UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
Commission file number 0-21899
KENWICK INDUSTRIES, INC.
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(Exact name of small business issuer as specified in its charter)
FLORIDA 65-0596319
--------------------------------- ---------------------------------
(State or other jurisdiction
of incorporation or organization) (IRS Employer Identification No.)
KENWICK INDUSTRIES, INC.
660 LINTON BOULEVARD, SUITE 202
DELRAY BEACH, FLORIDA 33445
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(Address of principal executive offices)
(561) 278-6090
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(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section13
or 15(d) of the 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 [ ]
As of September 30, 2000, Kenwick Industries, Inc. had 11,946,700 shares of
$.001 par value common stock outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
KENWICK INDUSTRIES, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
9/30/00 12/31/99
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
Cash $ 10,261 $ 29,555
Installment loans receivable, net 5,604,284 3,515,095
Inventory 987,525 1,633,631
Property and equipment, net 88,808 96,273
Intangible assets 29,981 29,554
Security deposits and other assets 25,913 20,164
----------- -----------
Total assets $ 6,746,772 $ 5,324,272
=========== ===========
Accounts payable and accrued expenses $ 664,521 $ 297,075
Payroll tax payable 17,858 48,509
Due to related parties 2,512,760 2,450,976
Note payable 295,707 244,691
Income tax payable 634,378 333,000
Preferred stock, $.001 par value, 5,000,000 shares
authorized, none issued -- --
Common stock, $.001 par value, 50,000,000 shares
authorized, 11,946,700 and 9,471,683 shares
issued and outstanding at September 30, 2000 and
and December 31, 1999, respectively 11,947 9,472
Additional paid in capital 2,907,012 2,553,458
Retained (deficit) (297,411) (612,909)
----------- -----------
Total liabilities and stockholders' equity $ 6,746,772 $ 5,324,272
=========== ===========
</TABLE>
Notes to financial statements are an integral part of this statement.
2
<PAGE>
KENWICK INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended September 30,
2000 1999
------------ ----------
<S> <C> <C>
Net sales $ 1,459,702 $1,111,698
Cost of goods sold 1,358,496 1,107,585
------------ ----------
Gross profit 101,206 4,113
Interest and other income 1,299,170 1,112,045
------------ ----------
Income before operating expenses 1,400,376 1,116,158
------------ ----------
General and administrative expenses
Advertising 6,479 --
Provision for doubtful accounts 745,007 134,980
Depreciation and amortization 5,315 8,535
Interest 167,848 117,365
Insurance 16,643 14,429
Rent 92,797 56,183
Salaries and commissions 847 950
Officers salaries 12,500 --
Other general & administrative expenses 191,033 168,665
------------ ----------
Total general and administrative expenses 1,238,469 501,107
------------ ----------
Income from operations 161,907 615,051
------------ ----------
Other expenses
Interest - discount on convertible debentures 87,735
Impairment loss 6,250 31,390
------------ ----------
Total other expenses 6,250 119,125
------------ ----------
Income before income taxes 155,657 495,926
Income taxes 116,890 109,681
------------ ----------
Net income $ 38,767 $ 386,245
============ ==========
3
<PAGE>
Basic earnings per share:
Weighted average shares outstanding 11,946,683 5,340,371
=========== ==========
Earnings per share:
Income from operations $ 0.01 $ 0.12
=========== ==========
Net income $ 0.00 $ 0.07
=========== ==========
Diluted earnings per share:
Adjusted weighted average shares outstanding 11,946,683 6,177,871
=========== ==========
Earnings per share:
Income from operations $ 0.01 $ 0.10
=========== ==========
Net income $ 0.00 $ 0.06
=========== ==========
</TABLE>
Notes to financial statements are an integral part of this statement.
4
<PAGE>
KENWICK INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
For the nine months ended September 30,
2000 1999
---------- ----------
<S> <C> <C>
Net sales $ 6,207,374 $4,297,777
Cost of goods sold 5,513,799 3,257,542
----------- ----------
Gross profit 693,575 1,040,235
Interest and other income 2,077,820 1,647,959
----------- ----------
Income before operating expenses 2,771,395 2,688,194
----------- ----------
General and administrative expenses
Advertising 32,842 41,864
Provision for doubtful accounts 952,515 369,956
Depreciation and amortization 15,725 25,326
Interest 279,175 173,829
Insurance 50,260 51,810
Rent 247,129 167,774
Salaries and commissions 21,469 28,290
Officers salaries 37,500 41,045
Other general & administrative expenses 470,403 496,758
----------- ----------
Total general and administrative expenses 2,107,018 1,396,652
----------- ----------
Income from operations 664,377 1,291,542
----------- ----------
Other expenses
Interest - discount on convertible debentures 28,750 62,090
Impairment loss 18,750 --
----------- ----------
Total other expenses 47,500 62,090
----------- ----------
Income before income taxes 616,877 1,229,452
Income taxes 301,379 491,781
----------- ----------
Net income $ 315,498 $ 737,671
=========== ==========
5
<PAGE>
Basic earnings per share:
Weighted average shares outstanding 11,607,794 4,845,624
=========== ==========
Earnings per share:
Income from operations $ 0.06 $ 0.27
=========== ==========
Net income $ 0.03 $ 0.15
=========== ==========
Diluted earnings per share:
Adjusted weighted average shares outstanding 11,607,794 5,683,124
=========== ==========
Earnings per share:
Income from operations $ 0.06 $ 0.23
=========== ==========
Net income $ 0.03 $ 0.13
=========== ==========
</TABLE>
Notes to financial statements are an integral part of this statement.
6
<PAGE>
KENWICK INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the nine months ended September 30,
---------------------------------------
2000
-----------
<S> <C>
OPERATING ACTIVITIES
Net income $ 315,498
Adjustments to reconcile net income to
cash (used in) operating activities:
Depreciation and amortization 15,725
Impairment loss 18,750
(Increase) in accounts receivable (2,089,188)
(Increase) in security deposits and other assets (26,486)
Decrease/(Increase) in inventory 646,106
Increase in accounts payable 212,575
(Decrease) in payroll tax payable (30,651)
Increase in income tax payable 301,378
-----------
Net cash (used in) operating activities (636,293)
-----------
INVESTING ACTIVITIES
Purchase of property and equipment (6,700)
-----------
Net cash (used) by investing activities (6,700)
-----------
FINANCING ACTIVITIES
Principal reduction in note payable 51,016
Increase in contributed capital 35,000
Increase in related party loans 216,654
Sale of common stock 321,029
-----------
Net cash provided in financing activities 623,699
-----------
Net increase (decrease) in cash (19,294)
Cash at the beginning of the year 29,555
-----------
Cash at the end of the period $ 10,261
===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ --
-----------
</TABLE>
Notes to financial statements are an integral part of this statement.
7
<PAGE>
KENWICK INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of the Company, the accompanying unaudited condensed consolidated
financial statements include all adjustments (consisting only of normal
recurring accruals), which are necessary for a fair presentation of the results
for the periods presented. Certain information and footnote disclosures normally
included in the financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. It is suggested
that these condensed consolidated financial statements be read in conjunction
with the Company's Annual Report for the year ended December 31, 1999. The
results of operations for the nine months ended September 30, 2000 are not
necessarily indicative of the results to be expected for the full year.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Activity
The Company operates in two business segments:
In August 1995, upon organization, the Company acquired the assets of American
Video Language Institute, Inc. These assets consisted of the trade name,
trademarks and copyrights needed to produce the English language courses. The
cost of the acquisition was $725,000, which exceeded the fair value of the net
tangible assets acquired by $655,000.
In August 1998, the Company acquired all of the issued and outstanding shares of
the common stock of Automax USA, Inc., Automax International, Inc. and Automax
USA Finance, Inc. (collectively referred to as "Automax") in exchange for
1,000,000 shares of Kenwick's common stock. This acquisition was accounted for
by the pooling-of-interest method.
Automax is a Florida corporation organized in 1997, and is engaged in the
business of buying, selling and financing used cars in West Palm Beach, Florida.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All intercompany accounts and
transactions have been eliminated.
Revenue Recognition
The Company and its subsidiaries utilizes the accrual basis of accounting. Sales
are recorded when products are shipped or when cars are delivered. The Company
recognizes interest on its installment loans receivable over the term of the
loan using the interest method.
8
<PAGE>
Installment Loans Receivable
The installment loans receivable are stated at the amount of unpaid principal
reduced by an allowance for doubtful accounts as follows:
As of September 30, 2000
<TABLE>
<CAPTION>
Automax Kenwick Combined
----------- ----------- -----------
<S> <C> <C> <C>
Retail Trade Receivables $ 6,226,208 -- $ 6,226,208
Less: allowance for doubtful accounts (621,924) -- (621,924)
----------- ----------- -----------
$ 5,604,284 -- $ 5,604,284
=========== =========== ===========
</TABLE>
As of December 31, 1999
<TABLE>
<CAPTION>
Automax Kenwick Combined
---------- --------- ----------
<S> <C> <C> <C>
Retail Trade Receivables $3,977,851 $ 3,008 $3,980,859
Less: allowance for doubtful accounts (465,764) -- (465,764)
---------- --------- ----------
$3,512,087 $ 3,008 $3,515,095
========== ========= ==========
</TABLE>
The receivables are collateralized by automobiles. If payments are delinquent,
the Company repossesses the automobiles which are then resold.
The allowance for doubtful accounts is maintained at a level considered adequate
to provide for losses that can be reasonably anticipated. The Company makes
continuous credit reviews of the loan portfolios and considers current economic
conditions, review of specific problem loans, and other factors in determining
the adequacy of its allowances. The Company's charge-off policy is based on a
loan-by-loan review. Since the Company has a short history, historical
information is being developed.
Inventories
Kenwick's inventories consist of blank and completed video tapes and shipping
materials. Inventories are stated at the lower of cost (determined on a
first-in-first-out basis) or market.
Automax's inventories consist of used automobiles held for sale using the
specific identification method. Cost includes acquisition expenses, including
reconditioning and transportation costs. Inventories including parts and
accessories are valued at the lower of cost (first-in, first-out) or market.
9
<PAGE>
Property and Equipment
Property and equipment are carried at cost. Expenditures for major additions and
improvements are capitalized, while minor replacements, maintenance and repairs
are charged to expense as incurred. When property is retired or otherwise
disposed of, the cost and accumulated depreciation are removed from the accounts
and any resulting gain or loss is reflected in the Consolidated Statement of
Income.
Depreciation is computed using the straight line method for financial reporting
purposes, and modified accelerated cost recovery system for income tax purposes.
For both methods, the useful lives are 5-7 years.
Deferred income taxes on the difference between tax and book depreciation is
insignificant.
A summary of property and equipment at September 30, 2000 and December 31, 1999
is as follows:
9/30/00 12/31/99
--------- ---------
Furniture, fixtures and equipment $ 77,984 $ 77,984
Machinery and equipment 29,634 26,834
Leasehold improvements 59,019 55,119
--------- ---------
Subtotal 166,637 159,937
Less: accumulated depreciation (77,829) (63,664)
--------- ---------
88,808 96,273
========= =========
Intangible Assets
Intangible assets consist primarily of the cost of the acquired business in
excess of the fair value of the net tangible assets acquired (goodwill). These
costs also include copyrights, trademarks and customer lists.
The intangible assets were being amortized over 15 years, straight line method,
for both financial reporting and federal income taxes.
During the first nine months of 2000, management reviewed its intangible assets
for impairment based on assessments of future operations and recorded an
impairment loss of $18,750.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
10
<PAGE>
Advertising
Advertising costs are expensed as incurred.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Accordingly, deferred income would be provided to
show the effect of temporary differences between the recognition of revenue an
expenses for financial and income tax reporting purposes and between the tax
basis of assets and liabilities and their reported amounts in the financial
statements.
The components of the provision for income taxes for the nine months ended
September 30 are as follows:
2000 1999
------- --------
Current:
Federal $256,000 $418,000
State 45,000 74,000
-------- --------
Provision for income taxes $301,000 $492,000
======== ========
Fair Value of Financial Instruments
The fair value of a financial instrument represents the amount at which the
instrument could be exchanged in a current transaction between willing parties
other than in a forced sale or liquidation.
At September 30, 2000 and December 31, 1999, the Company's financial instruments
included cash, receivables, accounts payable and borrowings. The fair values of
the these financial instruments approximated carrying values because of the
short-term nature of the instruments.
Earnings (Loss) Per Common Share
Basic and dilutive net income (loss) per common share is based on the net income
(loss) divided by the weighted average number of common shares outstanding
during each year.
The Company's potential issuable shares of common stock pursuant to outstanding
stock purchase warrants and employee stock options are excluded from the
Company's diluted computation as their effect would be antidilutive. However,
the Company's convertible debentures are included in the computation of diluted
earnings per share since they are dilutive.
11
<PAGE>
Reclassifications
Certain amounts in the prior period have been reclassified to conform to the
2000 presentation.
NOTE 3 - DUE TO RELATED PARTIES
The Company has loans with various shareholders in the amount of $2,512,760 and
$2,450,976 at September 30, 2000 and December 31, 1999 respectively. The note
calls for principal payments of $20,000 per month commencing November 1, 1998
and on the first day of each month thereafter. The note matures on March 1,
2009. The notes were non-interest bearing until March 1, 1999, at which time
interest is payable at prime plus 1/2%. For the two months, January and February
1999, interest expense of $36,590 was imputed along with a corresponding credit
to additional paid in capital. This charge is in accordance with Staff
Accounting Bulletin Topics 1B and 5T. Interest was calculated at prime plus
1/2%.
The Company is in default regarding the above payments and has obtained a waiver
from the Holder while the terms are being renegotiated.
NOTE 4 - STOCKHOLDERS EQUITY
On June 17, 1999, the Board of Directors along with a majority of the
shareholders amended the Articles of Incorporation increasing its authorized
preferred stock from 1 million to 5 million shares and its par value from $.01
to $.001 per share.
They also increased the authorized common stock from 10 million to 50 million
shares, also changing the par value from $.01 to $.001 per share.
12
<PAGE>
Item 2. Management's Discussion And Analysis Or Plan Of Operation
The following table sets forth revenues and expenses in aggregate dollars and as
a percentage of net sales for the Company for the nine months ended September
30, 1999 and 2000.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------------------------------------
Unaudited 2000 Unaudited 1999
------------------------------ --------------------------------
<S> <C> <C> <C> <C>
Net Sales 6,207,374 100.0% 4,297,777 100.0%
Cost of Goods Sold 5,513,799 88.8% 3,257,542 75.8%
Interest and Other Income 2,077,820 33.5% 1,647,959 38.3%
General and Administrative Expenses 2,107,018 33.9% 1,396,652 32.5%
Income before Income Tax 664,377 10.7% 1,291,542 30.1%
Net Income 315,498 5.1% 737,671 17.2%
</TABLE>
NET SALES. The Company's revenues increased approximately $1.9 million, or 44%
from approximately $4.3 million for the nine months ended September 30, 1999 to
approximately $6.2 million for the nine months ended September 30, 2000.
Kenwick's sales of language tapes decreased approximately $3,600 while Automax's
sales of automobiles and related income increased approximately $1.9 million.
COSTS. Costs of goods sold were approximately $5.5 million for the nine months
ended September 30, 2000 compared to approximately $3.3 million during the same
period in 1999, representing an increase of approximately $2.2 million, or 68%.
Cost of goods sold increased due largely to management's decision to reduce
older inventory in Automax. Management believes its current inventory will bring
increased margins in the future.
INTEREST INCOME. Interest income increased from approximately $1,648,000 for the
nine months ended September 30, 1999 to approximately $2.1 million for the nine
months ended September 30, 2000, an increase of 21%. The increase in interest
income is attributable to increased activity at Automax and larger average
accounts receivable balances. Automax's primary business activity is buying,
selling and financing used cars and interest income is a significant source of
income.
13
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
(including depreciation and amortization) increased approximately $710,000 from
approximately $1,397,000 for the nine months ended September 30, 1999 to
approximately $2.1 million for the nine months ended September 30, 2000.
Increased reserve for bad debt of nearly $583,000, interest expense of $134,000
and additional rent expense of approximately $79,000 were offset by reductions
of approximately $3,500 of salaries and commissions, $9,000 of advertising and
$7,600 of general office administration costs. The allowance for doubtful
accounts increased to maintain management's estimate of bad debt.
Liquidity and Capital Resources
The following table sets forth the major components of the increase/(decrease)
in the cash and cash equivalents of the combined predecessor companies:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30
------------------------------------------------
Unaudited 2000 Unaudited 1999
----------------------- ------------------------
<S> <C> <C>
Net cash (used) by operating activities (636,293) (502,632)
Net cash (used) by investing activities (6,700) (54,850)
Net cash provided by financing activities 623,699 693,419
Net increase (decrease) in cash (19,294) 135,937
</TABLE>
Net cash flows used in operating activities were approximately $503,000 and
$636,000 during the nine months ended September 30, 1999 and 2000, respectively.
Cash used in operating activities during the nine months ended September 30,
1999 can be primarily attributed to approximately $747,000 of interest imputed
to discounts on the Company's convertible debentures, an increase of about $1.8
million of accounts receivable, and an increase of $209,000 in inventory offset
by an increase of $494,000 of accounts payable and accrued liabilities. Cash
used in operating activities for the nine months ended September 30, 2000 can be
primarily attributed to approximately $316,000 in operating income, a decrease
in inventory of approximately $646,000, an increase in accounts payable and
accrued expenses of $213,000, an increase in income taxes payable of $301,000,
offset by an increase in accounts receivable of approximately $2.1 million.
Cash used in investing activities was approximately $55,000 and $7,000 during
the nine months ended September 30, 1999 and 2000, respectively. The 1999 and
2000 amounts reflect the acquisition of property and equipment consisting of
office equipment and leasehold improvements.
14
<PAGE>
Cash provided by financing activities was approximately $693,000 and $624,000
during the nine months ended September 30, 1999 and 2000 respectively. During
the nine months ended September 30, 1999, approximately $442,000 was raised
through increases in related party loans and $318,000 was raised by the sale of
convertible debentures. During the nine months ended September 30, 2000,
approximately $217,000 was raised through increases in related party loans, and
$35,000 was contributed from shareholders, increases in notes payable of
approximately $51,000 and sale of common stock of approximately $321,000.
The activities described above resulted in a net increase in cash of about
$136,000 for the nine months ended September 30, 1999 and a net decrease of
about $20,000 for the nine months ended September 30, 2000.
The following table sets forth revenues and expenses in aggregate dollars and as
a percentage of net sales for the Company for the three months ended September
30, 1999 and 2000.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30
---------------------------------------------------------------
Unaudited 2000 Unaudited 1999
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales 1,459,702 100.0% 1,111,698 100.0%
Cost of Goods Sold 1,358,496 93.1% 1,107,585 99.6%
Interest and Other Income 1,299,170 89.0% 1,112,045 100.0%
General and Administrative Expenses 1,238,469 84.8% 501,107 45.1%
Income before Income Tax 155,657 10.7% 495,926 44.6%
Net Income 38,767 2.7% 386,245 34.7%
</TABLE>
NET SALES. The Company's revenues increased approximately $348,000, or 31% from
approximately $1.1 million for the three months ended September 30, 1999 to
approximately $1.5 million for the three months ended September 30, 2000.
COSTS. Costs of goods sold were approximately $1.4 million for the three months
ended September 30, 2000 compared to approximately $1.1 million during the same
period in 1999, representing an increase of approximately $.3 million, or 23%.
This is due to increased Automax activity.
15
<PAGE>
INTEREST INCOME. Interest income increased from approximately $1.1 million for
the three months ended September 30, 1999 to approximately $1.3 million for the
three months ended September 30, 2000, an increase of 18%. The increase in
interest income is attributable to increased activity at Automax and larger
average accounts receivable balances. Automax's primary business activity is
buying, selling and financing used cars and interest income is a significant
source of income.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
(including depreciation and amortization) increased approximately $737,000 from
approximately $501,000 for the three months ended September 30, 1999 to
approximately $1,238,000 for the three months ended September 30, 2000.
Increased reserve for bad debt of nearly $610,000 and additional rent expense of
approximately $37,000, an increase of approximately $50,000 of interest expense,
and increases in officers' salaries, advertising and other general and
administrative expenses of approximately $40,000.
16
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
KENWICK INDUSTRIES, INC.
(Registrant)
By: /s/ Kenneth S. Wulwick
-----------------------------------------
Kenneth S. Wulwick
Chief Executive Officer, President and Director
Date: November 30, 2000
