, the balance due Reservoir was $317,000. The Company expects
to continue to draw on this credit facility in the future to alleviate
short-term cash requirements.
The Company continues to be out of compliance with certain listing requirements
of the American Stock Exchange by virtue of recent trading prices of its common
stock as well as stockholders' equity and working capital deficits, recent
losses and other factors. The Company has actively taken steps to address the
Exchange's guidelines, and has discussed with representatives of the Exchange
its situation and the basis on which a termination of listing might continue to
be deferred, but such deferral appears unlikely to continue absent changes in
the Company's circumstances, and there can be no assurance that a return to
compliance will be accomplished or that the listing will be continued.
The Company anticipates that implementation of the 1-for-3 reverse stock split
recommended by the American Stock Exchange and approved by
11
shareholders at the 1995 Annual Meeting would be delayed until after the
closing of the proposed transaction to sell the Secure Communications Division.
Management believes that cash on hand as of August 31, 1996 ($153,600), 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, 1997.
12
PART II OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(b) Reports of 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: October 15, 1996 /s/ Larry M. Heimendinger
------------------------------ -------------------------------
Chairman of the Board
(Principal Executive Officer)
Date: October 15, 1996 /s/ Sandy B. Sewitch
------------------------------ -------------------------------
Chief Financial Officer
(Principal Accounting Officer and
Principal Financial Officer)
14