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, 1996 Commission File Number 0-1738
------
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 January 5, 1997
6,508,925 Shares
INDEX
Page No.
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 -
November 30, 1996 and May 31, 1996................................................... 4
Condensed Consolidated Statements of Operations -
Six Months and Three Months Ended November 30, 1996 and November 30, 1995,
respectively........................................................................... 5
Condensed Consolidated Statements of Cash Flows -
Six Months and Three Months Ended November 30, 1996 and
November 30, 1995, 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...............................................................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
Consolidated Balance Sheets
November 30, May, 31
1996 1996
(Unaudited) (Audited)
-------------- ---------------
Assets
Current Assets:
Cash and cash equivalents $ 319,500 $ 364,100
Accounts receivable, net of allowance, $168,000 and $249,700 1,622,300 1,325,500
Inventories 562,000 3,505,900
Prepaid expenses and other 125,000 24,600
Assets held for Sale 2,242,400 -
------------- -------------
Total Current Assets 4,871,200 5,220,100
------------- -------------
Property, Plant and Equipment 4,849,600 6,869,300
Less: Accumulated Depreciation (3,609,500) (5,387,600)
------------- -------------
1,240,100 1,481,700
Other Assets, in 1996, principally capitalized software of
$206,100 at May 31, 1996 14,600 324,000
------------- -------------
Total Assets $ 6,125,900 $ 7,025,800
============= =============
Liablilities and Stockholders' Deficit
Current Liabilities:
Advances from factor $ 269,800 $ 146,500
Current maturities of long-term debt 212,900 244,800
Accounts payable, trade 1,104,700 1,541,600
Accrued expenses and other payables 810,500 1,224,400
------------- -------------
Total Current Liabilities 2,397,900 3,157,300
------------- -------------
Long-Term debt - less current maturities (including
$8,999,100 and $8,966,700 due to controlling shareholder) 9,755,500 9,800,100
Other long-term liabilities 272,600 292,300
------------- -------------
Total Long-Term Liabilities 10,028,100 10,092,400
------------- -------------
Total Liabilities 12,426,000 13,249,700
------------- -------------
Stockholders' Deficit:
Common Stock, $0.25 par value, 50,000,000 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 (14,795,800) (14,719,600)
------------- -------------
(5,849,900) (5,773,700)
Less:
Treasury Stock, at cost (526,632 shares) (450,200) (450,200)
------------- -------------
Total Stockholders' Deficit (6,300,100) (6,223,900)
------------- -------------
Total Liabilities and Stockholders' Deficit $ 6,125,900 $ 7,025,800
============= =============
The accompanying notes are an integral part of the above statements.
Page 4
GENERAL KINETICS INCORPORATED
Consolidated Statements of Operations
Six Months Ended Three Months Ended
November 30, November 30, November 30, November 30,
1996 1995 1996 1995
---- ---- ---- ----
Net Sales $ 4,726,900 $ 4,977,600 $ 2,087,800 $ 2,344,800
Cost of Sales 3,428,300 4,011,600 1,514,500 2,079,900
------------- ------------- ------------- -------------
Gross Profit 1,298,600 966,000 573,300 264,900
------------- ------------- ------------- -------------
Selling, General & Administrative 865,600 908,200 403,400 456,800
Product Research, Development & Improvement 66,600 (13,900) 7,500 (13,900)
------------- ------------- ------------- -------------
Total Operating Expenses 932,200 894,300 410,900 442,900
------------- ------------- ------------- -------------
Operating Income (Loss) 366,400 71,700 162,400 (178,000)
Interest Expense 202,000 186,600 96,600 75,000
------------- ------------- ------------- -------------
Net income (loss) from continuing operations 164,400 (114,900) 65,800 (253,000)
Net income(loss) from discontinued operations (240,700) 75,900 (205,900) 65,900
------------- ------------- ------------- -------------
Net Loss $ (76,300) $ (39,000) $ (140,100) $ (187,100)
============= ============= ============= =============
Earnings per share
Primary
Income (loss) from continuing operations 0.01 (0.02) 0.00 (0.04)
Income (loss) from discontinued operations (0.01) 0.01 (0.01) 0.01
------------- ------------- ------------- -------------
Net loss per share $ (0.00) $ (0.01) $ (0.00) $ (0.03)
============= ============= ============= =============
Weighted Average Number of Common Shares
and Dilutive Equivalents Outstanding 25,508,925 6,508,925 25,508,925 6,508,925
============= ============= ============= =============
The accompanying notes are an integral part of the above statements.
Page 5
GENERAL KINETICS INCORPORATED
Consolidated Statements of Cash Flows
Six Months Ended
November 30, November 30,
------------ ------------
1996 1995
---- ----
Cash Flows From Operating Activities:
Net (Loss) $ (76,300) $ (39,000)
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 74,500 251,500
Gain on disposal of equipment - 1,100
ESOP compensation - 10,000
Amortization of bond discount 32,300 32,300
(Increase) Decrease in Assets:
Accounts Receivable (726,200) 425,400
Inventories 453,400 627,900
Prepaid Expenses (107,300) 4,100
Other assets - Software Development Costs - (73,100)
Other assets 5,000 50,400
Increase (Decrease) in Liabilities:
Accounts Payable - Trade 255,900 (599,900)
Accrued Expenses 3,600 42,900
Other Long Term Liabilities (19,700) (19,200)
-------------- --------------
Net cash provided by/(used) in Operating Activites (104,800) 714,400
-------------- --------------
Cash Flows from Investing Activities:
Acquisition of property, plant and equipment (31,500) (116,200)
Net proceeds from sale of property, plant and equipment - 1,000
Change in assets held for sale 75,300 -
-------------- --------------
Net cash provided by/(used) in Investing Activities 43,800 (115,200)
-------------- --------------
Cash Flows from Financing Activities:
Advances from Factor/Borrowings
on Demand Notes Payable 1,543,900 820,500
Repayments of Advances from Factor/
Demand Notes Payable (1,420,600) (1,227,500)
Borrowings on Long Term Debt - 90,000
Repayments on Long Term Debt (106,900) (109,100)
-------------- --------------
Net cash provided by/(used) in Financing Activities 16,400 (426,100)
-------------- --------------
Net (decrease) increase in cash and cash equivalents (44,600) 173,100
Cash and Cash Equivalents: Beginning of Period 364,100 212,200
-------------- --------------
Cash and Cash Equivalents: End of Period $ 319,500 $ 385,300
============== ==============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 154,800 $ 245,600
Income Taxes - -
Supplemental Disclosures of Non Cash Investing
and Financing Activities:
Reduction in paid in capital based on fair market
value of ESOP shares $ - $ 140,000
Increase in assets held for sale $ 75,300 $ -
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, 1996, and
for the three months and six months ended November 30, 1996, and November 30,
1995, respectively, include the accounts of General Kinetics Incorporated
("GKI") 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 and six month periods
ended November 30, 1996, are not necessarily indicative of the results to be
expected for the full year.
Note 2 - Sale of the Secure Communications Division
As of December 5, 1996, GKI completed the sale of its secure
communications business to Cryptek Secure Communications, LLC (the "Purchaser"),
a Delaware limited liability company, the majority of whose equity interests are
owned by affiliates of Angelo Gordon & Co., L.P.
In the transaction GKI received $1.75 million in cash, a $750,000
secured promissory note payable over three years (bearing interest at 1% over
the prime rate) and $1.5 million face amount of 6% convertible preferred equity
of the Purchaser which must be redeemed by the Purchaser within five years
(unless previously converted). Such preferred equity interest is convertible, at
GKI's option, into 4.2% of the regular membership interests in the Purchaser on
a diluted basis. The Purchaser also assumed certain liabilities related to the
secure communications business, subject to the terms and conditions of the
agreement of sale. The foregoing summary is not a complete description of the
terms and conditions of the reported transaction; reference is made to the copy
of the agreement between the Purchaser and GKI attached as Exhibit 2.1 to the
Form 8-K dated December 20, 1996. Such summary is qualified in all respects by
such reference.
7
The consideration received by GKI for its secure communications
business was determined in arms-length negotiations with the Purchaser. GKI is
not aware of any material relationship between it or any of its directors and
officers, or between any affiliate or the directors or officers of any affiliate
and the Purchaser, that existed at the date of the disposition.
Operating results of the SCD for the six months and three months ended
November 30, 1996 are shown separately in the accompanying statement of
operations. The statement of operations for the six months and three months
ended November 30, 1995 have been restated and operating results of SCD are also
shown separately. Net sales of SCD for the six months ended November 30, 1996
and 1995 were approximately $1.6 million and $4.4 million, respectively. The net
income/(loss) for the division for the six months ended November 30, 1996 and
1995 were approximately ($240,700) and $75,900 respectively. These amounts are
included as a discontinued operation in the accompanying income statement.
Assets and liabilities of the SCD consisted of the following at
November 30 and May 31, 1996:
November 30, 1996 May 31, 1996
Accounts receivable $ 454,432 $ 429,839
Inventories 2,380,613 2,490,382
Prepaid expenses 2,517 6,910
Property, plant and Equip. 152,569 198,567
Other assets 201,269 304,429
--------- ---------
Total assets 3,191,400 3,429,667
--------- ---------
Accounts payable 544,398 692,798
Accrued expenses 404,640 419,163
--------- ---------
Net assets to be sold $2,242,362 $2,317,716
========== ==========
Net assets to be sold, at their book values, have been classified
separately in the accompanying balance sheet at November 30, 1996. The May 31,
1996 balance sheet has not been restated.
The Company expects to realize a gain of approximately $150,000 on the
sale of SCD, net of estimated disposal costs and an estimated provision for
operating losses during the phase-out period. As of November 30, 1996, the
Company has recorded approximately $86,600 in deferred closing costs related to
the sale of SCD.
Note 3 - Commitments and Contingencies
No significant changes.
8
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, RABO Investment Management AG
("RABO"), formerly Gutzwiller & Partner, AG. 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 six months ended November 30, 1996 and 1995,
both primary and fully diluted earnings/(loss) per share from continuing
operations were $0.01 and ($0.02), respectively.
Note 5 - Notes Payable
At May 31 and November 30, 1996 convertible debentures initially issued to RABO
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 November 30, 1996,
however, the lender has agreed to waive the violations through May 31, 1997. The
debt has been classified as a current liability at November 30, 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 $114,400 was outstanding at November 30,
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
Six Months Ended November 30, 1996, Compared to Six Months Ended November 30,
1995
Net sales for continuing operations for the six months ended November 30,
1996 were approximately $4.7 million compared to net sales of approximately $5.0
million for the six months ended November 30, 1995. The Electronic Enclosure
Division's net sales decreased from approximately $4.63 million for the six
months ended November 30, 1995 to approximately $4.58 million for the six months
ended November 30, 1996. There was a decrease in sales in Food Technology
Corporation of approximately $200,000 due to a decrease in demand for sorting
equipment in the six months ended November 31, 1996 as compared to the
corresponding period of the prior fiscal year.
Sales, General & Administrative costs were approximately $865,600 in the
first six months of fiscal 1996 to as compared to approximately $908,200 in the
first six months of the prior fiscal year. Total operating expenses increased
from $894,300 to $932,200 principally due to an expense of approximately $66,600
during the six months ended November 30, 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.
For the six months ended November 30, 1996, the Company showed operating
income of approximately $366,400 compared to operating income of $71,700 for the
comparable six months of the prior year. The increase was principally due
to an increase in gross profit margin of approximately 10% in the first half of
fiscal 1997 in the Electronic Enclosure Division as compared to the same period
in the prior fiscal year.
There was a net loss from discontinued operations (SCD) of approximately
$240,700 on net sales of $1.6 million during the six months ended November 30,
1996 as compared to net income of $75,900 on net sales of $4.4 million for the
corresponding period of the prior fiscal year.
Three Months Ended November 30, 1996, Compared to Three Months Ended November
30, 1995
Net sales for continuing operations for the three months ended November 30,
1996 were approximately $2.1 million compared to net sales of
10
approximately $2.3 million for the quarter ended November 30, 1995. The
Electronic Enclosure Division's net sales decreased from approximately $2.26
million for the quarter ended November 30, 1995 to approximately $2.01
million for the quarter ended November 30, 1996. The decrease in sales was due
principally to a decrease in demand and management's efforts to target new
contracts with higher profit margins.
Sales, General & Administrative costs were approximately $403,400 in the
second quarter of fiscal 1996 to as compared to approximately $456,800 in the
second quarter of the prior fiscal year. For the three months ended November
30, 1996, the Company showed operating income of approximately $162,400
compared to an operating loss of approximately $178,000 for the comparable
quarter of the prior year. The improvement was due principally to an increase
in gross profit margin of approximately 16% in the second quarter of fiscal 1997
in the Electronic Enclosure Division as compared to the corresponding period
in the prior fiscal year.
Liquidity and Capital Resources
As of December 5, 1996, GKI completed the sale of its secure
communications business to the Purchaser identified above. In the transaction
GKI received $1.75 million in cash, a $750,000 secured promissory note payable
over three years (bearing interest at 1% over the prime rate) and $1.5 million
face amount of 6% convertible preferred equity of the Purchaser which must be
redeemed by the Purchaser within five years (unless previously converted). Such
preferred equity interest is convertible, at GKI's option, into 4.2% of the
regular membership interests in the Purchaser on a diluted basis. The Purchaser
also assumed certain liabilities related to the secure communications business,
subject to the terms and conditions of the agreement of sale. The foregoing
summary is not a complete description of the terms and conditions of the
reported transaction; reference is made to the copy of the agreement between the
Purchaser and GKI attached as Exhibit 2.1 to the Form 8-K dated December 5,
1996. Such summary is qualified in all respects by such reference.
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 from continuing operations in the first half of fiscal 1997. In
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 and the first
half of fiscal 1997 as compared to the prior three fiscal years. The division
must continue to
11
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. 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 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 November 30, 1996, the balance due Reservoir was
$269,800. The Company does not expect to continue to draw on this credit
facility in the short term and plans to use the proceeds from the sale of the
secure communications division to alleviate any 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. However, 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. The Exchange has agreed to
defer consideration of termination in light of, among other things, the sale of
the secure communications division; however, there can be no assurance that a
return to compliance will be accomplished or that the listing will be continued.
Management believes that cash on hand as of November 30, 1996 ($319,500), the
proceeds from the sale of the secure communications division discussed above,
and careful management of operating costs and cash disbursements 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
Form 8-K dated December 5, 1996 reporting the Sale of the Secure
Communications Division.
Exhibits included in Form 8-K:
2.1 Asset Purchase Agreement between General
Kinetics Incorporated and Cryptek Secure
Communications, LLC, a Delaware limited liability
company formed by affiliates of Angelo, Gordon &
Co., L.P., dated as of November 1, 1996
2.2 List of Contents of Exhibits and Schedules to
the Asset Purchase Agreement.
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, 1997 /s/ Larry M. Heimendinger
_________________ _________________________________
Chairman of the Board
(Principal Executive Officer)
Date: January 14, 1997 /s/ Sandy B. Sewitch
_________________ _________________________________
Chief Financial Officer
(Principal Accounting Officer and
Principal Financial Officer)
14